<PAGE>
Filed Pursuant to Rule 497(c)
Registration File No.: 2-66269
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PROSPECTUS - APRIL 26, 1999
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MORGAN STANLEY DEAN WITTER
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AMERICAN OPPORTUNITIES FUND
[GRAPHIC 0MITTED]
A MUTUAL FUND THAT SEEKS LONG-TERM CAPITAL GROWTH
CONSISTENT WITH AN EFFORT TO REDUCE VOLATILITY
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
CONTENTS
The Fund Investment Objective .............................. 1
Principal Investment Strategies ................... 1
Principal Risks ................................... 2
Past Performance .................................. 2
Fees and Expenses ................................. 3
Additional Investment Strategy Information ........ 4
Additional Risk Information ....................... 5
Fund Management ................................... 7
Shareholder Information Pricing Fund Shares ............................... 8
How to Buy Shares ................................. 8
How to Exchange Shares ............................ 10
How to Sell Shares ................................ 12
Distributions ..................................... 13
Tax Consequences .................................. 14
Share Class Arrangements .......................... 14
Financial Highlights ................................................... 22
Our Family of Funds .................................... Inside Back Cover
This Prospectus contains important information about
the Fund. Please read it carefully and keep it for
future reference.
(SIDEBAR)
FUND CATEGORY
-------------
[X] GROWTH
[ ] Growth and Income
[ ] Income
[ ] Money Market
(END SIDEBAR)
<PAGE>
THE FUND
[GRAPHIC 0MITTED] INVESTMENT OBJECTIVE
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Morgan Stanley Dean Witter American Opportunities Fund is a mutual fund that
seeks long-term capital growth consistent with an effort to reduce volatility.
There is no guarantee that the Fund will achieve this objective. The Fund was
formerly named Morgan Stanley Dean Witter American Value Fund.
[GRAPHIC 0MITTED] PRINCIPAL INVESTMENT STRATEGIES
- -------------------------------------------------
(sidebar)
CAPITAL GROWTH
An investment objective having the goal of selecting securities with the
potential to rise in price rather than pay out income.
(end sidebar)
The Fund will normally invest at least 65% of its assets in a diversified
portfolio of common stocks. The Fund's "Investment Manager," Morgan Stanley Dean
Witter Advisors Inc., invests in companies that it believes have earnings growth
potential. The Investment Manager utilizes a process, known as sector rotation,
that emphasizes industry selection over individual company selection. The
Investment Manager invests in those industries that it believes will have the
strongest relative earnings growth potential given the projected economic
outlook. After selecting the Fund's target industries, the Investment Manager
then selects specific companies within those industries whose prospects are
deemed attractive after assessing company fundamentals and valuation screens.
SECTOR ROTATION. The Investment Manager will utilize a sector rotation process
designed to respond to changing economic cycles by proactively investing in
industries that the Investment Manager believes to be positioned to benefit
from the current phase of the economic cycle. First, the Investment Manager
attempts to identify at what stage of the business cycle the economy is in and
which industries have historically outperformed the overall market during that
stage of the cycle. To accomplish this task, the Investment Manager establishes
an economic forecast based on its short term and long term views of the
domestic and global economic cycles. As part of this process, the Investment
Manager will attempt to identify secular trends, such as shifting demographics
or technological developments, that could add clarity to its analysis. Also
considered are competitive industry variables, such as supply and demand,
pricing trends and new product cycles.
Common stock is a share ownership or equity interest in a corporation. It may
or may not pay dividends, as some companies reinvest all of their profits back
into their businesses, while others pay out some of their profits to
shareholders as dividends.
In addition, the Fund may invest up to 35% of its assets in convertible debt
and preferred securities; fixed-income securities (including zero coupon bonds)
such as U.S. government securities and investment grade corporate debt
securities; and foreign securities (including depository receipts).
In pursuing the Fund's investment objective, the Investment Manager has
considerable leeway in deciding which investments it buys, holds or sells on a
day-to-day basis -- and which trading or investment strategies it uses. For
example, the Investment Manager in its discretion may determine to use some
permitted trading or investment strategies while not using others.
1
<PAGE>
[GRAPHIC 0MITTED] PRINCIPAL RISKS
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The Fund's share price will fluctuate with changes in the market value of the
Fund's portfolio securities. When you sell Fund shares, they may be worth less
than what you paid for them and, accordingly, you can lose money investing in
this Fund.
A principal risk of investing in the Fund is associated with its common stock
investments. In general, stock values fluctuate in response to activities
specific to the company as well as general market, economic and political
conditions. Stock prices can fluctuate widely in response to these factors. The
Fund's emphasis on industries may cause its performance to be more sensitive to
developments affecting particular industries than a fund that places primary
emphasis on individual companies.
While the Fund principally invests in large, established companies, the Fund
may invest in medium sized companies and small sized companies. Investing in
securities of medium and small sized growth companies involves greater risk
than is customarily associated with investing in more established companies.
These stocks may be more volatile and have returns that vary, sometimes
significantly, from the overall stock market.
The performance of the Fund also will depend on whether the Investment Manager
is successful in pursuing the Fund's investment strategy. The Fund is also
subject to other risks from its permissible investments including the risks
associated with its fixed-income securities, convertible securities and foreign
securities investments. For more information about these risks, see the
"Additional Risk Information" section.
Shares of the Fund are not bank deposits and are not guaranteed or insured by
any bank, governmental entity, or the FDIC.
[GRAPHIC 0MITTED] PAST PERFORMANCE
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The bar chart and table below provide some indication of the risks of investing
in the Fund. The Fund's past performance does not indicate how the Fund will
perform in the future.
ANNUAL TOTAL RETURNS -- CALENDAR YEARS
[BAR GRAPH]
1989 '90 '91 '92 '93 '94 '95 '96 '97 '98
---- --- --- --- --- --- --- --- --- ---
25.39% -0.90% 56.26% 3.84% 18.70% -6.75% 42.20% 10.53% 31.55% 31.07%
(sidebar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Fund's Class B shares has varied
from year to year over the past 10 calendar years.
(end sidebar)
The bar chart reflects the performance of Class B shares; the performance of
the other Classes will differ because the Classes have different ongoing fees.
The performance information in the bar chart does not reflect the deduction of
sales charges; if these amounts were reflected, returns would be less than
shown.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 21.98% (quarter ended May 31, 1991), and the lowest return for a
calendar quarter was -11.99% (quarter ended September 30, 1990). Year-to-date
total return as of March 31, 1999 was 8.74%.
2
<PAGE>
(sidebar)
AVERAGE ANNUAL TOTAL RETURNS
This table compares the Fund's average annual returns with those of a broad
measure of market performance over time. The Fund's returns include the maximum
applicable sales charge for each Class and assume you sold your shares at the
end of each period.
(end sidebar)
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIOD ENDED THE 1998 CALENDAR YEAR)
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PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
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Class A 24.86% -- --
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Class B(1) 26.07% 20.18% 19.72%
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Class C 29.78% -- --
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Class D 32.12% -- --
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S&P 500 Index(2) 28.58% 24.05% 19.91%
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Lipper Growth Funds Index(3) 25.69% 19.82% 17.21%
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(1) Prior to July 28, 1997, the Fund only issued Class B shares.
(2) The Standard & Poor's (Registered Tracemark) 500 Composite Stock Price
Index is a broad-based index, the performance of which is based on the
average performance of 500 widely hold common stocks. The performance of
the Index does not include any expenses, fees or charges. The Index is
unmanaged and should not be considered an investment.
(3) The Lipper Growth Funds Index is an equally-weighted performance index of
the largest qualifying funds in the Lipper Growth Funds objective. The
returns for the Index have been adjusted to reflect the reinvestment of
dividends. The Index is unmanaged and should not be considered an
investment.
[GRAPHIC 0MITTED] FEES AND EXPENSES
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The Fund offers four classes of shares: Classes A, B, C and D. Each Class has a
different combination of fees, expenses and other features. The table below
briefly describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. The Fund does not charge account or exchange fees. See the
"Share Class Arrangements" section for further fee and expense information.
(sidebar)
SHAREHOLDER FEES
These fees are paid directly from your investment.
(end sidebar)
(sidebar)
ANNUAL FUND OPERATING EXPENSES
These expenses are deducted from the Fund's assets and are based on expenses
paid for the fiscal year ended December 31, 1998.
(end sidebar)
<TABLE>
<CAPTION>
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CLASS A CLASS B CLASS C CLASS D
<S> <C> <C> <C> <C>
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SHAREHOLDER FEES
Maximum sales charge (load) imposed on 5.25%(1) None None None
purchases (as a percentage of offering price)
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Maximum deferred sales charge (load) (as a
percentage based on the lesser of the offering None(2) 5.00%(3) 1.00%(4) None
price or net asset value at redemption)
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ANNUAL FUND OPERATING EXPENSES
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Management fee 0.49% 0.49% 0.49% 0.49%
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Distribution and service (12b-1) fees 0.25% 0.78% 1.00% None
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Other expenses 0.12% 0.12% 0.12% 0.12%
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Total annual Fund operating expenses 0.86% 1.39% 1.61% 0.61%
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</TABLE>
(1) Reduced for purchases of $25,000 and over.
(2) Investments that are not subject to any sales charge at the time of
purchase are subject to a contingent deferred sales charge ("CDSC") of
1.00% that will be imposed on sales made within one year after purchase,
except for certain specific circumstances.
(3) The CDSC is scaled down to 1.00% during the sixth year, reaching zero
thereafter. See "Share Class Arrangements" for a complete discussion of the
CDSC.
(4) Only applicable to sales made within one year after purchase.
3
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund, your investment has a
5% return each year, and the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, the tables below show your
costs at the end of each period based on these assumptions depending upon
whether or not you sell your shares at the end of each period.
<TABLE>
<CAPTION>
IF YOU SOLD YOUR SHARES: IF YOU HELD YOUR SHARES:
- -------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
- -------------------------------------------- ----------------------------------
CLASS A $608 $784 $975 $1,527 $608 $784 $975 $1,527
- -------------------------------------------- ----------------------------------
CLASS B $642 $740 $961 $1,669 $142 $440 $761 $1,669
- -------------------------------------------- ----------------------------------
CLASS C $264 $508 $876 $1,910 $164 $508 $876 $1,910
- -------------------------------------------- ----------------------------------
CLASS D $62 $195 $340 $ 761 $62 $195 $340 $761
- -------------------------------------------- ----------------------------------
</TABLE>
[GRAPHIC 0MITTED] ADDITIONAL INVESTMENT STRATEGY INFORMATION
- ------------------------------------------------------------
The Fund seeks long-term capital growth consistent with an effort to reduce
volatility. There is no guarantee that the Fund will achieve this objective.
This section provides additional information concerning the Fund's principal
strategies.
DEFENSIVE INVESTING. The Fund may take temporary "defensive" positions in
attempting to respond to adverse market conditions. The Fund may invest any
amount of its total assets in cash or money market instruments in a defensive
posture when the Investment Manager believes it is advisable to do so. Although
taking a defensive posture is designed to protect the Fund from an anticipated
market downturn, it could have the effect of reducing the benefit from any
upswing in the market.
PORTFOLIO TURNOVER. The Fund may engage in active and frequent trading of
portfolio securities to achieve its principal investment strategies. The
portfolio turnover rate is not expected to exceed 300% annually under normal
circumstances. A high turnover rate will increase Fund brokerage costs. It also
may increase the Fund's capital gains, which are passed along to Fund
shareholders as distributions. This, in turn, may increase your tax liability
as a Fund shareholder. See the sections on "Distributions" and "Tax
Consequences."
The percentage limitations relating to the composition of the Fund's portfolio
referenced in "Principal Investment Strategies" apply at the time the Fund
acquires an investment. Subsequent percentage changes that result from market
fluctuations or changes in total assets will not require the Fund to sell any
portfolio security. The Fund may change its principal investment strategies
without shareholder approval; however, you would be notified of any changes.
4
<PAGE>
[GRAPHIC 0MITTED] ADDITIONAL RISK INFORMATION
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As discussed in the "Principal Risks" section, a principal risk of investing in
the Fund is associated with its common stock investments. This section provides
additional information regarding the principal risks of investing in the Fund.
FIXED-INCOME SECURITIES. Principal risks of investing in the Fund are
associated with its fixed-income investments. All fixed-income securities, such
as corporate debt, are subject to two types of risk: credit risk and interest
rate risk. Credit risk refers to the possibility that the issuer of a security
will be unable to make interest payments and repay the principal on its debt.
Interest rate risk refers to fluctuations in the value of a fixed-income
security resulting from changes in the general level of interest rates. When
the general level of interest rates goes up, the prices of most fixed-income
securities go down. When the general level of interest rates goes down, the
prices of most fixed-income securities go up. (Zero coupon securities are
typically subject to greater price fluctuations than comparable securities that
pay interest.)
CONVERTIBLE SECURITIES. The Fund also may invest a portion of its assets in
convertible securities, which are securities that generally pay interest and
may be converted into common stock. These securities may carry risks associated
with both common stock and fixed-income securities.
FOREIGN SECURITIES. The Fund's investments in foreign securities (including
depository receipts) may involve risks in addition to the risks associated with
domestic securities. One additional risk is currency risk. While the price of
Fund shares is quoted in U.S. dollars, the Fund generally converts U.S. dollars
to a foreign market's local currency to purchase a security in that market. If
the value of that local currency falls relative to the U.S. dollar, the U.S.
dollar value of the foreign security will decrease. This is true even if the
foreign security's local price remains unchanged.
Foreign securities also have risks related to economic and political
developments abroad, including expropriations, confiscatory taxation, exchange
control regulation, limitations on the use or transfer of Fund assets and any
effects of foreign social, economic or political instability. Foreign
companies, in general, are not subject to the regulatory requirements of U.S.
companies and, as such, there may be less publicly available information about
these companies. Moreover, foreign accounting, auditing and financial reporting
standards generally are different from those applicable to U.S. companies.
Finally, in the event of a default of any foreign debt obligations, it may be
more difficult for the Fund to obtain or enforce a judgment against the issuers
of the securities.
Securities of foreign issuers may be less liquid than comparable securities of
U.S. issuers and, as such, their price changes may be more volatile.
Furthermore, foreign exchanges and broker-dealers are generally subject to less
government and exchange scrutiny and regulation than their U.S. counterparts.
In addition, differences in clearance and settlement procedures in foreign
markets may occasion delays in settlements of the Fund's trades effected in
those markets.
Many European countries have adopted or are in the process of adopting a single
European currency, referred to as the "euro." The consequences of the euro
5
<PAGE>
conversion for foreign exchange rates, interest rates and the value of European
securities the Fund may purchase are presently unclear. The consequences may
adversely affect the value and/or increase the volatility of securities held by
the Fund.
YEAR 2000. The Fund could be adversely affected if the computer systems
necessary for the efficient operation of the Investment Manager, the Fund's
other service providers and the markets and individual and governmental issuers
in which the Fund invests do not properly process and calculate date-related
information from and after January 1, 2000. While year 2000-related computer
problems could have a negative effect on the Fund, the Investment Manager and
affiliates are working hard to avoid any problems and to obtain assurances from
their service providers that they are taking similar steps.
In addition, it is possible that the markets for securities in which the Fund
invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues. In
addition, corporate and governmental data processing errors may result in
production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial and may be reported inconsistently in U.S. and
foreign financial statements. Accordingly, the Fund's investments may be
adversely affected.
6
<PAGE>
[GRAPHIC 0MITTED] FUND MANAGEMENT
- ---------------------------------
(sidebar)
MORGAN STANLEY DEAN WITTER ADVISORS INC.
The Investment Manager is widely recognized as a leader in the mutual fund
industry and together with Morgan Stanley Dean Witter Services Company Inc.,
its wholly-owned subsidiary, has more than $129.2 billion in assets under
management or administration as of March 31, 1999.
(end sidebar)
The Fund has retained the Investment Manager -- Morgan Stanley Dean Witter
Advisors Inc. -- to provide administrative services, manage its business affairs
and invest its assets, including the placing of orders for the purchase and sale
of portfolio securities. The Investment Manager is a wholly-owned subsidiary of
Morgan Stanley Dean Witter & Co., a preeminent global financial services firm
that maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services. Its main business office is
located at Two World Trade Center, New York, New York 10048.
The Fund's portfolio is managed within the Investment Manager's Sector Rotation
Group. Anita H. Kolleeny, a Senior Vice President of the Investment Manager and
head of the Sector Rotation Group, has been the primary portfolio manager of
the Fund for over five years. Ms. Kolleeny is assisted by Michelle Kaufman, a
Vice President of the Investment Manager since 1993 and a member of the Sector
Rotation Group.
The Fund pays the Investment Manager a monthly management fee as full
compensation for the services and facilities furnished to the Fund, and for
Fund expenses assumed by the Investment Manager. The fee is based on the Fund's
average daily net assets. For the fiscal year ended December 31, 1998, the Fund
accrued total compensation to the Investment Manager amounting to 0.49% of the
Fund's average daily net assets.
7
<PAGE>
SHAREHOLDER INFORMATION
[GRAPHIC 0MITTED] PRICING FUND SHARES
- -------------------------------------
The price of Fund shares (excluding sales charges), called "net asset value,"
is based on the value of the Fund's portfolio securities. While the assets of
each Class are invested in a single portfolio of securities, the net asset
value of each Class will differ because the Classes have different ongoing
distribution fees.
The net asset value per share of the Fund is determined once daily at 4:00 p.m.
Eastern time on each day that the New York Stock Exchange is open (or, on days
when the New York Stock Exchange closes prior to 4:00 p.m., at such earlier
time). Shares will not be priced on days that the New York Stock Exchange is
closed.
The value of the Fund's portfolio securities is based on the securities' market
price when available. When a market price is not readily available, including
circumstances under which the Investment Manager determines that a security's
market price is not accurate, a portfolio security is valued at its fair value,
as determined under procedures established by the Fund's Board of Trustees. In
these cases, the Fund's net asset value will reflect certain portfolio
securities' fair value rather than their market price. In addition, if the Fund
holds securities primarily listed on foreign exchanges, the value of the Fund's
portfolio securities may change on days when you will not be able to purchase
or sell your shares.
An exception to the Fund's general pricing policy concerns its short-term debt
portfolio securities. Debt securities with remaining maturities of sixty days
or less at the time of purchase are valued at amortized cost. However, if the
cost does not reflect the securities' market value, these securities will be
valued at their fair value.
HOW TO BUY SHARES
- -----------------
(sidebar)
CONTACTING A FINANCIAL ADVISOR
If you are new to the Morgan Stanley Dean Witter Family of Funds and would like
to contact a Financial Advisor, call (800) THE-DEAN for the telephone number of
the Morgan Stanley Dean Witter office nearest you. You may also access our
office locator on our Internet site at: www.deanwitter.com/funds
(end sidebar)
You may open a new account to buy Fund shares or buy additional Fund shares for
an existing account by contacting your Morgan Stanley Dean Witter Financial
Advisor or other authorized financial representative. Your Financial Advisor
will assist you, step-by-step, with the procedures to invest in the Fund. You
may also purchase shares directly by calling the Fund's transfer agent and
requesting an application.
Because every investor has different immediate financial needs and long-term
investment goals, the Fund offers investors four Classes of shares: Classes A,
B, C and D. Class D shares are only offered to a limited group of investors.
Each Class of shares offers a distinct structure of sales charges, distribution
and service fees, and other features that are designed to address a variety of
needs. Your Financial Advisor or other authorized financial representative can
help you decide which Class may be most appropriate for you. When purchasing
Fund shares, you must specify which Class of shares you wish to purchase.
When you buy Fund shares, the shares are purchased at the next share price
calculated, less any applicable front-end sales charge, after we receive your
investment order in proper form. We reserve the right to reject any order for
the purchase of Fund shares.
8
<PAGE>
<TABLE>
<CAPTION>
MINIMUM INVESTMENT AMOUNTS
- -----------------------------------------------------------------------------------------------
MINIMUM INVESTMENT
------------------------
INVESTMENT OPTIONS INITIAL ADDITIONAL
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Regular Accounts $1,000 $100
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Individual Retirement Accounts: Regular IRAs $1,000 $100
Education IRAs $500 $100
- -----------------------------------------------------------------------------------------------
EasyInvest(SM) (Automatically from your
checking or savings account or
Money Market Fund) $100* $100*
- -----------------------------------------------------------------------------------------------
</TABLE>
* Provided your schedule of investments totals $1,000 in twelve months.
(sidebar)
EASYINVEST(SM)
A purchase plan that allows you to transfer money automatically from your
checking or savings account or from a Money Market Fund on a semi-monthly,
monthly or quarterly basis. Contact your Morgan Stanley Dean Witter Financial
Advisor for further information about this service.
(end sidebar)
There is no minimum investment amount if you purchase Fund shares through: (1)
the Investment Manager's mutual fund asset allocation plan, (2) a program,
approved by the Fund's distributor, in which you pay an asset-based fee for
advisory, administrative and/or brokerage services, or (3) employer-sponsored
employee benefit plan accounts.
INVESTMENT OPTIONS FOR CERTAIN INSTITUTIONAL AND OTHER INVESTORS/CLASS D SHARES.
To be eligible to purchase Class D shares, you must qualify under one of the
investor categories specified in the "Share Class Arrangements" section of this
Prospectus.
THREE DAY SETTLEMENT. Fund shares are sold through the Fund's distributor,
Morgan Stanley Dean Witter Distributors Inc., on a normal three business day
basis; that is, your payment for Fund shares is due on the third business day
(settlement day) after you place a purchase order.
SUBSEQUENT INVESTMENTS SENT DIRECTLY TO THE FUND. In addition to buying
additional Fund shares for an existing account by contacting your Morgan
Stanley Dean Witter Financial Advisor, you may send a check directly to the
Fund. To buy additional shares in this manner:
o Write a "letter of instruction" to the Fund specifying the name(s) on the
account, the account number, the social security or tax identification
number, the Class of shares you wish to purchase, and the investment amount
(which would include any applicable front-end sales charge). The letter must
be signed by the account owner(s).
o Make out a check for the total amount payable to: Morgan Stanley Dean Witter
American Opportunities Fund.
o Mail the letter and check to Morgan Stanley Dean Witter Trust FSB at P.O. Box
1040, Jersey City, NJ 07303.
9
<PAGE>
[GRAPHIC 0MITTED] HOW TO EXCHANGE SHARES
- ----------------------------------------
PERMISSIBLE FUND EXCHANGES. You may exchange shares of any Class of the Fund
for the same Class of any other continuously offered Multi-Class Fund, or for
shares of a No-Load Fund, Money Market Fund or Short-Term U.S. Treasury Trust,
without the imposition of an exchange fee. See the inside back cover of this
Prospectus for each Morgan Stanley Dean Witter Fund's designation as a
Multi-Class Fund, No-Load Fund or Money Market Fund. If a Morgan Stanley Dean
Witter Fund is not listed, consult the inside back cover of that Fund's
Prospectus for its designation. For purposes of exchanges, shares of FSC Funds
(subject to a front-end sales charge) are treated as Class A shares of a
Multi-Class Fund.
Exchanges may be made after shares of the Fund acquired by purchase have been
held for thirty days. There is no waiting period for exchanges of shares
acquired by exchange or dividend reinvestment. The current Prospectus for each
fund describes its investment objective(s), policies and investment minimums,
and should be read before investment.
EXCHANGE PROCEDURES. You can process an exchange by contacting your Morgan
Stanley Dean Witter Financial Advisor or other authorized financial
representative. Otherwise, you must forward an exchange privilege authorization
form to the Fund's transfer agent, Morgan Stanley Dean Witter Trust FSB -- and
then write the transfer agent or call (800) 869-NEWS to place an exchange
order. You can obtain an exchange privilege authorization form by contacting
your Financial Advisor or other authorized financial representative or by
calling (800) 869-NEWS. If you hold share certificates, no exchanges may be
processed until we have received all applicable share certificates.
An exchange to any Morgan Stanley Dean Witter Fund (except a Money Market Fund)
is made on the basis of the next calculated net asset values of the Funds
involved after the exchange instructions are accepted. When exchanging into a
Money Market Fund, the Fund's shares are sold at their next calculated net
asset value and the Money Market Fund's shares are purchased at their net asset
value on the following business day.
The Fund may terminate or revise the exchange privilege upon required notice.
Certain services normally available to shareholders of Money Market Funds,
including the check writing privilege, are not available for Money Market Fund
shares you acquire in an exchange.
TELEPHONE EXCHANGES. For your protection when calling Morgan Stanley Dean
Witter Trust FSB, we will employ reasonable procedures to confirm that exchange
instructions communicated over the telephone are genuine. These procedures may
include requiring various forms of personal identification such as name,
mailing address, social security or other tax identification number. Telephone
instructions also may be recorded.
Telephone instructions will be accepted if received by the Fund's transfer
agent between 9:00 a.m. and 4:00 p.m. Eastern time, on any day the New York
Stock Exchange is open for business. During periods of drastic economic or
market changes, it is possible that the telephone exchange procedures may be
difficult to implement, although this has not been the case with the Fund in
the past.
10
<PAGE>
MARGIN ACCOUNTS. If you have pledged your Fund shares in a margin account,
contact your Morgan Stanely Dean Witter Financial Advisor or other authorized
financial representative regarding restrictions on the exchange of such shares.
TAX CONSIDERATIONS OF EXCHANGES. If you exchange shares of the Fund for shares
of another Morgan Stanley Dean Witter Fund there are important tax
considerations. For tax purposes, the exchange out of the Fund is considered a
sale of the Fund's shares -- and the exchange into the other Fund is considered
a purchase. As a result, you may realize a capital gain or loss.
You should review the "Tax Consequences" section and consult your own tax
professional about the tax consequences of an exchange.
FREQUENT EXCHANGES. A pattern of frequent exchanges may result in the Fund
limiting or prohibiting, at its discretion, additional purchases and/or
exchanges. The Fund will notify you in advance of limiting your exchange
privileges.
CDSC CALCULATIONS ON EXCHANGES. See the "Share Class Arrangements" section of
this Prospectus for a discussion of how applicable contingent deferred sales
charges (CDSCs) are calculated for shares of one Morgan Stanley Dean Witter
Fund that are exchanged for shares of another.
For further information regarding exchange privileges, you should contact your
Morgan Stanley Dean Witter Financial Advisor or call (800) 869-NEWS.
11
<PAGE>
[GRAPHIC 0MITTED] HOW TO SELL SHARES
- ------------------------------------
You can sell some or all of your Fund shares at any time. If you sell Class A,
Class B or Class C shares, your net sale proceeds are reduced by the amount of
any applicable CDSC. Your shares will be sold at the next price calculated
after we receive your order to sell as described below.
<TABLE>
<S> <C>
OPTIONS PROCEDURES
- --------------------------------------------------------------------------------
Contact Your To sell your shares, simply call your Morgan Stanley Dean
Financial Advisor Witter Financial Advisor or other authorized financial
[GRAPHIC 0MITTED] representative.
-----------------------------------------------------------
Payment will be sent to the address to which the account is
registered or deposited in your brokerage account.
- --------------------------------------------------------------------------------
By Letter You can also sell your shares by writing a "letter of
[GRAPHIC 0MITTED] instruction" that includes:
o your account number;
o the dollar amount or the number of shares you wish to
sell;
o the Class of shares you wish to sell; and
o the signature of each owner as it appears on the account.
-----------------------------------------------------------
If you are requesting payment to anyone other than the
registered owner(s) or that payment be sent to any address
other than the address of the registered owner(s) or
pre-designated bank account, you will need a signature
guarantee. You can obtain a signature guarantee from an
eligible guarantor acceptable to Morgan Stanley Dean Witter
Trust FSB. (You should contact Morgan Stanley Dean Witter
Trust FSB at (800) 869-NEWS for a determination as to
whether a particular institution is an eligible guarantor.)
A notary public cannot provide a signature guarantee.
Additional documentation may be required for shares held by
a corporation, partnership, trustee or executor.
-----------------------------------------------------------
Mail the letter to Morgan Stanley Dean Witter Trust FSB at
P.O. Box 983, Jersey City, New Jersey 07303. If you hold
share certificates, you must return the certificates, along
with the letter and any required additional documentation.
-----------------------------------------------------------
A check will be mailed to the name(s) and address in which
the account is registered, or otherwise according to your
instructions.
- --------------------------------------------------------------------------------
Systematic If your investment in all of the Morgan Stanley Dean Witter
Withdrawal Plan Family of Funds has a total market value of at least
[GRAPHIC 0MITTED] $10,000, you may elect to withdraw amounts of $25 or more,
or in any whole percentage of a Fund's balance (provided
the amount is at least $25), on a monthly, quarterly,
semi-annual or annual basis, from any Fund with a balance
of at least $1,000. Each time you add a Fund to the plan,
you must meet the plan requirements.
-----------------------------------------------------------
Amounts withdrawn are subject to any applicable CDSC. A
CDSC may be waived under certain circumstances. See the
Class B waiver categories listed in the "Share Class
Arrangements" section of this Prospectus.
-----------------------------------------------------------
To sign up for the systematic withdrawal plan, contact your
Morgan Stanley Dean Witter Financial Advisor or call (800)
869-NEWS. You may terminate or suspend your plan at any
time. Please remember that withdrawals from the plan are
sales of shares, not Fund "distributions," and ultimately
may exhaust your account balance. The Fund may terminate or
revise the plan at any time.
- --------------------------------------------------------------------------------
</TABLE>
PAYMENT FOR SOLD SHARES. After we receive your complete instructions to sell as
described above, a check will be mailed to you within seven days, although we
will attempt to make payment within one business day. Payment may also be sent
to your brokerage account.
Payment may be postponed or the right to sell your shares suspended under
unusual circumstances. If you request to sell shares that were recently
purchased by check, payment of the sale proceeds may be delayed for the minimum
time needed to verify that the check has been honored (not more than fifteen
days from the time we receive the check).
12
<PAGE>
TAX CONSIDERATIONS. Normally, your sale of Fund shares is subject to federal
and state income tax. You should review the "Tax Consequences" section of this
Prospectus and consult your own tax professional about the tax consequences of
a sale.
REINSTATEMENT PRIVILEGE. If you sell Fund shares and have not previously
exercised the reinstatement privilege, you may, within 35 days after the date
of sale, invest any portion of the proceeds in the same Class of Fund shares at
their net asset value and receive a pro rata credit for any CDSC paid in
connection with the sale.
INVOLUNTARY SALES. The Fund reserves the right, on sixty days' notice, to sell
the shares of any shareholder (other than shares held in an IRA or 403(b)
Custodial Account) whose shares, due to sales by the shareholder, have a value
below $100, or in the case of an account opened through EasyInvest(SM), if after
12 months the shareholder has invested less than $1,000 in the account.
However, before the Fund sells your shares in this manner, we will notify you
and allow you sixty days to make an additional investment in an amount that
will increase the value of your account to at least the required amount before
the sale is processed. No CDSC will be imposed on any involuntary sale.
MARGIN ACCOUNTS. Certain restrictions may apply to Fund shares pledged in
margin accounts with Dean Witter Reynolds or another authorized broker-dealer
of Fund shares. If you hold Fund shares in this manner, please contact your
Morgan Stanley Dean Witter Financial Advisor or other authorized financial
representative for more details.
[GRAPHIC 0MITTED] DISTRIBUTIONS
- -------------------------------
(sidebar)
TARGETED DIVIDENDS(SM)
You may select to have your Fund distributions automatically invested in other
Classes of Fund shares or Classes of another Morgan Stanley Dean Witter Fund
that you own. Contact your Morgan Stanley Dean Witter Financial Advisor for
further information about this service.
(end sidebar)
The Fund passes substantially all of its earnings from income and capital gains
along to its investors as "distributions." The Fund earns income from stocks
and interest from fixed-income investments. These amounts are passed along to
Fund shareholders as "income dividend distributions." The Fund realizes capital
gains whenever it sells securities for a higher price than it paid for them.
These amounts may be passed along as "capital gain distributions."
The Fund declares income dividends separately for each Class. Distributions
paid on Class A and Class D shares usually will be higher than for Class B and
Class C because distribution fees that Class B and Class C pay are higher.
Normally, income dividends and short-term capital gains are distributed
semi-annually and any other capital gains are distributed annually in December.
The Fund, however, may retain and reinvest any long-term capital gains. The
Fund may at times make payments from sources other than income or capital gains
that represent a return of a portion of your investment.
Distributions are reinvested automatically in additional shares of the same
Class and automatically credited to your account, unless you request in writing
that all distributions be paid in cash. If you elect the cash option, the Fund
will mail a check to you no later than seven business days after the
distribution is declared. No interest will accrue on uncashed checks. If you
wish to change how your distributions are paid, your request should be received
by the Fund's transfer agent, Morgan Stanley Dean Witter Trust FSB, at least
five business days prior to the record date of the distributions.
13
<PAGE>
[GRAPHIC 0MITTED] TAX CONSEQUENCES
- ----------------------------------
As with any investment, you should consider how your Fund investment will be
taxed. The tax information in this Prospectus is provided as general
information. You should consult your own tax professional about the tax
consequences of an investment in the Fund.
Unless your investment in the Fund is through a tax-deferred retirement
account, such as a 401(k) plan or IRA, you need to be aware of the possible tax
consequences when:
o The Fund makes distributions; and
o You sell Fund shares, including an exchange to another Morgan Stanley Dean
Witter Fund.
TAXES ON DISTRIBUTIONS. Your distributions are normally subject to federal and
state income tax when they are paid, whether you take them in cash or reinvest
them in Fund shares. A distribution also may be subject to local income tax.
Any income dividend distributions and any short-term capital gain distributions
are taxable to you as ordinary income. Any long-term capital gain distributions
are taxable as long-term capital gains, no matter how long you have owned
shares in the Fund.
Every January, you will be sent a statement (IRS Form 1099-DIV) showing the
taxable distributions paid to you in the previous year. The statement provides
full information on your dividends and capital gains for tax purposes.
TAXES ON SALES. Your sale of Fund shares normally is subject to federal and
state income tax and may result in a taxable gain or loss to you. A sale also
may be subject to local income tax. Your exchange of Fund shares for shares of
another Morgan Stanley Dean Witter Fund is treated for tax purposes like a sale
of your original shares and a purchase of your new shares. Thus, the exchange
may, like a sale, result in a taxable gain or loss to you and will give you a
new tax basis for your new shares.
When you open your Fund account, you should provide your Social Security or tax
identification number on your investment application. By providing this
information, you will avoid being subject to a federal backup withholding tax
of 31% on taxable distributions and redemption proceeds. Any withheld amount
would be sent to the IRS as an advance tax payment.
[GRAPHIC 0MITTED] SHARE CLASS ARRANGEMENTS
- ------------------------------------------
The Fund offers several Classes of shares having different distribution
arrangements designed to provide you with different purchase options according
to your investment needs. Your Morgan Stanley Dean Witter Financial Advisor or
other authorized financial representative can help you decide which Class may
be appropriate for you.
The general public is offered three Classes: Class A shares, Class B shares and
Class C shares, which differ principally in terms of sales charges and ongoing
expenses. A fourth Class, Class D shares, is offered only to a limited category
of investors. Shares that you acquire through reinvested distributions will not
be subject to any front-end sales charge or CDSC -- contingent deferred sales
charge. Sales personnel may receive different compensation for selling each
Class of shares. The sales charges applicable to each Class provide for the
distribution financing of shares of that Class.
14
<PAGE>
The chart below compares the sales charge and annual 12b-1 fees applicable to
each Class:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CLASS SALES CHARGE ANNUAL 12B-1 FEE
- --------------------------------------------------------------------------------
<S> <C> <C>
A Maximum 5.25% initial sales charge reduced for
purchase of $25,000 or more; shares sold without
an initial sales charge are generally subject to
a 1.0% CDSC during first year 0.25%
- --------------------------------------------------------------------------------
B Maximum 5.0% CDSC during the first year decreasing
to 0% after six years 1.0%
- --------------------------------------------------------------------------------
C 1.0% CDSC during first year 1.0%
- --------------------------------------------------------------------------------
D None None
- --------------------------------------------------------------------------------
</TABLE>
(sidebar)
FRONT-END SALES CHARGE OR FSC
An initial sales charge you pay when purchasing Class A shares that is based on
a percentage of the offering price. The percentage declines based upon the
dollar value of Class A shares you purchase. We offer three ways to reduce your
Class A sales charges -- the Combined Purchase Privilege, Right of Accumulation
and Letter of Intent.
(end sidebar)
CLASS A SHARES Class A shares are sold at net asset value plus an initial sales
charge of up to 5.25%. The initial sales charge is reduced for purchases of
$25,000 or more according to the schedule below. Investments of $1 million or
more are not subject to an initial sales charge, but are generally subject to a
contingent deferred sales charge, or CDSC, of 1.0% on sales made within one year
after the last day of the month of purchase. The CDSC will be assessed in the
same manner and with the same CDSC waivers as with Class B shares. Class A
shares are also subject to a distribution (12b-1) fee of up to 0.25% of the
average daily net assets of the Class.
The offering price of Class A shares includes a sales charge (expressed as a
percentage of the offering price) on a single transaction as shown in the
following table:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FRONT-END SALES CHARGE
- --------------------------------------------------------------------------------
PERCENTAGE OF APPROXIMATE PERCENTAGE
AMOUNT OF SINGLE TRANSACTION PUBLIC OFFERING PRICE OF AMOUNT INVESTED
- --------------------------------------------------------------------------------
<S> <C> <C>
Less than $25,000 5.25% 5.54%
- --------------------------------------------------------------------------------
$25,000 but less than $50,000 4.75% 4.99%
- --------------------------------------------------------------------------------
$50,000 but less than $100,000 4.00% 4.17%
- --------------------------------------------------------------------------------
$100,000 but less than $250,000 3.00% 3.09%
- --------------------------------------------------------------------------------
$250,000 but less than $1 million 2.00% 2.04%
- --------------------------------------------------------------------------------
$1 million and over 0 0
- --------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
The reduced sales charge schedule is applicable to purchases of Class A shares
in a single transaction by:
o A single account (including an individual, trust or fiduciary account).
o Family member accounts (limited to husband, wife and children under the age
of 21).
o Pension, profit sharing or other employee benefit plans of companies and
their affiliates.
o Tax-exempt organizations.
o Groups organized for a purpose other than to buy mutual fund shares.
COMBINED PURCHASE PRIVILEGE. You also will have the benefit of reduced sales
charges by combining purchases of Class A shares of the Fund in a single
transaction with purchases of Class A shares of other Multi-Class Funds and
shares of FSC Funds.
RIGHT OF ACCUMULATION. You also may benefit from a reduction of sales charges,
if the cumulative net asset value of Class A shares of the Fund purchased in a
single transaction, together with shares of other Funds you currently own which
were previously purchased at a price including a front-end sales charge
(including shares acquired through reinvestment of distributions), amounts to
$25,000 or more. Also, if you have a cumulative net asset value of all your
Class A and Class D shares equal to at least $5 million (or $25 million for
certain employee benefit plans), you are eligible to purchase Class D shares of
any Fund subject to the Fund's minimum initial investment requirement.
You must notify your Morgan Stanley Dean Witter Financial Advisor or other
authorized financial representative, (or Morgan Stanley Dean Witter Trust FSB
if you purchase directly through the Fund) at the time a purchase order is
placed, that the purchase qualifies for the reduced charge under the Right of
Accumulation. Similar notification must be made in writing when an order is
placed by mail. The reduced sales charge will not be granted if: (i)
notification is not furnished at the time of the order; or (ii) a review of the
records of Dean Witter Reynolds or other authorized dealer of Fund shares or
the Fund's transfer agent does not confirm your represented holdings.
LETTER OF INTENT. The schedule of reduced sales charges for larger purchases
also will be available to you if you enter into a written "letter of intent." A
letter of intent provides for the purchase of shares within a thirteen-month
period. It is available for purchases of Class A shares of Multi-Class Funds
and/or shares of FSC Funds. The initial purchase under a letter of intent must
be at least 5% of the stated investment goal. To determine the applicable sales
charge reduction, you may also include: (1) the cost of shares of other Morgan
Stanley Dean Witter Funds which were previously purchased at a price including
a front-end sales charge during the 90-day period prior to the distributor
receiving the letter of intent, and (2) the cost of shares of other Funds you
currently own acquired in exchange for shares of Funds purchased during that
period at a price including a front-end sales charge. You can obtain a letter
of intent by contacting your Morgan Stanley Dean Witter Financial Advisor or
other authorized financial representative, or by calling (800) 869-NEWS. If you
do not
16
<PAGE>
achieve the stated investment goal within the thirteen-month period, you are
required to pay the difference between the sales charges otherwise applicable
and sales charges actually paid.
OTHER FRONT-END SALES CHARGE WAIVERS. In addition to investments of $1 million
or more, your purchase of Class A shares is not subject to a front-end sales
charge (or a CDSC upon sale) if your account qualifies under one of the
following categories:
o A trust for which Morgan Stanley Dean Witter Trust FSB provides discretionary
trustee services.
o Persons participating in a fee-based investment program (subject to all of
its terms and conditions, including mandatory sale or transfer restrictions
on termination) approved by the Fund's distributor pursuant to which they
pay an asset based fee for investment advisory, administrative and/or
brokerage services.
o Employer-sponsored employee benefit plans, whether or not qualified under the
Internal Revenue Code, for which Morgan Stanley Dean Witter Trust FSB serves
as trustee or Dean Witter Reynold's Retirement Plan Services serves as
recordkeeper under a written Recordkeeping Services Agreement ("MSDW
Eligible Plans") which have at least 200 eligible employees.
o A MSDW Eligible Plan whose Class B shares have converted to Class A shares,
regardless of the plan's asset size or number of eligible employees.
o A client of a Morgan Stanley Dean Witter Financial Advisor who joined us from
another investment firm within six months prior to the date of purchase of
Fund shares, and you used the proceeds from the sale of shares of a
proprietary mutual fund of that Financial Advisor's previous firm that
imposed either a front-end or deferred sales charge to purchase Class A
shares, provided that: (1) you sold the shares not more than 60 days prior
to purchase, and (2) the sale proceeds were maintained in the interim in
cash or a money market fund.
o Current or retired Directors/Trustees of the Morgan Stanley Dean Witter
Funds, such persons' spouses and children under the age of 21, and trust
accounts for which any of such persons is a beneficiary.
o Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries, such persons' spouses and children
under the age of 21, and trust accounts for which any of such persons is a
beneficiary.
17
<PAGE>
CLASS B SHARES Class B shares are offered at net asset value with no initial
sales charge but are subject to a contingent deferred sales charge, or CDSC, as
set forth in the table below. For the purpose of calculating the CDSC, shares
are deemed to have been purchased on the last day of the month during which they
were purchased.
(sidebar)
CONTINGENT DEFERRED SALES CHARGE OR CDSC
A fee you pay when you sell shares of certain Morgan Stanley Dean Witter Funds
purchased without an initial sales charge. This fee declines the longer you hold
your shares as set forth in the table.
(end sidebar)
- ------------------------------------------------------------------------------
YEAR SINCE PURCHASE PAYMENT MADE CDSC AS A PERCENTAGE OF AMOUNT REDEEMED
- ------------------------------------------------------------------------------
First 5.0%
- ------------------------------------------------------------------------------
Second 4.0%
- ------------------------------------------------------------------------------
Third 3.0%
- ------------------------------------------------------------------------------
Fourth 2.0%
- ------------------------------------------------------------------------------
Fifth 2.0%
- ------------------------------------------------------------------------------
Sixth 1.0%
- ------------------------------------------------------------------------------
Seventh and thereafter None
- ------------------------------------------------------------------------------
Each time you place an order to sell or exchange shares, shares with no CDSC
will be sold or exchanged first, then shares with the lowest CDSC will be sold
or exchanged next. For any shares subject to a CDSC, the CDSC will be assessed
on an amount equal to the lesser of the current market value or the cost of the
shares being sold.
CDSC WAIVERS. A CDSC, if otherwise applicable, will be waived in the case of:
o Sales of shares held at the time you die or become disabled (within the
definition in Section 72(m)(7) of the Internal Revenue Code which relates to
the ability to engage in gainful employment), if the shares are: (i)
registered either in your name (not a trust) or in the names of you and your
spouse as joint tenants with right of survivorship; or (ii) held in a
qualified corporate or self-employed retirement plan, IRA or 403(b)
Custodial Account, provided in either case that the sale is requested within
one year of your death or initial determination of disability.
o Sales in connection with the following retirement plan "distributions": (i)
lump-sum or other distributions from a qualified corporate or self-employed
retirement plan following retirement (or, in the case of a "key employee" of
a "top heavy" plan, following attainment of age 591/2); (ii) distributions
from an IRA or 403(b) Custodial Account following attainment of age 591/2;
or (iii) a tax-free return of an excess IRA contribution (a "distribution"
does not include a direct transfer of IRA, 403(b) Custodial Account or
retirement plan assets to a successor custodian or trustee).
o Sales of shares held for you as a participant in a MSDW Eligible Plan.
o Sales of shares in connection with the Systematic Withdrawal Plan of up to
12% annually of the value of each Fund from which plan sales are made. The
percentage is determined on the date you establish the Systematic Withdrawal
Plan and based on the next calculated share price. You may have this CDSC
waiver applied in amounts up to 1% per month, 3% per quarter, 6%
semi-annually or 12% annually. Shares with no CDSC will be sold first,
followed by those with the lowest CDSC. As such, the waiver benefit will be
reduced by the amount of your shares that are not
18
<PAGE>
subject to a CDSC. If you suspend your participation in the plan, you may
later resume plan payments without requiring a new determination of the
account value for the 12% CDSC waiver.
All waivers will be granted only following the Distributor receiving
confirmation of your entitlement. If you believe you are eligible for a CDSC
waiver, please contact your Financial Advisor or call (800) 869-NEWS.
DISTRIBUTION FEE. Class B shares are also subject to an annual distribution
(12b-1) fee of 1.0% of the lesser of: (a) the average daily aggregate gross
purchases by all shareholders of the Fund's Class B shares since the inception
of the 12b-1 plan on April 30, 1984 (not including reinvestment of dividends or
capital gains distributions), less the average daily aggregate net asset value
of the Fund's Class B shares sold by all shareholders since the inception of
the 12b-1 plan upon which a CDSC has been imposed or waived, or (b) the average
daily net assets of Class B attributable to shares issued, net of related
shares sold, since inception of the 12b-1 plan.
CONVERSION FEATURE. After ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund with no initial sales charge. The
ten year period runs from the last day of the month in which the shares were
purchased, or in the case of Class B shares acquired through an exchange, from
the last day of the month in which the original Class B shares were purchased;
the shares will convert to Class A shares based on their relative net asset
values in the month following the ten year period. At the same time, an equal
proportion of Class B shares acquired through automatically reinvested
distributions will convert to Class A shares on the same basis. (Class B shares
held before May 1, 1997, however, will convert to Class A shares in May 2007.)
In the case of Class B shares held in a MSDW Eligible Plan, the plan is treated
as a single investor and all Class B shares will convert to Class A shares on
the conversion date of the Class B shares of a Morgan Stanley Dean Witter Fund
purchased by that plan.
Currently, the Class B share conversion is not a taxable event; the conversion
feature may be cancelled if it is deemed a taxable event in the future by the
Internal Revenue Service.
If you exchange your Class B shares for shares of a Money Market Fund, No-Load
Fund or Short-Term U.S. Treasury Trust, the holding period for conversion is
frozen as of the last day of the month of the exchange and resumes on the last
day of the month you exchange back into Class B shares.
EXCHANGING SHARES SUBJECT TO A CDSC. There are special considerations when you
exchange Fund shares that are subject to a CDSC. When determining the length of
time you held the shares and the corresponding CDSC rate, any period (starting
at the end of the month) during which you held shares of a fund that does not
charge a CDSC will not be counted. Thus, in effect the "holding period" for
purposes of calculating the CDSC is frozen upon exchanging into a fund that
does not charge a CDSC.
For example, if you held Class B shares of the Fund for one year, exchanged to
Class B of another Morgan Stanley Dean Witter Multi-Class Fund for another
year, then sold your shares, a CDSC rate of 4% would be imposed on the shares
based on a two year holding period -- one year for each Fund. However, if you
had exchanged the shares of
19
<PAGE>
the Fund for a Money Market Fund (which does not charge a CDSC) instead of the
Multi-Class Fund, then sold your shares, a CDSC rate of 5% would be imposed on
the shares based on a one year holding period. The one year in the Money Market
Fund would not be counted. Nevertheless, if shares subject to a CDSC are
exchanged for a fund that does not charge a CDSC, you will receive a credit
when you sell the shares equal to the distribution (12b-1) fees you paid on
those shares while in that Fund up to the amount of any applicable CDSC.
In addition, shares that are exchanged into or from a Morgan Stanley Dean
Witter Fund subject to a higher CDSC rate will be subject to the higher rate,
even if the shares are re-exchanged into a Fund with a lower CDSC rate.
CLASS C SHARES Class C shares are sold at net asset value with no initial sales
charge but are subject to a CDSC of 1.0% on sales made within one year after the
last day of the month of purchase. The CDSC will be assessed in the same manner
and with the same CDSC waivers as with Class B shares.
DISTRIBUTION FEE. Class C shares are subject to an annual distribution (12b-1)
fee of 1.0% of the average daily net assets of that Class. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A or Class D shares. Unlike Class B shares, Class C shares
have no conversion feature and, accordingly, an investor that purchases Class C
shares may be subject to distribution (12b-1) fees applicable to Class C shares
for an indefinite period.
CLASS D SHARES Class D shares are offered without any sales charge on purchases
or sales and without any distribution (12b-1) fee. Class D shares are offered
only to investors meeting an initial investment minimum of $5 million ($25
million for MSDW Eligible Plans) and the following categories of investors:
o Investors participating in the Investment Manager's mutual fund asset
allocation program (subject to all of its terms and conditions, including
mandatory sale or transfer restrictions on termination) pursuant to which
they pay an asset-based fee.
o Persons participating in a fee-based investment program (subject to all of
its terms and conditions, including mandatory sale or transfer restrictions
on termination) approved by the Fund's distributor pursuant to which they
pay an asset based fee for investment advisory, administrative and/or
brokerage services.
o Employee benefit plans maintained by Morgan Stanley Dean Witter & Co. or any
of its subsidiaries for the benefit of certain employees of Morgan Stanley
Dean Witter & Co. and its subsidiaries.
o Certain unit investment trusts sponsored by Dean Witter Reynolds.
o Certain other open-end investment companies whose shares are distributed by
the Fund's distributor.
o Investors who were shareholders of the Dean Witter Retirement Series on
September 11, 1998 for additional purchases for their former Dean Witter
Retirement Series accounts.
MEETING CLASS D ELIGIBILITY MINIMUMS. To meet the $5 million ($25 million for
MSDW Eligible Plans) initial investment to qualify to purchase Class D shares
you may
20
<PAGE>
combine: (1) purchases in a single transaction of Class D shares of the Fund
and other Morgan Stanley Dean Witter Multi-Class Funds and/or (2) previous
purchases of Class A and Class D shares of Multi-Class Funds and shares of FSC
Funds you currently own, along with shares of Morgan Stanley Dean Witter Funds
you currently own that you acquired in exchange for those shares.
NO SALES CHARGES FOR REINVESTED CASH DISTRIBUTIONS. If you receive a cash
payment representing an income dividend or capital gain and you reinvest that
amount in the applicable Class of shares by returning the check within 30 days
of the payment date, the purchased shares would not be subject to an initial
sales charge or CDSC.
PLAN OF DISTRIBUTION (RULE 12B-1 FEES) The Fund has adopted a Plan of
Distribution in accordance with Rule 12b-1 under the Investment Company Act of
1940 with respect to the distribution of Class A, Class B and Class C shares.
The Plan allows the Fund to pay distribution fees for the sale and distribution
of these shares. It also allows the Fund to pay for services to shareholders of
Class A, Class B and Class C shares. Because these fees are paid out of the
Fund's assets on an ongoing basis, over time these fees will increase the cost
of your investment in these Classes and may cost you more than paying other
types of sales charges.
21
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 fiscal years of the Fund. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate an investor would have earned or lost
on an investment in the Fund (assuming reinvestment of all dividends and
distributions).
This information has been audited by PricewaterhouseCoopers LLP, whose report,
along with the Fund's financial statements, is included in the annual report,
which is available upon request.
CLASS B
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998++ 1997++ 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $29.51 $27.01 $27.16 $21.21 $23.10
- ---------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations
Net investment income (loss) (0.03) (0.10) (0.08) 0.01 --
Net realized and unrealized gain (loss) 8.66 8.34 2.86 8.87 (1.57)
- ---------------------------------------------------------------------------------------------------------------
Total income (loss) from investment
operations 8.63 8.24 2.78 8.88 (1.57)
- ---------------------------------------------------------------------------------------------------------------
Less dividends and distributions from
Net investment income -- -- (0.01) -- --
Net realized gain (5.29) (5.74) (2.92) (2.93) (0.32)
- ---------------------------------------------------------------------------------------------------------------
Total dividends and distributions (5.29) (5.74) (2.93) (2.93) (0.32)
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $32.85 $29.51 $27.01 $27.16 $21.21
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ 31.07% 31.55% 10.53% 42.20% (6.75)%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.39%(1) 1.46% 1.53% 1.61% 1.71%
Net investment income (loss) (0.10)%(1) (0.34)% (0.33)% 0.06% 0.01%
- ---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period, in millions $5,750 $4,078 $3,099 $2,389 $1,490
Portfolio turnover rate 321% 275% 279% 256% 295%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
* Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date, other than shares which were purchased
prior to April 30, 1984 (and with respect to such shares, certain shares
acquired through reinvestment of dividends and capital gains distributions
(collectively the "Old Shares")), have been designated Class B shares. The
Old Shares have been designated Class D shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Reflects overall Fund ratios for investment income and non-class specific
expenses.
22
<PAGE>
CLASS A
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $29.59 $31.87
- --------------------------------------------------------------------------------
Income from investment operations
Net investment income 0.15 0.05
Net realized and unrealized gain 8.71 2.32
------- --------
Total income from investment operations 8.86 2.37
- --------------------------------------------------------------------------------
Less distributions from net realized gain (5.29) (4.65)
Net asset value, end of period $33.16 $29.59
- --------------------------------------------------------------------------------
TOTAL RETURN+ 31.78% 7.70%(1)
RATIOS TO AVERAGE NET ASSETS
Expenses 0.86%(3) 0.92%(2)
Net investment income 0.43%(3) 0.38%(2)
- --------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period, in thousands $116,894 $15,844
Portfolio turnover rate 321% 275%
- --------------------------------------------------------------------------------
</TABLE>
CLASS C
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
SELECTED PER SHARE DATA
Net asset value, beginning of period $29.49 $31.87
Income from investment operations
Net investment loss (0.10) (0.05)
Net realized and unrealized gain 8.64 2.32
------- --------
Total income from investment operations 8.54 2.27
- --------------------------------------------------------------------------------
Less distributions from net realized gain (5.29) (4.65)
Net asset value, end of period $32.74 $29.49
- --------------------------------------------------------------------------------
TOTAL RETURN+ 30.78% 7.39%(1)
RATIOS TO AVERAGE NET ASSETS
Expenses 1.61%(3) 1.66%(2)
Net investment loss (0.32)%(3) (0.36)%(2)
- --------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period, in thousands $60,861 $12,204
Portfolio turnover rate 321% 275%
- --------------------------------------------------------------------------------
</TABLE>
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
23
<PAGE>
CLASS D
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $29.63 $31.87
- --------------------------------------------------------------------------------
Income from investment operations
Net investment income 0.24 0.07
Net realized and unrealized gain 8.73 2.34
-------- --------
Total income from investment operations 8.97 2.41
- --------------------------------------------------------------------------------
Less distributions from net realized gain (5.29) (4.65)
Net asset value, end of period $33.31 $29.63
- --------------------------------------------------------------------------------
TOTAL RETURN+ 32.12% 7.83%(1)
RATIOS TO AVERAGE NET ASSETS
Expenses 0.61%(3) 0.64%(2)
Net investment income 0.68%(3) 0.50%(2)
- --------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period, in thousands $135,022 $49,772
Portfolio turnover rate 321% 275%
- --------------------------------------------------------------------------------
</TABLE>
* The date shares were first issued. Shareholders who held shares of the Fund
prior to July 28, 1997 (the date the Fund converted to a multiple class
share structure) should refer to the Financial Highlights of Class B to
obtain the historical per share data and ratio information of their shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
24
<PAGE>
MORGAN STANLEY DEAN WITTER
FAMILY OF FUNDS
The Morgan Stanley Dean Witter Family of Funds offers investors a wide range of
investment choices. Come on in and meet the family!
- --------------------------------------------------------------------------------
GROWTH FUNDS
Aggressive Equity Fund
American Opportunities Fund
Capital Growth Securities
Developing Growth Securities
Equity Fund
Growth Fund
Market Leader Trust
Mid-Cap Growth Fund
Special Value Fund
Value Fund
THEME FUNDS
Financial Services Trust
Health Sciences Trust
Information Fund
Natural Resource Development Securities
Precious Metals and Minerals Trust
GLOBAL/INTERNATIONAL FUNDS
Competitive Edge Fund - "Best Ideas" Portfolio
European Growth Fund
Fund of Funds - International Portfolio
Global Dividend Growth Securities
International SmallCap Fund
Japan Fund
Pacific Growth Fund
- --------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
Balanced Growth Fund
Balanced Income Fund
Convertible Securities Trust
Dividend Growth Securities
Fund of Funds - Domestic Portfolio
Income Builder Fund
Mid-Cap Dividend Growth Securities
S&P 500 Index Fund
S&P 500 Select Fund
Strategist Fund
Value/Added Market Series/Equity Portfolio
THEME FUNDS
Global Utilities Fund
Real Estate Fund
Utilities Fund
- --------------------------------------------------------------------------------
INCOME FUNDS
GOVERNMENT INCOME FUNDS
Federal Securities Trust
Short-Term U.S. Treasury Trust
U.S. Government Securities Trust
DIVERSIFIED INCOME FUNDS
Diversified Income Trust
CORPORATE INCOME FUNDS
High Yield Securities
Intermediate Income Securities
Short-Term Bond Fund(NL)
GLOBAL INCOME FUNDS
World Wide Income Trust
TAX-FREE INCOME FUNDS
California Tax-Free Income Fund
Hawaii Municipal Trust(FSC)
Limited Term Municipal Trust(NL)
Multi-State Municipal Series Trust(FSC)
New York Tax-Free Income Fund
Tax-Exempt Securities Trust
- --------------------------------------------------------------------------------
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
Liquid Asset Fund(MM)
U.S. Government Money Market Trust(MM)
TAX-FREE MONEY MARKET FUNDS
California Tax-Free Daily Income Trust(MM)
New York Municipal Money Market Trust(MM)
Tax-Free Daily Income Trust(MM)
There may be Funds created after this Prospectus was published. Please consult
the inside front cover of a new Fund's prospectus for its designations, e.g.,
Multi-Class Fund or Money Market Fund.
Unless otherwise noted, each listed Morgan Stanley Dean Witter Fund, except for
Short-Term U.S. Treasury Trust, is a Multi-Class Fund. A Multi-Class Fund is a
mutual fund offering multiple Classes of shares. The other types of Funds are:
NL -- No-Load (Mutual) Fund; MM -- Money Market Fund; FSC -- A mutual fund sold
with a front-end sales charge and a distribution (12b-1) fee.
<PAGE>
MORGAN STANLEY DEAN WITTER
AMERICAN OPPORTUNITIES FUND
Additional information about the Fund's investments is available in the Fund's
Annual and Semi-Annual Reports to Shareholders. In the Fund's Annual Report,
you will find a discussion of the market conditions and investment strategies
that significantly affected the Fund's performance during its last fiscal year.
The Fund's Statement of Additional Information also provides additional
information about the Fund. The Statement of Additional Information is
incorporated herein by reference (legally is part of this Prospectus). For a
free copy of any of these documents, to request other information about the
Fund, or to make shareholder inquiries, please call:
(800) 869-NEWS
You also may obtain information about the Fund by calling your Morgan Stanley
Dean Witter Financial Advisor or by visiting our Internet site at:
WWW.DEANWITTER.COM/FUNDS
(SIDEBAR)
TICKER SYMBOLS:
Class A: AMOAX
- ------------------
Class B: AMOBX
- ------------------
Class C: AMOCX
- ------------------
Class D: AMODX
- ------------------
(END SIDEBAR)
Information about the Fund (including the Statement of Additional Information)
can be viewed and copied at the Securities and Exchange Commission's Public
Reference Room in Washington, DC. Information about the Reference Room's
operations may be obtained by calling the SEC at (800) SEC-0330. Reports and
other information about the Fund are available on the SEC's Internet site
(www.sec.gov), and copies of this information may be obtained, upon payment of
a duplicating fee, by writing the Public Reference Section of the SEC,
Washington, DC 20549-6009.
(INVESTMENT COMPANY ACT FILE NO. 811-2978)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION MORGAN STANLEY DEAN WITTER
AMERICAN OPPORTUNITIES FUND
APRIL 26, 1999
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a Prospectus. The
Prospectus dated April 26, 1999 for the Morgan Stanley Dean Witter American
Opportunities Fund may be obtained without charge from the Fund at its address
or telephone number listed below or from Dean Witter Reynolds at any of its
branch offices.
Morgan Stanley Dean Witter American Opportunities Fund
Two World Trade Center
New York, New York 10048
(800) 869-NEWS
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
I. Fund History ......................................................... 4
II. Description of the Fund and Its Investments and Risks ................ 4
A. Classification .................................................... 4
B. Investment Strategies and Risks ................................... 4
C. Fund Policies/Investment Restrictions ............................. 13
III. Management of the Fund ............................................... 15
A. Board of Trustees ................................................. 15
B. Management Information ............................................ 15
C. Compensation ...................................................... 20
IV. Control Persons and Principal Holders of Securities .................. 21
V. Investment Management and Other Services ............................. 22
A. Investment Manager ................................................ 22
B. Principal Underwriter ............................................. 22
C. Services Provided by the Investment Manager and Fund
Expenses Paid by Third Parties .................................... 23
D. Dealer Reallowances ............................................... 24
E. Rule 12b-1 Plan ................................................... 24
F. Other Service Providers ........................................... 27
VI. Brokerage Allocation and Other Practices ............................. 28
A. Brokerage Transactions ............................................ 28
B. Commissions ....................................................... 28
C. Brokerage Selection ............................................... 29
D. Directed Brokerage ................................................ 30
E. Regular Broker-Dealers ............................................ 30
VII. Capital Stock and Other Securities ................................... 30
VIII. Purchase, Redemption and Pricing of Shares ........................... 31
A. Purchase/Redemption of Shares ..................................... 31
B. Offering Price .................................................... 32
IX. Taxation of the Fund and Shareholders ................................ 33
X. Underwriters ......................................................... 34
XI. Calculation of Performance Data ...................................... 35
XII. Financial Statements ................................................. 36
</TABLE>
2
<PAGE>
GLOSSARY OF SELECTED DEFINED TERMS
The terms defined in this glossary are frequently used in this Statement
of Additional Information (other terms used occasionally are defined in the
text of the document).
"Custodian" -- The Bank of New York.
"Dean Witter Reynolds" -- Dean Witter Reynolds Inc., a wholly-owned
broker-dealer subsidiary of MSDW.
"Distributor" -- Morgan Stanley Dean Witter Distributors Inc., a
wholly-owned broker-dealer subsidiary of MSDW.
"Financial Advisors" -- Morgan Stanley Dean Witter authorized financial
services representatives.
"Fund" -- Morgan Stanley Dean Witter American Opportunities Fund, a
registered open-end investment company.
"Investment Manager" -- Morgan Stanley Dean Witter Advisors Inc., a
wholly-owned investment advisor subsidiary of MSDW.
"Independent Trustees" -- Trustees who are not "interested persons" (as
defined by the Investment Company Act) of the Fund.
"Morgan Stanley & Co." -- Morgan Stanley & Co. Incorporated, a
wholly-owned broker-dealer subsidiary of MSDW.
"Morgan Stanley Dean Witter Funds" -- Registered investment companies (i)
for which the Investment Manager serves as the investment advisor; and (ii)
that hold themselves out to investors as related companies for investment and
investor services.
"MSDW" -- Morgan Stanley Dean Witter & Co., a preeminent global financial
services firm.
"MSDW Services Company" -- Morgan Stanley Dean Witter Services Company
Inc., a wholly-owned fund services subsidiary of the Investment Manager.
"Transfer Agent" -- Morgan Stanley Dean Witter Trust FSB, a wholly-owned
transfer agent subsidiary of MSDW.
"Trustees" -- The Board of Trustees of the Fund.
3
<PAGE>
I. FUND HISTORY
- --------------------------------------------------------------------------------
The Fund was incorporated in the State of Maryland on December 13, 1979
under the name InterCapital Industry-Valued Securities Inc. Effective March 21,
1983, the Fund's name was changed to Dean Witter Industry-Valued Securities
Inc. On April 6, 1987, the Fund reorganized as a Massachusetts business trust,
under a Declaration of Trust, with the name Dean Witter American Value Fund. On
June 22, 1998, the Fund's name was changed to Morgan Stanley Dean Witter
American Value Fund. Effective April 26, 1999, the Fund's name was changed to
Morgan Stanley Dean Witter American Opportunities Fund.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
- --------------------------------------------------------------------------------
A. CLASSIFICATION
The Fund is an open-end, diversified management investment company whose
investment objective is long-term capital growth consistent with an effort to
reduce volatility.
B. INVESTMENT STRATEGIES AND RISKS
The following discussion of the Fund's investment strategies and risks
should be read with the sections of the Fund's Prospectus titled "Principal
Investment Strategies," "Principal Risks," "Additional Investment Strategy
Information" and "Additional Risk Information."
CONVERTIBLE SECURITIES. The Fund may invest in fixed-income securities
which are convertible into common stock. Convertible securities rank senior to
common stocks in a corporation's capital structure and, therefore, entail less
risk than the corporation's common stock. The value of a convertible security
is a function of its "investment value" (its value as if it did not have a
conversion privilege), and its "conversion value" (the security's worth if it
were to be exchanged for the underlying security, at market value, pursuant to
its conversion privilege).
To the extent that a convertible security's investment value is greater
than its conversion value, its price will be primarily a reflection of such
investment value and its price will be likely to increase when interest rates
fall and decrease when interest rates rise, as with a fixed-income security
(the credit standing of the issuer and other factors may also have an effect on
the convertible security's value). If the conversion value exceeds the
investment value, the price of the convertible security will rise above its
investment value and, in addition, will sell at some premium over its
conversion value. (This premium represents the price investors are willing to
pay for the privilege of purchasing a fixed-income security with a possibility
of capital appreciation due to the conversion privilege.) At such times the
price of the convertible security will tend to fluctuate directly with the
price of the underlying equity security. Convertible securities may be
purchased by the Fund at varying price levels above their investment values
and/or their conversion values in keeping with the Fund's objective.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may enter into
forward foreign currency exchange contracts ("forward contracts") as a hedge
against fluctuations in future foreign exchange rates. The Fund may conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. A
forward contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large, commercial and investment banks) and
their customers. Forward contracts only will be entered into with United States
banks and their foreign branches, insurance companies and other dealers or
foreign banks whose assets total $1 billion or more. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades.
The Fund may enter into forward contracts under various circumstances. The
typical use of a forward contract is to "lock in" the price of a security in
U.S. dollars or some other foreign currency which
4
<PAGE>
the Fund is holding in its portfolio. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars or other currency, of the
amount of foreign currency involved in the underlying security transactions,
the Fund may be able to protect itself against a possible loss resulting from
an adverse change in the relationship between the U.S. dollar or other currency
which is being used for the security purchase and the foreign currency in which
the security is denominated during the period between the date on which the
security is purchased or sold and the date on which payment is made or
received.
The Investment Manager also may from time to time utilize forward
contracts for other purposes. For example, they may be used to hedge a foreign
security held in the portfolio or a security which pays out principal tied to
an exchange rate between the U.S. dollar and a foreign currency, against a
decline in value of the applicable foreign currency. They also may be used to
lock in the current exchange rate of the currency in which those securities
anticipated to be purchased are denominated. At times, the Fund may enter into
"cross-currency" hedging transactions involving currencies other than those in
which securities are held or proposed to be purchased are denominated.
The Fund will not enter into forward currency contracts or maintain a net
exposure to these contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. It will, however, do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the spread between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
The Fund may be limited in its ability to enter into hedging transactions
involving forward contracts by the Internal Revenue Code requirements relating
to qualification as a regulated investment company.
Forward currency contracts may limit gains on portfolio securities that
could otherwise be realized had they not been utilized and could result in
losses. The contracts also may increase the Fund's volatility and may involve a
significant amount of risk relative to the investment of cash.
OPTION AND FUTURES TRANSACTIONS. The Fund may engage in transactions in
listed and OTC options. Listed options are issued or guaranteed by the exchange
on which they are traded or by a clearing corporation such as the Options
Clearing Corporation ("OCC"). Ownership of a listed call option gives the Fund
the right to buy from the OCC (in the U.S.) or other clearing corporation or
exchange, the underlying security or currency covered by the option at the
stated exercise price (the price per unit of the underlying security) by filing
an exercise notice prior to the expiration date of the option. The writer
(seller) of the option would then have the obligation to sell to the OCC (in
the U.S.) or other clearing corporation or exchange, the underlying security or
currency at that exercise price prior to the expiration date of the option,
regardless of its then current market price. Ownership of a listed put option
would give the Fund the right to sell the underlying security or currency to
the OCC (in the U.S.) or other clearing corporation or exchange, at the stated
exercise price. Upon notice of exercise of the put option, the writer of the
put would have the obligation to purchase the underlying security or currency
from the OCC (in the U.S.) or other clearing corporation or exchange, at the
exercise price.
Covered Call Writing. The Fund is permitted to write covered call options
on portfolio securities and on the U.S. dollar and foreign currencies in which
they are denominated, without limit.
The Fund will receive from the purchaser, in return for a call it has
written, a "premium;" i.e., the price of the option. Receipt of these premiums
may better enable the Fund to earn a higher level of current income than it
would earn from holding the underlying securities (or currencies) alone.
Moreover, the premium received will offset a portion of the potential loss
incurred by the Fund if the securities (or currencies) underlying the option
decline in value.
The Fund may be required, at any time during the option period, to deliver
the underlying security (or currency) against payment of the exercise price on
any calls it has written. This obligation is
5
<PAGE>
terminated upon the expiration of the option period or at such earlier time
when the writer effects a closing purchase transaction. A closing purchase
transaction is accomplished by purchasing an option of the same series as the
option previously written. However, once the Fund has been assigned an exercise
notice, the Fund will be unable to effect a closing purchase transaction.
Options written by the Fund normally have expiration dates of from up to
eighteen months from the date written. The exercise price of a call option may
be below, equal to or above the current market value of the underlying security
at the time the option is written.
Covered Put Writing. As a writer of a covered put option, the Fund incurs
an obligation to buy the security underlying the option from the purchaser of
the put, at the option's exercise price at any time during the option period,
at the purchaser's election. Through the writing of a put option, the Fund
would receive income from the premium paid by purchasers. The potential gain on
a covered put option is limited to the premium received on the option (less the
commissions paid on the transaction). During the option period, the Fund may be
required, at any time, to make payment of the exercise price against delivery
of the underlying security (or currency). The aggregate value of the
obligations underlying puts may not exceed 50% of the Fund's assets. The
operation of and limitations on covered put options in other respects are
substantially identical to those of call options.
Purchasing Call and Put Options. The Fund may purchase listed and OTC call
and put options in amounts equaling up to 5% of its total assets. The purchase
of a call option would enable the Fund, in return for the premium paid to lock
in a purchase price for a security or currency during the term of the option.
The purchase of a put option would enable the Fund, in return for a premium
paid, to lock in a price at which it may sell a security or currency during the
term of the option.
Options on Foreign Currencies. The Fund may purchase and write options on
foreign currencies for purposes similar to those involved with investing in
forward foreign currency exchange contracts.
OTC Options. OTC options are purchased from or sold (written) to dealers
or financial institutions which have entered into direct agreements with the
Fund. With OTC options, such variables as expiration date, exercise price and
premium will be agreed upon between the Fund and the transacting dealer,
without the intermediation of a third party such as the OCC. The Fund will
engage in OTC option transactions only with member banks of the Federal Reserve
Bank System or primary dealers in U.S. Government securities or with affiliates
of such banks or dealers.
Risks of Options Transactions. The successful use of options depends on
the ability of the Investment Manager to forecast correctly interest rates,
currency exchange rates and/or market movements. If the market value of the
portfolio securities (or the currencies in which they are denominated) upon
which call options have been written increases, the Fund may receive a lower
total return from the portion of its portfolio upon which calls have been
written than it would have had such calls not been written. During the option
period, the covered call writer has, in return for the premium on the option,
given up the opportunity for capital appreciation above the exercise price
should the market price of the underlying security (or the value of its
denominated currency) increase, but has retained the risk of loss should the
price of the underlying security (or the value of its denominated currency)
decline. The covered put writer also retains the risk of loss should the market
value of the underlying security decline below the exercise price of the option
less the premium received on the sale of the option. In both cases, the writer
has no control over the time when it may be required to fulfill its obligation
as a writer of the option. Prior to exercise or expiration, an option position
can only be terminated by entering into a closing purchase or sale transaction.
Once an option writer has received an exercise notice, it cannot effect a
closing purchase transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price.
The Fund's ability to close out its position as a writer of an option is
dependent upon the existence of a liquid secondary market on option exchanges.
There is no assurance that such a market will exist, particularly in the case
of OTC options.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in options, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold
6
<PAGE>
through the broker and/or incur a loss of all or part of its margin deposits
with the broker. In the case of OTC options, if the transacting dealer fails to
make or take delivery of the securities underlying an option it has written, in
accordance with the terms of that option, due to insolvency or otherwise, the
Fund would lose the premium paid for the option as well as any anticipated
benefit of the transaction.
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security which may be
written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). An exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be
reflected in the option markets.
The markets in foreign currency options are relatively new and the Fund's
ability to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. There can be no assurance that a
liquid secondary market will exist for a particular option at any specific
time.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and have no relationship to the investment merits of a foreign security.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in
an odd lot market (generally consisting of transactions of less than $1
million) for the underlying foreign currencies at prices that are less
favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the
extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may
take place in the underlying markets that are not reflected in the options
market.
Stock Index Options. The Fund may invest in options on broadly based
indexes. Options on stock indexes are similar to options on stock except that,
rather than the right to take or make delivery of stock at a specified price,
an option on a stock index gives the holder the right to receive, upon exercise
of the option, an amount of cash if the closing level of the stock index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the
exercise price of the option expressed in dollars times a specified multiple.
The writer of the option is obligated, in return for the premium received, to
make delivery of this amount.
Risks of Options on Indexes. Because exercises of stock index options are
settled in cash, the Fund could not, if it wrote a call option, provide in
advance for its potential settlement obligations by acquiring and holding the
underlying securities. A call writer can offset some of the risk of its writing
position by holding a diversified portfolio of stocks similar to those on which
the underlying index is based. However, most investors cannot, as a practical
matter, acquire and hold a portfolio containing exactly the same stocks as the
underlying index, and, as a result, bear a risk that the value of the
securities held will vary from the value of the index. Even if an index call
writer could assemble a stock portfolio that exactly reproduced the composition
of the underlying index, the writer still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
7
<PAGE>
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the writer will not learn that it had been assigned
until the next business day, at the earliest. The time lag between exercise and
notice of assignment poses no risk for the writer of a covered call on a
specific underlying security, such as a common stock, because there the
writer's obligation is to deliver the underlying security, not to pay its value
as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds stocks that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those stocks against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value on the
exercise date; and by the time it learns that it has been assigned, the index
may have declined, with a corresponding decrease in the value of its stock
portfolio. This "timing risk" is an inherent limitation on the ability of index
call writers to cover their risk exposure by holding stock positions.
A holder of an index option who exercises it before the closing index
value for that day is available runs the risk that the level of the underlying
index may subsequently change. If a change causes the exercised option to fall
out-of-the-money, the exercising holder will be required to pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
If dissemination of the current level of an underlying index is
interrupted, or if trading is interrupted in stocks accounting for a
substantial portion of the value of an index, the trading of options on that
index will ordinarily be halted. If the trading of options on an underlying
index is halted, an exchange may impose restrictions prohibiting the exercise
of such options.
Futures Contracts. The Fund may purchase and sell interest rate, currency
and index futures contracts that are traded on U.S. and foreign commodity
exchanges on such underlying securities as U.S. Treasury bonds, notes, bills
and GNMA Certificates and/or any foreign government fixed-income security, on
various currencies and on such indexes of U.S. and foreign securities as may
exist or come into existence.
A futures contract purchaser incurs an obligation to take delivery of a
specified amount of the obligation underlying the contract at a specified time
in the future for a specified price. A seller of a futures contract incurs an
obligation to deliver the specified amount of the underlying obligation at a
specified time in return for an agreed upon price. The purchase of a futures
contract enables the Fund, during the term of the contract, to lock in a price
at which it may purchase a security or currency and protect against a rise in
prices pending purchase of portfolio securities. The sale of a futures contract
enables the Fund to lock in a price at which it may sell a security or currency
and protect against declines in the value of portfolio securities.
Although most futures contracts call for actual delivery or acceptance of
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. Index futures contracts provide for
the delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value at the open or close of the last trading day
of the contract and the futures contract price. A futures contract sale is
closed out by effecting a futures contract purchase for the same aggregate
amount of the specific type of security (currency) and the same delivery date.
If the sale price exceeds the offsetting purchase price, the seller would be
paid the difference and would realize a gain. If the offsetting purchase price
exceeds the sale price, the seller would pay the difference and would realize a
loss. Similarly, a futures contract purchase is closed out by effecting a
futures contract sale for the same aggregate amount of the specific type of
security (currency) and the same delivery date. If the offsetting sale price
exceeds the purchase price, the purchaser would realize a gain, whereas if the
purchase price exceeds the offsetting sale price, the purchaser would realize a
loss. There is no assurance that the Fund will be able to enter into a closing
transaction.
8
<PAGE>
Margin. If the Fund enters into a futures contract, it is initially
required to deposit an "initial margin" of cash or U.S. Government securities
or other liquid portfolio securities ranging from approximately 2% to 5% of the
contract amount. Initial margin requirements are established by the exchanges
on which futures contracts trade and may, from time to time, change. In
addition, brokers may establish margin deposit requirements in excess of those
required by the exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing
of funds by a broker's client but is, rather, a good faith deposit on the
futures contract which will be returned to the Fund upon the proper termination
of the futures contract. The margin deposits made are marked to market daily
and the Fund may be required to make subsequent deposits of cash or U.S.
Government securities, called "variation margin," which are reflective of price
fluctuations in the futures contract.
Options on Futures Contracts. The Fund may purchase and write call and put
options on futures contracts and enter into closing transactions with respect
to such options to terminate an existing position. An option on a futures
contract gives the purchaser the right (in return for the premium paid), and
the writer the obligation, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put)
at a specified exercise price at any time during the term of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option is accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents
the amount by which the market price of the futures contract at the time of
exercise exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract.
The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an
option on a futures contract are included in initial margin deposits.
Limitations on Futures Contracts and Options on Futures. The Fund may not
enter into futures contracts or purchase related options thereon if,
immediately thereafter, the amount committed to margin plus the amount paid for
premiums for unexpired options on futures contracts exceeds 5% of the value of
the Fund's total assets, after taking into account unrealized gains and
unrealized losses on such contracts it has entered into, provided, however,
that in the case of an option that is in-the-money (the exercise price of the
call (put) option is less (more) than the market price of the underlying
security) at the time of purchase, the in-the-money amount may be excluded in
calculating the 5%. However, there is no overall limitation on the percentage
of the Fund's net assets which may be subject to a hedge position.
Risks of Transactions in Futures Contracts and Related Options. The prices
of securities and indexes subject to futures contracts (and thereby the futures
contract prices) may correlate imperfectly with the behavior of the cash prices
of the Fund's portfolio securities (and the currencies in which they are
denominated). Also, prices of futures contracts may not move in tandem with the
changes in prevailing interest rates, market movements and/or currency exchange
rates against which the Fund seeks a hedge. A correlation may also be distorted
(a) temporarily, by short-term traders' seeking to profit from the difference
between a contract or security price objective and their cost of borrowed
funds; (b) by investors in futures contracts electing to close out their
contracts through offsetting transactions rather than meet margin deposit
requirements; (c) by investors in futures contracts opting to make or take
delivery of underlying securities rather than engage in closing transactions,
thereby reducing liquidity of the futures market; and (d) temporarily, by
speculators who view the deposit requirements in the futures markets as less
onerous than margin requirements in the cash market. Due to the possibility of
price distortion in the futures market and because of the possible imperfect
correlation between movements in the prices of securities and movements in the
prices of futures contracts, a correct forecast of interest rate, currency
exchange rate and/or market movement trends by the Investment Manager may still
not result in a successful hedging transaction.
There is no assurance that a liquid secondary market will exist for
futures contracts and related options in which the Fund may invest. In the
event a liquid market does not exist, it may not be possible
9
<PAGE>
to close out a futures position and, in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In addition, limitations imposed by an exchange or board of trade on
which futures contracts are traded may compel or prevent the Fund from closing
out a contract which may result in reduced gain or increased loss to the Fund.
The absence of a liquid market in futures contracts might cause the Fund to
make or take delivery of the underlying securities (currencies) at a time when
it may be disadvantageous to do so.
Exchanges limit the amount by which the price of a futures contract may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased. In the event of adverse price movements, the Fund
would continue to be required to make daily cash payments of variation margin
on open futures positions. In these situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In addition,
the Fund may be required to take or make delivery of the instruments underlying
interest rate futures contracts it holds at a time when it is disadvantageous
to do so. The inability to close out options and futures positions could also
have an adverse impact on the Fund's ability to effectively hedge its
portfolio.
Futures contracts and options thereon which are purchased or sold on
foreign commodities exchanges may have greater price volatility than their U.S.
counterparts. Furthermore, foreign commodities exchanges may be less regulated
and under less governmental scrutiny than U.S. exchanges. Brokerage
commissions, clearing costs and other transaction costs may be higher on
foreign exchanges. Greater margin requirements may limit the Fund's ability to
enter into certain commodity transactions on foreign exchanges. Moreover,
differences in clearance and delivery requirements on foreign exchanges may
occasion delays in the settlement of the Fund's transactions effected on
foreign exchanges.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the
broker and/or incur a loss of all or part of its margin deposits with the
broker.
MONEY MARKET SECURITIES. The Fund may invest in various money market
securities for cash management purposes or when assuming a temporary defensive
position, which among others may include commercial paper, bank acceptances,
bank obligations, corporate debt securities, certificates of deposit, U.S.
Government securities, obligations of savings institutions and repurchase
agreements. Such securities are limited to:
U.S. Government Securities. Obligations issued or guaranteed as to
principal and interest by the United States or its agencies (such as the
Export-Import Bank of the United States, Federal Housing Administration and
Government National Mortgage Association) or its instrumentalities (such as the
Federal Home Loan Bank), including Treasury bills, notes and bonds;
Bank Obligations. Obligations (including certificates of deposit, time
deposits and bankers' acceptances) of banks subject to regulation by the U.S.
Government and having total assets of $1 billion or more, and instruments
secured by such obligations, not including obligations of foreign branches of
domestic banks except to the extent below;
Eurodollar Certificates of Deposit. Eurodollar certificates of deposit
issued by foreign branches of domestic banks having total assets of $1 billion
or more;
Obligations of Savings Institutions. Certificates of deposit of savings
banks and savings and loan associations, having total assets of $1 billion or
more;
Fully Insured Certificates of Deposit. Certificates of deposit of banks
and savings institutions, having total assets of less than $1 billion, if the
principal amount of the obligation is federally insured by the Bank Insurance
Fund or the Savings Association Insurance Fund (each of which is administered
by the FDIC), limited to $100,000 principal amount per certificate and to 10%
or less of the Fund's total assets in all such obligations and in all illiquid
assets, in the aggregate;
10
<PAGE>
Commercial Paper. Commercial paper rated within the two highest grades by
Standard & Poor's Corporation ("S&P") or the two highest grades by Moody's
Investors Service, Inc. ("Moody's") or, if not rated, issued by a company
having an outstanding debt issue rated at least AA by S&P or Aa by Moody's; and
Repurchase Agreements. The Fund may invest in repurchase agreements. When
cash may be available for only a few days, it may be invested by the Fund in
repurchase agreements until such time as it may otherwise be invested or used
for payments of obligations of the Fund. These agreements, which may be viewed
as a type of secured lending by the Fund, typically involve the acquisition by
the Fund of debt securities from a selling financial institution such as a
bank, savings and loan association or broker-dealer. The agreement provides
that the Fund will sell back to the institution, and that the institution will
repurchase, the underlying security serving as collateral at a specified price
and at a fixed time in the future, usually not more than seven days from the
date of purchase. The collateral will be marked-to-market daily to determine
that the value of the collateral, as specified in the agreement, does not
decrease below the purchase price plus accrued interest. If such decrease
occurs, additional collateral will be requested and, when received, added to
the account to maintain full collateralization. The Fund will accrue interest
from the institution until the time when the repurchase is to occur. Although
this date is deemed by the Fund to be the maturity date of a repurchase
agreement, the maturities of securities subject to repurchase agreements are
not subject to any limits.
While repurchase agreements involve certain risks not associated with
direct investments in debt securities, the Fund follows procedures designed to
minimize such risks. These procedures include effecting repurchase transactions
only with large, well-capitalized and well-established financial institutions
whose financial condition will be continually monitored by the Investment
Manager subject to procedures established by the Trustees. In addition, as
described above, the value of the collateral underlying the repurchase
agreement will be at least equal to the repurchase price, including any accrued
interest earned on the repurchase agreement. In the event of a default or
bankruptcy by a selling financial institution, the Fund will seek to liquidate
such collateral. However, the exercising of the Fund's right to liquidate such
collateral could involve certain costs or delays and, to the extent that
proceeds from any sale upon a default of the obligation to repurchase were less
than the repurchase price, the Fund could suffer a loss. It is the current
policy of the Fund not to invest in repurchase agreements that do not mature
within seven days if any such investment, together with any other illiquid
assets held by the Fund, amounts to more than 15% of its net assets.
INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in real
estate investment trusts, which pool investors' funds for investments primarily
in commercial real estate properties. Investment in real estate investment
trusts may be the most practical available means for the Fund to invest in the
real estate industry (the Fund is prohibited from investing in real estate
directly). As a shareholder in a real estate investment trust, the Fund would
bear its ratable share of the real estate investment trust's expenses,
including its advisory and administration fees. At the same time the Fund would
continue to pay its own investment management fees and other expenses, as a
result of which the Fund and its shareholders in effect will be absorbing
duplicate levels of fees with respect to investments in real estate investment
trusts.
LENDING PORTFOLIO SECURITIES. The Fund may lend its portfolio securities
to brokers, dealers and other financial institutions, provided that the loans
are callable at any time by the Fund, and are at all times secured by cash or
cash equivalents, which are maintained in a segregated account pursuant to
applicable regulations and that are equal to at least 100% of the market value,
determined daily, of the loaned securities. The advantage of these loans is
that the Fund continues to receive the income on the loaned securities while at
the same time earning interest on the cash amounts deposited as collateral,
which will be invested in short-term obligations.
As with any extensions of credit, there are risks of delay in recovery
and, in some cases, even loss of rights in the collateral should the borrower
of the securities fail financially. However, these loans of portfolio
securities will only be made to firms deemed by the Fund's management to be
creditworthy and when the income which can be earned from such loans justifies
the attendant risks. Upon termination of the loan, the borrower is required to
return the securities to the Fund. Any gain or loss in the market price during
the loan period would inure to the Fund.
11
<PAGE>
When voting or consent rights which accompany loaned securities pass to
the borrower, the Fund will follow the policy of calling the loaned securities,
to be delivered within one day after notice, to permit the exercise of the
rights if the matters involved would have a material effect on the Fund's
investment in the loaned securities. The Fund will pay reasonable finder's,
administrative and custodial fees in connection with a loan of its securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From
time to time the Fund may purchase securities on a when-issued or delayed
delivery basis or may purchase or sell securities on a forward commitment
basis. When these transactions are negotiated, the price is fixed at the time
of the commitment, but delivery and payment can take place a month or more
after the date of commitment. While the Fund will only purchase securities on a
when-issued, delayed delivery or forward commitment basis with the intention of
acquiring the securities, the Fund may sell the securities before the
settlement date, if it is deemed advisable. The securities so purchased or sold
are subject to market fluctuation and no interest or dividends accrue to the
purchaser prior to the settlement date.
At the time the Fund makes the commitment to purchase or sell securities
on a when-issued, delayed delivery or forward commitment basis, it will record
the transaction and thereafter reflect the value, each day, of such security
purchased, or if a sale, the proceeds to be received, in determining its net
asset value. At the time of delivery of the securities, their value may be more
or less than the purchase or sale price. An increase in the percentage of the
Fund's assets committed to the purchase of securities on a when-issued, delayed
delivery or forward commitment basis may increase the volatility of its net
asset value. The Fund will also establish a segregated account on the Fund's
books in which it will continually maintain cash or cash equivalents or other
liquid portfolio securities equal in value to commitments to purchase
securities on a when-issued, delayed delivery or forward commitment basis.
WHEN, AS AND IF ISSUED SECURITIES. The Fund may purchase securities on a
"when, as and if issued" basis under which the issuance of the security depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization or debt restructuring. The commitment for the purchase
of any such security will not be recognized in the portfolio of the Fund until
the Investment Manager determines that issuance of the security is probable. At
that time, the Fund will record the transaction and, in determining its net
asset value, will reflect the value of the security daily. At that time, the
Fund will also establish a segregated account on the Fund's books in which it
will maintain cash or cash equivalents or other liquid portfolio securities
equal in value to recognized commitments for such securities.
The value of the Fund's commitments to purchase the securities of any one
issuer, together with the value of all securities of such issuer owned by the
Fund, may not exceed 5% of the value of the Fund's total assets at the time the
initial commitment to purchase such securities is made. An increase in the
percentage of the Fund's total assets committed to the purchase of securities
on a "when, as and if issued" basis may increase the volatility of its net
asset value. The Fund may also sell securities on a "when, as and if issued"
basis provided that the issuance of the security will result automatically from
the exchange or conversion of a security owned by the Fund at the time of sale.
PRIVATE PLACEMENTS. The Fund may invest up to 15% of its net assets in
securities which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933 (the "Securities Act"), or
which are otherwise not readily marketable. (Securities eligible for resale
pursuant to Rule 144A under the Securities Act, and determined to be liquid
pursuant to the procedures discussed in the following paragraph, are not
subject to the foregoing restriction.) These securities are generally referred
to as private placements or restricted securities. Limitations on the resale of
these securities may have an adverse effect on their marketability, and may
prevent the Fund from disposing of them promptly at reasonable prices. The Fund
may have to bear the expense of registering the securities for resale and the
risk of substantial delays in effecting the registration.
Rule 144A permits the Fund to sell restricted securities to qualified
institutional buyers without limitation. The Investment Manager, pursuant to
procedures adopted by the Trustees, will make a determination as to the
liquidity of each restricted security purchased by the Fund. If a restricted
security is determined to be "liquid," the security will not be included within
the category "illiquid securities," which
12
<PAGE>
under current policy may not exceed 15% of the Fund's net assets. However,
investing in Rule 144A securities could have the effect of increasing the level
of Fund illiquidity to the extent the Fund, at a particular point in time, may
be unable to find qualified institutional buyers interested in purchasing such
securities.
WARRANTS AND SUBSCRIPTION RIGHTS. The Fund may acquire warrants and
subscription rights attached to other securities. A warrant is, in effect, an
option to purchase equity securities at a specific price, generally valid for a
specific period of time, and has no voting rights, pays no dividends and has no
rights with respect to the corporation issuing it.
A subscription right is a privilege granted to existing shareholders of a
corporation to subscribe to shares of a new issue of common stock before it is
offered to the public. A subscription right normally has a life of two to four
weeks and a subscription price lower than the current market value of the
common stock. A subscription right is freely transferable.
YEAR 2000. The investment management services provided to the Fund by the
Investment Manager and the services provided to shareholders by the Distributor
and the Transfer Agent depend on the smooth functioning of their computer
systems. Many computer software systems in use today cannot recognize the year
2000, but revert to 1900 or some other date, due to the manner in which dates
were encoded and calculated. That failure could have a negative impact on the
handling of securities trades, pricing and account services. The Investment
Manager, the Distributor and the Transfer Agent have been actively working on
necessary changes to their own computer systems to prepare for the year 2000
and expect that their systems will be adapted before that date, but there can
be no assurance that they will be successful, or that interaction with other
non-complying computer systems will not impair their services at that time.
In addition, it is possible that the markets for securities in which the
Fund invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues. In
addition, corporate and governmental data processing errors may result in
production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial and may be reported inconsistently in U.S. and
foreign financial statements. Accordingly, the Fund's investments may be
adversely affected.
C. FUND POLICIES/INVESTMENT RESTRICTIONS
The investment objective, policies and restrictions listed below have been
adopted by the Fund as fundamental policies. Under the Investment Company Act
of 1940 (the "Investment Company Act"), a fundamental policy may not be changed
without the vote of a majority of the outstanding voting securities of the
Fund. The Investment Company Act defines a majority as the lesser of (a) 67% or
more of the shares present at a meeting of shareholders, if the holders of 50%
of the outstanding shares of the Fund are present or represented by proxy; or
(b) more than 50% of the outstanding shares of the Fund. For purposes of the
following restrictions: (i) all percentage limitations apply immediately after
a purchase or initial investment; and (ii) any subsequent change in any
applicable percentage resulting from market fluctuations or other changes in
total or net assets does not require elimination of any security from the
portfolio.
The Fund will:
1. Seek long-term capital growth consistent with an effort to reduce
volatility.
The Fund may not:
1. Invest more than 5% of the value of its total assets in the securities
of any one issuer (other than obligations issued, or guaranteed by,
the United States Government, its agencies or instrumentalities).
2. Purchase more than 10% of all outstanding voting securities or any
class of securities of any one issuer.
13
<PAGE>
3. Invest more than 25% of the value of its total assets in securities of
issuers in any one industry. This restriction does not apply to
obligations issued or guaranteed by the United States Government, its
agencies or instrumentalities or to cash equivalents.
4. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition
of assets.
5. Invest more than 5% of the value of its total assets in securities of
issuers having a record, together with predecessors, of less than 3
years of continuous operation. This restriction shall not apply to any
obligation of the United States Government, its agencies or
instrumentalities.
6. Invest in securities of any issuer if, to the knowledge of the Fund,
any officer or trustee of the Fund or of the Investment Manager owns
more than 1/2 of 1% of the outstanding securities of the issuer, and
the officers and trustees who own more than 1/2 of 1% own in the
aggregate more than 5% of the outstanding securities of the issuer.
7. Purchase or sell real estate or interests therein (including limited
partnership interests), although the Fund may purchase securities of
issuers which engage in real estate operations and securities secured
by real estate or interests therein.
8. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may
invest in the securities of companies which operate, invest in, or
sponsor these programs.
9. Purchase or sell commodities, except that the Fund may purchase or
sell (write) futures contracts and related options thereon.
10. Borrow money, except that the Fund may borrow from a bank for
temporary or emergency purposes, in amounts not exceeding 5% (taken at
the lower of cost or current value) of its total assets (not including
the amount borrowed).
11. Pledge its assets or assign or otherwise encumber them except to
secure permitted borrowings. For the purpose of this restriction,
collateral arrangements with respect to the writing of options and
collateral arrangements with respect to initial or variation margin
for futures are not deemed to be pledges of assets.
12. Issue senior securities as defined in the Investment Company Act,
except insofar as the Fund may be deemed to have issued a senior
security by reason of: (a) entering into any repurchase agreement; (b)
borrowing money in accordance with restrictions described above; or
(c) lending portfolio securities.
13. Make loans of money or securities, except: (a) by the purchase of debt
obligations in which the Fund may invest consistent with its
investment objective and policies; (b) by investment in repurchase
agreements; or (c) by lending its portfolio securities.
14. Make short sales of securities.
15. Purchase securities on margin, except for short-term loans as are
necessary for the clearance of portfolio securities. The deposit or
payment by the Fund of initial or variation margin in connection with
futures contracts or related options thereon is not considered the
purchase of a security on margin.
16. Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act in disposing of
a portfolio security.
17. Invest for the purpose of exercising control or management of any
other issuer.
Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objective by investing all or substantially all
of its assets in another investment company having substantially the same
investment objective and policies as the Fund.
14
<PAGE>
III. MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
A. BOARD OF TRUSTEES
The Board of Trustees of the Fund oversees the management of the Fund but
does not itself manage the Fund. The Trustees review various services provided
by or under the direction of the Investment Manager to ensure that the Fund's
general investment policies and programs are properly carried out. The Trustees
also conduct their review to ensure that administrative services are provided
to the Fund in a satisfactory manner.
Under state law, the duties of the Trustees are generally characterized as
a duty of loyalty and a duty of care. The duty of loyalty requires a Trustee to
exercise his or her powers in the interest of the Fund and not the Trustee's
own interest or the interest of another person or organization. A Trustee
satisfies his or her duty of care by acting in good faith with the care of an
ordinarily prudent person and in a manner the Trustee reasonably believes to be
in the best interest of the Fund and its shareholders.
B. MANAGEMENT INFORMATION
TRUSTEES AND OFFICERS. The Board of the Fund consists of nine (8)
Trustees. These same individuals also serve as directors or trustees for all of
the Morgan Stanley Dean Witter Funds. Six Trustees (75% of the total number)
have no affiliation or business connection with the Investment Manager or any
of its affiliated persons and do not own any stock or other securities issued
by the Investment Manager's parent company, MSDW. These are the
"non-interested" or "independent" Trustees. The other two Trustees (the
"management Trustees") are affiliated with the Investment Manager. All of the
Independent Trustees also serve as Independent Trustees of "Discover Brokerage
Index Series," a mutual fund for which the Investment Manager is the investment
advisor. Three of the six Independent Trustees are also Independent Trustees of
certain other mutual funds, referred to as the "TCW/DW Funds," for which MSDW
Services Company is the manager and TCW Funds Management, Inc. is the
investment advisor.
The Trustees and executive officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with the
Investment Manager, and with the 85 Morgan Stanley Dean Witter Funds, the 11
TCW/DW Funds and Discover Brokerage Index Series are shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------- ---------------------------------------------------
<S> <C>
Michael Bozic (58) ........................ Vice Chairman of Kmart Corporation (since
Trustee December, 1998); Director or Trustee of the Morgan
c/o Kmart Corporation Stanley Dean Witter Funds and Discover Brokerage
3100 West Big Beaver Road Index Series; formerly Chairman and Chief
Troy, Michigan Executive Officer of Levitz Furniture Corporation
(November, 1995-November, 1998) and President
and Chief Executive Officer of Hills Department
Stores (May, 1991-July, 1995); formerly variously
Chairman, Chief Executive Officer, President and
Chief Operating Officer (1987-1991) of the Sears
Merchandise Group of Sears, Roebuck and Co.;
Director of Eaglemark Financial Services, Inc. and
Weirton Steel Corporation.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------- -----------------------------------------------------
<S> <C>
Charles A. Fiumefreddo* (65) .............. Chairman, Director or Trustee, and Chief Executive
Chairman of the Board, Officer of the Morgan Stanley Dean Witter Funds,
Chief Executive Officer and Trustee the TCW/DW Funds and Discover Brokerage Index
Two World Trade Center Series; formerly Chairman, Chief Executive Officer
New York, New York and Director of the Investment Manager, the
Distributor and MSDW Services Company;
Executive Vice President and Director of Dean
Witter Reynolds; Chairman and Director of the
Transfer Agent; formerly Director and/or officer of
various MSDW subsidiaries (until June, 1998).
Edwin J. Garn (66) ........................ Director or Trustee of the Morgan Stanley Dean
Trustee Witter Funds and Discover Brokerage Index Series;
c/o Huntsman Corporation formerly United States Senator (R-Utah)
500 Huntsman Way (1974-1992) and Chairman, Senate Banking
Salt Lake City, Utah Committee (1980-1986); formerly Mayor of Salt
Lake City, Utah (1971-1974); formerly Astronaut,
Space Shuttle Discovery (April 12-19, 1985); Vice
Chairman, Huntsman Corporation; Director of
Franklin Covey (time management systems), BMW
Bank of North America, Inc., United Space Alliance
(joint venture between Lockheed Martin and the
Boeing Company) and Nuskin Asia Pacific
(multilevel marketing); member of the board of
various civic and charitable organizations.
Wayne E. Hedien (65) ...................... Retired; Director or Trustee of the Morgan Stanley
Trustee Dean Witter Funds and Discover Brokerage Index
c/o Gordon Altman Butowsky Series; Director of The PMI Group, Inc. (private
Weitzen Shalov & Wein mortgage insurance); Trustee and Vice Chairman
Counsel to the Independent Trustees of The Field Museum of Natural History; formerly
114 West 47th Street associated with the Allstate Companies
New York, New York (1966-1994), most recently as Chairman of The
Allstate Corporation (March, 1993-December,
1994) and Chairman and Chief Executive Officer of
its wholly-owned subsidiary, Allstate Insurance
Company (July, 1989-December, 1994); director of
various other business and charitable organizations.
Dr. Manuel H. Johnson (50) ................ Senior Partner, Johnson Smick International, Inc.,
Trustee a consulting firm; Co-Chairman and a founder of
c/o Johnson Smick International, Inc. the Group of Seven Council (G7C), an international
1133 Connecticut Avenue, N.W. economic commission; Chairman of the Audit
Washington, D.C. Committee and Director or Trustee of the Morgan
Stanley Dean Witter Funds, the TCW/DW Funds
and Discover Brokerage Index Series; Director of
Greenwich Capital Markets, Inc. (broker-dealer)
and NVR, Inc. (home construction); Chairman and
Trustee of the Financial Accounting Foundation
(oversight organization of the Financial Accounting
Standards Board); formerly Vice Chairman of the
Board of Governors of the Federal Reserve System
(1986-1990) and Assistant Secretary of the U.S.
Treasury.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------- -----------------------------------------------------
<S> <C>
Michael E. Nugent (62) .................... General Partner, Triumph Capital, L.P., a private
Trustee investment partnership; Chairman of the Insurance
c/o Triumph Capital, L.P. Committee and Director or Trustee of the Morgan
237 Park Avenue Stanley Dean Witter Funds, the TCW/DW Funds
New York, New York and Discover Brokerage Index Series; formerly
Vice President, Bankers Trust Company and BT
Capital Corporation (1984-1988); director of various
business organizations.
Philip J. Purcell* (55) ................... Chairman of the Board of Directors and Chief
Trustee Executive Officer of MSDW, Dean Witter Reynolds
1585 Broadway and Novus Credit Services Inc.; Director of the
New York, New York Distributor; Director or Trustee of the Morgan
Stanley Dean Witter Funds and Discover Brokerage
Index Series; Director and/or officer of various
MSDW subsidiaries.
John L. Schroeder (68) .................... Retired; Chairman of the Derivatives Committee
Trustee and Director or Trustee of the Morgan Stanley
c/o Gordon Altman Butowsky Dean Witter Funds, the TCW/DW Funds and
Weitzen Shalov & Wein Discover Brokerage Index Series; Director of
Counsel to the Independent Trustees Citizens Utilities Company; formerly Executive Vice
114 West 47th Street President and Chief Investment Officer of the
New York, New York Home Insurance Company (August, 1991-
September, 1995).
Mitchell M. Merin (45) .................... President and Chief Operating Officer of Asset
President Management of MSDW (since December, 1998);
Two World Trade Center President and Director (since April, 1997) and
New York, New York Chief Executive Officer (since June, 1998) of the
Investment Manager and MSDW Services
Company; Chairman, Chief Executive Officer and
Director of the Distributor (since June, 1998);
Chairman and Chief Executive Officer (since June,
1998) and Director (since January, 1998) of the
Transfer Agent; Director of various MSDW
subsidiaries; President of the Morgan Stanley Dean
Witter Funds, the TCW/DW Funds and Discover
Brokerage Index Series (since May, 1999);
previously Chief Strategic Officer of the Investment
Manager and MSDW Services Company and
Executive Vice President of the Distributor (April,
1997-June, 1998), Vice President of the Morgan
Stanley Dean Witter Funds, the TCW/DW Funds
and Discover Brokerage Index Series (May,
1997-April, 1999), and Executive Vice President of
Dean Witter, Discover & Co.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------- ----------------------------------------------------
<S> <C>
Barry Fink (44) ........................... Senior Vice President (since March, 1997) and
Vice President, Secretary and General Counsel (since February,
Secretary and General Counsel 1997) and Director (since July, 1998) of the
Two World Trade Center Investment Manager and MSDW Services
New York, New York Company; Senior Vice President (since March,
1997) and Assistant Secretary and Assistant
General Counsel (since February, 1997) of the
Distributor; Assistant Secretary of Dean Witter
Reynolds (since August, 1996); Vice President,
Secretary and General Counsel of the Morgan
Stanley Dean Witter Funds and the TCW/DW
Funds (since February, 1997); Vice President,
Secretary and General Counsel of Discover
Brokerage Index Series; previously First Vice
President (June, 1993-February, 1997), Vice
President and Assistant Secretary and Assistant
General Counsel of the Investment Manager and
MSDW Services Company and Assistant Secretary
of the Morgan Stanley Dean Witter Funds and the
TCW/DW Funds.
Anita H. Kolleeny (43) .................... Senior Vice President of the Investment Manager;
Vice President Vice President of various Morgan Stanley Dean
Two World Trade Center Witter Funds.
New York, New York
Michelle Kaufman (34) ..................... Senior Vice President (since February, 1999), Vice
Assistant Vice President President (June, 1997-February, 1999), Assistant
Two World Trade Center Vice President of MSDW Advisors (May, 1995-
New York, New York June, 1997) and portfolio manager with MSDW
Advisors (since September, 1993); previously
security analyst with Woodward and Associates
(March-August, 1993).
Thomas F. Caloia (52) ..................... First Vice President and Assistant Treasurer of the
Treasurer Investment Manager and MSDW Services
Two World Trade Center Company; Treasurer of the Morgan Stanley Dean
New York, New York Witter Funds, the TCW/DW Funds and Discover
Brokerage Index Series.
</TABLE>
- ----------
* Denotes Trustees who are "interested persons" of the Fund, as defined in
the Investment Company Act.
In addition, Ronald E. Robison, Executive Vice President, Chief
Administrative Officer and Director of the Investment Manager and MSDW Services
Company, Robert S. Giambrone, Senior Vice President of the Investment Manager,
MSDW Services Company, the Distributor and the Transfer Agent and Director of
the Transfer Agent, and Joseph J. McAlinden, Executive Vice President and Chief
Investment Officer of the Investment Manager and Director of the Transfer
Agent, and Kenton J. Hinchliffe, Ira N. Ross, Paul D. Vance, Senior Vice
Presidents of the Investment Manager, are Vice Presidents of the Fund.
In addition, Frank Bruttomesso, Marilyn K. Cranney, Lou Anne D. McInnis,
Carsten Otto and Ruth Rossi, First Vice Presidents and Assistant General
Counsels of the Investment Manager and MSDW Services Company, and Todd Lebo,
Vice President and Assistant General Counsel of the Investment Manager and MSDW
Services Company are Assistant Secretaries of the Fund.
18
<PAGE>
INDEPENDENT TRUSTEES AND THE COMMITTEES. Law and regulation establish both
general guidelines and specific duties for the Independent Trustees. The Morgan
Stanley Dean Witter Funds seek as Independent Trustees individuals of
distinction and experience in business and finance, government service or
academia; these are people whose advice and counsel are in demand by others and
for whom there is often competition. To accept a position on the Funds' Boards,
such individuals may reject other attractive assignments because the Funds make
substantial demands on their time. Indeed, by serving on the Funds' Boards,
certain Trustees who would otherwise be qualified and in demand to serve on
bank boards would be prohibited by law from doing so. All of the Independent
Trustees serve as members of the Audit Committee. In addition, three of the
Trustees, including two Independent Trustees, serve as members of the
Derivatives Committee and the Insurance Committee.
The Independent Trustees are charged with recommending to the full Board
approval of management, advisory and administration contracts, Rule 12b-1 plans
and distribution and underwriting agreements; continually reviewing Fund
performance; checking on the pricing of portfolio securities, brokerage
commissions, transfer agent costs and performance, and trading among Funds in
the same complex; and approving fidelity bond and related insurance coverage
and allocations, as well as other matters that arise from time to time. The
Independent Trustees are required to select and nominate individuals to fill
any Independent Trustee vacancy on the Board of any Fund that has a Rule 12b-1
plan of distribution. Most of the Morgan Stanley Dean Witter Funds have a Rule
12b-1 plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of the services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; reviewing the adequacy of the Fund's system of internal
controls; and preparing and submitting Committee meeting minutes to the full
Board.
The Board of each Fund has a Derivatives Committee to approve parameters
for and monitor the activities of the Fund with respect to derivative
investments, if any, made by the Fund.
Finally, the Board of each Fund has formed an Insurance Committee to
review and monitor the insurance coverage maintained by the Fund.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL
MORGAN STANLEY DEAN WITTER FUNDS. The Independent Trustees and the Funds'
management believe that having the same Independent Trustees for each of the
Morgan Stanley Dean Witter Funds avoids the duplication of effort that would
arise from having different groups of individuals serving as Independent
Trustees for each of the Funds or even of sub-groups of Funds. They believe
that having the same individuals serve as Independent Trustees of all the Funds
tends to increase their knowledge and expertise regarding matters which affect
the Fund complex generally and enhances their ability to negotiate on behalf of
each Fund with the Fund's service providers. This arrangement also precludes
the possibility of separate groups of Independent Trustees arriving at
conflicting decisions regarding operations and management of the Funds and
avoids the cost and confusion that would likely ensue. Finally, having the same
Independent Trustees serve on all Fund Boards enhances the ability of each Fund
to obtain, at modest cost to each separate Fund, the services of Independent
Trustees, of the caliber, experience and business acumen of the individuals who
serve as Independent Trustees of the Morgan Stanley Dean Witter Funds.
TRUSTEE AND OFFICER INDEMNIFICATION. The Fund's Declaration of Trust
provides that no Trustee, officer, employee or agent of the Fund is liable to
the Fund or to a shareholder, nor is any Trustee, officer, employee or agent
liable to any third persons in connection with the affairs of the Fund, except
as such liability may arise from his/her or its own bad faith, willful
misfeasance, gross negligence or reckless disregard of his/her or its duties.
It also provides that all third persons shall look solely to the Fund property
for satisfaction of claims arising in connection with the affairs of the Fund.
With the exceptions stated, the Declaration of Trust provides that a Trustee,
officer, employee or agent is entitled to be indemnified against all liability
in connection with the affairs of the Fund.
19
<PAGE>
C. COMPENSATION
The Fund pays each Independent Trustee an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Trustees, the Independent
Trustees or Committees of the Board of Trustees attended by the Trustee (the
Fund pays the Chairman of the Audit Committee an additional annual fee of $750,
and the Chairmen of the Derivatives and Insurance Committees additional annual
fees of $500). If a Board meeting and a meeting of the Independent Trustees or
a Committee meeting, or a meeting of the Independent Trustees and/or more than
one Committee meeting, take place on a single day, the Trustees are paid a
single meeting fee by the Fund. The Fund also reimburses such Trustees for
travel and other out-of-pocket expenses incurred by them in connection with
attending such meetings. Trustees and officers of the Fund who are or have been
employed by the Investment Manager or an affiliated company receive no
compensation or expense reimbursement from the Fund for their services as
Trustee.
The following table illustrates the compensation that the Fund paid to its
Independent Trustees for the fiscal year ended December 31, 1998.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- ------------------------------- --------------
<S> <C>
Michael Bozic ................. $1,500
Edwin J. Garn ................. 1,650
Wayne E. Hedien ............... 1,650
Dr. Manuel H. Johnson ......... 1,600
Michael E. Nugent ............. 1,650
John L. Schroeder ............. 1,650
</TABLE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1998 for services
to the 85 Morgan Stanley Dean Witter Funds and, in the case of Messrs. Johnson,
Nugent and Schroeder, the 11 TCW/DW Funds that were in operation at December
31, 1998. With respect to Messrs. Johnson, Nugent and Schroeder, the TCW/DW
Funds are included solely because of a limited exchange privilege between those
Funds and five Morgan Stanley Dean Witter Money Market Funds. No compensation
was paid to the Fund's Independent Trustees by Discover Brokerage Index Series
for the calendar year ended December 31, 1998.
CASH COMPENSATION FROM MORGAN STANLEY DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
FOR SERVICE TOTAL CASH
AS DIRECTOR COMPENSATION
OR TRUSTEE FOR SERVICE FOR SERVICES
AND COMMITTEE AS TRUSTEE TO 85
MEMBER OF 85 AND COMMITTEE MORGAN STANLEY
MORGAN STANLEY MEMBER OF 11 DEAN WITTER
NAME OF DEAN WITTER TCW/DW FUNDS AND 11
INDEPENDENT TRUSTEE FUNDS FUNDS TCW/DW FUNDS
- ------------------------------- ---------------- --------------- ---------------
<S> <C> <C> <C>
Michael Bozic ................. $120,150 -- $120,150
Edwin J. Garn ................. 132,450 -- 132,450
Wayne E. Hedien ............... 132,350 -- 132,350
Dr. Manuel H. Johnson ......... 128,400 $62,331 190,731
Michael E. Nugent ............. 132,450 62,131 194,581
John L. Schroeder ............. 132,450 64,731 197,181
</TABLE>
20
<PAGE>
As of the date of this Statement of Additional Information, 55 of the
Morgan Stanley Dean Witter Funds, including the Fund, have adopted a retirement
program under which an Independent Trustee who retires after serving for at
least five years (or such lesser period as may be determined by the Board) as
an Independent Director or Trustee of any Morgan Stanley Dean Witter Fund that
has adopted the retirement program (each such Fund referred to as an "Adopting
Fund" and each such Trustee referred to as an "Eligible Trustee") is entitled
to retirement payments upon reaching the eligible retirement age (normally,
after attaining age 72). Annual payments are based upon length of service.
Currently, upon retirement, each Eligible Trustee is entitled to receive
from the Adopting Fund, commencing as of his or her retirement date and
continuing for the remainder of his or her life, an annual retirement benefit
(the "Regular Benefit") equal to 30.22% of his or her Eligible Compensation
plus 0.5036667% of such Eligible Compensation for each full month of service as
an Independent Director or Trustee of any Adopting Fund in excess of five years
up to a maximum of 60.44% after ten years of service. The foregoing percentages
may be changed by the Board(1). "Eligible Compensation" is one-fifth of the
total compensation earned by such Eligible Trustee for service to the Adopting
Fund in the five year period prior to the date of the Eligible Trustee's
retirement. Benefits under the retirement program are not secured or funded by
the Adopting Funds.
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the Fund for the fiscal year ended December 31,
1998 and by the 55 Morgan Stanley Dean Witter Funds (including the Fund) for
the year ended December 31, 1998, and the estimated retirement benefits for the
Independent Trustees, to commence upon their retirement, from the Fund as of
December 31, 1998 and from the 55 Morgan Stanley Dean Witter Funds as of
December 31, 1998.
RETIREMENT BENEFITS FROM THE FUND AND ALL MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS
-------------------------------
ESTIMATED ANNUAL
RETIREMENT BENEFITS BENEFITS UPON
ESTIMATED ACCRUED AS EXPENSES RETIREMENT(2)
CREDITED YEARS ESTIMATED ------------------------ --------------------
OF SERVICE AT PERCENTAGE OF BY ALL FROM ALL
NAME OF RETIREMENT ELIGIBLE ADOPTING FROM THE ADOPTING
INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION BY THE FUND FUNDS FUND FUNDS
- ------------------- ------------ ------------ ----------- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic ............ 10 60.44% $420 $22,377 $1,058 $52,250
Edwin J. Garn ............ 10 60.44 728 35,225 1,058 52,250
Wayne E. Hedien .......... 9 51.37 785 41,979 899 44,413
Dr. Manuel H. Johnson..... 10 60.44 281 14,047 1,058 52,250
Michael E. Nugent ........ 10 60.44 539 25,336 1,058 52,250
John L. Schroeder ........ 8 50.37 851 45,117 885 44,343
</TABLE>
- ----------
(1) An Eligible Trustee may elect alternative payments of his or her
retirement benefits based upon the combined life expectancy of the
Eligible Trustee and his or her spouse on the date of such Eligible
Trustee's retirement. In addition, the Eligible Trustee may elect that
the surviving spouse's periodic payment of benefits will be equal to a
lower percentage of the periodic amount when both spouses were alive. The
amount estimated to be payable under this method, through the remainder
of the later of the lives of the Eligible Trustee and spouse, will be the
actuarial equivalent of the Regular Benefit.
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1)
above.
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
- --------------------------------------------------------------------------------
The following persons owned 5% or more of the outstanding Class A shares
of the Fund as of April 1, 1999: MSDW Trust as Trustee, VVP America, P.O. Box
957, Jersey City, NJ 07303-0957 -- 6.457%; MSDW Trust FSB, Trustee, Fairfield
Communities Inc. Savings/Profit Sharing Plan, P.O. Box 957, Jersey City, NJ
07303-0957 -- 6.178%. The following owned 5% or more of the outstanding Class D
shares of the Fund on April 1, 1999: Mellon Bank N.A., Mutual Funds, P.O. Box
3198, Pittsburgh, PA 15230, as
21
<PAGE>
trustee of the Morgan Stanley Dean Witter START Plan, an employee benefit plan
established under Sections 401(a) and 401(k) of the Internal Revenue Code for
the benefit of certain employees of MSDW and its subsidiaries -- 26.287%;
Morgan Stanley Dean Witter Trust FSB Kulicke & Soffa Ind. Inc. Incentive
Savings Plan, P.O. Box 957, Jersey City, NJ 07303-0957 -- 8.180%.
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's
officers and Trustees as a group was less than 1% of the Fund's shares of
beneficial interest outstanding.
V. INVESTMENT MANAGEMENT AND OTHER SERVICES
- --------------------------------------------------------------------------------
A. INVESTMENT MANAGER
The Investment Manager to the Fund is Morgan Stanley Dean Witter Advisors
Inc., a Delaware corporation, whose address is Two World Trade Center, New
York, New York 10048. The Investment Manager is a wholly-owned subsidiary of
MSDW, a Delaware corporation. MSDW is a preeminent global financial services
firm that maintains leading market positions in each of its three primary
businesses: securities, asset management and credit services.
Pursuant to an Investment Management Agreement (the "Management
Agreement") with the Investment Manager, the Fund has retained the Investment
Manager to provide administrative services and manage the investment of the
Fund's assets, including the placing of orders for the purchase and sale of
portfolio securities. The Fund pays the Investment Manager monthly compensation
calculated daily by applying the following annual rates to the net assets of
the Fund determined as of the close of each business day: 0.625% to the portion
of daily net assets not exceeding $250 million; 0.50% to the portion of daily
net assets exceeding $250 million but not exceeding $2.5 billion; 0.475% to the
portion of daily net assets exceeding $2.5 billion but not exceeding $3.5
billion; 0.45% to the portion of daily net assets exceeding $3.5 billion but
not exceeding $4.5 billion; and 0.425% to the portion of daily net assets
exceeding $4.5 billion. The management fee is allocated among the Classes pro
rata based on the net assets of the Fund attributable to each Class. For the
fiscal years ended December 31, 1996, 1997 and 1998, the Investment Manager
accrued total compensation under the Management Agreement in the amounts of
$14,111,045, $18,075,407 and $23,716,700, respectively.
The Investment Manager has retained its wholly-owned subsidiary, MSDW
Services Company, to perform administrative services for the Fund.
B. PRINCIPAL UNDERWRITER
The Fund's principal underwriter is the Distributor (which has the same
address as the Investment Manager). In this capacity, the Fund's shares are
distributed by the Distributor. The Distributor has entered into a selected
dealer agreement with Dean Witter Reynolds, which through its own sales
organization sells shares of the Fund. In addition, the Distributor may enter
into similar agreements with other selected broker-dealers. The Distributor, a
Delaware corporation, is a wholly-owned subsidiary of MSDW.
The Distributor bears all expenses it may incur in providing services
under the Distribution Agreement. These expenses include the payment of
commissions for sales of the Fund's shares and incentive compensation to
Financial Advisors. The Distributor also pays certain expenses in connection
with the distribution of the Fund's shares, including the costs of preparing,
printing and distributing advertising or promotional materials, and the costs
of printing and distributing prospectuses and supplements thereto used in
connection with the offering and sale of the Fund's shares. The Fund bears the
costs of initial typesetting, printing and distribution of prospectuses and
supplements thereto to shareholders. The Fund also bears the costs of
registering the Fund and its shares under federal and state securities laws and
pays filing fees in accordance with state securities laws.
The Fund and the Distributor have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act. Under the
Distribution Agreement, the Distributor uses its
22
<PAGE>
best efforts in rendering services to the Fund, but in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations, the Distributor is not liable to the Fund or any of its
shareholders for any error of judgment or mistake of law or for any act or
omission or for any losses sustained by the Fund or its shareholders.
C. SERVICES PROVIDED BY THE INVESTMENT MANAGER AND FUND EXPENSES PAID BY THIRD
PARTIES
The Investment Manager manages the investment of the Fund's assets,
including the placing of orders for the purchase and sale of portfolio
securities. The Investment Manager obtains and evaluates the information and
advice relating to the economy, securities markets, and specific securities as
it considers necessary or useful to continuously manage the assets of the Fund
in a manner consistent with its investment objective.
Under the terms of the Management Agreement, in addition to managing the
Fund's investments, the Investment Manager maintains certain of the Fund's
books and records and furnishes, at its own expense, the office space,
facilities, equipment, clerical help, bookkeeping and certain legal services as
the Fund may reasonably require in the conduct of its business, including the
preparation of prospectuses, proxy statements and reports required to be filed
with federal and state securities commissions (except insofar as the
participation or assistance of independent accountants and attorneys is, in the
opinion of the Investment Manager, necessary or desirable). In addition, the
Investment Manager pays the salaries of all personnel, including officers of
the Fund, who are employees of the Investment Manager. The Investment Manager
also bears the cost of telephone service, heat, light, power and other
utilities provided to the Fund.
Expenses not expressly assumed by the Investment Manager under the
Management Agreement or by the Distributor, will be paid by the Fund. These
expenses will be allocated among the four Classes of shares pro rata based on
the net assets of the Fund attributable to each Class, except as described
below. Such expenses include, but are not limited to: expenses of the Plan of
Distribution pursuant to Rule 12b-1; charges and expenses of any registrar,
custodian, stock transfer and dividend disbursing agent; brokerage commissions;
taxes; engraving and printing share certificates; registration costs of the
Fund and its shares under federal and state securities laws; the cost and
expense of printing, including typesetting, and distributing prospectuses of
the Fund and supplements thereto to the Fund's shareholders; all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing of
proxy statements and reports to shareholders; fees and travel expenses of
Trustees or members of any advisory board or committee who are not employees of
the Investment Manager or any corporate affiliate of the Investment Manager;
all expenses incident to any dividend, withdrawal or redemption options;
charges and expenses of any outside service used for pricing of the Fund's
shares; fees and expenses of legal counsel, including counsel to the Trustees
who are not interested persons of the Fund or of the Investment Manager (not
including compensation or expenses of attorneys who are employees of the
Investment Manager); fees and expenses of the Fund's independent accountants;
membership dues of industry associations; interest on Fund borrowings; postage;
insurance premiums on property or personnel (including officers and Trustees)
of the Fund which inure to its benefit; extraordinary expenses (including, but
not limited to, legal claims and liabilities and litigation costs and any
indemnification relating thereto); and all other costs of the Fund's operation.
The 12b-1 fees relating to a particular Class will be allocated directly to
that Class. In addition, other expenses associated with a particular Class
(except advisory or custodial fees) may be allocated directly to that Class,
provided that such expenses are reasonably identified as specifically
attributable to that Class and the direct allocation to that Class is approved
by the Trustees.
The Management Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Investment Manager is not liable to the Fund or any
of its investors for any act or omission by the Investment Manager or for any
losses sustained by the Fund or its investors.
The Management Agreement will remain in effect from year to year, provided
continuance of the Management Agreement is approved at least annually by the
vote of the holders of a majority, as defined in the Investment Company Act, of
the outstanding shares of the Fund, or by the Trustees; provided that in either
event such continuance is approved annually by the vote of a majority of the
Trustees.
23
<PAGE>
D. DEALER REALLOWANCES
Upon notice to selected broker-dealers, the Distributor may reallow up to
the full applicable front-end sales charge during periods specified in such
notice. During periods when 90% or more of the sales charge is reallowed, such
selected broker-dealers may be deemed to be underwriters as that term is
defined in the Securities Act.
E. RULE 12B-1 PLAN
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under
the Investment Company Act (the "Plan") pursuant to which each Class, other
than Class D, pays the Distributor compensation accrued daily and payable
monthly at the following annual rates: 0.25% and 1.0% of the average daily net
assets of Class A and Class C, respectively, and, with respect to Class B, 1.0%
of the lesser of: (a) the average daily aggregate gross sales of the Fund's
Class B shares since the inception of the plan of distribution adopted by the
Fund (the "Prior Plan") on April 30, 1984 (not including reinvestment of
dividends or capital gains distributions), less the average daily aggregate net
asset value of the Fund's Class B shares redeemed since the Prior Plan's
inception upon which a contingent deferred sales charge has been imposed or
upon which such charge has been waived; or (b) the average daily net assets of
Class B shares attributable to shares issued, net of shares redeemed, since the
inception of the Prior Plan.
The Distributor also receives the proceeds of front-end sales charges
("FSCs") and of contingent deferred sales charges ("CDSCs") imposed on certain
redemptions of shares, which are separate and apart from payments made pursuant
to the Plan. The Distributor has informed the Fund that it and/or Dean Witter
Reynolds received the proceeds of CDSCs and FSCs, for the last three fiscal
years ended December 31, in approximate amounts as provided in the table below
(the Distributor did not retain any of these amounts).
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Class A .......... FSCs:(1) $ 488,168 FSCs: $ 202,038 FSCs: N/A(2)
CDSCs: $ 929 CDSCs: $ 0 CDSCs: N/A(2)
Class B .......... CDSCs: $4,656,751 CDSCs: $4,721,534 CDSCs: $3,792,237
Class C .......... CDSCs: $ 36,715 CDSCs: $ 3,192 CDSCs: N/A(2)
</TABLE>
- ----------
(1) FSCs apply to Class A only.
(2) This Class commenced operations on July 28, 1997.
The Distributor has informed the Fund that the entire fee payable by Class
A and a portion of the fees payable by each of Class B and Class C each year
pursuant to the Plan equal to 0.25% of such Class' average daily net assets are
currently each characterized as a "service fee" under the Rules of the National
Association of Securities Dealers, Inc. (of which the Distributor is a member).
The "service fee" is a payment made for personal service and/or the maintenance
of shareholder accounts. The remaining portion of the Plan fees payable by a
Class, if any, is characterized as an "asset-based sales charge" as such is
defined by the Rules of the Association.
Under the Plan and as required by Rule 12b-1, the Trustees receive and
review promptly after the end of each calendar quarter a written report
provided by the Distributor of the amounts expended under the Plan and the
purpose for which such expenditures were made. Class B shares of the Fund
accrued amounts payable to the Distributor under the Plan, during the fiscal
year ended December 31, 1998, of $36,879,912. This amount is equal to 0.78% of
the average daily net assets of Class B for the fiscal year and was calculated
pursuant to clause (a) of the compensation formula under the Plan. For the
fiscal year ended December 31, 1998, Class A and Class C shares of the Fund
accrued payments under the Plan amounting to $138,389 and $301,162,
respectively, which amounts are equal to 0.25% and 1.00% of the average daily
net assets of Class A and Class C, respectively, for the fiscal year.
24
<PAGE>
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method the Fund offers four
Classes, each with a different distribution arrangement.
With respect to Class A shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from proceeds of the FSC, commissions for
the sale of Class A shares, currently a gross sales credit of up to 5.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.25% of the current value
of the respective accounts for which they are the Financial Advisors or dealers
of record in all cases. On orders of $1 million or more (for which no sales
charge was paid) or net asset value purchases by employer-sponsored employee
benefit plans, whether or not qualified under the Internal Revenue Code, for
which the Transfer Agent serves as Trustee or Dean Witter Reynolds Retirement
Plan Services serves as recordkeeper pursuant to a written Recordkeeping
Services Agreement ("MSDW Eligible Plans"), the Investment Manager compensates
Financial Advisors by paying them, from its own funds, a gross sales credit of
1.0% of the amount sold.
With respect to Class B shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class B shares, currently a gross sales credit of up to 5.0% of the amount
sold (except as provided in the following sentence) and an annual residual
commission, currently a residual of up to 0.25% of the current value (not
including reinvested dividends or distributions) of the amount sold in all
cases. In the case of Class B shares purchased by MSDW Eligible Plans, Dean
Witter Reynolds compensates its Financial Advisors by paying them, from its own
funds, a gross sales credit of 3.0% of the amount sold.
With respect to Class C shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class C shares, currently a gross sales credit of up to 1.0% of the amount
sold and an annual residual commission, currently up to 1.0% of the current
value of the respective accounts for which they are the Financial Advisors of
record.
With respect to Class D shares other than shares held by participants in
the Investment Manager's mutual fund asset allocation program, the Investment
Manager compensates Dean Witter Reynolds's Financial Advisors by paying them,
from its own funds, commissions for the sale of Class D shares, currently a
gross sales credit of up to 1.0% of the amount sold. There is a chargeback of
100% of the amount paid if the Class D shares are redeemed in the first year
and a chargeback of 50% of the amount paid if the Class D shares are redeemed
in the second year after purchase. The Investment Manager also compensates Dean
Witter Reynolds's Financial Advisors by paying them, from its own funds, an
annual residual commission, currently up to 0.10% of the current value of the
respective accounts for which they are the Financial Advisors of record (not
including accounts of participants in the Investment Manager's mutual fund
asset allocation program).
The gross sales credit is a charge which reflects commissions paid by Dean
Witter Reynolds to its Financial Advisors and Dean Witter Reynolds's
Fund-associated distribution-related expenses, including sales compensation,
and overhead and other branch office distribution-related expenses including
(a) the expenses of operating Dean Witter Reynolds's branch offices in
connection with the sale of Fund shares, including lease costs, the salaries
and employee benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies; (b) the costs of
client sales seminars; (c) travel expenses of mutual fund sales coordinators to
promote the sale of Fund shares; and (d) other expenses relating to branch
promotion of Fund sales.
The distribution fee that the Distributor receives from the Fund under the
Plan, in effect, offsets distribution expenses incurred under the Plan on
behalf of the Fund and, in the case of Class B shares, opportunity costs, such
as the gross sales credit and an assumed interest charge thereon ("carrying
charge"). In the Distributor's reporting of the distribution expenses to the
Fund, in the case of Class B shares, such assumed interest (computed at the
"broker's call rate") has been calculated on the gross credit as it is reduced
by amounts received by the Distributor under the Plan and any contingent
deferred sales charges received by the Distributor upon redemption of shares of
the Fund. No other interest charge is included as a distribution expense in the
Distributor's calculation of its distribution costs for this purpose. The
broker's call rate is the interest rate charged to securities brokers on loans
secured by exchange-listed securities.
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The Fund is authorized to reimburse expenses incurred or to be incurred in
promoting the distribution of the Fund's Class A and Class C shares and in
servicing shareholder accounts. Reimbursement will be made through payments at
the end of each month. The amount of each monthly payment may in no event
exceed an amount equal to a payment at the annual rate of 0.25%, in the case of
Class A, and 1.0%, in the case of Class C, of the average net assets of the
respective Class during the month. No interest or other financing charges, if
any, incurred on any distribution expenses on behalf of Class A and Class C
will be reimbursable under the Plan. With respect to Class A, in the case of
all expenses other than expenses representing the service fee, and, with
respect to Class C, in the case of all expenses other than expenses
representing a gross sales credit or a residual to Financial Advisors and other
authorized financial representatives, such amounts shall be determined at the
beginning of each calendar quarter by the Trustees, including, a majority of
the Independent Trustees. Expenses representing the service fee (for Class A)
or a gross sales credit or a residual to Financial Advisors and other
authorized financial representatives (for Class C) may be reimbursed without
prior determination. In the event that the Distributor proposes that monies
shall be reimbursed for other than such expenses, then in making quarterly
determinations of the amounts that may be reimbursed by the Fund, the
Distributor will provide and the Trustees will review a quarterly budget of
projected distribution expenses to be incurred on behalf of the Fund, together
with a report explaining the purposes and anticipated benefits of incurring
such expenses. The Trustees will determine which particular expenses, and the
portions thereof, that may be borne by the Fund, and in making such a
determination shall consider the scope of the Distributor's commitment to
promoting the distribution of the Fund's Class A and Class C shares.
Each Class paid 100% of the amounts accrued under the Plan with respect to
that Class for the fiscal year ended December 31, 1998 to the Distributor. The
Distributor and Dean Witter Reynolds estimate that they have spent, pursuant to
the Plan, $242,783,468 on behalf of Class B since the inception of the Prior
Plan. It is estimated that this amount was spent in approximately the following
ways: (i) 3.60% ($8,743,707)--advertising and promotional expenses; (ii) 0.33%
($801,233)--printing of prospectuses for distribution to other than current
shareholders; and (iii) 96.07% ($233,238,528)--other expenses, including the
gross sales credit and the carrying charge, of which 7.06% ($16,457,497)
represents carrying charges, 38.01% ($88,663,442) represents commission credits
to Dean Witter Reynolds branch offices and other selected broker-dealers for
payments of commissions to Financial Advisors and other authorized financial
representatives, and 54.93% ($128,117,589) represents overhead and other branch
office distribution-related expenses. The amounts accrued by Class A and Class
C for distribution during the fiscal year ended December 31, 1998 were for
expenses which relate to compensation of sales personnel and associated
overhead expenses.
In the case of Class B shares, at any given time, the expenses of
distributing shares of the Fund may be more or less than the total of (i) the
payments made by the Fund pursuant to the Plan; and (ii) the proceeds of CDSCs
paid by investors upon redemption of shares. For example, if $1 million in
expenses in distributing Class B shares of the Fund had been incurred and
$750,000 had been received as described in (i) and (ii) above, the excess
expense would amount to $250,000. The Distributor has advised the Fund that in
the case of Class B shares the excess distribution expenses, including the
carrying charge designed to approximate the opportunity costs incurred by Dean
Witter Reynolds which arise from it having advanced monies without having
received the amount of any sales charges imposed at the time of sale of the
Fund's Class B shares, totaled $83,296,669 as of December 31, 1998 (the end of
the Fund's fiscal year), which was equal to 1.45% of the net assets of Class B
on such date. Because there is no requirement under the Plan that the
Distributor be reimbursed for all distribution expenses with respect to Class B
shares or any requirement that the Plan be continued from year to year, this
excess amount does not constitute a liability of the Fund. Although there is no
legal obligation for the Fund to pay expenses incurred in excess of payments
made to the Distributor under the Plan and the proceeds of CDSCs paid by
investors upon redemption of shares, if for any reason the Plan is terminated,
the Trustees will consider at that time the manner in which to treat such
expenses. Any cumulative expenses incurred, but not yet recovered through
distribution fees or CDSCs, may or may not be recovered through future
distribution fees or CDSCs.
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<PAGE>
In the case of Class A and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales commission credited to Morgan Stanley Dean Witter Financial
Advisors and other authorized financial representatives at the time of sale may
be reimbursed in the subsequent calendar year. The Distributor has advised the
Fund that unreimbursed expenses representing a gross sales commission credited
to Morgan Stanley Dean Witter Financial Advisors and other authorized financial
representatives at the time of sale totaled $192,079 in the case of Class C at
December 31, 1998 (the end of the calendar year), which amount was equal to
0.32% of the net assets of Class C on such date, and that there were no such
expenses that may be reimbursed in the subsequent year in the case of Class A
on such date. No interest or other financing charges will be incurred on any
Class A or Class C distribution expenses incurred by the Distributor under the
Plan or on any unreimbursed expenses due to the Distributor pursuant to the
Plan.
No interested person of the Fund nor any Independent Trustee has any
direct financial interest in the operation of the Plan except to the extent
that the Distributor, the Investment Manager, Dean Witter Reynolds, MSDW
Services Company or certain of their employees may be deemed to have such an
interest as a result of benefits derived from the successful operation of the
Plan or as a result of receiving a portion of the amounts expended thereunder
by the Fund.
On an annual basis, the Trustees, including a majority of the Independent
Trustees, consider whether the Plan should be continued. Prior to approving the
most recent continuation of the Plan, the Trustees requested and received from
the Distributor and reviewed all the information which they deemed necessary to
arrive at an informed determination. In making their determination to continue
the Plan, the Trustees considered: (1) the Fund's experience under the Plan and
whether such experience indicates that the Plan is operating as anticipated;
(2) the benefits the Fund had obtained, was obtaining and would be likely to
obtain under the Plan, including that: (a) the Plan is essential in order to
give Fund investors a choice of alternatives for payment of distribution and
service charges and to enable the Fund to continue to grow and avoid a pattern
of net redemptions which, in turn, are essential for effective investment
management; and (b) without the compensation to individual brokers and the
reimbursement of distribution and account maintenance expenses of Dean Witter
Reynolds's branch offices made possible by the 12b-1 fees, Dean Witter Reynolds
could not establish and maintain an effective system for distribution,
servicing of Fund shareholders and maintenance of shareholder accounts; and (3)
what services had been provided and were continuing to be provided under the
Plan to the Fund and its shareholders. Based upon their review, the Trustees,
including each of the Independent Trustees, determined that continuation of the
Plan would be in the best interest of the Fund and would have a reasonable
likelihood of continuing to benefit the Fund and its shareholders. In the
Trustees' quarterly review of the Plan, they will consider its continued
appropriateness and the level of compensation provided therein.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of the
affected Class or Classes of the Fund, and all material amendments to the Plan
must also be approved by the Trustees in the manner described above. The Plan
may be terminated at any time, without payment of any penalty, by vote of a
majority of the Independent Trustees or by a vote of a majority of the
outstanding voting securities of the Fund (as defined in the Investment Company
Act) on not more than thirty days' written notice to any other party to the
Plan. So long as the Plan is in effect, the election and nomination of
Independent Trustees shall be committed to the discretion of the Independent
Trustees.
F. OTHER SERVICE PROVIDERS
(1) TRANSFER AGENT/DIVIDEND-PAYING AGENT
Morgan Stanley Dean Witter Trust FSB is the Transfer Agent for the Fund's
shares and the Dividend Disbursing Agent for payment of dividends and
distributions on Fund shares and Agent for shareholders under various
investment plans. The principal business address of the Transfer Agent is
Harborside Financial Center, Plaza Two, Jersey City, New Jersey 07311.
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(2) CUSTODIAN AND INDEPENDENT ACCOUNTANTS
The Bank of New York, 90 Washington Street, New York, New York 10286, is
the Custodian of the Fund's assets. Any of the Fund's cash balances with the
Custodian in excess of $100,000 are unprotected by federal deposit insurance.
These balances may, at times, be substantial.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New
York, 10036, serves as the independent accountants of the Fund. The independent
accountants are responsible for auditing the annual financial statements of the
Fund.
(3) AFFILIATED PERSONS
The Transfer Agent is an affiliate of the Investment Manager, and of the
Distributor. As Transfer Agent and Dividend Disbursing Agent, the Transfer
Agent's responsibilities include maintaining shareholder accounts, disbursing
cash dividends and reinvesting dividends, processing account registration
changes, handling purchase and redemption transactions, mailing prospectuses
and reports, mailing and tabulating proxies, processing share certificate
transactions, and maintaining shareholder records and lists. For these
services, the Transfer Agent receives a per shareholder account fee from the
Fund.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
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A. BROKERAGE TRANSACTIONS
Subject to the general supervision of the Trustees, the Investment Manager
is responsible for decisions to buy and sell securities for the Fund, the
selection of brokers and dealers to effect the transactions, and the
negotiation of brokerage commissions, if any. Purchases and sales of securities
on a stock exchange are effected through brokers who charge a commission for
their services. In the over-the-counter market, securities are generally traded
on a "net" basis with dealers acting as principal for their own accounts
without a stated commission, although the price of the security usually
includes a profit to the dealer. The Fund also expects that securities will be
purchased at times in underwritten offerings where the price includes a fixed
amount of compensation, generally referred to as the underwriter's concession
or discount. Options and futures transactions will usually be effected through
a broker and a commission will be charged. On occasion, the Fund may also
purchase certain money market instruments directly from an issuer, in which
case no commissions or discounts are paid.
For the fiscal years ended December 31, 1996, 1997 and 1998, the Fund paid
a total of $11,278,417, $15,385,470 and $22,355,171, respectively, in brokerage
commissions.
B. COMMISSIONS
Pursuant to an order of the SEC, the Fund may effect principal
transactions in certain money market instruments with Dean Witter Reynolds. The
Fund will limit its transactions with Dean Witter Reynolds to U.S. Government
and government agency securities, bank money instruments (i.e., certificates of
deposit and bankers' acceptances) and commercial paper. The transactions will
be effected with Dean Witter Reynolds only when the price available from Dean
Witter Reynolds is better than that available from other dealers.
During the fiscal years ended December 31, 1996, 1997 and 1998, the Fund
did not effect any principal transactions with Dean Witter Reynolds.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may
be effected through Dean Witter Reynolds, Morgan Stanley & Co. and other
affiliated brokers and dealers. In order for an affiliated broker or dealer to
effect any portfolio transactions on an exchange for the Fund, the commissions,
fees or other remuneration received by the affiliated broker or dealer must be
reasonable and fair compared to the commissions, fees or other remuneration
paid to other brokers in connection with comparable transactions involving
similar securities being purchased or sold on an exchange during a comparable
period of time. This standard would allow the affiliated broker or dealer to
receive no more than the remuneration which
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would be expected to be received by an unaffiliated broker in a commensurate
arm's-length transaction. Furthermore, the Trustees, including the Independent
Trustees, have adopted procedures which are reasonably designed to provide that
any commissions, fees or other remuneration paid to an affiliated broker or
dealer are consistent with the foregoing standard. The Fund does not reduce the
management fee it pays to the Investment Manager by any amount of the brokerage
commissions it may pay to an affiliated broker or dealer.
During the fiscal years ended December 31, 1996, 1997 and 1998, the Fund
paid a total of $902,407, $1,122,089 and $1,418,553, respectively, in brokerage
commissions to Dean Witter Reynolds. During the fiscal year ended December 31,
1998, the brokerage commissions paid to Dean Witter Reynolds represented
approximately 6.35% of the total brokerage commissions paid by the Fund during
the year and were paid on account of transactions having an aggregate dollar
value equal to approximately 6.82% of the aggregate dollar value of all
portfolio transactions of the Fund during the year for which commissions were
paid.
During the fiscal year ended December 31, 1998, the Fund paid a total of
$3,091,548 in brokerage commissions to Morgan Stanley & Co., which
broker-dealer became an affiliate of the Investment Manager on May 31, 1997
upon consummation of the merger of Dean Witter, Discover & Co. with Morgan
Stanley Group Inc. During the fiscal year ended December 31, 1998, the
brokerage commissions paid to Morgan Stanley & Co. represented approximately
13.83% of the total brokerage commissions paid by the Fund for this period and
were paid on account of transactions having an aggregate dollar value equal to
approximately 15.60% of the aggregate dollar value of all portfolio
transactions of the Fund during the year for which commissions were paid.
C. BROKERAGE SELECTION
The policy of the Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid
in all circumstances. The Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Investment Manager from obtaining a high quality of
brokerage and research services. In seeking to determine the reasonableness of
brokerage commissions paid in any transaction, the Investment Manager relies
upon its experience and knowledge regarding commissions generally charged by
various brokers and on its judgment in evaluating the brokerage and research
services received from the broker effecting the transaction. These
determinations are necessarily subjective and imprecise, as in most cases an
exact dollar value for those services is not ascertainable.
In seeking to implement the Fund's policies, the Investment Manager
effects transactions with those brokers and dealers who the Investment Manager
believes provide the most favorable prices and are capable of providing
efficient executions. If the Investment Manager believes the prices and
executions are obtainable from more than one broker or dealer, it may give
consideration to placing portfolio transactions with those brokers and dealers
who also furnish research and other services to the Fund or the Investment
Manager. The services may include, but are not limited to, any one or more of
the following: information as to the availability of securities for purchase or
sale; statistical or factual information or opinions pertaining to investment;
wire services; and appraisals or evaluations of portfolio securities. The
information and services received by the Investment Manager from brokers and
dealers may be of benefit to the Investment Manager in the management of
accounts of some of its other clients and may not in all cases benefit the Fund
directly.
The Investment Manager currently serves as investment manager to a number
of clients, including other investment companies, and may in the future act as
investment manager or advisor to others. It is the practice of the Investment
Manager to cause purchase and sale transactions to be allocated among the Fund
and others whose assets it manages in such manner as it deems equitable. In
making such allocations among the Fund and other client accounts, various
factors may be considered, including the
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<PAGE>
respective investment objectives, the relative size of portfolio holdings of
the same or comparable securities, the availability of cash for investment, the
size of investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the Fund and other client accounts.
In the case of certain initial and secondary public offerings, the Investment
Manager utilizes a pro rata allocation process based on the size of the Morgan
Stanley Dean Witter Funds involved and the number of shares available from the
public offering.
D. DIRECTED BROKERAGE
During the fiscal year ended December 31, 1998, the Fund paid $17,599,729
in brokerage commissions in connection with transactions in the aggregate
amount of $14,474,486,813 to brokers because of research services provided.
E. REGULAR BROKER-DEALERS
During the fiscal year ended October 31, 1998, the Fund purchased
securities issued by Merrill Lynch, Pierce, Fenner & Smith Inc., Lehman
Brothers Inc., BancAmerica, and Chase Manhattan Bank, which issuers were among
the ten brokers or the ten dealers that executed transactions for or with the
Fund in the largest dollar amounts during the year. At December 31, 1998, the
Fund held securities issued by Merrill Lynch, Pierce, Fenner & Smith Inc.,
Lehman Brothers Inc., BancAmerica, and Chase Manhattan Bank with market values
of $56,497,200, $17,144,719, $240,500, and $27,905,625, respectively.
VII. CAPITAL STOCK AND OTHER SECURITIES
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The shareholders of the Fund are entitled to a full vote for each full
share of beneficial interest held. The Fund is authorized to issue an unlimited
number of shares of beneficial interest. All shares of beneficial interest of
the Fund are of $0.01 par value and are equal as to earnings, assets and voting
privileges except that each Class will have exclusive voting privileges with
respect to matters relating to distribution expenses borne solely by such Class
or any other matter in which the interests of one Class differ from the
interests of any other Class. In addition, Class B shareholders will have the
right to vote on any proposed material increase in Class A's expenses, if such
proposal is submitted separately to Class A shareholders. Also, Class A, Class
B and Class C bear expenses related to the distribution of their respective
shares.
The Fund's Declaration of Trust permits the Trustees to authorize the
creation of additional series of shares (the proceeds of which would be
invested in separate, independently managed portfolios) and additional Classes
of shares within any series. The Trustees have not presently authorized any
such additional series or Classes of shares other than as set forth in the
Prospectus.
The Fund is not required to hold annual meetings of shareholders and in
ordinary circumstances the Fund does not intend to hold such meetings. The
Trustees may call special meetings of shareholders for action by shareholder
vote as may be required by the Investment Company Act or the Declaration of
Trust. Under certain circumstances, the Trustees may be removed by action of
the Trustees or by the shareholders.
Under Massachusetts law, shareholders of a business trust may, under
certain limited circumstances, be held personally liable as partners for the
obligations of the Fund. However, the Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Fund,
requires that notice of such Fund obligations include such disclaimer, and
provides for indemnification out of the Fund's property for any shareholder
held personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability, and
the nature of the Fund's assets and operations, the possibility of the Fund
being unable to meet its obligations is remote and thus, in the opinion of
Massachusetts counsel to the Fund, the risk to Fund shareholders of personal
liability is remote.
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All of the Trustees have been elected by the shareholders of the Fund,
most recently at a Special Meeting of Shareholders held on May 21, 1997. The
Trustees themselves have the power to alter the number and the terms of office
of the Trustees (as provided for in the Declaration of Trust), and they may at
any time lengthen or shorten their own terms or make their terms of unlimited
duration and appoint their own successors, provided that always at least a
majority of the Trustees has been elected by the shareholders of the Fund.
VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
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A. PURCHASE/REDEMPTION OF SHARES
Information concerning how Fund shares are offered to the public (and how
they are redeemed and exchanged) is provided in the Fund's Prospectus.
TRANSFER AGENT AS AGENT. With respect to the redemption or repurchase of
Fund shares, the application of proceeds to the purchase of new shares in the
Fund or any other Morgan Stanley Dean Witter Funds and the general
administration of the exchange privilege, the Transfer Agent acts as agent for
the Distributor and for the shareholder's authorized broker-dealer, if any, in
the performance of such functions. With respect to exchanges, redemptions or
repurchases, the Transfer Agent shall be liable for its own negligence and not
for the default or negligence of its correspondents or for losses in transit.
The Fund shall not be liable for any default or negligence of the Transfer
Agent, the Distributor or any authorized broker-dealer.
The Distributor and any authorized broker-dealer have appointed the
Transfer Agent to act as their agent in connection with the application of
proceeds of any redemption of Fund shares to the purchase of shares of any
other Morgan Stanley Dean Witter Fund and the general administration of the
exchange privilege. No commission or discounts will be paid to the Distributor
or any authorized broker-dealer for any transactions pursuant to the exchange
privilege.
TRANSFERS OF SHARES. In the event a shareholder requests a transfer of
Fund shares to a new registration, the shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to a CDSC or free of such charge (and with regard to the length
of time shares subject to the charge have been held), any transfer involving
less than all of the shares in an account will be made on a pro rata basis
(that is, by transferring shares in the same proportion that the transferred
shares bear to the total shares in the account immediately prior to the
transfer). The transferred shares will continue to be subject to any applicable
CDSC as if they had not been so transferred.
EXCHANGING SHARES OF CLASSES WITH A CDSC
When exchanging shares of a Class of the Fund that imposes a CDSC, shares
that are not subject to a CDSC because they were (i) purchased more than one
year ago (for Class A and Class C) or six years ago (for Class B) or (ii)
acquired through reinvestment of dividends or distributions (all such shares
referred to as "Free Shares") will be exchanged first. After exchanging such
Free Shares the shares subject to a CDSC that were held the longest will be
exchanged next. Shares purchased during the same month are deemed to be held
for the same length of time. (For shares held for the same length of time but
subject to different CDSC rates, the shares with the lower CDSC rate will be
exchanged first.) When exchanging shares subject to a CDSC, you should know
that the CDSC rate will be calculated on such exchanged shares based on the
lesser of: (a) the purchase price of those shares; or (b) their current net
asset value at the time of the exchange. Accordingly, any appreciation in value
on such exchanged shares are not subject to a CDSC. When exchanging a portion
of shares deemed to be held for the same length of time, shares representing
any appreciation in value (and therefore, such shares will not be subject to
any CDSC) will be exchanged first.
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B. OFFERING PRICE
The Fund's Class B, Class C and Class D shares are offered at net asset
value per share and the Class A shares are offered at net asset value per share
plus any applicable FSC which is distributed among the Fund's Distributor, Dean
Witter Reynolds and other authorized dealers as described in Section "V.
Investment Management and Other Services--E. Rule 12b-1 Plan."
The price of Fund shares, called "net asset value," is based on the value
of the Fund's portfolio securities. Net asset value per share of each Class is
calculated by dividing the value of the portion of the Fund's securities and
other assets attributable to that Class, less the liabilities attributable to
that Class, by the number of shares of that Class outstanding. The assets of
each Class of shares are invested in a single portfolio. The net asset value of
each Class, however, will differ because the Classes have different ongoing
fees.
In the calculation of the Fund's net asset value: (1) an equity portfolio
security listed or traded on the New York or American Stock Exchange or other
stock exchange is valued at its latest sale price on that exchange, prior to
the time when assets are valued; if there were no sales that day, the security
is valued at the latest bid price (in cases where a security is traded on more
than one exchange, the security is valued on the exchange designated as the
primary market pursuant to procedures adopted by the Trustees); and (2) all
other portfolio securities for which over-the-counter market quotations are
readily available are valued at the latest bid price. When market quotations
are not readily available, including circumstances under which it is determined
by the Investment Manager that sale or bid prices are not reflective of a
security's market value, portfolio securities are valued at their fair value as
determined in good faith under procedures established by and under the general
supervision of the Fund's Trustees. For valuation purposes, quotations of
foreign portfolio securities, other assets and liabilities and forward
contracts stated in foreign currency are translated into U.S. dollar
equivalents at the prevailing market rates prior to the close of the New York
Stock Exchange.
Short-term debt securities with remaining maturities of sixty days or less
at the time of purchase are valued at amortized cost, unless the Trustees
determine such does not reflect the securities' market value, in which case
these securities will be valued at their fair value as determined by the
Trustees.
Certain of the Fund's portfolio securities may be valued by an outside
pricing service approved by the Fund's Trustees. The pricing service may
utilize a matrix system incorporating security quality, maturity and coupon as
the evaluation model parameters, and/or research evaluations by its staff,
including review of broker-dealer market price quotations in determining what
it believes is the fair valuation of the portfolio securities valued by such
pricing service.
Listed options on debt securities are valued at the latest sale price on
the exchange on which they are listed unless no sales of such options have
taken place that day, in which case they will be valued at the mean between
their latest bid and asked prices. Unlisted options on debt securities and all
options on equity securities are valued at the mean between their latest bid
and asked prices. Futures are valued at the latest sale price on the
commodities exchange on which they trade unless the Trustees determine such
price does not reflect their market value, in which case they will be valued at
their fair value as determined in good faith under procedures established by
and under the supervision of the Trustees.
Generally, trading in foreign securities, as well as corporate bonds, U.S.
Government securities and money market instruments, is substantially completed
each day at various times prior to the close of the New York Stock Exchange.
The values of such securities used in computing the net asset value of the
Fund's shares are determined as of such times. Foreign currency exchange rates
are also generally determined prior to the close of the New York Stock
Exchange. Occasionally, events which may affect the values of such securities
and such exchange rates may occur between the times at which they are
determined and the close of the New York Stock Exchange and will therefore not
be reflected in the computation of the Fund's net asset value. If events that
may affect the value of such securities occur during such period, then these
securities may be valued at their fair value as determined in good faith under
procedures established by and under the supervision of the Trustees.
32
<PAGE>
IX. TAXATION OF THE FUND AND SHAREHOLDERS
- --------------------------------------------------------------------------------
The Fund generally will make two basic types of distributions: ordinary
dividends and long-term capital gain distributions. These two types of
distributions are reported differently on a shareholder's income tax return and
they are also subject to different rates of tax. The tax treatment of the
investment activities of the Fund will affect the amount and timing and
character of the distributions made by the Fund. Tax issues relating to the
Fund are not generally a consideration for shareholders such as tax exempt
entities and tax-advantaged retirement vehicles such as an IRA or 401(k) plan.
Shareholders are urged to consult their own tax professionals regarding
specific questions as to federal, state or local taxes.
INVESTMENT COMPANY TAXATION. The Fund intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986. As such, the Fund will not be subject to federal income tax on its net
investment income and capital gains, if any, to the extent that it distributes
such income and capital gains to its shareholders.
The Fund generally intends to distribute sufficient income and gains so
that the Fund will not pay corporate income tax on its earnings. The Fund also
generally intends to distribute to its shareholders in each calendar year a
sufficient amount of ordinary income and capital gains to avoid the imposition
of a 4% excise tax. However, the Fund may instead determine to retain all or
part of any net long-term capital gains in any year for reinvestment. In such
event, the Fund will pay federal income tax (and possibly excise tax) on such
retained gains.
Gains or losses on sales of securities by the Fund will be long-term
capital gains or losses if the securities have a tax holding period of more
than one year. Gains or losses on the sale of securities with a tax holding
period of one year or less will be short-term gains or losses.
Gains or losses on the Fund's transactions in listed non-equity options,
futures and options on futures generally are treated as 60% long-term and 40%
short-term. When the Fund engages in options and futures transactions, various
tax rules may accelerate or defer recognition of certain gains and losses,
change the character of certain gains or losses, or alter the holding period of
other investments held by the Fund. The application of these rules would
therefore also affect the amount, timing and character of distributions made by
the Fund.
Under certain tax rules, the Fund may be required to accrue a portion of
any discount at which certain securities are purchased as income each year even
though the Fund receives no payments in cash on the security during the year.
To the extent that the Fund invests in such securities, it would be required to
pay out such accrued discount as an income distribution in each year in order
to avoid taxation at the Fund level. Such distributions will be made from the
available cash of the Fund or by liquidation of portfolio securities if
necessary. If a distribution of cash necessitates the liquidation of portfolio
securities, the Investment Manager will select which securities to sell. The
Fund may realize a gain or loss from such sales. In the event the Fund realizes
net capital gains from such transactions, its shareholders may receive a larger
capital gain distribution, if any, than they would in the absence of such
transactions.
TAXATION OF DIVIDENDS AND DISTRIBUTIONS. Shareholders normally will have
to pay federal income taxes, and any state and/or local income taxes, on the
dividends and other distributions they receive from the Fund. Such dividends
and distributions, to the extent that they are derived from net investment
income or short-term capital gains, are taxable to the shareholder as ordinary
income regardless of whether the shareholder receives such payments in
additional shares or in cash.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder
has held the Fund's shares and regardless of whether the distribution is
received in additional shares or in cash. The Taxpayer Relief Act of 1997
reduced the maximum tax on long-term capital gains applicable to individuals
from 28% to 20%.
Shareholders are generally taxed on any ordinary dividend or capital gain
distributions from the Fund in the year they are actually distributed. However,
if any such dividends or distributions are declared in October, November or
December and paid in January then such amounts will be treated for tax purposes
as received by the shareholders on December 31, to shareholders of record of
such month.
33
<PAGE>
Subject to certain exceptions, a corporate shareholder may be eligible for
a 70% dividends received deduction to the extent that the Fund earns and
distributes qualifying dividends from its investments. Distributions of net
capital gains by the Fund will not be eligible for the dividends received
deduction.
Shareholders who are not citizens or residents of the United States and
certain foreign entities may be subject to withholding of United States tax on
distributions made by the Fund of investment income and short term capital
gains.
After the end of each calendar year, shareholders will be sent full
information on their dividends and capital gain distributions for tax purposes,
including the portion taxable as ordinary income, the portion taxable as
long-term capital gains and the amount of any dividends eligible for the
federal dividends received deduction for corporations.
PURCHASES AND REDEMPTIONS AND EXCHANGES OF FUND SHARES. Any dividend or
capital gains distribution received by a shareholder from any investment
company will have the effect of reducing the net asset value of the
shareholder's stock in that company by the exact amount of the dividend or
capital gains distribution. Furthermore, such dividends and capital gains
distributions are subject to federal income taxes. If the net asset value of
the shares should be reduced below a shareholder's cost as a result of the
payment of dividends or the distribution of realized long-term capital gains,
such payment or distribution would be in part a return of the shareholder's
investment but nonetheless would be taxable to the shareholder. Therefore, an
investor should consider the tax implications of purchasing Fund shares
immediately prior to a distribution record date.
In general, a sale of shares results in capital gain or loss, and for
individual shareholders, is taxable at a federal rate dependent upon the length
of time the shares were held. A redemption of a shareholder's Fund shares is
normally treated as a sale for tax purposes. Fund shares held for a period of
one year or less will, for tax purposes, generally result in short-term gains
or losses and those held for more than one year generally result in long-term
gain or loss. Any loss realized by shareholders upon a redemption of shares
within six months of the date of their purchase will be treated as a long-term
capital loss to the extent of any distributions of net long-term capital gains
with respect to such shares during the six-month period.
Gain or loss on the sale or redemption of shares in the Fund is measured
by the difference between the amount received and the tax basis of the shares.
Shareholders should keep records of investments made (including shares acquired
through reinvestment of dividends and distributions) so they can compute the
tax basis of their shares. Under certain circumstances a shareholder may
compute and use an average cost basis in determining the gain or loss on the
sale or redemption of shares.
Exchanges of Fund shares for shares of another fund, including shares of
other Morgan Stanley Dean Witter Funds, are also subject to similar tax
treatment. Such an exchange is treated for tax purposes as a sale of the
original shares in the first fund, followed by the purchase of shares in the
second fund.
If a shareholder realizes a loss on the redemption or exchange of a fund's
shares and reinvests in that fund's shares within 30 days before or after the
redemption or exchange, the transactions may be subject to the "wash sale"
rules, resulting in a postponement of the recognition of such loss for tax
purposes.
X. UNDERWRITERS
- --------------------------------------------------------------------------------
The Fund's shares are offered to the public on a continuous basis. The
Distributor, as the principal underwriter of the shares, has certain
obligations under the Distribution Agreement concerning the distribution of the
shares. These obligations and the compensation the Distributor receives are
described above in the sections titled "Principal Underwriter" and "Rule 12b-1
Plans."
34
<PAGE>
XI. CALCULATION OF PERFORMANCE DATA
- --------------------------------------------------------------------------------
From time to time, the Fund may quote its "total return" in advertisements
and sales literature. These figures are computed separately for Class A, Class
B, Class C and Class D shares. The Fund's "average annual total return"
represents an annualization of the Fund's total return over a particular period
and is computed by finding the annual percentage rate which will result in the
ending redeemable value of a hypothetical $1,000 investment made at the
beginning of a one, five or ten year period, or for the period from the date of
commencement of operations, if shorter than any of the foregoing. The ending
redeemable value is reduced by any contingent deferred sales charge ("CDSC") at
the end of the one, five, ten year or other period. For the purpose of this
calculation, it is assumed that all dividends and distributions are reinvested.
The formula for computing the average annual total return involves a percentage
obtained by dividing the ending redeemable value by the amount of the initial
investment (which in the case of Class A shares is reduced by the Class A
initial sales charge), taking a root of the quotient (where the root is
equivalent to the number of years in the period) and subtracting 1 from the
result. The average annual total returns for Class B for the one, five and ten
year periods ended December 31, 1998 were 26.07%, 20.18% and 19.72%,
respectively. The average annual total returns of Class A for the fiscal year
ended December 31, 1998 and for the period July 28, 1997 (inception of the
Class) through December 31, 1998 were 24.86% and 23.08%, respectively. The
average annual total returns of Class C for the fiscal year ended December 31,
1998 and for the period July 28, 1997 (inception of the Class) through December
31, 1998 were 29.78% and 26.88%, respectively. The average annual total returns
of Class D for the fiscal year ended December 31, 1998 and for the period July
28, 1997 (inception of the Class) through December 31, 1998 were 32.12% and
28.16%, respectively.
In addition, the Fund may advertise its total return for each Class over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. These calculations may or may not reflect the
imposition of the maximum front-end sales charge for Class A or the deduction
of the CDSC for each of Class B and Class C which, if reflected, would reduce
the performance quoted. For example, the average annual total return of the
Fund may be calculated in the manner described above, but without deduction for
any applicable sales charge. Based on this calculation, the average annual
total returns of Class B for the one, five and ten year periods ended December
31, 1998, were 31.07%, 20.37% and 19.72%, respectively. Based on this
calculation, the average annual total returns of Class A for the fiscal year
ended December 31, 1998 and for the period July 28, 1997 through December 31,
1998 were 31.78% and 27.82%, respectively, the average annual total returns of
Class C for the fiscal year ended December 31, 1998 and for the period July 28,
1997 through December 31, 1998 were 30.78% and 26.88%, respectively, and the
average annual total returns of Class D for the fiscal year ended December 31,
1998 and for the period July 28, 1997 through December 31, 1998 were 32.12% and
28.16%, respectively.
In addition, the Fund may compute its aggregate total return for each
Class for specified periods by determining the aggregate percentage rate which
will result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is assumed
that all dividends and distributions are reinvested. The formula for computing
aggregate total return involves a percentage obtained by dividing the ending
value (without reduction for any sales charge) by the initial $1,000 investment
and subtracting 1 from the result. Based on the foregoing calculation, the
total returns for Class B for the one, five and ten year period ended December
31, 1998, were 31.07%, 152.72% and 504.83%, respectively. Based on the
foregoing calculation, the total returns of Class A for the fiscal year ended
December 31, 1998 and for the period July 28, 1997 through December 31, 1998
were 31.78% and 41.93%, respectively, the total returns of Class C for the
fiscal year ended December 31, 1998 and for the period July 28, 1997 through
December 31, 1998 were 30.78% and 40.44%, respectively, and the total returns
of Class D for the fiscal year ended December 31, 1998 and for the period July
28, 1997 through December 31, 1998 were 32.12% and 42.47%, respectively.
35
<PAGE>
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in each Class of shares of the Fund by adding 1
to the Fund's aggregate total return to date (expressed as a decimal and
without taking into account the effect of any applicable CDSC) and multiplying
by $9,475, $48,000 and $97,000 in the case of Class A (investments of $10,000,
$50,000 and $100,000 adjusted for the initial sales charge) or by $10,000,
$50,000 and $100,000 in the case of each of Class B, Class C and Class D, as
the case may be. Investments of $10,000, $50,000 and $100,000 in each Class at
inception of the Class would have grown to the following amounts at
December 31, 1998:
<TABLE>
<CAPTION>
INVESTMENT AT INCEPTION OF:
INCEPTION --------------------------------------
CLASS DATE: $10,000 $50,000 $100,000
- ----------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Class A ......... 7/28/97 $13,448 $68,126 $ 137,672
Class B ......... 3/27/80 163,219 816,095 1,632,190
Class C ......... 7/28/97 14,044 72,220 140,440
Class D ......... 7/28/97 14,247 71,235 142,470
</TABLE>
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent organizations.
XII. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
EXPERTS. The financial statements of the Fund for the fiscal year ended
December 31, 1998 included in this Statement of Additional Information and
incorporated by reference in the Prospectus have been so included and
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
* * * * *
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the SEC. The complete Registration Statement may be obtained from
the SEC.
36
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
PORTFOLIO OF INVESTMENTS December 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (96.8%)
Advertising (0.4%)
310,000 Interpublic Group of
Companies, Inc. ...................... $ 24,722,500
--------------
Aerospace (0.5%)
560,600 General Dynamics Corp. ............... 32,865,175
--------------
Airlines (0.3%)
641,600 Southwest Airlines Co. ............... 14,395,900
--------------
Banking (1.3%)
9,000 Argentaria, Caja Postal y Banco
Hipotecario de Espana S.A.
(Spain) .............................. 233,070
622,100 Bank of New York Co., Inc. ........... 25,039,525
4,000 BankAmerica Corp. .................... 240,500
5,000 BankBoston Corp. ..................... 194,687
410,000 Chase Manhattan Corp. (The) .......... 27,905,625
9,500 Citigroup Inc. ....................... 470,250
203,000 Fifth Third Bancorp .................. 14,476,437
191,900 First Union Corp. .................... 11,669,919
5,000 Mellon Bank Corp. .................... 343,750
112,000 Unicredito Italiano SpA (Italy) ...... 664,309
15,000 Wells Fargo & Co. .................... 599,062
--------------
81,837,134
--------------
Biotechnology (3.1%)
430,000 Amgen Inc.* .......................... 44,935,000
228,000 Biogen, Inc.* ........................ 18,895,500
28,100 Genentech, Inc. (Special)* ........... 2,239,219
561,000 Genzyme Corp. (General Division)* 27,874,687
325,000 IDEC Pharmaceuticals Corp.* .......... 15,275,000
295,000 Immunex Corp.* ....................... 36,948,750
250,000 MedImmune, Inc.* ..................... 24,843,750
288,000 PathoGenesis Corp.* .................. 16,416,000
--------------
187,427,906
--------------
Broadcasting (2.3%)
14,000 CBS Corp. ............................ 458,500
589,000 Chancellor Media Corp.* .............. 28,161,562
1,050,500 Clear Channel Communications,
Inc.* ................................ 57,252,250
195,600 Infinity Broadcasting Corp.
(Class A)* ........................... 5,354,550
8,000 Jacor Communications, Inc.* .......... 515,000
605,000 Tele-Communications Liberty
Media Group (Class A)* ............... 27,867,812
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
4,200 Univision Communications, Inc.
(Class A)* ........................... $ 151,987
539,500 USA Networks, Inc.* .................. 17,837,219
--------------
137,598,880
--------------
Cable Television (3.6%)
1,126,000 Comcast Corp. (Class A Special) ...... 66,082,125
1,047,900 Cox Communications, Inc.
(Class A)* ........................... 72,436,087
14,000 MediaOne Group, Inc.* ................ 658,000
1,279,000 Time Warner, Inc. .................... 79,377,937
--------------
218,554,149
--------------
Computer Hardware (7.1%)
1,770,000 Compaq Computer Corp. ................ 74,229,375
362,000 Dell Computer Corp.* ................. 26,493,875
250,000 Flextronics International Ltd.* ...... 21,375,000
180,900 Hewlett-Packard Co. .................. 12,357,731
420,000 International Business Machines
Corp. ................................ 77,595,000
206,000 Jabil Circuit, Inc.* ................. 15,372,750
470,000 Sanmina Corp.* ....................... 29,257,500
547,000 SCI Systems, Inc.* ................... 31,589,250
688,400 Solectron Corp.* ..................... 63,978,175
886,000 Sun Microsystems, Inc.* .............. 75,808,375
--------------
428,057,031
--------------
Computer Software (3.4%)
200,000 Citrix Systems, Inc.* ................ 19,400,000
750,000 Compuware Corp.* ..................... 58,546,875
4,300 Great Plains Software, Inc.* ......... 207,475
219,000 Legato Systems, Inc.* ................ 14,426,625
700,000 Microsoft Corp.* ..................... 96,993,750
9,000 Platinum Technology, Inc.* ........... 172,687
249,000 Veritas Software Corp.* .............. 14,893,312
--------------
204,640,724
--------------
Consumer Electronics/
Appliances (0.9%)
285,000 Electronic Arts Inc.* ................ 15,960,000
631,000 Maytag Corp. ......................... 39,279,750
--------------
55,239,750
--------------
Consumer Sundries (2.3%)
905,000 Anheuser-Busch Companies, Inc. ....... 59,390,625
242,500 Clorox Co. ........................... 28,327,031
3,200 Colgate-Palmolive Co. ................ 297,200
235,000 Estee Lauder Companies, Inc.
(The) (Class A) ...................... 20,092,500
5,000 Groupe Danone (ADR) (France) ......... 281,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
37
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
PORTFOLIO OF INVESTMENTS December 31, 1998, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
4,000 PepsiCo, Inc. ......................... $ 163,750
530,000 Philip Morris Companies, Inc. ......... 28,355,000
1,700 Procter & Gamble Co. .................. 155,231
--------------
137,062,587
--------------
Consumer/Business Services (2.3%)
432,900 Automatic Data Processing, Inc. ....... 34,713,169
400,000 Ceridian Corp.* ....................... 27,925,000
465,000 Computer Sciences Corp.* .............. 29,963,437
347,800 Outdoor Systems, Inc.* ................ 10,434,000
693,200 Paychex, Inc. ......................... 35,656,475
3,000 Snyder Communications, Inc.* .......... 101,250
5,500 Waste Management, Inc. ................ 256,437
--------------
139,049,768
--------------
Diversified Financial Services (1.1%)
646,000 General Electric Co. .................. 65,932,375
--------------
Diversified Manufacturing (0.5%)
260,500 United Technologies Corp. ............. 28,329,375
--------------
Drug Store Chain (2.9%)
887,500 CVS Corp. ............................. 48,812,500
266,600 Duane Reade, Inc.* .................... 10,264,100
1,528,000 Rite Aid Corp. ........................ 75,731,500
739,000 Walgreen Co. .......................... 43,277,687
--------------
178,085,787
--------------
E.D.P. Peripherals (2.4%)
910,000 EMC Corp.* ............................ 77,350,000
1,675,000 Seagate Technology, Inc.* ............. 50,668,750
1,150,000 Western Digital Corp.* ................ 17,321,875
--------------
145,340,625
--------------
Electronic Production
Equipment (3.2%)
1,805,000 Applied Materials, Inc.* .............. 77,050,937
472,000 ASM Lithography Holding N.V.
(Netherlands)* ........................ 14,396,000
565,000 KLA-Tencor Corp.* ..................... 24,506,875
658,000 Novellus Systems, Inc.* ............... 32,488,750
1,000,000 Teradyne, Inc.* ....................... 42,375,000
42,000 Veeco Instruments Inc.* ............... 2,215,500
--------------
193,033,062
--------------
Energy (0.9%)
28 British Petroleum Co. P.L.C. (ADR)
(United Kingdom)* ..................... 2,509
460,000 Exxon Corp. ........................... 33,637,500
267,500 Mobil Corp. ........................... 23,305,937
--------------
56,945,946
--------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Farming/Seeds/Milling (0.0%)
4,000 Delta & Pine Land Co. ................. $ 148,000
--------------
Financial Services (8.3%)
6,000 American Express Co. .................. 613,500
25,000 Amvescap PLC (United Kingdom) 192,995
558,792 Associates First Capital Corp.
(Class A) ............................. 23,678,811
206,500 Capital One Financial Corp. ........... 23,747,500
268,200 CIT Group, Inc. (The) (Class A) ....... 8,532,113
495,500 E*TRADE Group, Inc.* .................. 23,164,625
6,350 Edwards (A.G.), Inc. .................. 236,538
706,500 Fannie Mae ............................ 52,281,000
325,900 Franklin Resources, Inc. .............. 10,428,800
963,500 Freddie Mac ........................... 62,085,531
10,000 Hambrecht & Quist Group* .............. 226,875
389,100 Lehman Brothers Holdings, Inc. ........ 17,144,719
846,400 Merrill Lynch & Co., Inc. ............. 56,497,200
757,400 Paine Webber Group, Inc. .............. 29,254,575
1,117,500 Providian Financial Corp. ............. 83,812,500
1,960,950 Schwab (CHARLES) Corp. ................ 110,180,878
--------------
502,078,160
--------------
Food Chains (2.4%)
1,343,800 Fred Meyer, Inc.* ..................... 80,963,950
12,000 Kroger Co.* ........................... 726,000
1,012,000 Safeway Inc.* ......................... 61,668,750
--------------
143,358,700
--------------
Forest Products (0.5%)
456,100 Georgia-Pacific Corp. ................. 26,710,356
1,855,000 Jefferson Smurfit Group PLC
(Ireland) ............................. 3,317,430
--------------
30,027,786
--------------
Healthcare (0.9%)
150,600 CIGNA Corp. ........................... 11,643,263
1,138,000 Health Management Associates,
Inc. (Class A)* ....................... 24,609,250
17,680 Total Renal Care Holdings, Inc.* ...... 522,665
235,000 Wellpoint Health Networks, Inc.* ...... 20,445,000
--------------
57,220,178
--------------
Insurance (3.3%)
2,010 Aegon N.V. (ARS) (Netherlands) ........ 245,723
282,000 Aegon N.V. (Netherlands) .............. 34,599,202
381,700 American General Corp. ................ 29,772,600
430,000 American International Group,
Inc. .................................. 41,548,750
7,000 AON Corp. ............................. 387,625
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
38
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
PORTFOLIO OF INVESTMENTS December 31, 1998, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
178,000 Axa (France)* ........................... $ 25,798,486
285,000 Equitable Companies, Inc. ............... 16,494,375
550,000 Hartford Financial Services
Group, Inc. (The) ....................... 30,181,250
271,500 Nationwide Financial Services,
Inc. (Class A) .......................... 14,033,156
5,000 ReliaStar Financial Corp. ............... 230,625
620,000 Societa Assicuratrice Industriale
(SAI) (Italy)* .......................... 7,471,237
5,100 SunAmerica Inc. ......................... 413,738
1,500 Torchmark Corp. ......................... 52,969
--------------
201,229,736
--------------
Internet Services (4.4%)
750,000 America Online, Inc.* ................... 108,562,500
310,000 At Home Corp. (Series A)* ............... 22,823,750
250,000 Inktomi Corp.* .......................... 32,484,375
620,000 Intuit Inc.* ............................ 44,950,000
14,000 Lycos, Inc.* ............................ 777,000
10,000 Netscape Communications Corp.* 602,500
5,700 Ticketmaster Online-CitySearch,
Inc. (Class B)* ......................... 324,900
243,000 Yahoo! Inc.* ............................ 57,560,625
--------------
268,085,650
--------------
Major Chemicals (0.0%)
7,000 Du Pont (E.I.) de Nemours & Co.,
Inc. .................................... 371,438
--------------
Major Pharmaceuticals (5.8%)
205,000 ALZA Corp.* ............................. 10,711,250
414,000 American Home Products Corp. ............ 23,313,375
122,000 Bristol-Myers Squibb Co. ................ 16,325,125
529,000 Elan Corp. PLC (ADR) (Ireland)* ......... 36,798,563
1,044,000 Forest Laboratories, Inc.* .............. 55,527,750
570,000 Glaxo Wellcome PLC
(United Kingdom) ........................ 19,519,087
310,000 Lilly (Eli) & Co. ....................... 27,551,250
484,500 Pfizer, Inc. ............................ 60,774,469
340,000 Pharmacia & Upjohn, Inc. ................ 19,252,500
764,400 Schering-Plough Corp. ................... 42,233,100
325,000 SmithKline Beecham PLC
(United Kingdom) ........................ 4,520,607
482,000 Warner-Lambert Co. ...................... 36,240,375
--------------
352,767,451
--------------
Media Conglomerates (0.8%)
7,000 News Corp., Ltd. (ADR) (Australia) ...... 185,063
7,000 Seagram Co. Ltd. (Canada) ............... 266,000
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
667,000 Viacom, Inc. (Class B)* ................. $ 49,358,000
7,500 Walt Disney Co. ......................... 225,000
--------------
50,034,063
--------------
Medical Equipment &
Supplies (2.0%)
388,000 Bausch & Lomb Inc. ...................... 23,280,000
16,000 Becton, Dickinson & Co. ................. 683,000
380,000 Guidant Corp. ........................... 41,895,000
705,000 Medtronic, Inc. ......................... 52,346,250
2,000 Sofamor Danek Group, Inc.* .............. 243,500
--------------
118,447,750
--------------
Motor Vehicles (1.8%)
961,000 Ford Motor Co. .......................... 56,398,688
720,000 General Motors Corp. .................... 51,525,000
--------------
107,923,688
--------------
Restaurants (0.8%)
10,000 Brinker International, Inc.* ............ 288,750
237,000 McDonald's Corp. ........................ 18,160,125
360,000 Outback Steakhouse, Inc.* ............... 14,310,000
6,000 Starbucks Corp.* ........................ 335,625
280,000 Tricon Global Restaurants, Inc.* ........ 14,035,000
--------------
47,129,500
--------------
Retail (8.4%)
536,200 Abercrombie & Fitch Co.
(Class A)* .............................. 37,936,150
179,000 Amazon.com, Inc.* ....................... 57,492,563
1,463,800 Ann Taylor Stores Corp.* ................ 57,728,613
6,000 Barnes & Noble, Inc.* ................... 255,000
490,000 Bed Bath & Beyond Inc.* ................. 16,690,625
622,000 Costco Companies, Inc.* ................. 44,900,625
7,500 Dollar Tree Stores, Inc.* ............... 327,188
32,000 Family Dollar Stores, Inc. .............. 704,000
1,005,000 Gap, Inc. (The) ......................... 56,531,250
1,137,000 Home Depot, Inc. (The) .................. 69,570,188
6,800 Kmart Corp.* ............................ 104,125
246,000 Linens 'N Things, Inc.* ................. 9,747,750
1,514,000 Lowe's Companies, Inc. .................. 77,497,875
885,000 Wal-Mart Stores, Inc. ................... 72,072,188
160,000 Williams-Sonoma, Inc.* .................. 6,450,000
--------------
508,008,140
--------------
Semiconductors (7.1%)
975,000 Altera Corp.* ........................... 59,231,250
688,000 Analog Devices, Inc.* ................... 21,586,000
467,500 Applied Micro Circuits Corp.* ........... 15,836,563
615,000 Intel Corp. ............................. 72,877,500
375,000 Linear Technology Corp. ................. 33,562,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
39
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
PORTFOLIO OF INVESTMENTS December 31, 1998, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------
<S> <C> <C>
780,000 Maxim Integrated Products, Inc.* $ 34,027,500
90,000 Micrel, Inc.* ......................... 4,950,000
1,175,500 Micron Technology, Inc.* .............. 59,436,219
805,600 Texas Instruments Inc. ................ 68,929,150
940,000 Xilinx, Inc.* ......................... 61,158,750
-------------
431,595,432
-------------
Telecommunication
Equipment (5.1%)
10,000 Alcatel (ADR) (France) ................ 244,375
1,300 Alcatel (France) ...................... 159,107
637,500 Ascend Communications, Inc.* .......... 41,915,625
235,000 Broadcom Corp. (Class A)* ............. 28,288,125
1,220,500 Cisco Systems, Inc.* .................. 113,277,656
306,100 Lucent Technologies Inc. .............. 33,671,000
903,000 Newbridge Networks Corp.
(Canada)* ............................. 27,428,625
206,000 Nokia Corp. (ADR) (Class A)
(Finland) ............................. 24,810,125
255,000 PMC - Sierra, Inc.* ................... 16,065,000
480,000 RF Micro Devices, Inc.* ............... 22,050,000
71,000 Xircom, Inc.* ......................... 2,414,000
-------------
310,323,638
-------------
Telecommunications (6.7%)
720,000 Ameritech Corp. ....................... 45,630,000
967,000 AT&T Corp. ............................ 72,766,750
765,000 Bell Atlantic Corp. ................... 43,461,563
930,000 BellSouth Corp. ....................... 46,383,750
975,000 MCI WorldCom, Inc.* ................... 69,956,250
601,200 Sprint Corp. (FON Group) .............. 50,575,950
252,500 Sprint PCS* ........................... 5,839,063
927,800 US West, Inc. ......................... 59,959,075
360,000 Winstar Communications, Inc.* ......... 14,017,500
-------------
408,589,901
-------------
TOTAL COMMON STOCKS
(Identified Cost $4,787,286,956) ...... 5,866,457,885
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
- -----------
<S> <C> <C>
SHORT-TERM INVESTMENTS (7.0%)
U.S. GOVERNMENT AGENCIES (a) (6.9%)
$ 272,500 Federal Home Loan Mortgage
Corp. 4.50% due 01/04/99 ............... 272,397,813
150,000 Federal Home Loan Mortgage
Corp. 5.14% due 01/08/99 ............... 149,850,083
------------
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- -----------------------------------------------------------------------
<S> <C> <C>
TOTAL U.S. GOVERNMENT AGENCIES
(Amortized Cost $422,247,896) .......... $422,247,896
------------
REPURCHASE AGREEMENT (0.1%)
$ 4,479 The Bank of New York 4.00%
due 01/04/99 (dated 12/31/98;
proceeds $4,481,451) (b)
(Identified Cost $4,479,460)............ 4,479,460
------------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $426,727,356) ......... 426,727,356
------------
TOTAL INVESTMENTS
(Identified Cost $5,214,014,312) (c) 103.8% 6,293,185,241
LIABILITIES IN EXCESS OF OTHER
ASSETS ................................. (3.8) (229,927,252)
----- --------------
NET ASSETS ............................. 100.0% $6,063,257,989
===== ==============
</TABLE>
- --------------------------------
ADR American Depository Receipt.
ARS American Regulatory Share.
* Non-income producing security.
(a) Securities were purchased on a discount basis. The interest rates
shown have been adjusted to reflect a money market equivalent
yield.
(b) Collateralized by $4,521,710 U.S. Treasury Note 6.75% due
06/30/99 valued at $4,569,050.
(c) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$1,111,112,200 and the aggregate gross unrealized depreciation is
$31,941,271, resulting in net unrealized appreciation of
$1,079,170,929.
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS IN DELIVERY APPRECIATION/
TO DELIVER EXCHANGE FOR DATE DEPRECIATION
- ------------------------------------------------------------------
<S> <C> <C> <C>
$ 4,534,755 GBP 2,722,759 01/08/99 $ (26,139)
$ 19,736,215 GBP 11,850,024 01/08/99 (113,760)
GBP 26,946 $ 44,878 01/08/99 259
---------
Net unrealized depreciation ................ $(139,640)
=========
Currency Abbreviation:
- ----------------------
GBP British Pound.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
40
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<TABLE>
<S> <C>
ASSETS :
Investments in securities, at value
(identified cost $5,214,014,312)................................. $6,293,185,241
Receivable for :
Investments sold ............................................... 39,901,358
Shares of beneficial interest sold ............................. 17,359,866
Dividends ...................................................... 1,716,813
Foreign withholding taxes reclaimed ............................ 465,867
Prepaid expenses and other assets ................................. 205,971
--------------
TOTAL ASSETS ................................................... 6,352,835,116
--------------
LIABILITIES:
Payable for :
Investments purchased .......................................... 273,189,212
Shares of beneficial interest repurchased ...................... 5,641,729
Dividends and distributions to shareholders .................... 4,237,837
Plan of distribution fee ....................................... 3,608,416
Investment management fee ...................................... 2,297,805
Accrued expenses and other payables ............................... 602,128
--------------
TOTAL LIABILITIES .............................................. 289,577,127
--------------
NET ASSETS ..................................................... $6,063,257,989
==============
COMPOSITION OF NET ASSETS :
Paid-in-capital ................................................... $4,848,284,549
Net unrealized appreciation ....................................... 1,079,194,234
Accumulated net investment loss ................................... (44,936)
Accumulated undistributed net realized gain ....................... 135,824,142
--------------
NET ASSETS ..................................................... $6,063,257,989
==============
CLASS A SHARES:
Net Assets ........................................................ $116,893,865
Shares Outstanding (unlimited authorized, $.01 par value).......... 3,524,872
NET ASSET VALUE PER SHARE ...................................... $33.16
======
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value) ............... $35.00
======
CLASS B SHARES:
Net Assets ........................................................ $5,750,481,023
Shares Outstanding (unlimited authorized, $.01 par value) ......... 175,055,357
NET ASSET VALUE PER SHARE ...................................... $32.85
======
CLASS C SHARES:
Net Assets ........................................................ $60,861,444
Shares Outstanding (unlimited authorized, $.01 par value) ......... 1,858,983
NET ASSET VALUE PER SHARE ...................................... $32.74
======
CLASS D SHARES :
Net Assets ........................................................ $135,021,657
Shares Outstanding (unlimited authorized, $.01 par value) ......... 4,053,894
NET ASSET VALUE PER SHARE ...................................... $33.31
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
41
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended December 31, 1998
<TABLE>
<S> <C>
NET INVESTMENT LOSS :
INCOME
Interest ............................................................. $ 33,556,385
Dividends (net of $604,412, foreign withholding tax).................. 29,485,237
--------------
TOTAL INCOME ...................................................... 63,041,622
--------------
EXPENSES
Plan of distribution fee (Class A shares) ............................ 138,389
Plan of distribution fee (Class B shares) ............................ 36,879,912
Plan of distribution fee (Class C shares) ............................ 301,162
Investment management fee ............................................ 23,716,700
Transfer agent fees and expenses ..................................... 4,747,072
Registration fees .................................................... 541,392
Custodian fees ....................................................... 348,885
Shareholder reports and notices ...................................... 296,808
Professional fees .................................................... 56,955
Trustees' fees and expenses .......................................... 19,310
Other ................................................................ 62,626
--------------
TOTAL EXPENSES ..................................................... 67,109,211
--------------
NET INVESTMENT LOSS ................................................ (4,067,589)
--------------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain on:
Investments ....................................................... 821,020,621
Foreign exchange transactions ..................................... 4,518
--------------
NET GAIN ........................................................... 821,025,139
--------------
Net change in unrealized appreciation/depreciation on:
Investments ....................................................... 554,955,558
Translation of forward foreign currency contracts, other assets and
liabilities denominated in foreign currencies ................... 23,145
--------------
NET APPRECIATION ................................................... 554,978,703
--------------
NET GAIN ........................................................... 1,376,003,842
--------------
NET INCREASE ......................................................... $1,371,936,253
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
42
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997*
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss .................................. $ (4,067,589) $ (11,954,379)
Net realized gain .................................... 821,025,139 738,335,473
Net change in unrealized appreciation ................ 554,978,703 251,384,827
-------------- --------------
NET INCREASE ....................................... 1,371,936,253 977,765,921
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
NET REALIZED GAIN:
Class A shares ....................................... (13,723,199) (1,747,209)
Class B shares ....................................... (795,828,381) (680,450,520)
Class C shares ....................................... (7,103,483) (1,454,608)
Class D shares ....................................... (17,168,974) (6,581,680)
-------------- --------------
TOTAL DISTRIBUTIONS ................................ (833,824,037) (690,234,017)
-------------- --------------
Net increase from transactions in shares of beneficial
interest ........................................... 1,369,254,273 769,509,113
-------------- --------------
NET INCREASE ....................................... 1,907,366,489 1,057,041,017
NET ASSETS:
Beginning of period .................................. 4,155,891,500 3,098,850,483
-------------- --------------
END OF PERIOD
(Including accumulated net investment losses of
$44,936 and $42,030, respectively)................. $6,063,257,989 $4,155,891,500
============== ==============
</TABLE>
- ---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
43
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS December 31, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter American Value Fund (the "Fund"), formerly Dean
Witter American Value Fund, is registered under the Investment Company Act of
1940, as amended (the "Act"), as a diversified, open-end management investment
company. The Fund's investment objective is capital growth consistent with an
effort to reduce volatility. The Fund seeks to achieve its objective by
investing in a diversified portfolio of securities consisting principally of
common stocks. The Fund was incorporated in Maryland in 1979, commenced
operations on March 27, 1980 and was reorganized as a Massachusetts business
trust on April 30, 1987. On July 28, 1997, the Fund commenced offering three
additional classes of shares, with the then current shares, other than shares
which were purchased prior to April 30, 1984 (and with respect to such shares,
certain shares acquired through reinvestment of dividends and capital gains
distributions (collectively the "Old Shares")), designated as Class B shares.
The Old Shares have been designated Class D shares.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year,
six years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price
(in cases where a security is traded on more than one exchange, the security is
valued on the exchange designated as the primary market pursuant to procedures
adopted by the Trustees); (2) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest available bid price prior to the time of valuation; (3) when market
quotations are not readily available, including circumstances under which it is
determined by Morgan Stanley Dean Witter Advisors Inc. (the "Investment
Manager"), formerly Dean Witter InterCapital Inc., that sale or bid prices are
not reflective of a security's market value, portfolio securities are valued at
their fair value as determined in good faith
44
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS December 31, 1998, continued
under procedures established by and under the general supervision of the
Trustees (valuation of debt securities for which market quotations are not
readily available may be based upon current market prices of securities which
are comparable in coupon, rating and maturity or an appropriate matrix
utilizing similar factors); and (4) short-term debt securities having a
maturity date of more than sixty days at time of purchase are valued on a
mark-to-market basis until sixty days prior to maturity and thereafter at
amortized cost based on their value on the 61st day. Short-term debt securities
having a maturity date of sixty days or less at the time of purchase are valued
at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date
such items are recognized. Distribution fees are charged directly to the
respective class.
D. FOREIGN CURRENCY TRANSLATION -- The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, other assets and liabilities and forward foreign
currency contracts are translated at the exchange rates prevailing at the end
of the period; and (2) purchases, sales, income and expenses are translated at
the exchange rates prevailing on the respective dates of such transactions. The
resultant exchange gains and losses are included in the Statement of Operations
as realized and unrealized gain/loss on foreign exchange transactions. Pursuant
to U.S. Federal income tax regulations, certain foreign exchange gains/losses
included in realized and unrealized gain/loss are included in or are a
reduction of ordinary income for federal income tax purposes. The Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the changes in the market prices of
the securities.
E. FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may enter into forward
foreign currency contracts which are valued daily at the appropriate exchange
rates. The resultant unrealized exchange gains and losses are included in the
Statement of Operations as unrealized gain/loss on foreign exchange
transactions. The Fund records realized gains or losses on delivery of the
currency or at the time the forward contract is extinguished (compensated) by
entering into a closing transaction prior to delivery.
45
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS December 31, 1998, continued
F. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which
may differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with the Investment Manager, the
Fund pays a management fee, accrued daily and payable monthly, by applying the
following annual rates to the net assets of the Fund determined at the close of
each business day: 0.625% to the portion of daily net assets not exceeding $250
million; 0.50% to the portion of daily net assets exceeding $250 million but
not exceeding $2.5 billion; 0.475% to the portion of daily net assets exceeding
$2.5 billion but not exceeding $3.5 billion and 0.45% of the portion of daily
net assets in excess of $3.5 billion but not exceeding $4.5 billion. Effective
May 1, 1998, the Agreement was amended to reduce the annual rate to 0.425% of
the portion of daily net assets in excess of $4.5 billion.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services,
heat, light, power and other utilities provided to the Fund.
46
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS December 31, 1998, continued
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A - up
to 0.25% of the average daily net assets of Class A; (ii) Class B - 1.0% of the
lesser of: (a) the average daily aggregate gross sales of the Class B shares
since the inception of the Fund (not including reinvestment of dividend or
capital gain distributions) less the average daily aggregate net asset value of
the Class B shares redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or waived; or (b) the average daily net
assets of Class B; and (iii) Class C - up to 1.0% of the average daily net
assets of Class C. In the case of Class A shares, amounts paid under the Plan
are paid to the Distributor for services provided. In the case of Class B and
Class C shares, amounts paid under the Plan are paid to the Distributor for (1)
services provided and the expenses borne by it and others in the distribution
of the shares of these Classes, including the payment of commissions for sales
of these Classes and incentive compensation to, and expenses of, Morgan Stanley
Dean Witter Financial Advisors and others who engage in or support distribution
of the shares or who service shareholder accounts, including overhead and
telephone expenses; (2) printing and distribution of prospectuses and reports
used in connection with the offering of these shares to other than current
shareholders; and (3) preparation, printing and distribution of sales
literature and advertising materials. In addition, the Distributor may utilize
fees paid pursuant to the Plan, in the case of Class B shares, to compensate
Dean Witter Reynolds Inc. ("DWR"), an affiliate of the Investment Manager and
Distributor and other selected broker-dealers for their opportunity costs in
advancing such amounts, which compensation would be in the form of a carrying
charge on any unreimbursed expenses.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund
pursuant to the Plan and contingent deferred sales charges paid by investors
upon redemption of Class B shares. Although there is no legal obligation for
the Fund to pay expenses incurred in excess of payments made to the Distributor
under the Plan and the proceeds of contingent deferred sales charges paid by
investors upon redemption of shares, if for any reason the Plan is terminated,
the Trustees will consider at that time the manner in which to treat such
expenses. The Distributor has advised the Fund that such excess amounts,
including carrying charges, totaled $83,296,669 at December 31, 1998.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will
47
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS December 31, 1998, continued
not be reimbursed by the Fund through payments in any subsequent year, except
that expenses representing a gross sales credit to Morgan Stanley Dean Witter
Financial Advisors or other selected broker-dealer representatives may be
reimbursed in the subsequent calendar year. For the year ended December 31,
1998, the distribution fee was accrued for Class A shares and Class C shares at
the annual rate of 0.25% and 1.0%, respectively.
The Distributor has informed the Fund that for year ended December 31, 1998, it
received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $929, $4,656,751
and $36,715, respectively and received $488,168 in front-end sales charges from
sales of the Fund's Class A shares. The respective shareholders pay such
charges which are not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities,
excluding short-term investments, for the year ended December 31, 1998,
aggregated $15,240,752,037 and $14,710,008,819, respectively. Included in the
aforementioned are purchases and sales of U.S. Government securities of
$1,695,231,351 and $2,089,737,989, respectively.
For the year ended December 31, 1998, the Fund incurred $1,418,553 in brokerage
commissions with DWR for portfolio transactions executed on behalf of the Fund.
At December 31, 1998, the Fund's payable for investments purchased and
receivables for investments sold included unsettled trades with DWR of
$107,612,218 and $9,622,953, respectively.
For the year ended December 31, 1998, the Fund incurred brokerage commissions
of $3,091,548 with Morgan Stanley & Co., Inc., an affiliate of the Investment
Manager and Distributor, for portfolio transactions executed on behalf of the
Fund.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager
and Distributor, is the Fund's transfer agent. At December 31, 1998, the Fund
had transfer agent fees and expenses payable of approximately $7,600.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended December 31, 1998
included in Trustees' fees and expenses in the Statement of Operations amounted
to $6,003. At December 31, 1998, the Fund had an accrued pension liability of
$44,873 which is included in accrued expenses in the Statement of Assets and
Liabilities.
48
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS December 31, 1998, continued
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997+*
---------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold .............................................. 3,040,045 $ 98,844,494 539,039 $ 17,439,944
Reinvestment of distributions ..................... 442,608 13,534,616 57,321 1,665,172
Redeemed .......................................... (493,155) (16,123,421) (60,986) (2,023,896)
--------- -------------- ------- --------------
Net increase - Class A ............................ 2,989,498 96,255,689 535,374 17,081,220
--------- -------------- ------- --------------
CLASS B SHARES
Sold .............................................. 41,693,951 1,350,536,686 26,893,089 818,085,006
Reinvestment of distributions ..................... 24,515,681 750,904,568 22,224,675 644,669,591
Redeemed .......................................... (29,339,840) (949,807,859) (24,498,814) (739,128,498)
----------- -------------- ----------- --------------
Net increase - Class B ............................ 36,869,792 1,151,633,395 24,618,950 723,626,099
----------- -------------- ----------- --------------
CLASS C SHARES
Sold .............................................. 1,645,951 53,383,964 387,776 12,691,589
Reinvestment of distributions ..................... 225,932 6,841,485 46,319 1,340,948
Redeemed .......................................... (426,767) (13,856,699) (20,228) (667,646)
----------- -------------- ----------- --------------
Net increase - Class C ............................ 1,445,116 46,368,750 413,867 13,364,891
----------- -------------- ----------- --------------
CLASS D SHARES
Sold .............................................. 1,603,145 52,338,697 332,349 10,839,979
Reinvestment of distributions ..................... 512,115 15,767,494 208,632 6,067,022
Shares issued in connection with the acquisition of
Retirement American Value ........................ 1,423,395 44,485,158 -- --
Redeemed .......................................... (1,164,596) (37,594,910) (45,049) (1,470,098)
----------- -------------- ----------- --------------
Net increase - Class D ............................ 2,374,059 74,996,439 495,932 15,436,903
----------- -------------- ----------- --------------
Net increase in Fund .............................. 43,678,465 $1,369,254,273 26,064,123 $ 769,509,113
=========== ============== =========== ==============
</TABLE>
- ---------------
+ On July 28, 1997 1,183,904 shares representing $37,731,024 were transferred
to Class D.
* For Class A, C and D shares, for the period July 28, 1997 (issue date)
through December 31, 1997.
6. FEDERAL INCOME TAX STATUS
As of December 31, 1998, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and permanent book/tax
differences primarily attributable to a net operating loss. To reflect
reclassifications arising from the permanent differences, accumulated
undistributed net realized gain was charged $4,064,701, paid-in-capital was
credited $18 and accumulated net investment loss was credited $4,064,683.
49
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS December 31, 1998, continued
7. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward foreign currency contracts ("forward
contracts") to facilitate settlement of foreign currency denominated portfolio
transactions or to manage foreign currency exposure associated with foreign
currency denominated securities.
Forward contracts involve elements of market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The Fund bears the risk
of an unfavorable change in the foreign exchange rates underlying the forward
contracts. Risks may also arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
At December 31, 1998, there were outstanding forward contracts used to
facilitate settlement of foreign currency denominated portfolio transactions.
8. ACQUISITION OF DEAN WITTER RETIREMENT SERIES -- AMERICAN VALUE SERIES
On September 11, 1998, the Fund acquired all the net assets of Dean Witter
Retirement Series -- American Value Series ("Retirement American") pursuant to
a plan of reorganization approved by the shareholders of Retirement American on
August 19, 1998. The acquisition was accomplished by a tax-free exchange of
1,423,395 Class D shares of the Fund at a net asset value of $31.24 per share
for 3,765,186 shares of Retirement American. The net assets of the Fund and
Retirement American immediately before the acquisition were $4,748,265,432, and
$44,485,158, respectively, including unrealized appreciation of $3,189,940 for
Retirement American. Immediately after the acquisition, the combined assets of
the Fund amounted to $4,792,750,590.
9. ACQUISITION OF MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
On October 29, 1998, the Trustees of the Fund and of Morgan Stanley Dean Witter
Capital Appreciation Fund ("Capital Appreciation") approved a reorganization
plan ("the Plan") whereby Capital Appreciation would be merged into the Fund.
The Plan is subject to the consent of Capital Appreciation's shareholders. If
approved, the assets of Capital Appreciation would be combined with the assets
of the Fund and shareholders of Capital Appreciation would become shareholders
of the Fund, receiving shares of the corresponding class of the Fund equal to
the value of their holdings in Capital Appreciation.
50
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1998++ 1997*++ 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $29.51 $ 27.01 $ 27.16 $ 21.21 $ 23.10
------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income (loss) .......................... (0.03) (0.10) (0.08) 0.01 --
Net realized and unrealized gain (loss) ............... 8.66 8.34 2.86 8.87 (1.57)
------- ------- ------- ------- -------
Total income (loss) from investment operations ......... 8.63 8.24 2.78 8.88 (1.57)
------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income ................................. -- -- (0.01) -- --
Net realized gain ..................................... (5.29) (5.74) (2.92) (2.93) (0.32)
------- ------- ------- ------- -------
Total dividends and distributions ...................... (5.29) (5.74) (2.93) (2.93) (0.32)
------- ------- ------- ------- -------
Net asset value, end of period ......................... $32.85 $29.51 $27.01 $27.16 $21.21
======= ======= ======= ======= =======
TOTAL RETURN+ .......................................... 31.07% 31.55% 10.53% 42.20% (6.75)%
RATIOS TO AVERAGE NET ASSETS :
Expenses ............................................... 1.39%(1) 1.46% 1.53% 1.61% 1.71%
Net investment income (loss) ........................... (0.10)%(1) (0.34)% (0.33)% 0.06% 0.01%
SUPPLEMENTAL DATA :
Net assets, end of period, in millions ................. $5,750 $4,078 $3,099 $2,389 $1,490
Portfolio turnover rate ................................ 321% 275% 279% 256% 295%
</TABLE>
- -------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date, other than shares which were purchased
prior to April 30, 1984 (and with respect to such shares, certain shares
acquired through reinvestment of dividends and capital gains distributions
(collectively the "Old Shares")), have been designated Class B shares. The
Old Shares have been designated Class D shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
51
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- ------------------
<S> <C> <C>
CLASS A SHARES ++
SELECTED PER SHARE DATA:
Net asset value, beginning of period .............. $29.59 $31.87
-------- --------
Income from investment operations:
Net investment income ............................ 0.15 0.05
Net realized and unrealized gain ................. 8.71 2.32
-------- --------
Total income from investment operations ........... 8.86 2.37
-------- --------
Less distributions from net realized gain......... (5.29) (4.65)
-------- --------
Net asset value, end of period .................... $33.16 $29.59
======== ========
TOTAL RETURN+ ..................................... 31.78 % 7.70 %(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 0.86 %(3) 0.92 %(2)
Net investment income ............................. 0.43 %(3) 0.38 %(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $116,894 $15,844
Portfolio turnover rate ........................... 321 % 275 %
CLASS C SHARES ++
SELECTED PER SHARE DATA:
Net asset value, beginning of period .............. $29.49 $31.87
-------- --------
Income from investment operations:
Net investment loss .............................. (0.10) (0.05)
Net realized and unrealized gain ................. 8.64 2.32
-------- --------
Total income from investment operations ........... 8.54 2.27
-------- --------
Less distributions from net realized gain......... (5.29) (4.65)
-------- --------
Net asset value, end of period .................... $32.74 $29.49
======== ========
TOTAL RETURN+ ..................................... 30.78 % 7.39 %(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 1.61 %(3) 1.66 %(2)
Net investment loss ............................... (0.32)%(3) (0.36)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $60,861 $12,204
Portfolio turnover rate ........................... 321 % 275 %
</TABLE>
- -------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
52
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- ------------------
<S> <C> <C>
CLASS D SHARES ++
SELECTED PER SHARE DATA:
Net asset value, beginning of period .............. $ 29.63 $ 31.87
-------- --------
Income from investment operations:
Net investment income ............................ 0.24 0.07
Net realized and unrealized gain ................. 8.73 2.34
-------- --------
Total income from investment operations ........... 8.97 2.41
-------- --------
Less distributions from net realized gain......... (5.29) (4.65)
-------- --------
Net asset value, end of period .................... $ 33.31 $ 29.63
======== ========
TOTAL RETURN+ ..................................... 32.12% 7.83%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 0.61%(3) 0.64%(2)
Net investment income ............................. 0.68%(3) 0.50%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $135,022 $ 49,772
Portfolio turnover rate ........................... 321% 275%
</TABLE>
- -------------
* The date shares were first issued. Shareholders who held shares of the
Fund prior to July 28, 1997 (the date the Fund converted to a multiple
class share structure) should refer to the Financial Highlights of Class B
to obtain the historical per share data and ratio information of their
shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
53
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Morgan Stanley Dean Witter
American Value Fund (the "Fund"), formerly Dean Witter American Value Fund, at
December 31, 1998, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended
and the financial highlights for each of the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 5, 1999
1998 FEDERAL TAX NOTICE
During the year ended December 31, 1998, the Fund paid to its
shareholders $2.75 per share from long-term capital gains. For such
period, 4.66% of the income paid qualified for the dividends received
deduction available to corporations.
54
