<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 1999
REGISTRATION NOS.: 2-82510
811-3692
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
POST-EFFECTIVE AMENDMENT NO. 25 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 26 /X/
------------------------
MORGAN STANLEY DEAN WITTER VARIABLE INVESTMENT SERIES
(A MASSACHUSETTS BUSINESS TRUST)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 392-1600
BARRY FINK, ESQ.
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
DAVID M. BUTOWSKY, ESQ.
GORDON ALTMAN BUTOWSKY
WEITZEN SHALOV & WEIN
114 WEST 47TH STREET
NEW YORK, NEW YORK 10036
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after this
Post-Effective
Amendment becomes effective
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
___ immediately upon filing pursuant to paragraph (b)
___ on (date) pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)
_X_ on April 30, 1999 pursuant to paragraph (a) of rule 485
AMENDING THE PROSPECTUS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MORGAN STANLEY DEAN WITTER VARIABLE INVESTMENT SERIES
CROSS-REFERENCE SHEET
FORM N-1A
<TABLE>
<CAPTION>
ITEM CAPTION
- ---------------------------------------------- ---------------------------------------------------------------------
<S> <C>
PART A
1. ......................................... Cover Page; Back Cover
2. ......................................... The Portfolios and Their Management; Risk Factors
3. ......................................... Not Applicable
4. ......................................... The Portfolios and Their Management; Risk Factors
5. ......................................... Not Applicable
6. ......................................... Eligible Purchasers of the Fund; Investment Management
7. ......................................... Eligible Purchasers of the Fund; Shareholder Information
8. ......................................... Not Applicable
9. ......................................... Financial Highlights
PART B STATEMENT OF ADDITIONAL INFORMATION
Information required to be included in Part B is set forth under the appropriate caption in Part B of this
Registration Statement.
PART C
Information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C of
this Registration Statement.
</TABLE>
<PAGE>
PROSPECTUS - MAY 1, 1999
Morgan Stanley Dean Witter
VARIABLE INVESTMENT SERIES
[COVER PHOTO]
Morgan Stanley Dean Witter Variable Investment Series is a
mutual fund comprised of 16 separate Portfolios, each with
its own distinctive investment objective(s) and policies.
The Portfolios are:
<TABLE>
<S> <C>
The Money Market Portfolio The Global Dividend Growth Portfolio
The Short-Term Bond Portfolio The European Growth Portfolio
The Quality Income Plus Portfolio The Pacific Growth Portfolio
The High Yield Portfolio The Equity Portfolio
The Utilities Portfolio The S&P 500 Index Portfolio
The Income Builder Portfolio The Competitive Edge "Best Ideas" Portfolio
The Dividend Growth Portfolio The Aggressive Equity Portfolio
The Capital Growth Portfolio The Strategist Portfolio
</TABLE>
Shares of each Portfolio are sold exclusively to certain
life insurance companies in connection with particular life
insurance and/or annuity contracts they issue. The insurance
companies invest in shares of the portfolios in accordance
with instructions received from owners of the applicable
life insurance or annuity policy.
This PROSPECTUS must be accompanied by a current prospectus
for the variable annuity contracts issued by Northbrook Life
Insurance Company, Allstate Life Insurance Company of New
York or Glenbrook Life and Annuity Company or a current
prospectus for the variable life insurance contracts issued
by Northbrook Life Insurance Company, Glenbrook Life and
Annuity Company or Paragon Life Insurance Company.
The Securities and Exchange Commission has not approved these securities or
passed upon the adequacy of this PROSPECTUS. Any representation to the contrary
is a criminal offense.
<PAGE>
CONTENTS
<TABLE>
<S> <C> <C>
Eligible Purchasers of
the
Fund ............................................................ 1
The Portfolios and Their
Management ............................................................ 2
The Money Market Portfolio.................................. 2
The Short-Term Bond Portfolio............................... 5
The Quality Income Plus Portfolio........................... 6
The High Yield Portfolio.................................... 9
The Utilities Portfolio..................................... 11
The Income Builder Portfolio................................ 14
The Dividend Growth Portfolio............................... 17
The Capital Growth Portfolio................................ 19
The Global Dividend Growth Portfolio........................ 21
The European Growth Portfolio............................... 23
The Pacific Growth Portfolio................................ 26
The Equity Portfolio........................................ 29
The S&P 500 Index Portfolio................................. 31
The Competitive Edge "Best Ideas" Portfolio................. 33
The Aggressive Equity Portfolio............................. 35
The Strategist Portfolio.................................... 37
Additional Information
About the Portfolios ............................................................ 39
Risk Factors ............................................................ 40
Investment Management ............................................................ 45
Shareholder Information ............................................................ 48
Pricing Fund Shares......................................... 48
Dividends and Distributions................................. 48
Tax Consequences............................................ 49
Financial Highlights ............................................................ 50
</TABLE>
<PAGE>
ELIGIBLE PURCHASERS OF THE FUND
Morgan Stanley Dean Witter Variable Investment Series (the
"Fund") is comprised of 16 separate Portfolios (each a
"Portfolio"), each with its own distinct investment
objective(s) and policies. The Fund is offered exclusively
to certain life insurance companies in connection with
particular life insurance and/or annuity contracts they
offer. Shares of each Portfolio are purchased by the life
insurance companies at net asset value per share without a
sales charge in accordance with instructions received from
the owners of the applicable life insurance or annuity
contract. Currently the Fund is offered to the following
insurance companies:
<TABLE>
<CAPTION>
INSURANCE COMPANY TYPE OF POLICY
<C> <S>
- -----------------------------------------------------------------------------
Northbrook Life Insurance Certain Flexible Premium Variable Annuity and
Company Variable Life Insurance Contracts
- -----------------------------------------------------------------------------
Allstate Life Insurance Certain Flexible Premium Deferred Variable
Company Annuity Contracts
- -----------------------------------------------------------------------------
Glenbrook Life and Annuity Certain Flexible Premium Deferred Variable
Company Annuity Contracts and Certain Flexible
Premium Variable Life Insurance Contracts
- -----------------------------------------------------------------------------
Paragon Life Insurance Certain Flexible Premium Variable Life
Company Insurance Contracts (issued in connection
with an employer-sponsored insurance program
offered only to certain employees of Morgan
Stanley Dean Witter & Co., the parent of the
Fund's Investment Manager)
- -----------------------------------------------------------------------------
</TABLE>
1
<PAGE>
THE PORTFOLIOS AND THEIR MANAGEMENT
The Investment Manager to each of the Portfolios is Morgan
Stanley Dean Witter Advisors Inc. The Sub-Advisor to the
Pacific Growth Portfolio and the European Growth Portfolio
is Morgan Stanley Dean Witter Investment Management Inc.
(See "Investment Management" for information about the
Investment Manager and the Sub-Advisor.)
THE MONEY MARKET PORTFOLIO
ICON INVESTMENT OBJECTIVES
- --------------------------------------------------------------------------------
The investment objectives of the Money Market Portfolio are
high current income, preservation of capital and liquidity.
There is no guarantee that the Portfolio will achieve these
objectives.
ICON PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Portfolio invests in high quality, short-term debt
obligations. In selecting investments, the Investment
Manager seeks to manage the Portfolio's share price to
remain stable at $1.00. A mutual fund's share price
remaining stable at $1.00 means that the fund would preserve
the principal value of the shareholders' investments.
Since the Portfolio's income from its portfolio securities
will fluctuate, the Portfolio's yield will fluctuate. The
yield reflects the actual income paid to Fund shareholders.
Yield is calculated every day by dividing the Portfolio's
net income per share, expressed at annual rates, by the
share price. The yield will fluctuate in response to general
interest rate changes.
The Portfolio's investments are limited, as a matter of
fundamental investment policy, which may not be changed
without shareholder approval, to the following types of
money market instruments:
1. Commercial paper that is rated by Standard & Poor's
Corporation ("S&P") in one of the two highest rating
categories or the highest grade by Moody's Investors
Services 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.
2. Corporate obligations rated at least A by S&P or Moody's.
3. Debt obligations of U.S.-regulated banks having total
assets of $1 billion or more, and instruments secured by
those obligations. These investments include certificates
of deposit.
4. Eurodollar certificates of deposit issued by foreign
branches of domestic banks having total assets of $1
billion or more.
5. Certificates of deposit of savings banks and savings and
loan associations having total assets of $1 billion or
more.
6. Debt obligations issued or guaranteed as to principal and
interest by the U.S. government, its agencies or its
instrumentalities.
2
<PAGE>
7. 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.
8. Repurchase agreements, which may be viewed as a type of
secured lending by the Portfolio.
The Portfolio may purchase debt obligations that have fixed,
variable or floating rates of interest. The interest rates
payable on variable rate or floating rate obligations may
fluctuate based upon changes in market rates.
The Portfolio attempts to balance its objectives of high
income, capital preservation and liquidity by investing in
securities of varying maturities and risks. The Portfolio
does not, however, invest in securities that mature in more
than one year from the date of purchase.
ICON SUMMARY OF PRINCIPAL RISKS
- --------------------------------------------------------------------------------
A principal risk of investing in the Portfolio is associated
with its debt obligation investments. All debt obligations,
such as bonds, 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/or repay the principal on its
debt. Interest rate risk refers to fluctuations in the value
of a debt security resulting from changes in the general
level of interest rates.
The Investment Manager actively manages the Portfolio's
assets to reduce the risk of losing any principal investment
as a result of credit or interest rate risks. The
Portfolio's assets are reviewed to maintain or improve
creditworthiness. In addition, federal regulations require
money market funds to invest only in debt obligations of
high quality and short maturities, and repurchase agreements
with respect to such obligations.
An investment in the Portfolio is not a bank deposit and is
not insured or guaranteed by the FDIC or any other
governmental agency. Although the Portfolio seeks to
preserve the value of your investment at $1.00 per share, if
it is unable to do so, it is possible to lose money by
investing in the Portfolio.
For a discussion of the other risks associated with
investing in the Portfolio, see "Risk Factors."
3
<PAGE>
(Sidebar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Portfolio's shares has varied from
year to year over the past 10 years.
AVERAGE ANNUAL
TOTAL RETURNS
This table compares the Portfolio's average annual returns with those of a broad
measure of market performance over time.
(End Sidebar)
ICON PAST PERFORMANCE
- --------------------------------------------------------------------------------
The bar chart and table below provide some indication of the
Portfolio's performance history. The Portfolio's past
performance does not indicate how it will perform in the
future.
ANNUAL RETURNS - CALENDAR YEARS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989 9.10%
1990 7.93%
1991 5.70%
1992 3.43%
1993 2.75%
1994 3.81%
1995 5.66%
1996 5.11%
1997 5.23%
1998 5.18%
</TABLE>
During the periods shown in the bar chart, the highest
return for a calendar quarter was 2.40% (quarter ended June
30, 1989) and the lowest return for a calendar quarter was
0.66% (quarter ended June 30, 1993).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED THE 1998 CALENDAR YEAR)
- -------------------------------------------------------------------------------
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
Money Market Portfolio 5.18% 5.00% 5.38%
- -------------------------------------------------------------------------------
Benchmark - [to be inserted] % % %
- -------------------------------------------------------------------------------
Lipper - [to be inserted] % % %
- -------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
THE SHORT-TERM BOND PORTFOLIO
ICON INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
The investment objective of the Short-Term Bond Portfolio is
to provide a high level of current income consistent with
the preservation of capital. There is no guarantee that the
Portfolio will achieve this objective.
ICON PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Portfolio normally invests at least 65% of its assets in
bonds issued or guaranteed as to principal and interest by
the U.S. Government, its agencies or instrumentalities
(including zero coupon securities), and investment grade
corporate and other types of bonds. In selecting portfolio
investments, the Investment Manager considers both domestic
and international economic developments, interest rate
trends and other factors and seeks to maintain an overall
weighted average maturity for the Portfolio of less than
three years.
MORTGAGE-BACKED SECURITIES. Certain of the U.S. Government
securities in which the Portfolio may invest are
mortgage-backed securities. One type of mortgage-backed
security, in which the Portfolio may invest, is a mortgage
pass-through security. These securities represent a
participation interest in a pool of residential mortgage
loans originated by U.S. Governmental or private lenders
such as banks. They differ from conventional debt
securities, which provide for periodic payment of interest
in fixed amounts and principal payments at maturity or on
specified call dates. Mortgage pass-through securities
provide for monthly payments that are a "pass-through" of
the monthly interest and principal payments made by the
individual borrowers on the pooled mortgage loans. Mortgage
pass-through securities may be collateralized by mortgages
with fixed rates of interest or adjustable rates.
The Portfolio may invest up to 25% of its assets in
investment grade fixed-income securities issued by foreign
governments or corporations. The Portfolio's investments
also include "Rule 144A" fixed-income securities, which are
subject to resale restrictions. Up to 5% of the Portfolio's
assets may be invested in fixed-income securities rated
lower than investment grade, or if unrated of comparable
quality as determined by the Investment Manager (commonly
known as "junk bonds").
ICON SUMMARY OF PRINCIPAL RISKS
- --------------------------------------------------------------------------------
Principal risks of investing in the Portfolio are associated
with the Portfolio's investments in fixed-income securities.
These risks are credit risk and interest rate risk. Credit
risk is the possibility that the issuer of a security will
be unable to make interest payments and/or 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.
There are also particular risks associated with the
Portfolio's investments in mortgage-backed securities. For
example mortgage-backed securities are subject to prepayment
risk and in some cases may be more volatile and less liquid
than other traditional types of debt securities.
The foregoing risks and other risks associated with the
Portfolio's investments are discussed in detail under the
heading "Risk Factors."
5
<PAGE>
THE QUALITY INCOME PLUS PORTFOLIO
ICON INVESTMENT OBJECTIVES
- --------------------------------------------------------------------------------
The primary investment objective of the Quality Income Plus
Portfolio is to provide a high level of current income by
investing primarily in U.S. government securities and other
fixed-income securities. As a secondary objective the
Portfolio seeks capital appreciation but only when
consistent with its primary objective. There is no guarantee
that the Portfolio will achieve these objectives.
ICON PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Portfolio normally invests at least 65% of its assets in
(i) U.S. Government securities issued or guaranteed as to
principal and interest by the U.S. Government, its agencies
or instrumentalities, (ii) debt securities (including zero
coupon securities), rated at the time of purchase within the
three highest bond rating categories by Moody's or S&P or if
not rated determined to be of comparable quality by the
Investment Manager, and (iii) Yankee government bonds rated
at the time of purchase within the three highest rating
categories of Moody's or S&P or if not rated determined to
be of comparable quality by the Investment Manager. Yankee
government bonds are U.S. dollar denominated bonds issued by
foreign government agencies or instrumentalities (no more
than 20% of the Portfolio's assets may be invested in Yankee
government bonds). The Portfolio is not limited as to the
maturities of the U.S. Government and other debt securities
in which it may invest.
In making investment decisions for the Portfolio, the
Investment Manager considers both domestic and international
economic developments, interest rate trends and other
factors. The Investment Manager evaluates technical
considerations such as the relative supply of and demand for
corporate notes and U.S. Treasury and agencies issues before
it decides upon an asset allocation. Similarly, the
assessment of the strength of individual companies that
issue corporate debt and the overall country risk of
sovereign debt obligations contribute to the decision-making
process.
MORTGAGE-BACKED SECURITIES. Certain of the U.S. Government
securities in which the Portfolio may invest are
mortgage-backed securities. One type of mortgage-backed
security, in which the Portfolio may invest, is a mortgage
pass-through security. These securities represent a
participation interest in a pool of residential mortgage
loans originated by U.S. Governmental or private lenders
such as banks. They differ from conventional debt
securities, which provide for periodic payment of interest
in fixed amounts and principal payments at maturity or on
specified call dates. Mortgage pass-through securities
provide for monthly payments that are a "pass-through" of
the monthly interest and principal payments made by the
individual borrowers on the pooled mortgage loans. Mortgage
pass-through securities may be collateralized by mortgages
with fixed rates of interest or adjustable rates.
BORROWING. In seeking to increase income, the Portfolio may
borrow to purchase securities. Such borrowing may not exceed
25% of the Portfolio's total assets.
6
<PAGE>
ICON OTHER INVESTMENTS
- --------------------------------------------------------------------------------
Up to 15% of the Portfolio's assets may be invested in
Yankee corporate bonds which are rated at the time of
purchase within the three highest grades as determined by
Moody's or S&P or which, if not rated, are of comparable
quality as determined by the Investment Manager. Yankee
corporate bonds are U.S. dollar denominated debt securities
issued by foreign companies.
ICON SUMMARY OF PRINCIPAL RISKS
- --------------------------------------------------------------------------------
A principal risk of investing in the Portfolio is associated
with the Portfolio's investments in fixed-income securities.
These risks are credit risk and interest rate risk. Credit
risk is the possibility that the issuer of a security will
be unable to make interest payments and/or 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.
There are also particular risks associated with the
Portfolio's investments in mortgage-backed securities. For
example mortgage-backed securities are subject to prepayment
risk and in some cases may be more volatile and less liquid
than other traditional types of debt securities. The
foregoing risks and other risks associated with the
Portfolio's investments are discussed in detail under the
heading "Risk Factors."
The Portfolio may borrow money to purchase securities. To
the extent that the Portfolio engages in such practice it
may be leveraged. Leveraging generally exaggerates the
effect on net asset value of any increase or decrease in the
market value of the Portfolio's investments.
7
<PAGE>
(Sidebar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Portfolio's shares has varied from
year to year over the past 10 years.
AVERAGE ANNUAL
TOTAL RETURNS
This table compares the Portfolio's average annual returns with those of a broad
measure of market performance over time.
(End Sidebar)
ICON PAST PERFORMANCE
- --------------------------------------------------------------------------------
The bar chart and table below provide some indication of the
Portfolio's performance history. The Portfolio's past
performance does not indicate how it will perform in the
future.
ANNUAL TOTAL RETURNS - CALENDAR YEARS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989 12.78%
1990 6.84%
1991 18.75%
1992 8.26%
1993 12.99%
1994 -6.63%
1995 24.30%
1996 1.56%
1997 11.09%
1998 8.67%
</TABLE>
During the periods shown in the bar chart, the highest
return for a calendar quarter was 8.07% (quarter ended June
30, 1995) and the lowest return for a calendar quarter was
-4.83% (quarter ended March 31, 1994).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED THE 1998 CALENDAR YEAR)
- -------------------------------------------------------------------------------
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
Quality Income Plus Portfolio 8.67% 7.31% 9.55%
- -------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond
Index(1) 8.69% 7.27% 9.26%
- -------------------------------------------------------------------------------
Lipper Analytical Services Inc.
Variable Annuity Corporate Debt
A-Rated Underlying Funds
Average(2) 7.04% 5.96% 8.14%
- -------------------------------------------------------------------------------
</TABLE>
(1) The Lehman Brothers Aggregate Bond Index tracks the performance of all U.S.
Government agency and Treasury securities, investment grade corporate debt
securities, agency mortgage-backed securities and asset-backed securities.
The performance of the Index does not include any expenses, fees or
charges. The Index is unmanaged and should not be considered an investment.
(2) The Lipper Variable Annuity Corporate Debt A-Rated Funds Average tracks the
performance of funds which invest at least 65% of their assets in corporate
debt issues rated "A" or better or government issues, as reported by Lipper
Analytical Services.
8
<PAGE>
THE HIGH YIELD PORTFOLIO
ICON INVESTMENT OBJECTIVES
- --------------------------------------------------------------------------------
The primary investment objective of the High Yield Portfolio
is to provide a high level of current income by investing in
a diversified portfolio consisting principally of
fixed-income securities, which may include both
non-convertible and convertible debt securities and
preferred stocks. As a secondary objective the Portfolio
will seek capital appreciation, but only when consistent
with its primary objective. There is no guarantee that the
Portfolio will achieve these objectives.
ICON PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Portfolio normally invests at least 65% of its assets in
fixed-income securities (including zero coupon securities)
rated Baa or lower by Moody's or BBB or lower by S&P or in
nonrated securities considered by the Investment Manager to
be appropriate investments for the Portfolio. These
securities are commonly known as "junk bonds." They may also
include "Rule 144A" securities, which are subject to resale
restrictions. There are no minimum quality ratings for
investments.
In making investment decisions the Investment Manager
considers an issuer's creditworthiness, economic
developments, interest rate trends and other factors it
deems relevant. In evaluating an issuer's creditworthiness
the Investment Manager relies principally on its own
analysis. A security's credit rating is simply one factor
that may be considered by the Investment Manager in this
regard.
ICON OTHER INVESTMENTS
- --------------------------------------------------------------------------------
In addition to junk bonds, the Portfolio may invest in the
following:
1. Higher rated fixed-income securities -- The Portfolio may
invest in securities rated higher than Baa or BBB (or if
not rated, determined to be of comparable quality) when
the Investment Manager believes that such securities may
produce attractive yields.
2. Foreign securities -- The Portfolio may invest up to 20%
of its assets in securities issued by foreign governments
and other foreign issuers (including American depository
receipts or other similar securities convertible into
securities of foreign issuers) but not more than 10% of
its assets in these securities may be denominated in
foreign currencies.
3. Unit Offerings -- The Portfolio may purchase units which
combine debt securities with equity securities and/or
warrants.
ICON SUMMARY OF PRINCIPAL RISKS
- --------------------------------------------------------------------------------
A principal risk of investing in the Portfolio is associated
with its investments in junk bonds. Junk bonds are subject
to greater risk of loss of income and principal than higher
rated securities. The prices of junk bonds have been found
generally to be less sensitive to changes in prevailing
interest rates than higher rated securities but are more
likely to be sensitive to adverse economic changes or
individual corporate developments.
The risks of junk bonds and other risks associated with the
Portfolio's investments are discussed in detail under the
heading "Risk Factors."
9
<PAGE>
(Sidebar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Portfolio's shares has varied from
year to year over the past 10 years.
AVERAGE ANNUAL
TOTAL RETURNS
This table compares the Portfolio's average annual returns with those of a broad
measure of market performance over time.
(End Sidebar)
ICON PAST PERFORMANCE
- --------------------------------------------------------------------------------
The bar chart and table below provide some indication of the
Portfolio's performance history. The Portfolio's past
performance does not indicate how it will perform in the
future.
ANNUAL TOTAL RETURNS - CALENDAR YEARS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989 -12.44%
1990 -25.54%
1991 58.14%
1992 18.35%
1993 24.13%
1994 -2.47%
1995 14.93%
1996 11.98%
1997 11.87%
1998 -6.20%
</TABLE>
During the periods shown in the bar chart, the highest
return for a calendar quarter was 27.00% (quarter ended
March 31, 1991) and the lowest return for a calendar quarter
was -15.93% (quarter ended December 31, 1990).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED THE 1998 CALENDAR YEAR)
- -------------------------------------------------------------------------------
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
High Yield Portfolio -6.20% 5.66% 7.15%
- -------------------------------------------------------------------------------
Lehman Brothers High Yield
Index(1) 1.60% 8.52% 10.52%
- -------------------------------------------------------------------------------
Lipper Analytical Services Inc.
Variable Annuity High Current
Yield Underlying Funds Average(2) -1.57% 7.42% 9.52%
- -------------------------------------------------------------------------------
</TABLE>
(1) The Lehman Brothers High Yield Index tracks the performance of all below
investment grade securities which have at least $100 million in outstanding
issuance, are greater than one year to maturity and are issued in fixed-
rate U.S. dollar denominations. The Index does not include any expenses,
fees or charges. The Index is unmanaged and should not be considered an
investment.
(2) The Lipper Variable Annuity High Current Yield Funds Average tracks the
performance of funds which aim at high (relative) current yield from
fixed-income securities, has no quality or maturity restrictions, and tends
to invest in lower grade debt issues, as reported by Lipper Analytical
Services.
10
<PAGE>
THE UTILITIES PORTFOLIO
ICON INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
The investment objective of the Utilities Portfolio is to
provide current income and long term growth of income and
capital by investing primarily in equity and fixed-income
securities of companies engaged in the utilities industry.
There is no guarantee that the Portfolio will achieve this
objective.
ICON PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Portfolio normally invests at least 65% of its assets in
securities of companies in the public utilities industry.
These securities include equity securities and investment
grade fixed income securities (including zero coupon
securities). The term "public utilities industry" consists
of companies engaged in the manufacture, production,
generation, transmission, sale and distribution of gas and
electric energy, as well as companies engaged in the
communications field, including telephone, telegraph,
satellite, microwave and other companies providing
communication facilities for the public and business, but
excluding public broadcasting companies. For purposes of the
Portfolio, a company will be considered to be in the public
utilities industry if, during the most recent twelve month
period, at least 50% of the company's gross revenues, on a
consolidated basis, is derived from the public utilities
industry.
The Portfolio does not have any set policies to concentrate
within any particular segment of the utilities industry. The
Portfolio will shift its asset allocation without
restriction between types of utilities and between equity
and fixed-income securities. These shifts will be based upon
the Investment Manager's determination of how to achieve the
Portfolio's investment objective in light of prevailing
market, economic and financial conditions. For example, at a
particular time the Investment Manager may choose to
allocate up to 100% of the Portfolio's assets in a
particular type of security (for example, equity securities)
or in a specific utility industry segment (for example,
electric utilities).
Criteria to be utilized by the Investment Manager in the
selection of equity securities include but are not limited
to the following screens; earnings and dividend growth; book
value; dividend discount; and price/earnings relationships.
In addition, the Investment Manager makes continuing
assessments of management, the prevailing regulatory
framework and industry trends. The Investment Manager may
also utilize computer-based equity selection models in
connection with stock allocation in the equity portion of
the portfolio. In keeping with the Portfolio's objective, if
in the opinion of the Investment Manager favorable
conditions for capital growth of equity securities are not
prevalent at a particular time, the Portfolio may allocate
its assets predominantly or exclusively in debt securities
with the aim of obtaining current income as well as
preserving capital and thus benefiting long term growth of
capital.
11
<PAGE>
ICON OTHER INVESTMENTS
- --------------------------------------------------------------------------------
1. Up to 35% of the Portfolio's assets may be invested in
U.S. Government securities issued or guaranteed as to
principal and interest by the U.S. Government or its
agencies or instrumentalities and in real estate
investment trusts (commonly known as "REITs").
2. Foreign Securities - Up to 10% of the Portfolio's assets
may be invested in foreign securities (including
depository receipts). This percentage limitation,
however, does not apply to securities of foreign
companies that are listed in the U.S. on a national
securities exchange.
ICON SUMMARY OF PRINCIPAL RISKS
- --------------------------------------------------------------------------------
The Portfolio invests primarily in securities of companies
in the public utilities industry. As a consequence, the
performance of the Portfolio will be affected significantly
by political and regulatory developments and economic
conditions specifically affecting the utilities industry.
The Portfolio's investments in common stock are also subject
to the risks that affect all common stocks. In particular,
stock prices can fluctuate widely in response to activities
specific to the issuer as well as general market economic
and political conditions.
The Portfolio's investment in fixed-income securities are
subject to credit risk and interest rate risk. Credit risk
refers to a possibility that the issuer of a security will
be unable to make interest payments and/or repay the
principal on its debts. Interest rate risk refers to
fluctuations in the value of a fixed-income security
resulting from changes in the general level of interest
rates.
The foregoing risks and other risks associated with the
Portfolio's investments are discussed in detail under the
heading "Risk Factors."
12
<PAGE>
(Sidebar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Portfolio's shares has varied from
year to year over the life of the Portfolio.
AVERAGE ANNUAL
TOTAL RETURNS
This table compares the Portfolio's average annual returns with those of a broad
measure of market performance over time.
(End Sidebar)
ICON PAST PERFORMANCE
- --------------------------------------------------------------------------------
The bar chart and table below provide some indication of the
Portfolio's performance history. The Portfolio's past
performance does not indicate how it will perform in the
future.
ANNUAL TOTAL RETURNS - CALENDAR YEARS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 4.52%*
1991 20.56%
1992 12.64%
1993 15.69%
1994 -9.02%
1995 28.65%
1996 8.68%
1997 27.15%
1998 23.76%
</TABLE>
* For the period March 1, 1990 to December 31, 1990.
During the periods shown in the bar chart, the highest
return for a calendar quarter was 12.58% (quarter ended
December 31, 1997) and the lowest return for a calendar
quarter was 8.19% (quarter ended March 31, 1994).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED THE 1998 CALENDAR YEAR)
- -----------------------------------------------------------------------------
LIFE OF THE
PAST 1 YEAR PAST 5 YEARS PORTFOLIO
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
Utilities Portfolio 23.76% 14.89% 14.42%
- -----------------------------------------------------------------------------
Standard & Poor's 500 Stock Index
(S&P 500)(1) 28.58% 24.05% 18.98%
- -----------------------------------------------------------------------------
Lipper Analytical Services Inc.
Variable Annuity Utility
Underlying Funds Average(2) 16.79% 13.53% 13.19%
- -----------------------------------------------------------------------------
</TABLE>
(1) The Standard and Poor's 500 Stock Index (S&P 500) is a broad-based index,
the performance of which is based on the average performance of 500 widely
held common stocks. The Index does not include any expenses, fees or
charges. The Index is unmanaged and should not be considered an investment.
(2) The Lipper Variable Annuity Utility Fund Average tracks the performance of
funds which invest at least 65% of their portfolio in utility shares, as
reported by Lipper Analytical Services.
13
<PAGE>
THE INCOME BUILDER PORTFOLIO
ICON INVESTMENT OBJECTIVES
- --------------------------------------------------------------------------------
The primary investment objective of the Income Builder
Portfolio is to seek reasonable income. Growth of capital is
a secondary objective. There is no guarantee that the
Portfolio will achieve these objectives.
ICON PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Portfolio normally invests at least 65% of its assets in
income-producing equity securities, including common stock,
preferred stock and convertible securities. The Investment
Manager uses a value-oriented style in the selection of
securities. Investments are normally made primarily in (i)
common stocks of large capitalization companies with a
record of paying dividends and which in the opinion of the
Investment Manager have the potential for maintaining
dividends, (ii) preferred stock and (iii) securities
convertible into common stocks of small and midcap companies
-- including synthetic and enhanced convertibles. The
Portfolio's investments also include "Rule 144A" securities,
which are subject to resale restrictions.
Up to 25% of the Portfolio's total assets may be invested in
"enhanced" convertible securities. Enhanced convertible
securities offer holders the opportunity to obtain higher
current income than would be available from a traditional
equity security issued by the same company, in return for
reduced participation or a cap on appreciation in the
underlying common stock of the issuer which the holder can
realize. In addition, in many cases, enhanced convertible
securities are convertible into the underlying common stock
of the issuer automatically at maturity, unlike traditional
convertible securities which are convertible only at the
option of the security holder.
Up to 10% of the Portfolio's total assets may be invested in
"synthetic" convertible securities. Unlike traditional
convertible securities whose conversion values are based on
the common stock of the issuer of the convertible security,
"synthetic" convertible securities are preferred stocks or
debt obligations of an issuer which are combined with an
equity component whose conversion value is based on the
value of the common stock of a different issuer or a
particular benchmark (which may include a foreign issuer or
basket of foreign stocks, or a company whose stock is not
yet publicly traded). In many cases, "synthetic" convertible
securities are not convertible prior to maturity, at which
time the value of the security is paid in cash by the
issuer.
The Investment Manager follows a "bottom-up" approach in the
selection of convertible securities for the Portfolio.
Beginning with a universe of about 500 companies, the
Investment Manager narrows the focus to small and midcap
companies and reviews the issues to determine if the
convertible is trading with the underlying equity security.
The yield of the underlying equity security is evaluated and
company fundamentals are studied to evaluate cash flow,
risk/reward balance, valuation and the prospects for growth.
14
<PAGE>
ICON OTHER INVESTMENTS
- --------------------------------------------------------------------------------
1. Junk Bonds -- Up to 20% of the Portfolio's assets may be
invested in fixed-income securities rated lower than
investment grade by S&P or Moody's (but not below B) or
if unrated of comparable quality as determined by the
Investment Manager (commonly known as "junk bonds"). The
20% limitation is not applicable to convertible
securities.
2. Up to 35% of the Portfolio's assets may be invested in
U.S. Government securities issued or guaranteed as to
principal and interest by the U.S. Government or its
agencies or instrumentalities and investment grade
fixed-income securities (including zero coupon
securities), common stocks that do not pay a regular
dividend and real estate investment trusts (commonly
known as "REITs").
3. Foreign Securities -- Up to 25% of the Portfolio's assets
may be invested in foreign securities (including
depository receipts). This percentage limitation,
however, does not apply to securities of foreign
companies that are listed in the U.S. on a national
securities exchange.
ICON SUMMARY OF PRINCIPAL RISKS
- --------------------------------------------------------------------------------
A principal risk of investing in the Portfolio is associated
with its investment in common stocks. In particular the
prices of common stocks can fluctuate widely in response to
activities specific to the issuer as well as general market,
economic and political conditions.
The Portfolio is also subject to the risks of investing in
convertible securities. These securities may carry risks
associated with both common stock and fixed-income
securities. In addition, because the convertible securities
in which the Portfolio invests are convertible into the
common stocks of small and midcap companies, the Portfolio
is subject to the specific risks associated with investing
in small and midcap companies. Investments in small and
medium capitalization companies involve greater risk of
volatility than is customarily associated with investments
in more established companies as well as certain other
additional risks.
There are also special risks associated with the Portfolio's
investments in "enhanced" and "synthetic" convertible
securities. These securities may be more volatile and less
liquid than traditional convertible securities.
The foregoing risks and other risks associated with the
Portfolio's investments are discussed in detail under the
heading "Risk Factors."
15
<PAGE>
(Sidebar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Portfolio's shares has varied from
year to year over the life of the Portfolio.
AVERAGE ANNUAL
TOTAL RETURNS
This table compares the Portfolio's average annual returns with those of a broad
measure of market performance over time.
(End Sidebar)
ICON PAST PERFORMANCE
- --------------------------------------------------------------------------------
The bar chart and table below provide some indication of the
Portfolio's performance history. The Portfolio's past
performance does not indicate how it will perform in the
future.
ANNUAL TOTAL RETURNS - CALENDAR YEARS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1997 22.38%*
1998 3.21%
</TABLE>
* For the period January 21, 1997 to December 31, 1997.
During the periods shown in the bar chart, the highest
return for a calendar quarter was 10.04% (quarter ended
September 30, 1997) and the lowest return for a calendar
quarter was -10.46% (quarter ended September 30, 1998).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED THE 1998
CALENDAR YEAR)
- -------------------------------------------------------------------
LIFE OF THE
PAST 1 YEAR PORTFOLIO
<S> <C> <C>
- -------------------------------------------------------------------
Income Builder Portfolio 3.21% 12.79%
- -------------------------------------------------------------------
Standard & Poor's 500 Stock Index (S&P
500)(1) 28.58% 28.32%
- -------------------------------------------------------------------
Lipper Analytical Services Inc.
Variable Annuity Equity Income
Underlying Funds Average(2) 11.20% 17.82%
- -------------------------------------------------------------------
</TABLE>
(1) The Standard and Poor's 500 Stock Index (S&P 500) is a broad-based index,
the performance of which is based on the average performance of 500 widely
held common stocks. The Index does not include any expenses, fees or
charges. The Index is unmanaged and should not be considered an investment.
(2) The Lipper Variable Annuity Equity Income Fund Average tracks the
performance of funds that seek relatively high current income and growth of
income through investing 60% or more of their portfolio in equities, as
reported by Lipper Analytical Services.
16
<PAGE>
THE DIVIDEND GROWTH PORTFOLIO
ICON INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
The investment objective of the Dividend Growth Portfolio is
to provide reasonable current income and long term growth of
income and capital. There is no guarantee that the Portfolio
will achieve this objective.
ICON PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Portfolio invests primarily in common stock of companies
with a record of paying dividends and the potential for
increasing dividends. The Investment Manager initially
employs a quantitative screening process in an attempt to
develop a number of common stocks which are undervalued and
which have a record of paying dividends. The Investment
Manager then applies qualitative analysis to determine which
stocks it believes have the potential to increase dividends
and, finally, to determine whether any of the stocks should
be added to the Portfolio.
The Investment Manager attempts to avoid investment in
speculative securities or those with speculative
characteristics.
ICON OTHER INVESTMENTS
- --------------------------------------------------------------------------------
1. Up to 30% of the Portfolio's assets may be invested in
convertible securities, U.S. Government securities issued
or guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities, and
investment grade fixed-income securities (including zero
coupon securities).
2. Foreign Securities - The Portfolio may only invest in
securities of foreign companies (including depository
receipts) that are listed in the U.S. on a national
securities exchange.
ICON SUMMARY OF PRINCIPAL RISKS
- --------------------------------------------------------------------------------
A principal risk of investing in the Portfolio is associated
with its investments in common stock. In particular the
prices of common stock may fluctuate widely in response to
activities specific to the company as well as general
market, economic and political conditions.
These risks and other risks associated with the Portfolio's
investments are discussed in detail under the heading "Risk
Factors."
17
<PAGE>
(Sidebar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Portfolio's shares has varied from
year to year over the life of the Portfolio.
AVERAGE ANNUAL
TOTAL RETURNS
This table compares the Portfolio's average annual returns with those of a broad
measure of market performance over time.
(End Sidebar)
ICON PAST PERFORMANCE
- --------------------------------------------------------------------------------
The bar chart and table below provide some indication of the
Portfolio's performance history. The Portfolio's past
performance does not indicate how it will perform in the
future.
ANNUAL TOTAL RETURNS - CALENDAR YEARS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 -7.81%*
1991 27.76%
1992 8.16%
1993 14.34%
1994 -3.27%
1995 36.38%
1996 23.96%
1997 25.61%
1998 14.28%
</TABLE>
* For the period March 1, 1990 to December 31, 1990.
During the periods shown in the bar chart, the highest
return for a calendar quarter was 16.92% (quarter ended June
30, 1997) and the lowest return for a calendar quarter was
-17.71% (quarter ended September 30, 1990).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED THE 1998 CALENDAR YEAR)
- -----------------------------------------------------------------------------
LIFE OF THE
PAST 1 YEAR PAST 5 YEARS PORTFOLIO
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
Dividend Growth Portfolio 14.28% 18.61% 14.93%
- -----------------------------------------------------------------------------
Standard & Poor's 500 Stock Index
(S&P 500)(1) 28.58% 24.05% 18.98%
- -----------------------------------------------------------------------------
Lipper Analytical Services Inc.
Variable Annuity Growth and Income
Underlying Funds Average(2) 15.72% 17.60% 14.99%
- -----------------------------------------------------------------------------
</TABLE>
(1) The Standard and Poor's 500 Stock Index (S&P 500) is a broad-based index,
the performance of which is based on the average performance of 500 widely
held common stocks. The Index does not include any expenses, fees or
charges. The Index is unmanaged and should not be considered an investment.
(2) The Lipper Variable Annuity Growth and Income Average tracks the
performance of funds which combine a growth-of-earnings orientation and an
income requirement for level and/or rising dividends, as reported by Lipper
Analytical Services.
18
<PAGE>
THE CAPITAL GROWTH PORTFOLIO
ICON INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
The investment objective of the Capital Growth Portfolio is
long term capital growth. There is no guarantee that the
Portfolio will achieve this objective.
ICON PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Portfolio normally invests at least 65% of its assets in
common stocks. The Investment Manager utilizes a two-stage
computerized screening process designed to find companies
that demonstrate a history of consistent growth in earnings
and revenues over the past several years, and have solid
future earnings growth characteristics and attractive
valuations. Dividend income is not a consideration in this
stock selection process. Companies meeting these
requirements are potential candidates for investment by the
Portfolio. The Investment Manager may modify the screening
process and/or may utilize additional or different screening
processes in connection with the Portfolio's investments.
ICON OTHER INVESTMENTS
- --------------------------------------------------------------------------------
1. Up to 35% of the Portfolio's assets may be invested in
U.S. Government securities issued or guaranteed as to
principal and interest by the U.S. Government or its
agencies or instrumentalities, investment grade
fixed-income securities (including zero coupon
securities), convertible securities, unit offerings
involving a combination of a debt security and a
convertible security and/or warrant and real estate
investment trusts (commonly known as "REITs").
2. Foreign Securities -- The Portfolio may invest up to 25%
of its assets in foreign securities (including depository
receipts). This percentage limitation, however, does not
apply to securities of foreign companies that are listed
in the U.S. on a national securities exchange.
ICON SUMMARY OF PRINCIPAL RISKS
- --------------------------------------------------------------------------------
A principal risk of investment in the Portfolio is
associated with the Portfolio's investments in common stock.
In particular the prices of common stocks may fluctuate
widely in response to activities specific to the company as
well as general market, economic and political conditions.
Other risks associated with the Portfolio's investments are
discussed in detail under the heading "Risk Factors."
19
<PAGE>
(Sidebar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Portfolio's shares has varied from
year to year over the life of the Portfolio.
AVERAGE ANNUAL TOTAL RETURNS
This table compares the Portfolio's average annual returns with those of a broad
measure of market performance over time.
(End Sidebar)
ICON PAST PERFORMANCE
- --------------------------------------------------------------------------------
The bar chart and table below provide some indication of the
Portfolio's performance history. The Portfolio's past
performance does not indicate how it will perform in the
future.
ANNUAL TOTAL RETURNS - CALENDAR YEARS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1991 28.41%*
1992 1.64%
1993 -6.99%
1994 -1.28%
1995 32.92%
1996 11.55%
1997 24.54%
1998 19.63%
</TABLE>
* For the period March 1, 1991 to December 31, 1991.
During the periods shown in the bar chart, the highest
return for a calendar quarter was 20.47% (quarter ended
December 31, 1998) and the lowest return for a calendar
quarter was -13.95% (quarter ended September 30, 1998).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED THE 1998 CALENDAR YEAR)
- -----------------------------------------------------------------------------
LIFE OF THE
PAST 1 YEAR PAST 5 YEARS PORTFOLIO
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
Capital Growth Portfolio 19.63% 16.88% 13.23%
- -----------------------------------------------------------------------------
Standard & Poor's 500 Stock Index
(S&P 500)(1) 28.58% 24.05% 19.44%
- -----------------------------------------------------------------------------
Lipper Analytical Services Inc.
Variable Annuity Growth Underlying
Funds Average(2) 25.82% 19.19% 17.07%
- -----------------------------------------------------------------------------
</TABLE>
(1) The Standard and Poor's 500 Stock Index (S&P 500) is a broad-based index,
the performance of which is based on the average performance of 500 widely
held common stocks. The Index does not include any expenses, fees or
charges. The Index is unmanaged and should not be considered an investment.
(2) The Lipper Variable Annuity Growth Fund Average tracks the performance of
funds which primarily invest their assets in companies with long-term
earnings expected to grow significantly faster than the earnings of the
stocks represented in the major unmanaged stock indices, as reported by
Lipper Analytical Services.
20
<PAGE>
THE GLOBAL DIVIDEND GROWTH PORTFOLIO
ICON INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
The investment objective of the Global Dividend Growth
Portfolio is to provide reasonable current income and long
term growth of income and capital. There is no guarantee
that the Portfolio will achieve this objective.
ICON PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Portfolio will normally invest at least 65% of its
assets in dividend paying equity securities issued by
issuers located in various countries around the world. The
Investment Manager seeks investments primarily in common
stock of companies with a record of paying dividends and
potential for increasing dividends. The Portfolio invests in
at least three separate countries. The percentage of assets
invested in particular geographic sectors will shift from
time to time in accordance with the judgement of the
Investment Manager.
ICON OTHER INVESTMENTS
- --------------------------------------------------------------------------------
Up to 35% of the Portfolio's assets may be invested as
follows:
1. Convertible securities, U.S. Government securities
issued or guaranteed as to principal and interest by
the U.S. Government, its agencies or instrumentalities,
fixed-income securities issued by foreign governments
and international organizations and investment grade
debt securities (including zero coupon securities).
2. Forward Currency Contracts -- The Portfolio's
investments may include forward currency contracts
which involve the purchase or sale of a specific amount
of foreign currency at a specified price with delivery
at a specified future date. The Portfolio may use these
contracts to hedge against adverse price movements in
its portfolio securities and the currencies in which
they are denominated.
ICON SUMMARY OF PRINCIPAL RISKS
- --------------------------------------------------------------------------------
A principal risk of Investment in the Portfolio is
associated with the Portfolio's investments in common
stocks. In particular, the price of common stocks may
fluctuate widely in response to activities specific to the
company as well as general market, economic and political
conditions.
Another principal risk relates to the Portfolio's
investments in foreign securities. In particular, foreign
security investments may be adversely affected by changes in
currency exchange rates. In addition, investments in foreign
securities may be adversely affected by among other things
political, social and economic developments abroad.
The foregoing risks and other risks associated with the
Portfolio's investments are discussed in detail under the
heading "Risk Factors."
21
<PAGE>
(Sidebar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Portfolio's shares has varied from
year to year over the life of the Portfolio.
AVERAGE ANNUAL
TOTAL RETURNS
This table compares the Portfolio's average annual returns with those of a broad
measure of market performance over time.
(End Sidebar)
ICON PAST PERFORMANCE
- --------------------------------------------------------------------------------
The bar chart and table below provide some indication of the
Portfolio's performance history. The Portfolio's past
performance does not indicate how it will perform in the
future.
ANNUAL TOTAL RETURNS - CALENDAR YEARS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1994 0.27%*
1995 22.04%
1996 17.59%
1997 12.04%
1998 12.53%
</TABLE>
* For the period from February 23, 1994 to December 31,
1994.
During the periods shown in the bar chart, the highest
return for a calendar quarter was 17.14% (quarter ended
December 31, 1998) and the lowest return for a calendar
quarter was -12.43% (quarter ended September 30, 1998).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED THE 1998
CALENDAR YEAR)
- -------------------------------------------------------------------
LIFE OF THE
PAST 1 YEAR PORTFOLIO
<S> <C> <C>
- -------------------------------------------------------------------
Global Dividend Growth Portfolio 12.53% 13.06%
- -------------------------------------------------------------------
Morgan Stanley Capital International
World Index(1) 22.78% 13.46%
- -------------------------------------------------------------------
Lipper Analytical Services Inc.
Variable Annuity Global Underlying
Funds Average(2) 15.84% 11.68%
- -------------------------------------------------------------------
</TABLE>
(1) The Morgan Stanley Capital International World Index (MSCI) measures
performance for a diverse range of global stock markets including the U.S.,
Canada, Europe, Australia, New Zealand, and the Far East. The Index does
not include any expenses, fees or charges, or reinvestment of dividends.
The Index is unmanaged and should not be considered an investment.
(2) The Lipper Variable Annuity Global Funds Average tracks the performance of
funds which invest at least 25% of their portfolio in securities traded
outside of the United States and that may own U.S. securities as well, as
reported by Lipper Analytical Services.
22
<PAGE>
THE EUROPEAN GROWTH PORTFOLIO
ICON INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
The investment objective of the European Growth Portfolio is
to maximize the capital appreciation of its investments.
There is no guarantee that the Portfolio will achieve this
objective.
ICON PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Portfolio normally invests at least 65% of its assets in
securities issued by issuers located in European countries.
A company is considered located in Europe if (i) it is
organized under the laws of a European country and has a
principal office in a European country; (ii) it derives at
least 50% of its total revenue from business in Europe; or
(iii) the company's equity securities are traded principally
on a stock exchange in Europe. The principal countries in
which the Portfolio invests are France, the United Kingdom,
Germany, the Netherlands, Spain, Sweden, Switzerland and
Italy. The Portfolio invests in at least three separate
countries.
The Portfolio generally invests principally in equity
securities but may also invest without limitation in
fixed-income securities issued or guaranteed by European
governments when the Investment Manager or the sub-advisor
to the Portfolio - Morgan Stanley Dean Witter Investment
Management Inc. (the "Sub-Advisor") - determine such
investments to be appropriate.
The Investment Manager and the Sub-Advisor generally invest
Portfolio assets in companies they believe have a high rate
of earnings growth potential. They also select securities,
which in their view, possess, both on an absolute basis and
as compared with other securities around the world,
attractive price/earnings, price/ cash flow and
price/revenue ratios.
ICON OTHER INVESTMENTS
- --------------------------------------------------------------------------------
1. Up to 35% of the Portfolio's assets may be invested as
follows:
(a) Equity securities issued by non-European issuers, and
government and convertible securities issued by
non-European governmental or private issuers.
(b) Forward foreign currency contracts -- The Portfolio
may invest in forward currency contracts, which
involve the purchase or sale of a specific amount of
foreign currency at the current price with delivery at
a specified future date. The Portfolio may use these
contracts to hedge against adverse price movements in
its portfolio securities and securities it intends to
purchase and the currencies in which they are
denominated.
2. Up to 5% of the Portfolio's assets may be invested in put
and call options with respect to foreign currencies
(limit of 5% of its assets for the purchase of put and
call options).
3. The Portfolio may invest in warrants and acquire warrants
attached to other securities.
23
<PAGE>
ICON SUMMARY OF PRINCIPAL RISKS
- --------------------------------------------------------------------------------
A principal risk factor associated with investment in the
Portfolio relates to the Portfolio's investments in Europe.
In particular, adverse political, social or economic
developments in Europe, or in a particular European country,
could cause a substantial decline in the value of the
Portfolio.
The Portfolio's investments in common stock are also subject
to the risks that affect all common stocks. In particular,
stock prices can fluctuate widely in response to activities
specific to the issuer as well as general market economic
and political conditions.
The conversion to a single European currency by many
European countries could potentially adversely affect the
value and/or increase the volatility of the Portfolio's
investments.
In addition, the Portfolio is subject to the risks
associated with foreign securities generally. These risks
include, among other things, the possibility that the
Portfolio could be adversely affected by changes in currency
exchange rates.
The foregoing risks and others related to the Portfolio's
investments are discussed in greater detail under the
heading "Risk Factors."
24
<PAGE>
(Sidebar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Portfolio's shares has varied from
year to year over the life of the Portfolio.
AVERAGE ANNUAL
TOTAL RETURNS
This table compares the Portfolio's average annual returns with those of a broad
measure of market performance over time.
(End Sidebar)
ICON PAST PERFORMANCE
- --------------------------------------------------------------------------------
The bar chart and table below provide some indication of the
Portfolio's performance history. The Portfolio's past
performance does not indicate how it will perform in the
future.
ANNUAL TOTAL RETURNS - CALENDAR YEARS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1991 1.34%*
1992 3.99%
1993 40.88%
1994 8.36%
1995 25.89%
1996 29.99%
1997 16.07%
1998 23.96%
</TABLE>
* For the period from March 1, 1991 to December 31, 1991.
During the periods shown in the bar chart, the highest
return for a calendar quarter was 20.09% (quarter ended
March 31, 1998) and the lowest return for a calendar quarter
was -15.72% (quarter ended September 30, 1998).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED THE 1998 CALENDAR YEAR)
- -----------------------------------------------------------------------------
LIFE OF THE
PAST 1 YEAR PAST 5 YEARS PORTFOLIO
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
European Growth Portfolio 23.96% 20.60% 18.53%
- -----------------------------------------------------------------------------
Morgan Stanley Capital
International World Index(1) 22.78% 13.95% 10.80%
- -----------------------------------------------------------------------------
Lipper Analytical Services Inc.
Variable Annuity International
Underlying Funds Average(2) 12.54% 8.18% 8.77%
- -----------------------------------------------------------------------------
</TABLE>
(1) The Morgan Stanley Capital International World Index (MSCI) measures
performance for a diverse range of global stock markets including the U.S.,
Canada, Europe, Australia, New Zealand, and the Far East. The Index does
not include any expenses, fees or charges, or reinvestment of dividends.
The Index is unmanaged and should not be considered an investment.
(2) The Lipper Variable Annuity International Funds Average tracks the
performance of funds which invest their assets in securities with primary
trading markets outside of the United States, as reported by Lipper
Analytical Services.
25
<PAGE>
THE PACIFIC GROWTH PORTFOLIO
ICON INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
The investment objective of the Pacific Growth Portfolio is
to maximize the capital appreciation of its investments.
There is no guarantee that the Portfolio will achieve this
objective.
ICON PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Portfolio normally invests at least 65% of its assets in
common stocks and other securities of companies which are
(i) organized under the laws of and have a principal place
of business in Asia, Australia or New Zealand or (ii)
derives at least 50% of their total revenues from business
in such areas. The principal Asian countries include: Japan,
Malaysia, Singapore, Hong Kong, Thailand, the Philippines,
India, Indonesia, Taiwan and South Korea. The Portfolio's
assets are invested in at least three countries. The
Portfolio may invest more than 25% of its assets in Japan,
Hong Kong, South Korea and Taiwan. Thus, the investment
performance of the Portfolio may be subject to the social,
political and economic events occurring in these countries
to a greater extent than other countries.
The Investment Manager and Morgan Stanley Dean Witter
Investment Management Inc. (the "Sub-Advisor") generally
invest Portfolio assets in companies they believe have a
high rate of earnings growth potential. They also select
securities, which in their view, possess, both on an
absolute basis and as compared with other securities around
the world, attractive price/earnings, price/cash flow and
price/revenue ratios.
The Portfolio generally invests principally in equity
securities but may also invest without limitation in
fixed-income obligations issued or guaranteed by an Asian
country or Australia or New Zealand when the Investment
Manager or the Sub-Advisor determine such investments to be
appropriate.
ICON OTHER INVESTMENTS
- --------------------------------------------------------------------------------
1. Up to 35% of the Portfolio's assets may be invested as
follows:
(a) Equity, fixed-income or convertible securities
(including zero coupon securities) of companies
located anywhere in the world, including the United
States.
(b) Forward currency exchange contracts which involve the
purchase or sale of a specific amount of foreign
currency at the current price with a delivery at a
specified future date. The Portfolio may use these
contracts to hedge against adverse price movements in
its Portfolio securities and securities it intends to
purchase and the currencies in which they are
denominated.
2. Up to 5% of the Portfolio's assets may be invested in put
and call options with respect to foreign currencies
(limit of 5% of its assets for the purchase of put and
call options).
3. Investment Companies -- The Portfolio may invest up to
10% of its assets in securities issued by other
investment companies. The Investment Manager and/or
26
<PAGE>
Sub-Advisor may view these investments as necessary or
advisable to participate in certain foreign markets where
foreigners are prohibited from investing directly in the
securities of individual companies without regulatory
approval.
4. The Portfolio may invest in warrants and acquire warrants
attached to other securities.
ICON SUMMARY OF PRINCIPAL RISKS
- --------------------------------------------------------------------------------
A principal risk of investment in the Portfolio relates to
the Portfolio's investments in the Pacific region. In
particular, adverse political, social or economic
developments in the Pacific region or in a particular
Pacific country could cause a substantial decline in the
value of the Portfolio.
The Portfolio's investments in common stock are also subject
to the risks that affect all common stocks. In particular,
stock prices can fluctuate widely in response to activities
specific to the issuer as well as general market economic
and political conditions.
In addition, the Portfolio is subject to the risks
associated with foreign securities generally. These risks
include among other things the possibility that the
Portfolio could be adversely affected by changes in currency
exchange rates. The Portfolio may invest a substantial
portion of its assets in developing countries. These
investments carry greater risks than those associated with
investment in more developed countries.
The foregoing risks and others related to the Portfolio's
investments are discussed in greater detail under the
heading "Risk Factors."
27
<PAGE>
(Sidebar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Portfolio's shares has varied from
year to year over the life of the Portfolio.
AVERAGE ANNUAL
TOTAL RETURNS
This table compares the Portfolio's average annual returns with those of a broad
measure of market performance over time.
(End Sidebar)
ICON PAST PERFORMANCE
- --------------------------------------------------------------------------------
The bar chart and table below provide some indication of the
Portfolio's performance history. The Portfolio's past
performance does not indicate how it will perform in the
future.
ANNUAL TOTAL RETURNS - CALENDAR YEARS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1994 -6.73%*
1995 5.74%
1996 3.89%
1997 -37.70%
1998 -10.40%
</TABLE>
* For the period February 23, 1994 to December 31, 1994.
During the periods shown in the bar chart, the highest
return for a calendar quarter was 25.61% (quarter ended
December 31, 1998) and the lowest return for a calendar
quarter was -27.57% (quarter ended December 31, 1997).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED THE 1998
CALENDAR YEAR)
- -------------------------------------------------------------------
LIFE OF THE
PAST 1 YEAR PORTFOLIO
<S> <C> <C>
- -------------------------------------------------------------------
Pacific Growth Portfolio -10.40% -10.88%
- -------------------------------------------------------------------
Morgan Stanley Capital International
World Index(1) 22.78% 13.46%
- -------------------------------------------------------------------
Morgan Stanley Capital International
Pacific Free Index(2) 1.43% -7.79%
- -------------------------------------------------------------------
Morgan Stanley Capital International
All Country Far East (excluding Japan)
Free Index(3) -7.39% -11.81%
- -------------------------------------------------------------------
Lipper Analytical Services Inc.
Variable Annuity Pacific Region
Underlying Funds Average(4) -7.01% -7.26%
- -------------------------------------------------------------------
</TABLE>
(1) The Morgan Stanley Capital International World Index (MSCI) measures
performance from a diverse range of global stock markets including the
U.S., Canada, Europe, Australia, New Zealand, and the Far East. The Index
does not include any expenses, fees, or charges, or reinvestment of
dividends. The Index is unmanaged and should not be considered an
investment.
(2) The Morgan Stanley Capital International Pacific Free Index (MSCI PF)
measures performance of stock markets in Australia, Hong Kong, Japan,
Malaysia, New Zealand and Singapore, and excludes shares that are not
readily purchased by non-local investors. The Index does not include any
expenses, fees, or charges, or reinvestment of dividends. The Index is
unmanaged and should not be considered an investment.
(3) The Morgan Stanley Capital International All Country Far East Free
(excluding Japan) Index (MSCI ACFEF) measures performance of both the
developed and the emerging markets of the Far East (excluding Japan), and
excludes shares that are not readily purchased by non-local investors. The
Index does not include any expenses, fees, or charges, or reinvestment of
dividends. The Index is unmanaged and should not be considered an
investment.
(4) The Lipper Variable Annuity Pacific Region Funds Average tracks the
performance of funds which concentrate their investments in equity
securities with primary trading markets or operations concentrated in the
Western Pacific Basin region or a single country within this region, as
reported by Lipper Analytical Services.
28
<PAGE>
THE EQUITY PORTFOLIO
ICON INVESTMENT OBJECTIVES
- --------------------------------------------------------------------------------
The primary investment objective of the Equity Portfolio is
growth of capital through investments in common stocks of
companies believed by the Investment Manager to have
potential for superior growth. As a secondary objective the
Equity Portfolio seeks income but only when consistent with
its primary objective. There is no guarantee that the
Portfolio will achieve these objectives.
ICON PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Portfolio normally invests at least 65% of its assets in
equity securities and securities convertible into equity
securities. In selecting investments, the Investment Manager
may employ valuation models based on various economic and
market indicators. The Investment Manager currently 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 Portfolio'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.
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 that 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.
ICON OTHER INVESTMENTS
- --------------------------------------------------------------------------------
1. Up to 35% of the Portfolio's assets may be invested in
corporate debt securities (including zero coupon
securities) rated Aa or better by Moody's or AA or better
by S&P, U.S. Government securities, issued or guaranteed
as to principal and interest by the U.S. Government, its
agencies or instrumentalities, and preferred stocks.
2. Foreign Securities -- The Portfolio may invest in
securities of Canadian issuers registered under the
Securities Exchange Act of 1934 or American Depository
Receipts.
ICON SUMMARY OF PRINCIPAL RISKS
- --------------------------------------------------------------------------------
A principal risk of investment in the Portfolio is
associated with the Portfolio's investments in common stock.
In particular the price of common stocks may
29
<PAGE>
(Sidebar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Portfolio's shares has varied from
year to year over the past 10 years.
AVERAGE ANNUAL
TOTAL RETURNS
This table compares the Portfolio's average annual returns with those of a broad
measure of market performance over time.
(End Sidebar)
fluctuate widely in response to activities specific to the
company as well as general market, economic and political
conditions. Stocks of small and medium capitalization
companies in which the Portfolio may invest pose greater
risk of volatility than is customarily associated with
larger established companies as well as certain other
additional risks.
Another principal risk relates to the Portfolio's
investments in fixed-income securities. Fixed-income
securities involve credit risk and interest rate risk.
Credit risk relates to the possibility that an issuer could
default on its obligation to pay principal and/or interest.
Interest rate risk relates to the possibility that the value
of securities may be adversely affected by fluctuations in
interest rates.
The foregoing risks and others associated with the
Portfolio's investments are discussed in greater detail
under the heading "Risk Factors."
ICON PAST PERFORMANCE
- --------------------------------------------------------------------------------
The bar chart and table below provide some indication of the
Portfolio's performance history. The Portfolio's past
performance does not indicate how it will perform in the
future.
ANNUAL TOTAL RETURNS - CALENDAR YEARS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989 18.83%
1990 -3.62%
1991 59.05%
1992 0.05%
1993 19.72%
1994 -4.91%
1995 42.53%
1996 12.36%
1997 37.43%
1998 30.45%
</TABLE>
During the periods shown in the bar chart, the highest
return for a calendar quarter was 20.65% (quarter ended
March 31, 1991) and the lowest return for a calendar quarter
was -15.83% (quarter ended September 30, 1990).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED THE 1998 CALENDAR YEAR)
- -------------------------------------------------------------------------------
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
Equity Portfolio 30.45% 22.25% 19.54%
- -------------------------------------------------------------------------------
Standard & Poor's 500 Stock Index
(S&P 500)(1) 28.58% 24.05% 19.19%
- -------------------------------------------------------------------------------
Lipper Analytical Services Inc.
Variable Annuity Growth Underlying
Funds Average(2) 25.82% 19.19% 16.95%
- -------------------------------------------------------------------------------
</TABLE>
(1) The Standard and Poor's 500 Stock Index (S&P 500) is a broad-based index,
the performance of which is based on the average performance of 500 widely
held common stocks. The Index does not include any expenses, fees or
charges. The Index is unmanaged and should not be considered an investment.
(2) The Lipper Variable Annuity Growth Fund Average tracks the performance of
funds which primarily invest their assets in companies with long-term
earnings expected to grow significantly faster than the earnings of the
stocks represented in the major unmanaged stock indices, as reported by
Lipper Analytical Services.
30
<PAGE>
THE S&P 500 INDEX PORTFOLIO
ICON INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
The investment objective of the S&P 500 Index Portfolio is
to provide investment results that before expenses,
correspond to the total return (I.E., the combination of
capital changes and income) of the Standard &
Poor's-Registered Trademark- 500 Composite Stock Price
Index. There is no guarantee that the Portfolio will achieve
this objective.
ICON PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Portfolio normally invests at least 80% of its assets in
common stocks included in the S&P 500 Index. The Investment
Manager "passively" manages the Portfolio's assets by
investing in stocks in approximately the same proportion as
they are represented in the S&P 500 Index. For example,
where the common stock of a specific company represents five
percent of the Index, the Investment Manager typically will
invest five percent of the Portfolio's assets in that stock.
The S&P 500 Index is a well-known stock market index that
includes common stocks of 500 companies representing a
significant portion of the market value of all common stocks
publicly traded in the United States.
"Standard & Poor's-Registered Trademark-,"
"S&P-Registered Trademark-," "S&P
500-Registered Trademark-," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and
have been licensed for use by the S&P 500 Index Portfolio.
The Portfolio is not sponsored, endorsed, sold or promoted
by S&P, and S&P makes no representation regarding the
advisability of investing in the Portfolio. (Please see the
Statement of Additional Information which sets forth certain
additional disclaimers and limitations of liabilities on
behalf of S&P.)
ICON OTHER INVESTMENTS
- --------------------------------------------------------------------------------
1. Stock Index Futures -- The Portfolio may purchase and
sell stock index futures to simulate investment in the
S&P 500. Generally stock index futures will be employed
to provide liquidity necessary to meet anticipated
redemptions or for day-to-day operating purposes.
2. Standard & Poor's Depository Receipts ("SPDRs") -- The
Portfolio may purchase interests in a unit investment
trust holding a portfolio of securities linked to the S&P
500 Index. SPDRs closely track the underlying portfolio
of securities, trade like a share of common stock and pay
periodic dividends proportionate to those paid by the
portfolio of stocks that comprise the S&P 500 Index. The
Portfolio may invest up to 10% of its total assets in the
aggregate in SPDRs.
ICON SUMMARY OF PRINCIPAL RISKS
- --------------------------------------------------------------------------------
A principal risk of investing in the Portfolio is associated
with its common stock investments. In general, stock values
fluctuate in response to activities specific to the issuer,
as well as general market, economic and political
conditions. Stock prices can fluctuate widely in response to
these factors.
Another risk of investing in the Portfolio arises from its
operation as a "passively" managed index fund. As such, the
adverse performance of a particular stock
31
<PAGE>
ordinarily will not result in the elimination of the stock
from the Portfolio. The Portfolio will remain invested in
common stocks even when stock prices are generally falling.
Ordinarily, the Investment Manager will not sell the
Portfolio's securities except to reflect additions or
deletions of the stocks that comprise the S&P 500 Index, or
as may be necessary to raise cash to pay Portfolio
shareholders who sell (redeem) Portfolio shares.
The performance of the S&P 500 is a hypothetical number
which does not take into account brokerage commissions and
other transaction costs, custody and other costs of
investing which will be borne by the Portfolio and any
incremental operating costs borne by the Portfolio (e.g.,
management fee, transfer agency and accounting costs).
Accordingly, the performance of the Portfolio may not
correlate directly with the performance of the S&P 500
Index.
For more information about the other risks associated with
the Portfolio, see the "Risk Factors" section.
32
<PAGE>
THE COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO
ICON INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
The investment objective of the Competitive Edge "Best
Ideas" Portfolio is long-term capital growth. There is no
guarantee that the Portfolio will achieve this objective.
ICON PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Portfolio normally invests primarily in the common stock
of U.S. and non-U.S. companies included in the "Best Ideas"
subgroup of "Global Investing: The Competitive Edge," a
research compilation assembled and maintained by Morgan
Stanley Dean Witter ("MSDW") Equity Research.
THE COMPETITIVE EDGE "BEST IDEAS" LIST. MSDW Equity Research
is recognized as a world leader in global financial research
and provides comprehensive research and in-depth knowledge
about general markets and specific companies from around the
world. It believes that companies with a sustainable
competitive edge in the operations of their businesses are
worth more than their weaker competitors. Through its
ongoing research and analysis, MSDW Equity Research has
developed and undertaken a comprehensive study which it
calls "Global Investing: The Competitive Edge" which
represents the list of those companies.
MSDW Equity Research group's research analysts and
strategists presently evaluate approximately 2,100 companies
in 21 industry sectors worldwide. An initial comprehensive
review was conducted in October 1996 and identified 238 of
these companies as having a long-term sustainable
competitive advantage in the global arena (the "Competitive
Edge List"). The criteria used to select companies that have
a global competitive advantage vary according to industry
sector. The Competitive Edge List is currently updated
quarterly. From the Competitive Edge List, MSDW Equity
Research then assembles a subgroup of 40 companies which it
considers at that time to be the most attractive investment
opportunities of the companies identified as having a
long-term sustainable competitive advantage in the global
arena (the "Competitive Edge 'Best Ideas' List"). A list of
the companies contained on the Competitive Edge "Best Ideas"
List as of , 1999 is set forth in the Statement
of Additional Information. In order to respond to changing
market conditions, MSDW Equity Research may update the
Competitive Edge "Best Ideas" List at any time.
It is the intention of the Investment Manager that at least
1% and not more than 5% of the Portfolio's assets will be
invested in each company on the Competitive Edge "Best
Ideas" List, determined at the time of investment and
subject to the specific investment policies and restrictions
described below. However, the Investment Manager may
eliminate or reduce its investment in any company on the
Competitive Edge "Best Ideas" List below 1% of the
Portfolio's assets, in the following circumstances: (a) the
stock is no longer publicly traded, such as in the case of a
leveraged buyout or merger; (b) in the view of the
Investment Manager, there is a material adverse development
with respect to a company, including but not limited to the
downgrading of the company's rating by MSDW Equity Research;
(c) concerns that, in view of the price of the company's
securities, the depth of the market in those securities and
the amount of those securities held or to be held by the
Portfolio, retaining shares of that company or making
additional purchases would be inadvisable because of
liquidity concerns; or (d) the diversification and
33
<PAGE>
other requirements that apply to registered investment
companies. The Investment Manager will monitor on an ongoing
basis all companies falling within any of the circumstances
described in this paragraph, and may increase the
Portfolio's holdings in such company's shares when and if
those conditions cease to exist. The Portfolio will purchase
any security which is added to the Competitive Edge "Best
Ideas" List, and generally will sell a security which is
eliminated from the Competitive Edge "Best Ideas" List as
soon as practicable after the Competitive Edge "Best Ideas"
List has been updated by MSDW Equity Research. Accordingly,
securities may be purchased and sold by the Portfolio when
such purchases and sales would not be made under traditional
investment criteria. The Investment Manager will not have
access to the Competitive Edge "Best Ideas" List prior to
its quarterly update by MSDW Equity Research.
The Portfolio may at times purchase securities that are not
included on the Competitive Edge "Best Ideas" List but are
on the Competitive Edge List. In the event no securities the
investment Manager deems to be suitable are on the
Competitive Edge List securities outside the list may be
purchased. Securities that are not on the Competitive Edge
"Best Ideas" List generally will not exceed 35% of the
Portfolio's assets.
ICON OTHER INVESTMENTS
- --------------------------------------------------------------------------------
Forward Currency Contracts -- The Portfolio's investments
may include forward currency contracts which involve the
purchase or sale of a specific amount of foreign currency at
a specified price with delivery at a specified future date.
The Portfolio may use these contracts to hedge against
adverse price movements in its portfolio securities and the
currencies in which they are denominated.
ICON SUMMARY OF PRINCIPAL RISKS
- --------------------------------------------------------------------------------
A principal risk of investment in the Portfolio is
associated with the Portfolio's investments in common
stocks. In particular the prices of common stocks may
fluctuate widely in response to activities specific to the
company as well as general market, economic and political
conditions.
The Portfolio invests principally in securities included on
the Competitive Edge "Best Ideas" List which currently
consists of 40 companies. As a result of the small universe
of stocks in which the Portfolio invests it may be subject
to greater risks than would a more diversified company. At
times the Portfolio may be restricted in its ability to
purchase or sell securities on the Competitive Edge "Best
Ideas" List as a result of activities of affiliates of the
Investment Manager.
The Portfolio may invest a substantial portion of its assets
in foreign securities. Foreign securities investments may be
adversely affected by changes in currency exchange rates. In
addition, investment in foreign securities may be adversely
affected by among other things political, social and
economic developments abroad.
The foregoing risks and others associated with the
Portfolio's investments are discussed in greater detail
under the section entitled "Risk Factors."
34
<PAGE>
THE AGGRESSIVE EQUITY PORTFOLIO
ICON INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
The investment objective of the Aggressive Equity Portfolio
is long-term capital growth. There is no guarantee that the
Portfolio will achieve this objective.
ICON PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Portfolio normally invests at least 65% of its assets in
the equity securities of companies covered by Morgan Stanley
Dean Witter ("MSDW") Equity Research that the Investment
Manager believes offer the potential for superior earnings
growth. The equity securities in which the Portfolio may
invest include common stocks, preferred stocks, convertible
securities, rights and warrants. No more than 25% of the
Portfolio's assets may be invested in foreign equity or
fixed-income securities denominated in a foreign currency
and traded primarily in non-U.S. markets.
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 are trading at attractive prices
relative to their earnings-growth potential. After
identifying industries, the Investment Manager then selects
individual companies. At this stage, the Investment Manager
will review and assess the available analytical research
reports and investment recommendations from MSDW Equity
Research, as well as from the equity research departments of
other recognized securities firms. Companies are selected by
the Investment Manager utilizing this research as well as
its own industry and company analysis including an
evaluation of valuation screens and prospective company
fundamentals.
MSDW EQUITY RESEARCH. MSDW Equity Research is recognized as
a world leader in global financial research and provides
comprehensive research and in-depth knowledge about general
markets and specific companies from around the world. MSDW
Equity Research's analysts and strategists presently
evaluate approximately 2,100 companies in 21 industry
sectors worldwide. While MSDW Equity Research is an
affiliate of the Investment Manager, MSDW Equity Research
has no role in the selection of securities for the
Portfolio.
ICON OTHER INVESTMENTS
- --------------------------------------------------------------------------------
Up to 35% of the Portfolio's assets may be invested as
follows:
1. (a) U.S. and foreign equity securities (subject to the
25% overall limit on foreign securities described
above) not covered by MSDW Equity Research, (b) fixed-
income securities of U.S. companies, (c) fixed-income
securities of foreign companies and governments and
international organizations, (d) U.S. Government
securities, issued or guaranteed as to principal and
interest by the U.S. Government, its agencies or
instrumentalities, and (e) real estate investment
trusts (commonly known as "REITs"). However, no more
than 5% of the Portfolio's assets may be invested in
debt securities rated lower than investment grade, or
if unrated of comparable quality as determined by the
Investment Manager (commonly known as "junk bonds").
35
<PAGE>
2. Forward currency contracts which involve the purchase
or sale of a specific amount of foreign currency at a
specified price with delivery at a specified future
date. The Portfolio may use these contracts to hedge
against adverse price movements in its portfolio
securities and the currencies in which they are
denominated.
3. Put and call options and futures with respect to
financial instruments, stock and interest rate indexes
and foreign currencies (limit of 5% of its assets for
the purchase of put and call options). Options and
futures may be used to generate income or to seek to
protect against a decline in security or currency
prices or an increase in prices of securities or
currencies that may be purchased.
ICON SUMMARY OF PRINCIPAL RISKS
- --------------------------------------------------------------------------------
A principal risk of investment in the Portfolio is
associated with the Portfolio's investments in common
stocks. In particular, the prices of common stocks may
fluctuate widely in response to activities specific to the
company as well as general market, economic and political
conditions.
The Portfolio may invest a substantial portion of its assets
in securities issued by small and medium sized companies.
Investment in small and medium size companies involves
greater risk of volatility than is customarily associated
with investment in larger established companies as well as
certain other additional risks.
The foregoing risks and other risks associated with the
Portfolio's investments are discussed in detail under the
heading "Risk Factors."
36
<PAGE>
THE STRATEGIST PORTFOLIO
ICON INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
The investment objective of the Strategist Portfolio is high
total investment return through a fully managed investment
policy utilizing equity, fixed-income and money market
securities and the writing of covered call and put options.
There is no guarantee that the Portfolio will achieve this
objective.
ICON PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Investment Manager actively allocates the Portfolio's
assets among the major asset categories of equity
securities, fixed-income securities and money market
instruments. Assets are allocated by the Investment Manager
based on among other things, its assessment of economic and
market trends on different sectors of the market. There is
not limit as to the percentage of assets that may be
allocated to any one asset class. The Investment Manager
does not, however, currently intend to write covered call or
put options.
Within the equity sector, the Investment Manager actively
allocates funds to those economic sectors it expects to
benefit from major trends and to individual stocks which it
considers to have superior investment potential.
Within the fixed-income sector of the market, the Investment
Manager seeks to maximize the return on its investments by
adjusting maturities and coupon rates as well as by
exploiting yield differentials among different types of
investment grade bonds, including short-term and
intermediate-term bonds.
Within the money market sector of the market, the Investment
Manager seeks to maximize returns by exploiting spreads
among short-term instruments.
Securities in which the Portfolio may invest include common
stocks, preferred stocks, convertible securities, investment
grade debt securities (including zero coupon securities),
U.S. Government securities, real estate investment trusts
(commonly known as "REITs") and money market instruments.
The Portfolio is not limited as to the maturities of the
U.S. government securities and other debt securities in
which it may invest.
ICON OTHER INVESTMENTS
- --------------------------------------------------------------------------------
Up to 20% of the Portfolio's assets may be invested in
securities issued by foreign governments and foreign private
issuers but not more than 10% of its assets in securities
denominated in a foreign currency.
ICON SUMMARY OF PRINCIPAL RISKS
- --------------------------------------------------------------------------------
A principal risk of investment in the Portfolio is
associated with the Portfolio's investments in common
stocks. In particular, the prices of common stocks may
fluctuate widely in response to activities specific to the
company as well as general market, economic and political
conditions.
37
<PAGE>
(Sidebar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Portfolio's shares has varied from
year to year over the past 10 years.
AVERAGE ANNUAL
TOTAL RETURNS
This table compares the Portfolio's average annual returns with those of a broad
measure of market performance over time.
(End Sidebar)
The Portfolio's investment in fixed-income securities are
subject to credit risk and interest rate risk. Credit risk
refers to a possibility that the issuer of a security will
be unable to make interest payments and/or repay the
principal on its debts. Interest rate risk refers to
fluctuations in the value of a fixed-income security
resulting from changes in the general level of interest
rates.
The foregoing risks and others associated with the
Portfolio's investments are discussed in detail under the
heading "Risk Factors."
ICON PAST PERFORMANCE
- --------------------------------------------------------------------------------
The bar chart and table below provide some indication of the
Portfolio's performance history. The Portfolio's past
performance does not indicate how it will perform in the
future.
ANNUAL TOTAL RETURNS - CALENDAR YEARS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989 10.67%
1990 1.56%
1991 28.26%
1992 7.24%
1993 10.38%
1994 3.94%
1995 9.40%
1996 15.20%
1997 15.71%
1998 26.55%
</TABLE>
During the periods shown in the bar chart, the highest
return for a calendar quarter was 17.60% (quarter ended
December 31, 1998) and the lowest return for a calendar
quarter was -8.25% (quarter ended September 30, 1990).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED THE 1998 CALENDAR YEAR)
- -------------------------------------------------------------------------------
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
Strategist Portfolio 26.55% 13.48% 12.38%
- -------------------------------------------------------------------------------
Standard & Poor's 500 Stock Index
(S&P 500)(1) 28.58% 24.05% 19.19%
- -------------------------------------------------------------------------------
Lehman Brothers Government/
Corporate Bond Index(2) 9.47% 7.30% 9.33%
- -------------------------------------------------------------------------------
Lipper Analytical Services Inc.
Variable Annuity Flexible
Portfolio Underlying Fund
Average(3) 13.05% 12.24% 12.56%
- -------------------------------------------------------------------------------
</TABLE>
(1) The Standard and Poor's 500 Stock Index (S&P 500) is a broad-based index,
the performance of which is based on the average performance of 500 widely
held common stocks. The Index does not include any expenses, fees or
charges. The Index is unmanaged and should not be considered an investment.
(2) The Lehman Brothers Government/Corporate Bond Index tracks the performance
of government and corporate obligations, including U.S. government agency
and U.S. treasury securities and corporate and yankee bonds, with
maturities of one to ten years. 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 Variable Annuity Flexible Portfolio Funds Average tracks the
performance of funds which allocate their investments across various asset
classes, including domestic common stocks, bonds, and money market
instruments, with a focus on total return, as reported by Lipper Analytical
Services.
38
<PAGE>
ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS
FUNDAMENTAL INVESTMENT POLICY. The investment objective of
each Portfolio is a fundamental policy which may not be
changed without the approval of shareholders.
INVESTMENT DISCRETION. In pursuing each Portfolio'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
strategies it uses. For example, the Investment Manager in
its discretion may determine to use some permitted trading
strategies while not using others. The Sub-Advisor has a
similar degree of discretion.
DEFENSIVE INVESTING. Each Portfolio (other than the S&P 500
Index Portfolio) may take temporary "defensive" positions in
attempting to respond to adverse market conditions. Each
Portfolio may invest any amount of its assets in cash or
money market instruments in a defensive posture when the
Investment Manager or Sub-Advisor, as the case may be,
believes it advisable to do so. This could have the effect
of reducing the benefit of an upswing in the market.
INVESTMENT POLICIES. The percentage limitations relating to
the composition of a Portfolio apply at the time a Portfolio
acquires an investment. Subsequent percentage changes that
result from market fluctuations or changes in assets will
not require a Portfolio to sell any Portfolio security. A
Portfolio may change its principal investment strategies
without shareholder approval; however you would be notified
of any change.
PORTFOLIO TURNOVER. Each Portfolio's turnover rate is not
expected to exceed the following respective percentages
under normal circumstances.
<TABLE>
<S> <C>
The Short-Term Bond Portfolio 100%
- ---------------------------------------------------------------
The Quality Income Plus Portfolio
300%
- ---------------------------------------------------------------
The High Yield Portfolio
300%
- ---------------------------------------------------------------
The Utilities Portfolio
100%
- ---------------------------------------------------------------
The Income Builder Portfolio
90%
- ---------------------------------------------------------------
The Dividend Growth Portfolio
90%
- ---------------------------------------------------------------
The Capital Growth Portfolio
200%
- ---------------------------------------------------------------
The Global Dividend Growth Portfolio
100%
- ---------------------------------------------------------------
The European Growth Portfolio
100%
- ---------------------------------------------------------------
The Pacific Growth Portfolio
100%
- ---------------------------------------------------------------
The Equity Portfolio
300%
- ---------------------------------------------------------------
The S&P 500 Index Portfolio
100%
- ---------------------------------------------------------------
The Competitive Edge "Best Ideas" Portfolio
100%
- ---------------------------------------------------------------
The Aggressive Equity Portfolio
400%
- ---------------------------------------------------------------
The Strategist Portfolio
400%
- ---------------------------------------------------------------
</TABLE>
A high turnover rate will increase a Portfolio's costs. It
may also increase a Portfolio's capital gains which will be
passed along to Portfolio shareholders.
39
<PAGE>
RISK FACTORS
GENERAL RISKS. Each Portfolio's share price will fluctuate
with changes in the market value of its portfolio
securities. When you sell Portfolio shares, they may be
worth less than what you paid for them and, accordingly, you
can lose money investing in this Fund.
The performance of each Portfolio also will depend on
whether or not the Investment Manager or Sub-Advisor, as the
case may be, is successful in pursuing each Portfolio's
investment strategy.
Shares of the Portfolios are not bank deposits and are not
guaranteed or insured by any bank, governmental entity, or
the FDIC.
RISKS OF YEAR 2000. Each Portfolio could be adversely
affected if the computer systems necessary for the efficient
operation of the Investment Manager, the Sub-Advisor, the
Fund's other service providers and the markets and
individual and governmental issuers in which the Portfolios
invest 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 and the Portfolios, the Investment Manager, the
Sub-Advisor and affiliates are working hard to avoid any
problems and to obtain assurances from their service
providers that they are taking similar steps.
The risks set forth below are applicable to a Portfolio only
to the extent the Portfolio invests in the investment
described. See "The Portfolios and Their Management" for a
description of the investments which each Portfolio may
make.
RISKS OF FIXED-INCOME SECURITIES. All fixed-income
securities 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/or 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 price of most fixed-income securities
goes down. When the general level of interest rates goes
down, the price of most fixed-income securities goes up.
(Zero coupon securities are typically subject to greater
price fluctuations than comparable securities that pay
interest.) Accordingly, a rise in the general level of
interest rates may cause the price of a Portfolio's
fixed-income securities to fall substantially. As merely
illustrative of the relationship between fixed-income
securities and interest rates, the following table shows how
interest rates affect bond prices.
40
<PAGE>
HOW INTEREST RATES AFFECT BOND PRICES
<TABLE>
<CAPTION>
PRICE PER $1,000 OF A BOND IF
INTEREST RATES:
-------------------------------------
INCREASE DECREASE
----------------- -----------------
BOND MATURITY COUPON 1% 2% 1% 2%
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
1 year N/A $ 1,000 $ 1,000 $ 1,000 $ 1,000
- -------------------------------------------------------------------------------
5 years 4 1/4% $ 967 $ 934 $ 1,038 $ 1,076
- -------------------------------------------------------------------------------
10 years 4 3/4% $ 930 $ 867 $ 1,074 $ 1,155
- -------------------------------------------------------------------------------
30 years 5 1/4% $ 865 $ 756 $ 1,166 $ 1,376
- -------------------------------------------------------------------------------
</TABLE>
Coupons reflect yields on Treasury securities as of December
31, 1998. The table is not representative of price changes
for mortgage-backed securities principally because of
prepayments, and it is not representative of junk bonds. In
addition, the table is an illustration and does not
represent expected yields or share price changes of any
Morgan Stanley Dean Witter mutual fund.
RISKS OF MORTGAGE-BACKED SECURITIES. Mortgage-backed
securities have different risk characteristics than
traditional debt securities. Although generally the value of
fixed-income securities increases during periods of falling
interest rates and decreases during periods of rising
interest rates, this is not always the case with
mortgage-backed securities. This is due to the fact that
principal on underlying mortgages may be prepaid at any time
as well as other factors. Generally, prepayments will
increase during a period of falling interest rates and
decrease during a period of rising interest rates. The rate
of prepayments also may be influenced by economic and other
factors. Prepayment risk includes the possibility that, as
interest rates fall, securities with stated interest rates
may have the principal prepaid earlier than expected,
requiring the Fund to invest the proceeds at generally lower
interest rates.
Investments in mortgage-backed securities are made based
upon, among other things, expectations regarding the rate of
prepayments on underlying mortgage pools. Rates of
prepayment, faster or slower than expected by the Investment
Manager, could reduce a Portfolio's yield, increase the
volatility of the Portfolio and/ or cause a decline in net
asset value. Certain mortgage-backed securities in which a
Portfolio may invest may be more volatile and less liquid
than other traditional types of debt securities.
RISKS OF JUNK BONDS. A Portfolio's investments in securities
rated lower than investment grade or if unrated of
comparable quality as determined by the Investment Manager
(commonly known as "junk bonds") pose significant risks. The
prices of junk bonds are likely to be more sensitive to
adverse economic changes or individual corporate
developments than higher rated securities. During an
economic downturn or substantial period of rising interest
rates, junk bond issuers and, in particular, highly
leveraged issuers may experience financial stress that would
adversely affect their ability to service their principal
and interest payment obligations, to meet their projected
business goals or to obtain additional financing. In the
event of a default, the Portfolio may incur additional
expenses to seek recovery. The secondary market for junk
bonds may be less liquid than the markets for higher quality
securities and, as such, may have an adverse effect on the
market prices of certain securities. The Rule 144A
securities could have the effect of increasing the level of
Portfolio illiquidity to the extent a Portfolio may be
unable to find qualified institutional buyers interested in
purchasing the securities. The illiquidity of the market may
also adversely affect the ability of the Fund's Trustees to
arrive at a fair value for certain junk bonds at certain
times and could make it difficult for the Portfolios to sell
certain securities. In addition, periods of economic
uncertainty and change probably would result in an increased
volatility of market prices of high yield securities and a
corresponding volatility in a Portfolio's net asset value.
41
<PAGE>
RISKS OF SECURITIES RATED IN THE LOWEST INVESTMENT GRADE
CATEGORY. Investments in the fixed-income securities rated
in the lowest investment grade category by Moody's or S&P
may have speculative characteristics and therefore changes
in economic or other circumstances are more likely to weaken
their capacity to make principal and interest payments than
would be the case with investments in securities with higher
credit ratings.
RISKS OF FOREIGN SECURITIES. Foreign securities (including
depository receipts) involve risks in addition to the risks
associated with domestic securities. One additional risk is
currency risk. While the price of Portfolio shares is quoted
in U.S. dollars, a Portfolio 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 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.
The foreign securities in which certain of the Portfolios
may invest (in particular the Pacific Growth Portfolio) may
be issued by companies located in developing countries.
Compared to the United States and other developed countries,
developing countries may have relatively unstable
governments, economies based on only a few industries and
securities markets that trade a small number of securities.
Prices of these securities tend to be especially volatile
and, in the past, securities in these countries have offered
greater potential loss (as well as gain) than securities of
companies located in developed countries. 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 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 a Portfolio.
RISKS OF SMALL & MEDIUM CAPITALIZATION COMPANIES. A
Portfolio's investments in smaller and medium sized
companies carry more risk than investments in larger
companies. While some of a Portfolio's holdings in these
companies may be listed on a national securities exchange,
such securities are more likely to be traded in the
over-the-counter market. The low market liquidity of these
securities may have an adverse impact on a Portfolio's
ability to sell certain securities at favorable prices and
may also make it difficult for a Portfolio to obtain market
quotations based on actual trades, for purposes of valuing a
Portfolio's securities. Investing in lesser-known, smaller
and medium capitalization companies involves greater risk of
volatility of a Portfolio's net asset value than is
customarily associated with larger, more established
companies. Often smaller and medium capitalization companies
and the industries in which they are focused are still
evolving and, while this may offer better growth potential
than larger, more established companies, it also may make
them more sensitive to changing market conditions.
42
<PAGE>
RISKS OF OPTIONS AND FUTURES. If a Portfolio invests in
options and/or futures, its participation in these markets
would subject the Portfolio to certain risks. The Investment
Manager's predictions of movements in the direction of the
stock, bond, currency or interest rate markets may be
inaccurate, and the adverse consequences to the Portfolio
(e.g., a reduction in the Portfolio's net asset value or a
reduction in the amount of income available for
distribution) may leave the Portfolio in a worse position
than if these strategies were not used. Other risks inherent
in the use of options and futures include, for example, the
possible imperfect correlation between the price of options
and futures contracts and movements in the prices of the
securities being hedged, and the possible absence of a
liquid secondary market for any particular instrument.
Certain options may be over-the-counter options, which are
options negotiated with dealers; there is no secondary
market for these investments.
RISKS OF FORWARD CURRENCY CONTRACTS. A Portfolio's
participation in forward currency contracts also involves
risks. If the Investment Manager employs a strategy that
does not correlate well with the Fund's investments or the
currencies in which the investments are denominated,
currency contracts could result in a loss. The contracts
also may increase the Fund's volatility and may involve a
significant risk.
RISKS OF REAL ESTATE INVESTMENT TRUSTS ("REITS"). The
performance of any Portfolio REIT holdings ultimately
depends on the types of real property in which the REITs
invest and how well the property is managed. A general
downturn in real estate values also can hurt REIT
performance.
RISKS OF UTILITIES COMPANIES. The public utilities industry
as a whole has certain characteristics and risks particular
to that industry. Unlike industrial companies, the rates
which utility companies may charge their customers generally
are subject to review and limitation by governmental
regulatory commissions. Although rate changes of a utility
usually fluctuate in approximate correlation with financing
costs, due to political and regulatory factors rate changes
ordinarily occur only following a delay after the changes in
financing costs. This factor will tend to favorably affect a
utility company's earnings and dividends in times of
decreasing costs, but conversely will tend to adversely
affect earnings and dividends when costs are rising. In
addition, the value of public utility debt securities (and,
to a lesser extent, equity securities) tends to have an
inverse relationship to the movement of interest rates.
Among the risks affecting the utilities industry are the
following: risks of increases in fuel and other operating
costs; the high cost of borrowing to finance capital
construction during inflationary periods; restrictions on
operations and increased costs and delays associated with
compliance with environmental and nuclear safety
regulations; the difficulties involved in obtaining natural
gas for resale or fuel for generating electricity at
reasonable prices; the risks in connection with the
construction and operation of nuclear power plants; the
effects of energy conservation and the effects of regulatory
changes, such as possible adverse effects of profits on
recent increased competition within the telecommunications,
electric and natural gas industries and the uncertainties
resulting from companies within these industries
diversifying into new domestic and international businesses,
as well as from agreements by many such companies linking
future rate increases to inflation or other factors not
directly related to the actual operating profits of the
enterprise.
ADDITIONAL RISKS OF COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO.
The net asset value of the Competitive Edge "Best Ideas"
Portfolio will fluctuate depending upon, among other things,
the performance of the securities included on the
Competitive Edge "Best Ideas" List, which currently consists
of only 40 companies. As a result of the small universe of
stocks in which the Portfolio invests, it may be subject to
43
<PAGE>
greater risks than would a more diversified company. There
can be no assurance that the securities contained in the
Competitive Edge "Best Ideas" List will perform as
anticipated. The selection of companies on the Competitive
Edge "Best Ideas List is a subjective determination by MSDW
Equity Research. Past performance of the securities and
issuers included in the Competitive Edge "Best Ideas" List
cannot be used to predict future results of the Portfolio,
which is actively managed by the Investment Manager and the
results of which are expected to vary from the performance
of the Competitive Edge "Best Ideas" List.
The activities of affiliates of the Investment Manager,
including but not limited to Dean Witter Reynolds Inc. or
Morgan Stanley & Co. Incorporated, may from time to time
limit the Portfolio's ability to purchase or sell securities
on the Competitive Edge "Best Ideas" List. For instance,
when Dean Witter Reynolds Inc. or Morgan Stanley & Co.
Incorporated or one of their affiliates is engaged in an
underwriting or other distribution of stock of an issuer,
the Investment Manager may be prohibited from purchasing the
stock of that issuer for the Portfolio. In addition, the
Competitive Edge "Best Ideas" List is available to other
clients of MSDW and its affiliates, including the Investment
Manager, as well as the Portfolio. The lists are also
subject to restrictions related to MSDW's other businesses
and particular securities may or may not be on the lists due
to other business concerns of, or legal restrictions
applicable to, MSDW.
As a diversified financial services firm, with three primary
businesses - securities, asset management and credit
services - MSDW provides a wide range of financial services
to issuers of securities and investors in securities. MSDW
and other associated with it may create markets or
specialize in, have positions in and affect transactions in
securities of companies included on its research lists and
may also perform or seek to perform investment banking
services for those companies. Within the last three years
MSDW may have managed or co-managed public security
offerings for companies included on their research lists,
and they or their employees may have a long or short
position on holdings in the securities, or options on
securities, or other related investments of companies
included on their research lists.
44
<PAGE>
INVESTMENT MANAGEMENT
Morgan Stanley Dean Witter Advisors Inc. is the Investment
Manager to each Portfolio. Each Portfolio has retained the
Investment Manager to provide administrative services,
manage its business affairs and (except for the Pacific and
European Portfolios) 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, NY 10048.
Each of the Pacific Growth and European Growth Portfolios
has retained the Investment Manager to supervise the
investment of its assets. The Investment Manager has, in
turn, contracted with the Sub-Advisor - Morgan Stanley Dean
Witter Investment Management Inc. - to invest each
Portfolio's assets, including the placing of orders for the
purchase and sale of portfolio securities. The Sub-Advisor
also is a subsidiary of Morgan Stanley Dean Witter & Co. Its
main business office is located at 1221 Avenue of the
Americas, New York, New York.
(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 $ billion in assets under management
or administration as of , 1999.
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC.
The Sub-Advisor, together with its institutional investment management
affiliates, manages more than $150 billion primarily for employee benefit plans,
investment companies, endowments, foundations and wealthy individuals.
(End Sidebar)
Each Portfolio pays the Investment Manager a monthly
management fee as full compensation for the services and
facilities furnished to each Portfolio, and for Portfolio
expenses assumed by the Investment Manager. The fee is based
on the Portfolio's average daily net assets. For the fiscal
year ended December 31, 1998 each Portfolio (other than the
Short-Term Bond Portfolio and the Aggressive Equity
Portfolio which, as of the date of this PROSPECTUS, had not
yet commenced operations) accrued total compensation to the
Investment Manager as set forth in the following table. The
contractual fee rate for the Short-Term Bond Portfolio is
0.45% of average daily net assets and for the Aggressive
Equity Portfolio is 0.75% of average daily net assets.
<TABLE>
<CAPTION>
MANAGEMENT FEES AS A
PERCENTAGE OF
AVERAGE
NAME OF PORTFOLIO DAILY NET ASSETS
<S> <C>
- ------------------------------------------------------------------------
The Money Market Portfolio %
- ------------------------------------------------------------------------
The Quality Income Plus Portfolio %
- ------------------------------------------------------------------------
The High Yield Portfolio %
- ------------------------------------------------------------------------
The Utilities Portfolio %
- ------------------------------------------------------------------------
The Income Builder Portfolio %
- ------------------------------------------------------------------------
The Dividend Growth Portfolio %
- ------------------------------------------------------------------------
The Global Dividend Growth Portfolio %
- ------------------------------------------------------------------------
The Capital Growth Portfolio %
- ------------------------------------------------------------------------
The European Growth Portfolio1(1) %(2)
- ------------------------------------------------------------------------
The Pacific Growth Portfolio(3) %(2)
- ------------------------------------------------------------------------
The Equity Portfolio %
- ------------------------------------------------------------------------
The S&P 500 Index Portfolio(4) 0%(5)
- ------------------------------------------------------------------------
The Competitive Edge "Best Ideas" Portfolio(4) 0%
- ------------------------------------------------------------------------
The Strategist Portfolio %
- ------------------------------------------------------------------------
</TABLE>
1 Effective December 1, 1998 the investment management fee was reduced to
0.95% of the Portfolio's daily net assets up to $500 million and 0.90% of
the Portfolio's daily net assets over $500 million. Previously the fee had
been 1.00% of daily net assets up to $500 million and 0.95% of daily net
assets over $500 million.
45
<PAGE>
<TABLE>
<S> <C>
2 40% of the Investment Manager's compensation is paid to the Sub-Advisor.
3 Effective November 1, 1998 the investment management fee was reduced from
1.00% of daily net assets to 0.95%.
4 The S&P 500 Index Portfolio and the Competitive Edge "Best Ideas" Portfolio
commenced operations on May 18, 1998. The Investment Manager has undertaken
to assume all expenses of each of these Portfolios (except for any
brokerage fees) and to waive the compensation provided for each of these
Portfolios in its Management Agreement with the Fund until such time as the
pertinent Portfolio has $50 million of net assets or until April 30, 1999,
whichever occurs first. The S&P 500 Index Portfolio attained $50 million of
net assets on January 5, 1999. As of the date of this PROSPECTUS the
Competitive Edge "Best Ideas" Portfolio had not attained $50 million of net
assets.
5 The Investment Manager has permanently undertaken to cap total expenses of
the S&P 500 Index Portfolio (other than brokerage fees) at 0.50% of average
daily net assets.
</TABLE>
The following individuals are primarily responsible for the
day-to-day management of certain of the Portfolios of the
Fund. Except as otherwise noted, each of these individuals
has been a primary portfolio manager of the designated
Portfolio for over five years or since the inception of the
Portfolio (if less than five years) and has been a portfolio
manager with the Investment Manager for over five years.
SHORT-TERM BOND PORTFOLIO - Rochelle G. Siegel, Senior Vice
President of the Investment Manager, is the primary
portfolio manager of the Portfolio.
QUALITY INCOME PLUS PORTFOLIO - Paula LaCosta, Vice
President of the Investment Manager, is the primary
portfolio manager of the Portfolio.
HIGH YIELD PORTFOLIO - Peter M. Avelar, Senior Vice
President of the Investment Manager, is the primary
portfolio manager of the Portfolio.
UTILITIES PORTFOLIO - Edward F. Gaylor, Senior Vice
President of the Investment Manager, is the primary
portfolio manager of the Portfolio.
INCOME BUILDER PORTFOLIO - Paul D. Vance, Senior Vice
President of the Investment Manager, and Mr. Avelar have
been the primary portfolio co-managers of the Portfolio
since its inception and since January 1998, respectively.
DIVIDEND GROWTH PORTFOLIO - Mr. Vance is the primary
portfolio manager of the Portfolio.
CAPITAL GROWTH PORTFOLIO - Peter Hermann, Vice President of
the Investment Manager, has been the primary portfolio
manager of the Portfolio since May 1996.
GLOBAL DIVIDEND GROWTH PORTFOLIO - Mr. Vance and Matthew T.
Haynes, Vice President of the Investment Manager, have been
the primary portfolio co-managers of the Portfolio since its
inception and since May 1997, respectively.
EUROPEAN GROWTH PORTFOLIO - Jeremy Lodwick, a principal of
the Sub-Advisor, has been the primary portfolio manager of
the Portfolio since December 1998. Prior to joining the
Sub-Advisor, Mr. Lodwick was a portfolio manager with Morgan
Grenfell Investment Services Limited for over five years,
where he was the Portfolio's primary portfolio manager from
April 1994 to April 1998.
PACIFIC GROWTH PORTFOLIO - Timothy Jensen, a Principal of
the Sub-Advisor, and Ashutosh Sinha, Vice President of the
Sub-Advisor, are members of the Sub-Advisor's emerging
markets group. Mr. Jensen and Mr. Sinha have been the
primary portfolio managers of the Portfolio since November
1998. Prior to joining the
46
<PAGE>
Sub-Advisor in January 1998, Mr. Jensen was a Partner at
Ardsley Partners (July 1994 - December 1997) and prior
thereto was a Vice President of Bankers Trust (June 1993 -
June 1994). Mr. Sinha was an analyst at SBI Funds Management
Ltd. (1993 - 1995) prior to joining the Sub-Advisor in June
1995.
EQUITY PORTFOLIO - Michelle Kaufman, Vice President of the
Investment Manager, has been a primary portfolio manager of
the Portfolio since May 1996, and has been the sole primary
portfolio manager of the Portfolio since December 1996.
S&P 500 INDEX PORTFOLIO - Kenton J. Hinchliffe, Senior Vice
President of the Investment Manager, is the primary
portfolio manager of the Portfolio and has been assisted by
Kevin Jung, Vice President of the Investment Manager, since
October 1998. Mr. Jung has been a portfolio manager with the
Investment Manager since September 1997, prior to which time
he was a Vice President and portfolio manager with UBS Asset
Management (NY) Inc. (April 1993 - August 1997).
COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO - Mark Bavoso,
Senior Vice President of the Investment Manager, is the
primary portfolio manager of the Portfolio.
AGGRESSIVE EQUITY PORTFOLIO - Anita H. Kolleeny, Senior Vice
President of the Investment Manager, is the primary
portfolio manager of the Portfolio and co-management is
provided by Ms. Kaufman.
STRATEGIST PORTFOLIO - Mr. Bavoso has been the primary
portfolio manager of the Portfolio since September 1995.
47
<PAGE>
SHAREHOLDER INFORMATION
ICON PRICING FUND SHARES
- --------------------------------------------------------------------------------
The price of shares of each Portfolio called "net asset
value," is based on the value of its portfolio securities.
The net asset value for each Portfolio is calculated once
daily at 4:00 p.m. Eastern time on each day 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 each Portfolio's securities (other than the
Money Market Portfolio) is based on the securities' market
price when available. When a market price is not readily
available, including circumstances under which the
Investment Manager (or, if applicable, the Sub-Advisor)
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 applicable Portfolio's net
asset value will reflect certain portfolio securities' fair
value rather than their market price. An exception to the
general policy of using market prices concerns each
Portfolio's 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.
The Money Market Portfolio utilizes amortized cost in
determining the value of its portfolio securities. The
amortized cost valuation method involves valuing a debt
obligation in reference to its acquisition cost rather than
market forces.
ICON DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
Dividends from net investment income and capital gains
distributions, if any, are declared and paid as follows:
<TABLE>
<CAPTION>
NET REALIZED
CAPITAL GAINS
DIVIDENDS DISTRIBUTIONS
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO Declared and paid on each day the New Declared and paid at least once per
York Stock Exchange is open to calendar year, net short-term gains may
shareholders as of the close of business be paid more frequently
the preceding business day
- ----------------------------------------------------------------------------------------------------------------------------
SHORT-TERM BOND, QUALITY INCOME PLUS Declared and paid monthly Declared and paid at least once per year
AND HIGH YIELD PORTFOLIOS
- ----------------------------------------------------------------------------------------------------------------------------
UTILITIES, INCOME BUILDER, DIVIDEND Declared and paid quarterly Declared and paid at least once per
GROWTH, GLOBAL DIVIDEND GROWTH, EQUITY calendar year
AND STRATEGIST PORTFOLIOS
- ----------------------------------------------------------------------------------------------------------------------------
CAPITAL GROWTH, EUROPEAN GROWTH, Declared and paid at least once per Declared and paid at least once per
PACIFIC GROWTH, S&P 500 INDEX, calendar year calendar year
COMPETITIVE EDGE "BEST IDEAS" AND
AGGRESSIVE EQUITY PORTFOLIOS
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
ICON TAX CONSEQUENCES
- --------------------------------------------------------------------------------
Each Portfolio expects to qualify under IRS regulations
pursuant to which the Portfolios will not be required to pay
any federal income tax on their income and capital gains.
For information concerning the federal income tax
consequences to holders of the underlying variable annuity
or variable life insurance contracts, see the accompanying
prospectus for the applicable contract.
49
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand each
Portfolio's financial performance for the past 5 fiscal years of the
Fund. Certain information reflects financial results for a single
Portfolio share. The total returns in the tables represent the rate an
investor would have earned or lost on an investment in each Portfolio
(assuming reinvestment of all dividends and distributions).
Further information about the performance of the Portfolios of the Fund
is contained in the Fund's ANNUAL REPORT TO SHAREHOLDERS, which may be
obtained without charge upon request to the Fund. See the discussion
under the caption "Charges and Other Deductions" in the accompanying
prospectus for either the Variable Annuity Contracts or the Variable
Life Contracts issued by the applicable insurance company for a
description of charges which are applicable thereto. Any such charges
are not reflected in the financial highlights below. Inclusion of any
such charge would reduce the total return figures for all periods shown.
The S&P 500 Index Portfolio and the Competitive Edge "Best Ideas"
Portfolio commenced operations on May 18, 1998. The Short-Term Bond
Portfolio and the Aggressive Equity Portfolio have not as of the date of
this PROSPECTUS commenced operation.
This information has been audited by , whose report, along
with the Fund's financial statements, is included in the annual report,
which is available upon request.
***CHARTS HERE FOR EACH PORTFOLIO***
FISCAL YEAR END: DECEMBER 31
50
<PAGE>
MORGAN STANLEY DEAN WITTER
VARIABLE INVESTMENT SERIES
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
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 at 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.
(MORGAN STANLEY DEAN WITTER VARIABLE INVESTMENT SERIES; INVESTMENT COMPANY ACT
FILE NO. 811-3692)
<PAGE>
MORGAN STANLEY DEAN WITTER
VARIABLE
STATEMENT OF ADDITIONAL INFORMATION INVESTMENT
MAY 1, 1999 SERIES
- ----------------------------------------------------------------------------
-THE MONEY MARKET PORTFOLIO
-THE SHORT-TERM BOND PORTFOLIO
-THE QUALITY INCOME PLUS PORTFOLIO
-THE HIGH YIELD PORTFOLIO
-THE UTILITIES PORTFOLIO
-THE INCOME BUILDER PORTFOLIO
-THE DIVIDEND GROWTH PORTFOLIO
-THE CAPITAL GROWTH PORTFOLIO
-THE GLOBAL DIVIDEND GROWTH PORTFOLIO
-THE EUROPEAN GROWTH PORTFOLIO
-THE PACIFIC GROWTH PORTFOLIO
-THE EQUITY PORTFOLIO
-THE S&P 500 INDEX PORTFOLIO
-THE COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO
-THE AGGRESSIVE EQUITY PORTFOLIO
-THE STRATEGIST PORTFOLIO
This STATEMENT OF ADDITIONAL INFORMATION is not a PROSPECTUS. The PROSPECTUS
(dated May 1, 1999) for the Morgan Stanley Dean Witter Variable Investment
Series (the "Fund") provides the basic information you should know before
allocating your investment under your variable annuity contract or your variable
life contract. The Prospectus may be obtained without charge from the Fund at
its address or telephone numbers listed below or from the Fund's Distributor,
Morgan Stanley Dean Witter Distributors Inc., or from Dean Witter Reynolds at
any of its branch offices.
Morgan Stanley Dean Witter
Variable Investment Series
Two World Trade Center
New York, New York 10048
(212) 392-2550 or (800) 869-NEWS
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
I. Fund History........................................................ 4
II. Description of the Fund and Its Investments and Risks............... 4
A. Classification................................................. 4
B. Eligible Purchasers............................................ 4
C. Investment Strategies and Risks................................ 4
D. Fund Policies/Investment Restrictions.......................... 17
III. Management of the Fund.............................................. 20
A. Board of Trustees.............................................. 20
B. Management Information......................................... 20
C. Compensation................................................... 25
IV. Control Persons and Principal Holders of Securities................. 27
V. Investment Management and Other Services............................ 27
A. Investment Manager and Sub-Advisor............................. 27
B. Principal Underwriter.......................................... 30
C. Services Provided by the Investment Manager and Fund Expenses
Paid by Third Parties.......................................... 30
D. Other Service Providers........................................ 31
VI. Brokerage Allocation and Other Practices............................ 31
A. Brokerage Transactions......................................... 31
B. Commissions.................................................... 32
C. Brokerage Selection............................................ 34
D. Directed Brokerage............................................. 35
E. Regular Broker-Dealers......................................... 36
VII. Capital Stock and Other Securities.................................. 36
VIII. Purchase, Redemption and Pricing of Shares.......................... 37
A. Purchase of Shares............................................. 37
B. Offering Price................................................. 37
IX. Taxation of the Fund and Shareholders............................... 40
X. Underwriters........................................................ 40
XI. Calculation of Performance Data..................................... 40
XII. Financial Statements................................................ 43
</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).
"CONTRACT"--Variable annuity contract and/or variable life insurance contract
issued by Northbrook Life Insurance Company, Allstate Life Insurance Company of
New York, Glenbrook Life and Annuity Company and Paragon Life Insurance Company.
"CONTRACT OWNERS"--Owners of a Contract.
"CUSTODIAN"--The Bank of New York for each Portfolio other than the GLOBAL
DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH
PORTFOLIO. The Chase Manhattan Bank for the GLOBAL DIVIDEND GROWTH PORTFOLIO,
the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO.
"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.
"FUND"--Morgan Stanley Dean Witter Variable Investment Series, a registered
open-end series investment company currently consisting of sixteen Portfolios.
"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.
"PORTFOLIO(S)"--The separate investment portfolio(s) of the Fund.
"SUB-ADVISOR"--Morgan Stanley Dean Witter Investment Management Inc., a
subsidiary of MSDW (only applicable to the EUROPEAN GROWTH PORTFOLIO and the
PACIFIC GROWTH PORTFOLIO).
"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 organized under the laws of the Commonwealth of Massachusetts
on February 25, 1983 under the name Dean Witter Variable Annuity Investment
Series and is a trust of the type commonly referred to as a Massachusetts
Business Trust. Effective February 23, 1988, the Fund's name was changed to Dean
Witter Variable Investment Series. On September 1, 1995, the name of the MANAGED
ASSETS PORTFOLIO was changed to the STRATEGIST PORTFOLIO. Effective June 22,
1998, the Fund's name was changed to Morgan Stanley Dean Witter Variable
Investment Series.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
- --------------------------------------------------------------------------------
A. CLASSIFICATION
The Fund is an open-end, diversified management investment company.
B. ELIGIBLE PURCHASERS
As discussed in the Prospectus, shares of the Fund are sold only to
particular insurance companies in connection with variable annuity and/or
variable life insurance contracts they issue. It is conceivable that in the
future it may become disadvantageous for both variable life insurance and
variable annuity contract separate accounts to invest in the same underlying
funds. Although neither the various insurance companies nor the Fund currently
foresee any such disadvantage, the Trustees intend to monitor events in order to
identify any material irreconcilable conflict between the interest of variable
annuity contract owners and variable life insurance contract owners and to
determine what action, if any, should be taken in response thereto.
C. INVESTMENT STRATEGIES AND RISKS
The following discussion of each Portfolio'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. Each Portfolio, other than the MONEY MARKET
PORTFOLIO, the S&P 500 INDEX PORTFOLIO and the COMPETITIVE EDGE "BEST IDEAS"
PORTFOLIO, may acquire through purchase fixed-income securities which are
convertible into common stock ("CONVERTIBLE SECURITIES"). In addition, each
Portfolio, other than the MONEY MARKET PORTFOLIO, may acquire convertible
securities through a distribution by a security held in its portfolio.
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 to 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 a
Portfolio at varying price levels above their investment values and/ or their
conversion values in keeping with the Portfolio's objective.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The SHORT-TERM BOND PORTFOLIO,
the HIGH YIELD PORTFOLIO, the UTILITIES PORTFOLIO, the INCOME BUILDER PORTFOLIO,
the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN
GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST
IDEAS" PORTFOLIO, the AGGRESSIVE EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO
may enter into
4
<PAGE>
forward foreign currency exchange contracts ("FORWARD CONTRACTS"): to facilitate
settlement in an attempt to limit the effect of changes in the relationship
between the U.S. dollar and the foreign currency during the period between the
date on which the security is purchased or sold and the date on which payment is
made or received. In addition, the SHORT-TERM BOND PORTFOLIO, the GLOBAL
DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH
PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO and the AGGRESSIVE EQUITY
PORTFOLIO may enter into forward contracts as a hedge against fluctuations in
future foreign exchange rates. Each Portfolio 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 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 Portfolios may use a forward contract to "lock in" the price of a
security in U.S. dollars or some other foreign currency which a Portfolio 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 Portfolio
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 SHORT-TERM BOND PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the
EUROPEAN GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO and the
AGGRESSIVE EQUITY PORTFOLIO 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 Portfolios may enter into
"cross-currency" hedging transactions involving currencies other than those in
which securities are held or proposed to be purchased are denominated.
A Portfolio will not enter into forward currency contracts or maintain a net
exposure to these contracts where the consummation of the contracts would
obligate the Portfolio to deliver an amount of foreign currency in excess of the
value of the Portfolio's portfolio securities.
Although a Portfolio 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 Portfolio
at one rate, while offering a lesser rate of exchange should the Portfolio
desire to resell that currency to the dealer.
A Portfolio 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 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 Portfolio's volatility and may involve a
significant amount of risk relative to the investment of cash.
OPTION AND FUTURES TRANSACTIONS. Each of the following Portfolios may
engage in transactions in listed and OTC options: the SHORT-TERM BOND PORTFOLIO,
the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES
5
<PAGE>
PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO,
the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the COMPETITIVE
EDGE "BEST IDEAS" PORTFOLIO, the AGGRESSIVE EQUITY PORTFOLIO and the STRATEGIST
PORTFOLIO. 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 Portfolio 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
Portfolio 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. Each of the above-named Portfolios is permitted to
write covered call options on portfolio securities without limit. Each of the
SHORT-TERM BOND PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN
GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST
IDEAS" PORTFOLIO and the AGGRESSIVE EQUITY PORTFOLIO may also write covered call
options on the U.S. dollar and foreign currencies in which its portfolio
securities are denominated, without limit.
The Portfolio 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 Portfolio 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 Portfolio if the securities (or currencies) underlying the
option decline in value.
The Portfolio 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 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 Portfolio has been assigned an exercise notice, the Portfolio
will be unable to effect a closing purchase transaction.
Options written by the Portfolio 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. Each of the Portfolios that may engage in covered call
writing may engage in covered put writing. As a writer of a covered put option,
the Portfolio 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 Portfolio 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). At any time during
the option period, the Portfolio may be required 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 Portfolio'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. Each of the SHORT-TERM BOND PORTFOLIO, the
CAPITAL GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH
PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO and the AGGRESSIVE EQUITY
PORTFOLIO may purchase listed and OTC call and put options in amounts equaling
up to 5% of its total assets and, in the case of each of the QUALITY INCOME PLUS
PORTFOLIO, the UTILITIES PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO and the
STRATEGIST PORTFOLIO, up to 10% of its total assets. Each of the last three
listed Portfolios may purchase stock index options in amounts not exceeding 5%
of its total assets. The purchase of a call option would enable a Portfolio, in
return for the
6
<PAGE>
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 a Portfolio, 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 SHORT-TERM BOND PORTFOLIO, the GLOBAL
DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH
PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, and the AGGRESSIVE
EQUITY PORTFOLIO 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 a
Portfolio. With OTC options, such variables as expiration date, exercise price
and premium will be agreed upon between a Portfolio and the transacting dealer,
without the intermediation of a third party such as the OCC. The Portfolios may
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 or, if applicable, the Sub-Advisor, 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,
a Portfolio 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.
A Portfolio'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 a Portfolio engages
in transactions in options, the Portfolio 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. 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 Portfolio 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
Portfolios 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.
7
<PAGE>
The markets in foreign currency options are relatively new and a Portfolio'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. Each of the UTILITIES PORTFOLIO, the CAPITAL GROWTH
PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST
IDEAS" PORTFOLIO, the AGGRESSIVE EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO
may invest in options on stock 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, a Portfolio 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.
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
8
<PAGE>
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. Each of the SHORT-TERM BOND PORTFOLIO, the QUALITY
INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO,
the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC
GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, the AGGRESSIVE
EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO may purchase and sell interest
rate and index futures contracts that are traded on U.S. commodity exchanges on
such underlying securities as U.S. Treasury bonds, notes, bills and GNMA
Certificates and, in the case of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the
EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the COMPETITIVE EDGE
"BEST IDEAS" PORTFOLIO and the AGGRESSIVE EQUITY PORTFOLIO, on any foreign
government fixed-income security and on various currencies, and with respect to
each of the ten listed Portfolios that may engage in futures transactions, on
such indexes of U.S. (and, if applicable, 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 a Portfolio, 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 a Portfolio 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 a Portfolio will be able to enter into a
closing transaction.
MARGIN. If a Portfolio 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 Portfolio upon the proper termination of
the futures
9
<PAGE>
contract. The margin deposits made are marked to market daily and the Portfolio
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. Each of the SHORT-TERM BOND PORTFOLIO, the
QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH
PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO,
the PACIFIC GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, the
AGGRESSIVE EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO 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. A Portfolio 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 Portfolio's total assets, after taking into account unrealized gains and
unrealized losses on such contracts into which it has entered; 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
a Portfolio'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 Portfolio's 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 a Portfolio 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 (and/or if
applicable, the Sub-Advisor) 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 a Portfolio may invest. In the event a
liquid market does not exist, it may not be possible to close out a futures
position and, in the event of adverse price movements, the Portfolio 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 Portfolio from closing out a
contract which may result in reduced gain or increased loss to the Portfolio.
The
10
<PAGE>
absence of a liquid market in futures contracts might cause the Portfolio 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, a Portfolio would continue
to be required to make daily cash payments of variation margin on open futures
positions. In these situations, if the Portfolio 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 Portfolio 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 a Portfolio'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 a Portfolio'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 a Portfolio's transactions effected on foreign exchanges.
In the event of the bankruptcy of a broker through which a Portfolio engages
in transactions in futures or options thereon, the Portfolio 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.
ADDITIONAL INFORMATION CONCERNING THE QUALITY INCOME PLUS AND SHORT-TERM BOND
PORTFOLIOS
COLLATERALIZED MORTGAGE OBLIGATIONS. The Portfolio(s) may invest in CMOs -
collateralized mortgage obligations. CMOs are debt obligations collateralized by
mortgage loans or mortgage pass-through securities (collectively "Mortgage
Assets"). Payments of principal and interest on the Mortgage Assets and any
reinvestment income are used to make payments on the CMOs. CMOs are issued in
multiple classes. Each class has a specific fixed or floating coupon rate and a
stated maturity or final distribution date. The principal and interest on the
Mortgage Assets may be allocated among the classes in a number of different
ways. Certain classes will, as a result of the collection, have more predictable
cash flows than others. As a general matter, the more predictable the cash flow,
the lower the yield relative to other Mortgage Assets. The less predictable the
cash flow, the higher the yield and the greater the risk. The Portfolio(s) may
invest in any class of CMO.
Certain mortgage-backed securities in which the Portfolio(s) may invest
(E.G.,certain classes of CMOs) may increase or decrease in value substantially
with changes in interest rates and/or the rates of prepayment. In addition, if
the collateral securing CMOs or any third party guarantees are insufficient to
make payments, the Portfolio could sustain a loss.
In addition, the SHORT-TERM BOND PORTFOLIO may invest up to 15% of its net
assets in stripped mortgage-backed securities, which are usually structured in
two classes. One class entitles the holder to receive all or most of the
interest but little or none of the principal of a pool of Mortgage Assets (the
interest-only or "IO Class"), while the other class entitles the holder to
receive all or most of the principal but little or none of the interest (the
principal-only or "PO" Class). IOs tend to decrease in value substantially if
interest rates decline and prepayment rates become more rapid. POs tend to
decrease in value substantially if interest rates increase and the rate of
repayment decreases.
The SHORT-TERM BOND PORTFOLIO may invest up to 10% of its assets in inverse
floaters. An inverse floater has a coupon rate that moves in the direction
opposite to that of a designated interest rate index. Like most other fixed
income securities, the value of inverse floaters will decrease as interest rates
increase. They are more volatile, however, than most other fixed income
securities because the coupon
11
<PAGE>
rate on an inverse floater typically changes at a multiple of the change in the
relevant index rate. Thus, any rise in the index rate (as a consequence of an
increase in interest rates) causes a correspondingly greater drop in the coupon
rate of an inverse floater while a drop in the index rate causes a
correspondingly greater increase in the coupon of an inverse floater. Some
inverse floaters may also increase or decrease substantially because of changes
in the rate of prepayments.
ASSET-BACKED SECURITIES. The securitization techniques used to develop
mortgage-backed securities are also applied to a broad range of other assets.
Various types of assets, primarily automobile and credit card receivables and
home equity loans, are being securitized in pass-through structures similar to
the mortgage pass-through structures. These types of securities are known as
asset-backed securities. The Portfolio(s) may invest in any type of asset-backed
security.
Asset-backed securities have risk characteristics similar to mortgage-backed
securities. Like mortgage-backed securities, they generally decrease in value as
a result of interest rate increases, but may benefit less than other
fixed-income securities from declining interest rates, principally because of
prepayments. Also, as in the case of mortgage-backed securities, prepayments
generally increase during a period of declining interest rates although other
factors, such as changes in credit use and payment patterns, may also influence
prepayment rates. Asset-backed securities also involve the risk that various
federal and state consumer laws and other legal and economic factors may result
in the collateral backing the securities being insufficient to support payment
on the securities.
ADDITIONAL INFORMATION CONCERNING THE SHORT-TERM BOND PORTFOLIO. The
SHORT-TERM BOND PORTFOLIO'S investments in preferred stocks are limited to those
rated in one of the four highest categories by a nationally recognized
statistical rating organization ("NRSRO") including Moody's Investors Service,
Inc., Standard & Poor's Corporation, Duff and Phelps, Inc. and Fitch Investors
Service, Inc. Investments in securities rated within the four highest rating
categories by a NRSRO are considered "investment grade." However, such
securities rated within the fourth highest rating category by a NRSRO may have
speculative characteristics and, therefore, changes in economic conditions or
other circumstances are more likely to weaken their capacity to make principal
and interest payments than would be the case with investments in securities with
higher credit ratings.
ADDITIONAL INFORMATION CONCERNING THE S&P 500 INDEX PORTFOLIO. The S&P 500
INDEX PORTFOLIO is not sponsored, endorsed, sold or promoted by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no
representation or warranty, express or implied, to the owners of shares of the
Portfolio or any member of the public regarding the advisability of investing in
securities generally or in the Portfolio particularly or the ability of the S&P
500 Index to track general stock market performance. S&P's only relationship to
the S&P 500 INDEX PORTFOLIO is the licensing of certain trademarks and trade
names of S&P and of the S&P 500 Index which is determined, composed and
calculated by S&P without regard to the Portfolio. S&P has no obligation to take
the needs of the Portfolio or the owners of shares of the Portfolio into
consideration in determining, composing or calculating the S&P 500 Index. S&P is
not responsible for and has not participated in the determination of the prices
and amount of the Portfolio or the timing of the issuance or sale of shares of
the Portfolio. S&P has no obligation or liability in connection with the
administration, marketing or trading of the Portfolio.
S&P does not guarantee the accuracy or the completeness of the S&P 500 Index
or any data included therein, and S&P shall have no liability for any errors,
omissions or interruptions therein. S&P makes no warranty, express or implied,
as to results to be obtained by the S&P 500 INDEX PORTFOLIO, owners of shares of
the Portfolio, or any other person or entity from the use of the S&P 500 Index
or any data included therein. S&P makes no express or implied warranties, and
expressly disclaims all warranties of merchantability or fitness for a
particular purpose or use with respect to the S&P 500 Index or any data included
therein. Without limiting any of the foregoing, in no event shall S&P have any
liability for any special, punitive, indirect, or consequential damages
(including lost profits), even if notified of the possibility of such damages.
COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO: "BEST IDEAS" LIST. As of October
15, 1998, the companies in the "Best Ideas" subgroup of "Global Investing: The
Competitive Edge" were as follows: AES Corp., American Express, American Home
Products, AXA-UAP, Bank of New York, BMW, Boeing,
12
<PAGE>
Chevron, Cisco Systems, Coca-Cola Enterprises, Computer Associates, Diageo,
DuPont, Eli Lilly, Emerson Electric, Federal Express, Fuji Photo Film, General
Electric, Halliburton, Heineken, Holderbank, HSBC Holdings, Intel, MAN,
Medtronic, Microsoft, Nestle, News Corp., Quintiles Transnational, Schlumberger,
Siebe, Skandia International, Sony, Southern Company, Time Warner, Total,
Unilever plc, UPM-Kymmene, Wal-Mart and Wolters Kluwer.
MONEY MARKET SECURITIES. The Portfolios may invest in various money market
securities, 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. This section does not apply to the MONEY MARKET PORTFOLIO whose
money market instruments are described in the Prospectus.
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 association, 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 a Portfolio's total assets in all such obligations and in all illiquid
assets, in the aggregate; and
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.
REPURCHASE AGREEMENTS. Each Portfolio may invest in repurchase agreements.
When cash may be available for only a few days, it may be invested by a
Portfolio in repurchase agreements until such time as it may otherwise be
invested or used for payments of obligations of the Portfolio. These agreements,
which may be viewed as a type of secured lending by the Portfolio, typically
involve the acquisition by the Portfolio of debt securities from a selling
financial institution such as a bank, savings and loan association or
broker-dealer. The agreement provides that the Portfolio 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 Portfolio will accrue interest from the institution until
the time when the repurchase is to occur. Although this date is deemed by the
Portfolio 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 Portfolio 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
13
<PAGE>
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 case of the MONEY MARKET PORTFOLIO, such collateral
will consist entirely of securities that are direct obligations of, or that are
fully guaranteed as to principal and interest by, the United States or any
agency thereof, and/or certificates of deposit, bankers' acceptances which are
eligible for acceptance by a Federal Reserve Bank, and, if the seller is a bank,
mortgage related securities (as such term is defined in section 3(a)(41) of the
Securities Exchange Act of 1934) that at the time the repurchase agreement is
entered into are rated in the highest rating category by the "Requisite NRSROs"
(as defined in Rule 2a-7 under the Investment Company Act of 1940).
Additionally, in the case of the MONEY MARKET PORTFOLIO, the collateral must
qualify the repurchase agreement for preferential treatment under the Federal
Deposit Insurance Act of the Federal Bankruptcy Code. In the event of a default
or bankruptcy by a selling financial institution, the Portfolio will seek to
liquidate such collateral. However, the exercising of the Portfolio'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 Portfolio could suffer a
loss. It is the current policy of each Portfolio 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 Portfolio, amounts to more than 10%
of its net assets in the case of each of the MONEY MARKET PORTFOLIO, the QUALITY
INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO,
the CAPITAL GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the EQUITY
PORTFOLIO and the STRATEGIST PORTFOLIO and 15% of its net assets in the case of
each of the other Portfolios.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. Each of the SHORT-TERM BOND
PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and
the PACIFIC GROWTH PORTFOLIO and may use reverse repurchase agreements for
purposes of meeting redemptions or as part of its investment strategy. The
SHORT-TERM BOND PORTFOLIO may also use dollar rolls as part of its investment
strategy.
Reverse repurchase agreements involve sales by the Portfolio of assets
concurrently with an agreement by the Portfolio to repurchase the same assets at
a later date at a fixed price. Reverse repurchase agreements involve the risk
that the market value of the securities the Portfolio is obligated to purchase
under the agreement may decline below the repurchase price. In the event the
buyer of securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, the Portfolio's use of the proceeds of the agreement may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Portfolio's obligation to repurchase the
securities.
Dollar rolls involve the Portfolio selling securities for delivery in the
current month and simultaneously contracting to repurchase substantially similar
(same type and coupon) securities on a specified future date. During the roll
period, the Portfolio will forgo principal and interest paid on the securities.
The Portfolio is compensated by the difference between the current sales price
and the lower forward price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale.
Reverse repurchase agreements and dollar rolls are speculative techniques
involving leverage and are considered borrowings by the Portfolio. With respect
to each of the QUALITY INCOME PLUS PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and
the PACIFIC GROWTH PORTFOLIO, reverse repurchase agreements may not exceed 10%
of the Portfolio's total assets.
INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS. Each of the UTILITIES
PORTFOLIO, the INCOME BUILDER PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the
CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO the EQUITY
PORTFOLIO and the STRATEGIST PORTFOLIO 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 a Portfolio 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, a Portfolio would bear its
ratable share of the real estate investment trust's expenses, including its
advisory and administration fees. At the same time the Portfolio would continue
to pay its own investment management fees and other expenses, as a result of
which the Portfolio and its
14
<PAGE>
shareholders in effect will be absorbing duplicate levels of fees with respect
to investments in real estate investment trusts.
LENDING PORTFOLIO SECURITIES. Each Portfolio may lend its portfolio
securities to brokers, dealers and other financial institutions, provided that
the loans are callable at any time by the Portfolio, 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 Portfolio 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. A
Portfolio will not lend securities with a value exceeding 10% of the Portfolio's
total assets.
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 Portfolio'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 Portfolio. Any gain or loss in the market price during the
loan period would inure to the Portfolio.
When voting or consent rights which accompany loaned securities pass to the
borrower, a Portfolio 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 Portfolio's
investment in the loaned securities. The Portfolio 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, each Portfolio other than the S&P 500 INDEX PORTFOLIO and the
COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO 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 a Portfolio will only purchase
securities on a when-issued, delayed delivery or forward commitment basis with
the intention of acquiring the securities, the Portfolio 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 a Portfolio 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 a
Portfolio'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 Portfolio will also establish a segregated account on its
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. Each Portfolio other than the MONEY
MARKET PORTFOLIO, the S&P 500 INDEX PORTFOLIO and the COMPETITIVE EDGE "BEST
IDEAS" PORTFOLIO 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 a Portfolio until the Portfolio determines that issuance of the
security is probable. At that time, the Portfolio will record the transaction
and, in determining its net asset value, will reflect the value of the security
daily. At that time, the Portfolio will also establish a segregated account on
the Portfolio'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.
15
<PAGE>
The value of a Portfolio's commitments to purchase the securities of any one
issuer, together with the value of all securities of such issuer owned by the
Portfolio, may not exceed 5% of the value of the Portfolio's total assets at the
time the initial commitment to purchase such securities is made. An increase in
the percentage of the Portfolio assets committed to the purchase of securities
on a "when, as and if issued" basis may increase the volatility of its net asset
value. A Portfolio 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 Portfolio at the time of sale.
PRIVATE PLACEMENTS. As a fundamental policy, which may only be changed by
the shareholders of the affected Portfolios, each of the QUALITY INCOME PLUS
PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the EQUITY PORTFOLIO and the
STRATEGIST PORTFOLIO may invest up to 5% of its total 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.
As a non-fundamental policy, which may be changed by the Trustees, each of
the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the INCOME BUILDER
PORTFOLIO and the EUROPEAN GROWTH PORTFOLIO may invest up to 10% of its total
assets in such restricted securities; each of the HIGH YIELD PORTFOLIO, the
PACIFIC GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO and the
COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO may invest up to 15% of its total assets
in such restricted securities; and each of the SHORT-TERM BOND PORTFOLIO and the
AGGRESSIVE EQUITY PORTFOLIO may invest up to 15% of its net assets in such
restricted securities. (With respect to these ten Portfolios, 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.) Limitations on the
resale of these securities may have an adverse effect on their marketability,
and may prevent a Portfolio from disposing of them promptly at reasonable
prices. A Portfolio 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 above-listed Portfolios 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 a Portfolio. If a
restricted security is determined to be "liquid," the security will not be
included within the category "illiquid securities," which under current policy
may not exceed, as to each of the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES
PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the
EUROPEAN GROWTH PORTFOLIO, the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO,
10% of the Portfolio's total assets and as to each of the other Portfolios
listed above, 15% of the Portfolio's net assets, as more fully described under
"Fund Policies/Investment Restrictions" below. However, investing in Rule 144A
securities could have the effect of increasing the level of Portfolio
illiquidity to the extent the Portfolio, at a particular point in time, may be
unable to find qualified institutional buyers interested in purchasing such
securities.
WARRANTS AND SUBSCRIPTION RIGHTS. The Portfolios, other than the MONEY
MARKET PORTFOLIO and the QUALITY INCOME PLUS PORTFOLIO, may acquire warrants and
subscription rights attached to other securities. In addition, each of the
INCOME BUILDER PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the GLOBAL DIVIDEND
GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO,
the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO may invest up to 5% of its
assets in warrants not attached to other securities with a limit of up to 2 % of
its total assets in warrants that are not listed on the New York or American
Stock Exchange. The COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO may invest in
warrants which are issued as a distribution by the issuer or a security held in
its portfolio. 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 Portfolios by
the Investment Manager, and, in the case of the EUROPEAN GROWTH PORTFOLIO and
the PACIFIC GROWTH PORTFOLIO, by the Sub-
16
<PAGE>
Advisor, 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
Sub-Advisor, 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
Portfolios invest 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 Portfolios' investments may be
adversely affected.
D. FUND POLICIES/INVESTMENT RESTRICTIONS
The investment restrictions listed below have been adopted by the Fund as
fundamental policies of the Portfolios. Under the Investment Company Act of 1940
(the "INVESTMENT COMPANY ACT"), a fundamental policy of a Portfolio may not be
changed without the vote of a majority of the outstanding voting securities of
the Portfolio. The Investment Company Act defines a majority as the lesser of
(a) 67% or more of the shares of a Portfolio present at a meeting of Fund
shareholders, if the holders of 50% of the outstanding shares of the Portfolio
are present or represented by proxy; or (b) more than 50% of the outstanding
shares of the Portfolio. 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.
RESTRICTIONS APPLICABLE TO ALL PORTFOLIOS
Each Portfolio may not:
1. Invest more that 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), or purchase more than 10%
of the voting securities, or more than 10% of any class of security, of any
issuer (for this purpose all outstanding debt securities of an issuer are
considered as one class and all preferred stock of an issuer are considered as
one class). With regard to the SHORT-TERM BOND PORTFOLIO, the INCOME BUILDER
PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO,
the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the S&P 500 INDEX
PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO and the AGGRESSIVE EQUITY
PORTFOLIO, these limitations apply only as to 75% of the Portfolio's total
assets.
2. Concentrate its investments in any particular industry, but if deemed
appropriate for attainment of its investment objective, a Portfolio may invest
up to 25% of its total assets (valued at the time of investment) in any one
industry classification used by that Portfolio for investment purposes. This
restriction does not apply to obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities, or, in the case of the
MONEY MARKET PORTFOLIO, to domestic bank obligations (not including obligations
issued by foreign branches of such banks) or, in the case of the UTILITIES
PORTFOLIO, to the utilities industry, in which industry the Portfolio will
concentrate.
3. Except for the SHORT-TERM BOND PORTFOLIO and the AGGRESSIVE EQUITY
PORTFOLIO, invest more than 5% of the value of its total assets in securities of
issuers having a record, together with predecessors, of less than three years of
continuous operation. This restriction shall not apply to any obligations issued
or guaranteed by the United States Government, its agencies or
instrumentalities.
4. Purchase or sell commodities or commodity futures contracts, or oil, gas
or mineral exploration or developmental programs, except that a Portfolio may
invest in the securities of companies which
17
<PAGE>
operate, invest in, or sponsor such programs, and (i) the SHORT-TERM BOND
PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the
INCOME BUILDER PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CAPITAL GROWTH
PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO,
the PACIFIC GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, the
AGGRESSIVE EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO may purchase or sell
futures contracts and related options thereon, (ii) the SHORT-TERM BOND
PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO,
the PACIFIC GROWTH PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO and
the AGGRESSIVE EQUITY PORTFOLIO may purchase or sell currency futures contracts
and related options thereon and the S&P 500 INDEX PORTFOLIO may purchase or sell
index futures contracts.
5. Borrow money (except insofar as each of the SHORT-TERM BOND PORTFOLIO,
the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO may be deemed to
have borrowed by entrance into a reverse repurchase agreement (in an amount not
exceeding 10% of the Portfolio's total assets, except in the case of the
SHORT-TERM BOND PORTFOLIO)), except from banks for temporary or emergency
purposes or to meet redemption requests which might otherwise require the
untimely disposition of securities, and, in the case of the Portfolios other
than the QUALITY INCOME PLUS PORTFOLIO, not for investment or leveraging,
provided that borrowing in the aggregate (other than, in the case of the QUALITY
INCOME PLUS PORTFOLIO, for investment or leveraging) may not exceed 5% of the
value of the Portfolio's total assets (including the amount borrowed) at the
time of such borrowing.
6. 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 margin for futures are not deemed to be pledges of
assets.)
7. Purchase securities on margin (but the Portfolios may obtain short-term
loans as are necessary for the clearance of transactions). The deposit or
payment by the SHORT-TERM BOND PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO, the
UTILITIES PORTFOLIO, the INCOME BUILDER PORTFOLIO, the DIVIDEND GROWTH
PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO,
the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the S&P 500 INDEX
PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO, the AGGRESSIVE EQUITY
PORTFOLIO and the Strategist Portfolio of initial or variation margin in
connection with futures contracts or related options thereon is not considered
the purchase of a security on margin.
8. In the case of each Portfolio other than the SHORT-TERM BOND PORTFOLIO,
the S&P 500 INDEX PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO and the
AGGRESSIVE EQUITY PORTFOLIO, purchase securities of other investment companies,
except in connection with a merger, consolidation, reorganization or acquisition
of assets or, in the case of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN
GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, in accordance with the
provisions of Section 12(d) of the Investment Company Act and any Rules
promulgated thereunder.
9. Make loans of money or securities, except (a) by the purchase of debt
obligations in which the Portfolio may invest consistent with its investment
objectives and policies; (b) by investing in repurchase agreements; or (c) by
lending its portfolio securities, not in excess of 10% of the value of a
Portfolio's total assets, including maintaining collateral from the borrower
equal at all times to the current market value of the securities loaned,
provided that lending of portfolio securities is not deemed to be loans in the
case of the SHORT-TERM BOND PORTFOLIO, the S&P 500 INDEX PORTFOLIO, the
COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO and the AGGRESSIVE EQUITY PORTFOLIO.
10. In the case of each portfolio other than the SHORT-TERM BOND PORTFOLIO,
the S&P 500 INDEX PORTFOLIO, the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO and the
AGGRESSIVE EQUITY PORTFOLIO, invest in securities of any issuer if, to the
knowledge of the Fund, any officer or Trustee of the Fund or any officer or
director of the Investment Manager owns more than 1/2 of 1% of the outstanding
securities of such issuer, and such officers, Trustees and directors who own
more than 1/2 of 1% own in the aggregate more than 5% of the outstanding
securities of such issuer.
11. Purchase or sell real estate; however, the Portfolios may purchase
marketable securities of issuers which engage in real estate operations or which
invest in real estate or interests therein, including real estate investment
trusts and securities which are secured by real estate or interests therein.
18
<PAGE>
12. Engage in the underwriting of securities except insofar as the Portfolio
may be deemed an underwriter under the Securities Act in disposing of a
portfolio security.
13. Invest for the purposes of exercising control or management of another
company.
14. Participate on a joint or a joint and several basis in any securities
trading account. The "bunching" of orders of two or more Portfolios (or of one
or more Portfolios and of other accounts under the investment management of the
Investment Manager) for the sale or purchase of portfolio securities shall not
be considered participating in a joint securities trading account.
15. Issue senior securities as defined in the Investment Company Act except
insofar as the Portfolio may be deemed to have issued a senior security by
reason of: (a) entering into any repurchase agreement (or, in the case of the
QUALITY INCOME PLUS PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the PACIFIC
GROWTH PORTFOLIO, a reverse repurchase agreement, or, in the case of the
SHORT-TERM BOND PORTFOLIO, a reverse repurchase agreement or a dollar roll); (b)
borrowing money in accordance with restrictions described above; (c) purchasing
any security on a when-issued, delayed delivery or forward commitment basis; (d)
lending portfolio securities; or (e) purchasing or selling futures contracts,
forward foreign exchange contracts or options, if such investments are otherwise
permitted for the Portfolio.
RESTRICTIONS APPLICABLE TO RESTRICTED AND ILLIQUID SECURITIES
16. Each of the QUALITY INCOME PLUS PORTFOLIO, the DIVIDEND GROWTH
PORTFOLIO, the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO may not invest more
than 5% of the value of its total assets in securities which are restricted as
to disposition under the Federal securities laws or otherwise, provided that
this restriction shall not apply to securities received as a result of a
corporate reorganization or similar transaction affecting readily marketable
securities already held by the Portfolio; however, these Portfolios will attempt
to dispose in an orderly fashion of any of these securities to the extent that
these, together with other illiquid securities, exceed 10% of the Portfolio's
total assets.
17. Each of the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO and the
EUROPEAN GROWTH PORTFOLIO may not invest more than 10% of its total assets in
"illiquid securities" (securities for which market quotations are not readily
available) and repurchase agreements which have a maturity of longer than seven
days. In addition, no more than 15% of the EUROPEAN GROWTH PORTFOLIO'S net
assets will be invested in such illiquid securities and foreign securities not
traded on a recognized domestic or foreign exchange.
RESTRICTIONS APPLICABLE TO THE MONEY MARKET PORTFOLIO ONLY
The MONEY MARKET PORTFOLIO may not:
1. Invest in securities other than those listed in the description of its
investment objectives and policies above and in the Prospectus.
2. Invest in securities maturing more than one year from the date of
purchase, except that where securities are held subject to repurchase agreements
having a term of one year or less from the date of delivery, the securities
subject to the agreement may have maturity dates in excess of one year from the
date of delivery.
3. Purchase securities for which there are legal or contractual
restrictions on resale (I.E., restricted securities).
4. Write, purchase or sell puts, calls, straddles, spreads or combinations
thereof.
RESTRICTIONS APPLICABLE TO THE QUALITY INCOME PLUS PORTFOLIO ONLY
The QUALITY INCOME PLUS PORTFOLIO may not acquire any common stocks except
when acquired upon conversion of fixed-income securities. The QUALITY INCOME
PLUS PORTFOLIO will attempt to dispose in an orderly fashion of any common
stocks acquired under these circumstances.
RESTRICTIONS APPLICABLE TO THE HIGH YIELD PORTFOLIO ONLY
The HIGH YIELD PORTFOLIO may not:
1. Acquire any common stocks, except (a) when attached to or included in a
unit with fixed-income securities; (b) when acquired upon conversion of
fixed-income securities; or (c) when acquired
19
<PAGE>
upon exercise of warrants attached to fixed-income securities. The HIGH YIELD
PORTFOLIO may retain common stocks so acquired, but not in excess of 10% of its
total assets.
2. Write, purchase or sell puts, calls, straddles, spreads or combinations
thereof.
RESTRICTIONS APPLICABLE TO THE DIVIDEND GROWTH PORTFOLIO ONLY
The DIVIDEND GROWTH PORTFOLIO may not invest more than 5% of the value of
its total assets in warrants, including not more than 2% of such assets in
warrants not listed on either the New York or American Stock Exchange. However,
the acquisition of warrants attached to other securities is not subject to this
restriction.
RESTRICTIONS APPLICABLE TO THE EQUITY PORTFOLIO ONLY
The EQUITY PORTFOLIO may not:
1. Invest more than 5% of the value of its total assets in warrants,
including not more than 2% of such assets in warrants not listed on either the
New York or American Stock Exchange. However, the acquisition of warrants
attached to other securities is not subject to this restriction.
2. Purchase non-convertible corporate bonds unless rated at the time of
purchase Aa or better by Moody's Investors Service ("Moody's") or AA or better
by S&P, or purchase commercial paper unless issued by a U.S. corporation and
rated at the time of purchase Prime-1 by Moody's or A-1 by S&P, although it may
continue to hold a security if its quality rating is reduced by a rating service
below those specified.
3. Write, purchase or sell puts, calls, straddles, spreads or combinations
thereof.
4. Invest in securities of foreign issuers, except for (i) securities of
Canadian issuers registered under the Securities Exchange Act of 1934 and (ii)
American Depositary Receipts.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of total or net assets will not be considered a
violation of any of the foregoing restrictions.
III. MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
A. BOARD OF TRUSTEES
The Trustees oversee the management of the Portfolios but do not manage each
Portfolio. The Trustees review various services provided by or under the
direction of the Investment Manager to ensure that each Portfolio's general
investment policies and programs are properly carried out. The Trustees also
conduct their review to ensure that administrative services are provided to each
Portfolio 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 each Portfolio 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 each Portfolio
and its shareholders.
B. MANAGEMENT INFORMATION
TRUSTEES AND OFFICERS. The Board of the Fund consists of eight (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.
20
<PAGE>
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 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 December, 1998); Director or
Trustee Trustee of the Morgan Stanley Dean Witter Funds; Trustee of Discover
c/o Kmart Corporation Brokerage Index Series; formerly Chairman and Chief Executive Officer
3100 West Big Beaver Road of Levitz Furniture Corporation (November, 1995-November, 1998) and
Troy, Michigan 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 Mer-
chandise Group of Sears, Roebuck and Co.; Director of Eaglemark
Financial Services, Inc. and Weirton Steel Corporation.
Charles A. Fiumefreddo* (65) Chairman, Director or Trustee, President and Chief Executive Officer of
Chairman of the Board, the Morgan Stanley Dean Witter Funds; Chairman, Chief Executive Officer
President, Chief Executive and Trustee of the TCW/DW Funds; Trustee of Discover Brokerage Index
Officer and Trustee Series; formerly Chairman, Chief Executive Officer and Director of the
Two World Trade Center Investment Manager, the Distributor and MSDW Services Company;
New York, New York Executive Vice President and Director of Dean Witter Reynolds; Chairman
and Director of the Transfer Agent; formerly Director and/or officer of
various Morgan Stanley Dean Witter subsidiaries (until June, 1998).
Edwin J. Garn (66) Director or Trustee of the Morgan Stanley Dean Witter Funds; Trustee of
Trustee Discover Brokerage Index Series; formerly United States Senator
c/o Huntsman Corporation (R-Utah)(1974-1992) and Chairman, Senate Banking Committee (1980-1986);
500 Huntsman Way formerly Mayor of Salt Lake City, Utah (1971-1974); formerly Astronaut,
Salt Lake City, Utah Space Shuttle Discovery (April 12-19, 1985); Vice Chairman, Huntsman
Corporation; Director of Franklin Covey (time management systems), John
Alden Financial Corp. (health insurance), 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 Dean Witter Funds;
Trustee Trustee of Discover Brokerage Index Series; Director of The PMI Group,
c/o Gordon Altman Butowsky Inc. (private mortgage insurance); Trustee and Vice Chairman of The
Weitzen Shalov & Wein Field Museum of Natural History; formerly associated with the Allstate
Counsel to the Companies (1966-1994), most recently as Chairman of The Allstate
Independent Trustees Corporation (March, 1993-December, 1994) and Chairman and Chief
114 West 47th Street Executive Officer of its wholly-owned subsidiary, Allstate Insurance
New York, New York Company (July, 1989-December, 1994); director of various other busi-
ness and charitable organizations.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Dr. Manuel H. Johnson (50) Senior Partner, Johnson Smick International, Inc., a consulting firm;
Trustee Co-Chairman and a founder of the Group of Seven Council (G7C), an
c/o Johnson Smick international economic commission; Director or Trustee of the Morgan
International, Inc. Stanley Dean Witter Funds; Trustee of the TCW/DW Funds; Trustee of
1133 Connecticut Avenue, N.W. Discover Brokerage Index Series; Director of NASDAQ (since June, 1995);
Washington, D.C. 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.
Michael E. Nugent (62) General Partner, Triumph Capital, L.P., a private investment part-
Trustee nership; Director or Trustee of the Morgan Stanley Dean Witter Funds;
c/o Triumph Capital, L.P. Trustee of the TCW/DW Funds; Trustee of Discover Brokerage Index
237 Park Avenue Series; formerly Vice President, Bankers Trust Company and BT Capital
New York, New York Corporation (1984-1988); director of various business organizations.
Philip J. Purcell* (55) Chairman of the Board of Directors and Chief Executive Officer of MSDW,
Trustee Dean Witter Reynolds and Novus Credit Services Inc.; Director of the
1585 Broadway Distributor; Director or Trustee of the Morgan Stanley Dean Witter
New York, New York Funds; Trustee of Discover Brokerage Index Series; Director and/or
officer of various MSDW subsidiaries.
John L. Schroeder (68) Retired; Director or Trustee of the Morgan Stanley Dean Witter Funds;
Trustee Trustee of the TCW/DW Funds; Trustee of Discover Brokerage Index
c/o Gordon Altman Butowsky Series; Director of Citizens Utilities Company; formerly Executive Vice
Weitzen Shalov & Wein President and Chief Investment Officer of the Home Insurance Company
Counsel to the Independent (August, 1991-September, 1995).
Trustees
114 West 47th Street
New York, New York
Barry Fink (44) Senior Vice President (since March, 1997) and Secretary and General
Vice President, Counsel (since February, 1997) and Director (since July, 1998) of the
Secretary and General Counsel Investment Manager and MSDW Services Company; Senior Vice President
Two World Trade Center (since March, 1997) and Assistant Secretary and Assistant General
New York, New York 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.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Peter M. Avelar (40) Senior Vice President of the Investment Manager; Vice President of
Vice President various Morgan Stanley Dean Witter Funds.
Two World Trade Center
New York, New York
Mark Bavoso (38) Senior Vice President of the Investment Manager; Vice President of
Vice President various Morgan Stanley Dean Witter Funds.
Two World Trade Center
New York, New York
Edward F. Gaylor (57) Senior Vice President of the Investment Manager; Vice President of
Vice President various Morgan Stanley Dean Witter Funds.
Two World Trade Center
New York, New York
Rajesh K. Gupta (38) Senior Vice President of the Investment Manager; Vice President of
Vice President various Morgan Stanley Dean Witter Funds.
Two World Trade Center
New York, New York
Matthew Haynes (33) Vice President of the Investment Manager (since June, 1997) and
Vice President portfolio manager with the Investment Manager (since April, 1993); Vice
Two World Trade Center President or Assistant Vice President of various Morgan Stanley Dean
New York, New York Witter Funds; previously Assistant Vice President of the Investment
Manager (May, 1995-June, 1997).
Peter Hermann (39) Vice President of the Investment Manager (since May, 1995) and
Vice President portfolio manager with the Investment Manager (since March, 1994); Vice
Two World Trade Center President of various Morgan Stanley Dean Witter Funds.
New York, New York
Kenton J. Hinchliffe (54) Senior Vice President of the Investment Manager; Vice President of
Vice President various Morgan Stanley Dean Witter Funds.
Two World Trade Center
New York, New York
Michelle Kaufman (34) Vice President of the Investment Manager (since June, 1997) and
Vice President portfolio manager with the Investment Manager (since September, 1993);
Two World Trade Center Vice President or Assistant Vice President of various Morgan Stanley
New York, New York Dean Witter Funds; previously Assistant Vice President of the
Investment Manager (May, 1995-June, 1997).
Anita H. Kolleeny (43) Senior Vice President of the Investment Manager; Vice President of
Vice President various Morgan Stanley Dean Witter Funds.
Two World Trade Center
New York, New York
Paula LaCosta (47) Vice President of the Investment Manager; Vice President of various
Vice President Morgan Stanley Dean Witter Funds.
Two World Trade Center
New York, New York
Jonathan R. Page (52) Senior Vice President of the Investment Manager; Vice President of
Vice President various Morgan Stanley Dean Witter Funds.
Two World Trade Center
New York, New York
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Rochelle G. Siegel (50) Senior Vice President of the Investment Manager; Vice President of
Vice President various Morgan Stanley Dean Witter Funds.
Two World Trade Center
New York, New York
Paul D. Vance (63) Senior Vice President of the Investment Manager; Vice President of
Vice President various Morgan Stanley Dean Witter Funds.
Two World Trade Center
New York, New York
Aaron Clark (30) Assistant Vice President of the Investment Manager (since April, 1997);
Assistant Vice President formerly independent analyst (December, 1996-April, 1997) and junior
Two World Trade Center bank stock analyst (January, 1995-December, 1996) with Gerard Klauer
New York, New York Mattison & Co. and prior thereto a research analyst with Prudential
Securities Inc. (October, 1993-December 1994).
Kevin Jung (33) Vice President of the Investment Manager (since September, 1997);
Assistant Vice President formerly Vice President of UBS Asset Management (NY) Inc. (April,
Two World Trade Center 1993-August, 1997).
New York, New York
Thomas F. Caloia (53) First Vice President and Assistant Treasurer of the Investment Manager
Treasurer and MSDW Services Company; Treasurer of the Morgan Stanley Dean Witter
Two World Trade Center Funds, the TCW/DW Funds and Discover Brokerage Index Series.
New York, New York
</TABLE>
- -------------------
* A Trustee who is an "interested person" of the Fund, as defined in the
Investment Company Act.
In addition, MITCHELL M. MERIN, President and Chief Operating Officer of
Asset Management of MSDW, President, Chief Executive Officer and Director of the
Investment Manager and MSDW Services Company, Chairman and Director of the
Distributor and the Transfer Agent, Executive Vice President and Director of
Dean Witter Reynolds, and Director of various MSDW subsidiaries, RONALD E.
ROBISON, Executive Vice President and Chief Administrative Officer 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, are Vice Presidents of the Fund.
In addition, MARILYN K. CRANNEY and CARSTEN OTTO, First Vice Presidents and
Assistant General Counsels of the Investment Manager and MSDW Services Company,
FRANK BRUTTOMESSO, LOU ANNE D. MCINNIS and RUTH ROSSI, Vice Presidents and
Assistant General Counsels of the Investment Manager and MSDW Services Company,
and TODD LEBO, a staff attorney with the Investment Manager, are Assistant
Secretaries of the Fund.
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.
24
<PAGE>
The Independent Trustees are charged with recommending to the full Board
approval of man-agement, advisory and administration contracts and distribution
and underwriting agreements; continually reviewing Portfolio 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 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 Portfolios.
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.
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).
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
25
<PAGE>
affiliated company receive no compensation or expenses reimbursed from the Fund
for their services as Trustee. Effective May 1, 1999, Mr. serves as
Chairman of the Audit Committee.
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.................................................................................... $
Edwin J. Garn....................................................................................
Wayne E. Hedien..................................................................................
Dr. Manuel H. Johnson............................................................................
Michael E. Nugent................................................................................
John L. Schroeder................................................................................
</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. Effective May 1, 1999, Mr. serves as Chairman of the Audit
Committee of each Morgan Stanley Dean Witter Fund and each TCW/DW Fund. 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 AS
DIRECTOR OR TOTAL CASH
TRUSTEE AND COMPENSATION FOR
COMMITTEE FOR SERVICE AS SERVICES TO 85
MEMBER OF 85 TRUSTEE AND MORGAN STANLEY
MORGAN STANLEY COMMITTEE DEAN WITTER FUNDS
DEAN WITTER MEMBER OF 11 AND 11 TCW/DW
NAME OF INDEPENDENT TRUSTEE FUNDS TCW/DW FUNDS FUNDS
- ---------------------------------------------------------- ---------------- ---------------- ------------------
<S> <C> <C> <C>
Michael Bozic............................................. $ -- $
Edwin J. Garn............................................. --
Wayne E. Hedien........................................... $
Dr. Manuel H. Johnson..................................... --
Michael E. Nugent......................................... --
John L. Schroeder......................................... --
</TABLE>
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
26
<PAGE>
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 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
ESTIMATED RETIREMENT BENEFITS BENEFITS
CREDITED ACCRUED AS EXPENSES UPON
YEARS ESTIMATED RETIREMENT(2)
OF SERVICE PERCENTAGE ------------------------- ----------------
AT OF BY ALL FROM FROM ALL
RETIREMENT ELIGIBLE BY THE ADOPTING THE ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS
- ------------------------------ ------------ ------------ ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic................. 10 60.44% $ $ $ $
Edwin J. Garn................. 10 60.44
Wayne E. Hedien............... 9
Dr. Manuel H. Johnson......... 10 60.44
Michael E. Nugent............. 10 60.44
John L. Schroeder............. 8
</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
- --------------------------------------------------------------------------------
As of the date of this STATEMENT OF ADDITIONAL INFORMATION, Northbrook Life
Insurance Company, Allstate Life Insurance Company of New York and Paragon Life
Insurance Company owned all of the outstanding shares of the Fund for allocation
to their respective separate accounts ("ACCOUNTS"), none of the Fund's Trustees
was a Contract Owner under the Accounts, and the aggregate number of shares of
each Portfolio of the Fund allocated to Contracts owned by the Fund's officers
as a group was less than one percent of each Portfolio's outstanding shares.
V. INVESTMENT MANAGEMENT AND OTHER SERVICES
- --------------------------------------------------------------------------------
A. INVESTMENT MANAGER AND SUB-ADVISOR
The Investment Manager to each Portfolio 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.
The Sub-Advisor to the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH
PORTFOLIO is Morgan Stanley Dean Witter Investment Management Inc., a subsidiary
of MSDW and an affiliate of the Investment Manager, whose address is 1221 Avenue
of the Americas, New York, New York 10020. The Sub-
27
<PAGE>
Advisor was retained to provide sub-advisory services to the EUROPEAN GROWTH
PORTFOLIO and the PACIFIC GROWTH PORTFOLIO effective December 1, 1998 and
November 1, 1998, respectively.
Pursuant to an Investment Management Agreement (the "Management Agreement")
with the Investment Manager, the Fund has retained the Investment Manager to
provide each Portfolio administrative services, manage its business affairs and,
other than with respect to the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH
PORTFOLIO, manage its investments, including the placing of orders for the
purchase and sale of portfolio securities. With respect to the EUROPEAN GROWTH
PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, the Investment Manager supervises
these Portfolios' investments. The Fund pays the Investment Manager monthly
compensation calculated daily by applying the following annual rates to the net
assets of each Portfolio determined as of the close of each business day:
<TABLE>
<CAPTION>
NAME OF PORTFOLIO INVESTMENT MANAGEMENT FEE RATES
- ------------------------------------------- ---------------------------------------------------------------------
<S> <C>
The Money Market Portfolio 0.50% of net assets
The Short-Term Bond Portfolio 0.45% of net assets
The Quality Income Plus Portfolio 0.50% of net assets up to $500 million and
0.45% of net assets exceeding $500 million
The High Yield Portfolio 0.50% of net assets up to $500 million and
0.425% of net assets exceeding $500 million
The Utilities Portfolio 0.65% of net assets up to $500 million and
0.55% of net assets exceeding $500 million
The Income Builder Portfolio 0.75% of net assets
The Dividend Growth Portfolio 0.625% of net assets up to $500 million;
0.50% of net assets exceeding $500 million
but not exceeding $1 billion;
0.475% of net assets exceeding $1 billion
but not exceeding $2 billion; and
0.45% of net assets exceeding $2 billion
The Capital Growth Portfolio 0.65% of net assets
The Global Dividend Growth Portfolio 0.75% of net assets
The European Growth Portfolio 0.95% of net assets up to $500 million and
0.90% of net assets exceeding $500 million
The Pacific Growth Portfolio 0.95% of net assets
The Equity Portfolio 0.50% of net assets up to $1 billion and
0.475% of net assets exceeding $1 billion
The S&P 500 Index Portfolio 0.40% of net assets
The Competitive Edge "Best Ideas" Portfolio 0.65% of net assets
The Aggressive Equity Portfolio 0.75% of net assets
The Strategist Portfolio 0.50% of net assets
</TABLE>
28
<PAGE>
For the fiscal years ended December 31, 1996, 1997 and 1998, the Investment
Manager accrued compensation under the Management Agreement as follows:
<TABLE>
<CAPTION>
COMPENSATION ACCRUED FOR THE FISCAL YEAR ENDED
DECEMBER 31,
----------------------------------------------
NAME OF PORTFOLIO 1996 1997 1998
- ---------------------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
The Money Market Portfolio...................................... $ 1,454,423 $ 1,764,304 $
The Quality Income Plus Portfolio............................... 2,407,993 2,301,725
The High Yield Portfolio........................................ 1,009,452 1,539,080
The Income Builder Portfolio.................................... N/A 30,071
The Dividend Growth Portfolio................................... 5,902,896 8,563,208
The Capital Growth Portfolio.................................... 509,004 698,171
The Global Dividend Growth Portfolio............................ 2,005,162 3,183,049
The European Growth Portfolio................................... 2,332,742 3,589,371
The Pacific Growth Portfolio.................................... 1,392,813 1,195,454
The Equity Portfolio............................................ 2,211,777 3,306,222
The S&P 500 Index Portfolio..................................... N/A N/A
The Competitive Edge "Best Ideas" Portfolio..................... N/A N/A
The Strategist Portfolio........................................ 1,994,396 2,361,054
The Utilities Portfolio......................................... 2,972,835 2,710,383
-------------- -------------- --------------
Total....................................................... $ 24,193,493 $ 31,242,092
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The SHORT-TERM BOND PORTFOLIO and the AGGRESSIVE EQUITY PORTFOLIO did not
commence operations prior to the date of this STATEMENT OF ADDITIONAL
INFORMATION.
The Investment Manager has retained its wholly-owned subsidiary, MSDW
Services Company, to perform administrative services for the Fund.
Under a Sub-Advisory Agreement (the "SUB-ADVISORY AGREEMENT") between the
Sub-Advisor and the Investment Manager respecting the EUROPEAN GROWTH PORTFOLIO
and the PACIFIC GROWTH PORTFOLIO, the Sub-Advisor provides these Portfolios with
investment advice and portfolio management, subject to the overall supervision
of the Investment Manager. The Investment Manager pays the Sub-Advisor monthly
compensation equal to 40% of the Investment Manager's fee, payable in respect of
the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO.
Prior to November 1, 1998, with respect to the PACIFIC GROWTH PORTFOLIO and
December 1, 1998, with respect to the EUROPEAN GROWTH PORTFOLIO, these
Portfolios were sub-advised by the Former Sub-Advisor, Morgan Grenfell
Investment Services Limited, in each case pursuant to a sub-advisory agreement
between the Investment Manager and the Former Sub-Advisor (the "PRIOR
SUB-ADVISORY AGREEMENT"). In May, 1998, the Former Sub-Advisor indicated its
intention to resign as Sub-Advisor for both Portfolios. On June 2, 1998, the
Trustees recommended that the Sub-Advisory Agreements with the Sub-Advisor be
submitted to shareholders of each of the EUROPEAN GROWTH PORTFOLIO and the
PACIFIC GROWTH PORTFOLIO for approval. The Sub-Advisory Agreement with the
Sub-Advisor was approved on August 18, 1998. Under the Prior Sub-Advisory
Agreement, the Investment Manager paid the Former Sub-Advisor monthly
compensation equal to 40% of the Investment Manager's fee in respect of the
EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO.
Concurrent with effectiveness of the Sub-Advisory Agreement, the Investment
Manager and the Fund amended the Management Agreement to reduce the fee paid by
the Fund to the Investment Manager respecting the EUROPEAN GROWTH PORTFOLIO and
the PACIFIC GROWTH PORTFOLIO, from an annual rate of (a) with respect to the
EUROPEAN GROWTH PORTFOLIO, 1.00% of the portion of daily net assets up to $500
million and 0.95% of the portion of daily net assets exceeding $500 million; and
(b) with respect to the PACIFIC GROWTH PORTFOLIO, 1.00% of the portion of that
Portfolio's daily net assets; to the rates set forth above.
29
<PAGE>
B. PRINCIPAL UNDERWRITER
The Fund's principal underwriter is the Distributor (which has the same
address as the Investment Manager). In this capacity, each Portfolio's shares
are distributed by the Distributor. The Distributor, a Delaware corporation, is
a wholly-owned subsidiary of MSDW.
The Trustees, including a majority of the Independent Trustees, approved the
current Distribution Agreement appointing the Distributor as exclusive
distributor of the Fund's shares and providing for the Distributor to bear
certain of the Fund's distribution expenses. By its terms, the Distribution
Agreement had an initial term ending April 30, 1998 and will remain in effect
from year to year thereafter if approved by the Trustees. At their meeting held
on April , 1999, the Trustees of the Fund, including a majority of the
Independent Trustees, approved the continuation of the Distribution Agreement
until April 30, 2000.
The Distributor bears all expenses incurred by it in connection with its
duties and activities under the Distribution Agreement (except such expenses as
are specifically undertaken by the Fund under the Agreement). The Fund bears all
costs and expenses of the Fund, including the expense of preparing, printing,
mailing and otherwise distributing prospectuses, annual or interim reports or
proxy materials to Contract Owners. The Fund also bears the costs of registering
the Fund and its shares under federal securities laws and, if deemed necessary
or advisable, to qualify the shares of the Fund for sale under 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 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
Each Portfolio has retained the Investment Manager to provide administrative
services, manage its business affairs and (except for the PACIFIC GROWTH
PORTFOLIO and the EUROPEAN GROWTH PORTFOLIO) invest its assets, including the
placing of orders for the purchase and sale of portfolio securities. Each of the
PACIFIC GROWTH PORTFOLIO and the EUROPEAN GROWTH PORTFOLIO has retained the
Investment Manager to supervise the investment of its assets.
Under the terms of the Management Agreement, the Investment Manager also
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.
The services provided by the Sub-Advisor are discussed above under
"Investment Manager and Sub-Advisor."
Expenses not expressly assumed by the Investment Manager under the
Management Agreement, by the Sub-Advisor for the EUROPEAN GROWTH PORTFOLIO and
the PACIFIC GROWTH PORTFOLIO under the Sub-Advisory Agreement, or by the
Distributor, will be paid by the Portfolios. Each Portfolio pays all expenses
incurred in its operation and a portion of the Fund's general administration
expenses allocated based on the asset sizes of the Portfolios. The Portfolios'
direct expenses include, but are not limited to: charges and expenses of any
registrar, custodian, transfer and dividend disbursing agent; brokerage
commissions; certain taxes; registration costs of the Fund under federal and
state securities laws; shareholder servicing costs, charges and expenses of any
outside service used for pricing of the Portfolios' 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 (or the Sub-Advisor) (not including
compensation or expenses of
30
<PAGE>
attorneys who are employees of the Investment Manager (or the Sub-Advisor));
fees and expenses of the Fund's independent accountants; interest on Portfolio
borrowings; and all other expenses attributable to a particular Portfolio.
Expenses which are allocated on the basis of size of the respective
Portfolios include the costs and expenses of printing, including typesetting,
and distributing prospectuses and statements of additional information of the
Fund and supplements thereto to the Fund's shareholders; all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing
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 the Sub-Advisor) or any corporate affiliate of the
Investment Manager (or the Sub-Advisor); state franchise taxes; Securities and
Exchange Commission fees; membership dues of industry associations; postage;
insurance premiums on property or personnel (including officers and Trustees) of
the Fund which inure to its benefit; and all other costs of the Fund's
operations properly payable by the Fund and allocable on the basis of size to
the respective Portfolios. Depending on the nature of a legal claim, liability
or lawsuit, litigation costs, payment of legal claims or liabilities and any
indemnification relating thereto may be directly applicable to the Portfolio or
allocated on the basis of the size of the respective Portfolios. The Trustees
have determined that this is an appropriate method of allocation of expenses.
Each of the Management Agreement and the Sub-Advisory Agreement provides
that in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations thereunder, the Investment Manager and the
Sub-Advisor, respectively, are not liable to the Fund or any of its investors
(and, in the case of the Sub-Advisory Agreement, to the Investment Manager) for
any act or omission or for any losses sustained by the Fund or its investors.
D. OTHER SERVICE PROVIDERS
(1) TRANSFER AGENT/DIVIDEND-DISBURSING AGENT
The Transfer Agent is the transfer agent for each Portfolio's shares and the
Dividend Disbursing Agent for payment of dividends and distributions on
Portfolio shares. The principal business address of the Transfer Agent is
Harborside Financial Center, Plaza Two, Jersey City, New Jersey 07311.
(2) CUSTODIAN AND INDEPENDENT ACCOUNTANTS
The Bank of New York, 90 Washington Street, New York, New York 10286, is the
Custodian of each Portfolio's assets other than those of the GLOBAL DIVIDEND
GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the EUROPEAN GROWTH
PORTFOLIO. The Chase Manhattan Bank is the Custodian of the assets of the GLOBAL
DIVIDEND GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the EUROPEAN GROWTH
PORTFOLIO. Any Portfolio's cash balances with the Custodian in excess of
$100,000 are unprotected by federal deposit insurance. These balances may, at
times, be substantial.
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, of the
Sub-Advisor and of the Distributor. As Transfer Agent and Dividend Disbursing
Agent, the Transfer Agent's responsibilities include maintaining shareholder
accounts, reinvesting dividends, processing account registration changes,
handling purchase and redemption transactions, tabulating proxies and
maintaining shareholder records and lists. For these services, the Transfer
Agent receives a fee from each Portfolio.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
- --------------------------------------------------------------------------------
A. BROKERAGE TRANSACTIONS
Subject to the general supervision of the Trustees, the Investment Manager
and, for the PACIFIC GROWTH PORTFOLIO and the EUROPEAN GROWTH PORTFOLIO, the
Sub-Advisor are responsible for decisions to buy and sell securities for each
Portfolio, the selection of brokers and dealers to effect the transactions,
31
<PAGE>
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. Certain securities (e.g., certain money
market instruments) are purchased 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 Portfolios
paid brokerage commissions as follows:
<TABLE>
<CAPTION>
BROKERAGE BROKERAGE BROKERAGE
COMMISSIONS PAID COMMISSIONS PAID COMMISSIONS PAID
FOR FISCAL YEAR FOR FISCAL YEAR FOR FISCAL YEAR
NAME OF PORTFOLIO ENDED 12/31/96 ENDED 12/31/97 ENDED 12/31/98
- ---------------------------------------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
High Yield Portfolio................................ $ 10,013 --
Utilities Portfolio................................. 120,935 $ 110,773
Income Builder Portfolio............................ N/A 39,789
Dividend Growth Portfolio........................... 796,688 1,267,591
Capital Growth Portfolio............................ 176,767 265,450
Global Dividend Growth Portfolio.................... 762,353 1,244,001
European Growth Portfolio........................... 575,660 783,716
Pacific Growth Portfolio............................ 878,874 670,101
Equity Portfolio.................................... 1,825,817 1,573,295
Strategist Portfolio................................ 429,659 455,450
------------------ ------------------ ------------------
Total........................................... $ 5,576,766 $ 6,410,166 $
------------------ ------------------ ------------------
------------------ ------------------ ------------------
</TABLE>
B. COMMISSIONS
Pursuant to an order of the SEC, the Portfolios may effect principal
transactions in certain money market instruments with Dean Witter Reynolds. The
Portfolios will limit their 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 Portfolios, 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 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.
32
<PAGE>
During the fiscal years ended December 31, 1996 and 1997 the Portfolios paid
brokerage commissions to Dean Witter Reynolds as follows:
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS
PAID
TO DEAN WITTER REYNOLDS
FOR FISCAL YEAR ENDED
------------------------
NAME OF PORTFOLIO 12/31/96 12/31/97
- ---------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Utilities Portfolio............................................................... $ 49,500 $ 35,250
Income Builder Portfolio.......................................................... N/A 24,982
Dividend Growth Portfolio......................................................... 181,121 229,890
Capital Growth Portfolio.......................................................... 38,010 45,335
Global Dividend Growth Portfolio.................................................. 35,401 54,004
Equity Portfolio.................................................................. 220,150 158,587
Strategist Portfolio.............................................................. 34,525 73,880
----------- -----------
Total......................................................................... $ 558,707 $ 621,928
----------- -----------
----------- -----------
</TABLE>
For the fiscal year ended December 31, 1998, the Portfolios paid brokerage
commissions to Dean Witter Reynolds as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE DOLLAR
AMOUNT OF EXECUTED
PERCENTAGE OF TRADES ON WHICH
BROKERAGE AGGREGATE BROKERAGE BROKERAGE
COMMISSIONS PAID TO COMMISSIONS FOR COMMISSIONS WERE
DWR FOR FISCAL YEAR FISCAL YEAR ENDED PAID FOR FISCAL
NAME OF PORTFOLIO ENDED 12/31/98 12/31/98 YEAR ENDED 12/31/98
- ----------------------------------------------- -------------------- --------------------- -------------------
<S> <C> <C> <C>
High Yield Portfolio...........................
Utilities Portfolio............................
Income Builder Portfolio.......................
Dividend Growth Portfolio......................
Capital Growth Portfolio.......................
Global Dividend Growth Portfolio...............
European Growth Portfolio......................
Pacific Growth Portfolio.......................
Equity Portfolio...............................
Strategist Portfolio...........................
Total......................................
</TABLE>
During the period June 1 through December 31, 1997, the Portfolios paid
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., as
follows:
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS PAID TO
MORGAN STANLEY & CO. FOR FISCAL
NAME OF PORTFOLIO YEAR ENDED 12/31/97
- --------------------------------------------------------------------------------- -------------------------------
<S> <C>
Utilities Portfolio.............................................................. $ 1,000
Income Builder Portfolio......................................................... 710
Dividend Growth Portfolio........................................................ 73,920
Capital Growth Portfolio......................................................... 10,305
Global Dividend Growth Portfolio................................................. 123,860
European Growth Portfolio........................................................ 4,655
Pacific Growth Portfolio......................................................... 13,927
Equity Portfolio................................................................. 69,900
Strategist Portfolio............................................................. 34,140
----------
Total........................................................................ $ 332,417
----------
----------
</TABLE>
33
<PAGE>
For the fiscal year ended December 31, 1998, the Portfolios paid brokerage
commissions to Morgan Stanley & Co. as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE DOLLAR
AMOUNT OF EXECUTED
PERCENTAGE OF TRADES ON WHICH
BROKERAGE COMMISSIONS AGGREGATE BROKERAGE BROKERAGE
PAID TO MORGAN STANLEY & COMMISSIONS FOR COMMISSIONS WERE
CO. FOR FISCAL YEAR FISCAL YEAR ENDED PAID FOR FISCAL YEAR
NAME OF PORTFOLIO ENDED 12/31/98 12/31/98 ENDED 12/31/98
- ------------------------------------------ ------------------------ --------------------- --------------------
<S> <C> <C> <C>
High Yield Portfolio......................
Utilities Portfolio.......................
Income Builder Portfolio..................
Dividend Growth Portfolio.................
Capital Growth Portfolio..................
Global Dividend Growth Portfolio..........
European Growth Portfolio.................
Pacific Growth Portfolio..................
Equity Portfolio..........................
Strategist Portfolio......................
Total.................................
</TABLE>
For the fiscal years ended December 31, 1996 and 1997, the EUROPEAN GROWTH
PORTFOLIO paid a total of $0 and $1,849, respectively, in brokerage commissions
to Deutsche Bank AG, London, and a total of $0 and $2,624, respectively, in
brokerage commissions to Deutsche Morgan Grenfell, London, affiliated brokers of
the Former Sub-Advisor, and the PACIFIC GROWTH PORTFOLIO paid a total of $2,146
and $3,263, respectively, in brokerage commissions to Deutsche Morgan Grenfell &
Partners Securities Pte Ltd. and a total of $14,787 and $7,569, respectively, in
brokerage commissions to Deutsche Morgan Grenfell Securities Hong Kong Limited,
also affiliated brokers of the Former Sub-Advisor. For the fiscal year ended
December 31, 1998, the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH
PORTFOLIO paid brokerage commissions to affiliated brokers of their former
Sub-Advisor for transactions as follows:
<TABLE>
<CAPTION>
BROKERAGE PERCENTAGE OF
COMMISSIONS PAID AGGREGATE DOLLAR
TO AFFILIATED PERCENTAGE OF AMOUNT OF EXECUTED
BROKER OF MORGAN AGGREGATE TRADES ON WHICH
GRENFELL BROKERAGE BROKERAGE
INVESTMENT COMMISSIONS COMMISSIONS WERE
SERVICES LTD. FOR FISCAL PAID FOR FISCAL
FOR FISCAL YEAR YEAR ENDED YEAR ENDED
NAME OF PORTFOLIO NAME OF BROKER ENDED 12/31/98 12/31/98 12/31/98
- ----------------------------------- ---------------------- ---------------- -------------- ------------------
<S> <C> <C> <C> <C>
European Growth Portfolio.......... Deutsche Bank AG,
London
Deutsche Morgan
Grenfell, London
Pacific Growth Portfolio........... Deutsche Morgan
Grenfell & Partners
Securities Pte Ltd.
Deutsche Morgan
Grenfell Securities
Hong Kong Limited
</TABLE>
C. BROKERAGE SELECTION
The policy of the Fund regarding purchases and sales of securities for the
Portfolios 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
34
<PAGE>
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 (or, if applicable, the Sub-Advisor) 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 (or, if applicable, the Sub-Advisor) 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 each Portfolio's policies, the Investment Manager
(or, if applicable, the Sub-Advisor) effects transactions with those brokers and
dealers who the Investment Manager (or, if applicable, the Sub-Advisor) believes
provide the most favorable prices and are capable of providing efficient
executions. If the Investment Manager (or, if applicable, the Sub-Advisor)
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 (or, if applicable, the Sub-Advisor). 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 (or, if applicable, the Sub-Advisor) from
brokers and dealers may be of benefit to the Investment Manager (or, if
applicable, the Sub-Advisor) in the management of accounts of some of its other
clients and may not in all cases benefit a Portfolio directly.
The Investment Manager and the Sub-Advisor currently serve as investment
advisors to a number of clients, including other investment companies, and may
in the future act as investment advisors to others. It is the practice of the
Investment Manager (or, if applicable, the Sub-Advisor) to cause purchase and
sale transactions to be allocated among the Portfolios and others whose assets
it manages in such manner as it deems equitable. In making such allocations
among the Portfolios and other client accounts, various factors may be
considered, including the 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 and other client
accounts. In the case of certain initial and secondary public offerings, the
Investment Manager (or, if applicable, the Sub-Advisor) 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 Portfolios paid
brokerage commissions to brokers because of research services provided as
follows:
<TABLE>
<CAPTION>
AGGREGATE DOLLAR AMOUNT OF
BROKERAGE COMMISSIONS DIRECTED TRANSACTIONS FOR WHICH
IN CONNECTION WITH RESEARCH SUCH COMMISSIONS WERE PAID
SERVICES PROVIDED FOR FISCAL FOR FISCAL YEAR ENDED
NAME OF PORTFOLIO YEAR ENDED 12/31/98 12/31/98
- ---------------------------------------------------- ------------------------------- --------------------------
<S> <C> <C>
Utilities Portfolio.................................
Income Builder Portfolio............................
Dividend Growth Portfolio...........................
Capital Growth Portfolio............................
Global Dividend Growth Portfolio....................
Equity Portfolio....................................
Strategist Portfolio................................
Total...........................................
</TABLE>
35
<PAGE>
E. REGULAR BROKER-DEALERS
During the fiscal year ended December 31, 1998, [Portfolio] purchased [type
of securities] issued by [list brokers], which were among the ten brokers or the
ten dealers that executed transactions for or with the Fund or the Portfolio in
the largest dollar amounts during the year. At December 31, 1998, [Portfolio]
held [type of securities] issued by such brokers with market values of [ ]
[and , respectively]. [Add similar sentences for each relevant Portfolio.]
VII. CAPITAL STOCK AND OTHER SECURITIES
- --------------------------------------------------------------------------------
The shareholders of each Portfolio 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. The Fund's shares of beneficial
interest are divided currently into sixteen separate Portfolios.
The Fund's Declaration of Trust permits the Trustees to authorize the
creation of additional Portfolios and additional classes of shares within any
Portfolio.
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.
Shareholders have the right to vote on the election of Trustees of the Fund
and on any and all matters on which by law or the provisions of the Fund's
By-Laws they may be entitled to vote. To the extent required by law, Northbrook
Life Insurance Company, Allstate Life Insurance Company of New York, Glenbrook
Life and Annuity Company and Paragon Life Insurance Company, which are the only
shareholders of the Fund, will vote the shares of the Fund held in each Account
established to fund the benefits under either a flexible premium deferred
variable annuity Contract or a flexible premium variable life insurance Contract
in accordance with instructions from the owners of such Contracts. Shareholders
of all Portfolios vote for a single set of Trustees. 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.
On any matters affecting only one Portfolio, only the shareholders of that
Portfolio are entitled to vote. On matters relating to all the Portfolios, but
affecting the Portfolios differently, separate votes by Portfolio are required.
Approval of an Investment Management Agreement and a change in fundamental
policies would be regarded as matters requiring separate voting by each
Portfolio.
With respect to the submission to shareholder vote of a matter requiring
separate voting by Portfolio, the matter shall have been effectively acted upon
with respect to any Portfolio if a majority of the outstanding voting securities
of that Portfolio votes for the approval of the matter, notwithstanding that:
(1) the matter has not been approved by a majority of the outstanding voting
securities of any other Portfolio; or (2) the matter has not been approved by a
majority of the outstanding voting securities of the
36
<PAGE>
Fund. The voting rights of shareholders are not cumulative, so that holders of
more than 50 percent of the shares voting can, if they choose, elect all
Trustees being selected, while the holders of the remaining shares would be
unable to elect any Trustees.
VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
- --------------------------------------------------------------------------------
A. PURCHASE OF SHARES
Information concerning how Fund shares are offered (and how they are
redeemed) is provided in the Fund's Prospectus.
B. OFFERING PRICE
The price of each Portfolio shares, called "net asset value," is based on
the value of the Portfolio's securities.
The MONEY MARKET PORTFOLIO, however, utilizes the amortized cost method in
valuing its portfolio securities for purposes of determining the net asset value
of its shares. The MONEY MARKET PORTFOLIO utilizes the amortized cost method in
valuing its portfolio securities even though the portfolio securities may
increase or decrease in market value, generally in connection with changes in
interest rates. The amortized cost method of valuation involves valuing a
security at its cost at the time of purchase adjusted by a constant amortization
to maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the MONEY MARKET
PORTFOLIO would receive if it sold the investment. During such periods, the
yield to investors in the MONEY MARKET PORTFOLIO may differ somewhat from that
obtained in a similar company which uses mark-to-market values for all of its
portfolio securities. For example, if the use of amortized cost resulted in a
lower (higher) aggregate portfolio value on a particular day, a prospective
investor in the MONEY MARKET PORTFOLIO would be able to obtain a somewhat higher
(lower) yield than would result from investment in such a similar company and
existing investors would receive less (more) investment income. The purpose of
this method of calculation is to facilitate the maintenance of a constant net
asset value per share of $1.00.
The use of the amortized cost method to value the portfolio securities of
the MONEY MARKET PORTFOLIO and the maintenance of the per share net asset value
of $1.00 is permitted pursuant to Rule 2a-7 of the Act (the "RULE") and is
conditioned on its compliance with various conditions contained in the Rule
including: (a) the Trustees are obligated, as a particular responsibility within
the overall duty of care owed to the Portfolio's shareholders, to establish
procedures reasonably designed, taking into account current market conditions
and the Portfolio's investment objectives, to stabilize the net asset value per
share as computed for the purpose of distribution and redemption at $1.00 per
share; (b) the procedures include (i) calculation, at such intervals as the
Trustees determine are appropriate and as are reasonable in light of current
market conditions, of the deviation, if any, between net asset value per share
using amortized cost to value portfolio securities and net asset value per share
based upon available market quotations with respect to such portfolio
securities; (ii) periodic review by the Trustees of the amount of deviation as
well as methods used to calculate it; and (iii) maintenance of written records
of the procedures, and the Trustees' considerations made pursuant to them and
any actions taken upon such consideration; (c) the Trustees should consider what
steps should be taken, if any, in the event of a difference of more than 1/2 of
1% between the two methods of valuation; and (d) the Trustees should take such
action as they deem appropriate (such as shortening the average portfolio
maturity, realizing gains or losses, withholding dividends or, as provided by
the Declaration of Trust, reducing the number of outstanding shares of the MONEY
MARKET PORTFOLIO) to eliminate or reduce to the extent reasonably practicable
material dilution or other unfair results to investors or existing shareholders
which might arise from differences between the two methods of valuation. Any
reduction of outstanding shares will be effected by having each shareholder
proportionately contribute to the MONEY MARKET PORTFOLIO'S capital the necessary
shares that represent the amount of excess upon such determination. Each
Contract
37
<PAGE>
Owner will be deemed to have agreed to such contribution in these circumstances
by allocating investment under his or her Contract to the MONEY MARKET
PORTFOLIO.
Generally, for purposes of the procedures adopted under the Rule, the
maturity of a portfolio security is deemed to be the period remaining
(calculated from the trade date or such other date on which the MONEY MARKET
PORTFOLIO'S interest in the instrument is subject to market action) until the
date on which in accordance with the terms of the security the principal amount
must unconditionally be paid, or in the case of a security called for
redemption, the date on which the redemption payment must be made.
A variable rate security that is subject to a demand feature is deemed to
have a maturity equal to the period remaining until the principal amount can be
recovered through demand. A floating rate security that is subject to a demand
feature is deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand.
An "NRSRO" is a nationally recognized statistical rating organization. The
term "Requisite NRSROs" means (i) any two NRSROs that have issued a rating with
respect to a security or class of debt obligations of an issuer, or (ii) if only
one NRSRO has issued a rating with respect to such security or issuer at the
time a fund purchases or rolls over the security, that NRSRO.
An Eligible Security is generally defined in the Rule to mean (i) a security
with a remaining maturity of 397 calendar days or less that has received a
short-term rating (or that has been issued by an issuer that has received a
short-term rating with respect to a class of debt obligations, or any debt
obligation within that class, that is comparable in priority and security with
the security) by the Requisite NRSROs in one of the two highest short-term
rating categories (within which there may be sub-categories or gradations
indicating relative standing); or (ii) a security: (A) that at the time of
issuance had a remaining maturity of more than 397 calendar days but that has a
remaining maturity of 397 calendar days or less; and (B) whose issuer has
received from the Requisite NRSROs a rating with respect to a class of debt
obligations (or any debt obligations within that class) that is now comparable
in priority and security with the security, in one of the two highest short-term
rating categories (within which there may be subcategories or gradations
indicating relative standing); or (iii) an unrated security that is of
comparable quality to a security meeting the requirements of (i) or (ii) above,
as determined by the Trustees. The MONEY MARKET PORTFOLIO will limit its
investments to securities that meet the requirements for Eligible Securities
including the required ratings by S&P or Moody's.
As permitted by the Rule, the Board has delegated to the Fund's Investment
Manager, subject to the Board's oversight pursuant to guidelines and procedures
adopted by the Board, the authority to determine which securities present
minimal credit risks and which unrated securities are comparable in quality to
rated securities.
Also, as required by the Rule, the MONEY MARKET PORTFOLIO will limit its
investments in securities, other than Government securities, so that, at the
time of purchase: (a) except as further limited in (b) below with regard to
certain securities, no more than 5% of its total assets will be invested in the
securities of any one issuer; and (b) with respect to Eligible Securities that
have received a rating in less than the highest category by any one of the
NRSROs whose ratings are used to qualify the security as an Eligible Security,
or that have been determined to be of comparable quality: (i) no more than 5% in
the aggregate of the Portfolio's total assets in all such securities, and (ii)
no more than the greater of 1% of total assets, or $1 million, in the securities
on any one issuer.
The presence of a line of credit or other credit facility offered by a bank
or other financial institution which guarantees the payment obligation of the
issuer, in the event of a default in the payment of principal or interest of an
obligation, may be taken into account in determining whether an investment is an
Eligible Security, provided that the guarantee itself is an Eligible Security.
The Rule further requires that the Money Market Portfolio limit its
investments to U.S. dollar-denominated instruments which the Trustees determine
present minimal credit risks and which are Eligible Securities. The Rule also
requires the Portfolio to maintain a dollar-weighted average portfolio maturity
(not more than 90 days) appropriate to its objective of maintaining a stable net
asset value of
38
<PAGE>
$1.00 per share and precludes the purchase of any instrument with a remaining
maturity of more than 397 days. (An Investment Restriction of the Fund further
precludes the Portfolio from investing in securities maturing more than one year
from the date of purchase.) Should the disposition of a portfolio security
result in a dollar-weighted average portfolio maturity of more than 90 days, the
Portfolio will invest its available cash in such a manner as to reduce such
maturity to 90 days or less a soon as is reasonably practicable.
If the Trustees determine that it is no longer in the best interests of the
MONEY MARKET PORTFOLIO and its shareholders to maintain a stable price of $1 per
share or if the Trustees believe that maintaining such price no longer reflects
a market-based net asset value per share, the board has the right to change from
an amortized cost basis of valuation to valuation based on market quotations.
The Fund will notify shareholders of the Portfolio of any such change.
In the calculation of a Portfolio's net asset value (other than for the
MONEY MARKET PORTFOLIO): (1) an equity 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 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 (or if applicable, the Sub-Advisor) 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 Portfolios' securities (other than securities of the MONEY
MARKET PORTFOLIO) 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 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 a Portfolio'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.
39
<PAGE>
IX. TAXATION OF THE PORTFOLIOS AND SHAREHOLDERS
- --------------------------------------------------------------------------------
Each of the Portfolios is treated as a separate entity for federal tax
purposes. Each of the Portfolios intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986. As
such, each of the Portfolios 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. Each of the
Portfolios generally intends to distribute sufficient income and gains so that
each of the Portfolios will not pay corporate income tax on its earnings.
Section 817(h) of the Internal Revenue Code provides that the investments of
a separate account underlying a variable insurance contract (or the investments
of a mutual fund, the shares of which are owned by the variable separate
account) must be "adequately diversified" in order for the contract to be
treated as an annuity or life insurance for tax purposes. The Treasury
Department has issued regulations prescribing these diversification
requirements. Each Portfolio intends to comply with these requirements.
Information concerning the federal income tax consequences to holders of the
underlying variable annuity or variable life insurance Contracts is contained in
the accompanying prospectus for the applicable Contract.
X. UNDERWRITERS
- --------------------------------------------------------------------------------
The Portfolios' shares are offered 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 are described above in the section titled "Principal Underwriter."
XI. CALCULATION OF PERFORMANCE DATA
- --------------------------------------------------------------------------------
The annualized current yield of the MONEY MARKET PORTFOLIO, as may be quoted
from time to time in advertisements and other communications to shareholders and
potential investors, is computed by determining, for a stated seven-day period,
the net change, exclusive of capital changes and including the value of
additional shares purchased with dividends and any dividends declared therefrom,
in the value of a hypothetical pre-existing account have a balance of one share
at the beginning of the period, subtracting a hypothetical charge which reflects
deductions from shareholder accounts (such as management fees), and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then multiplying the base period return by
(365/7).
The MONEY MARKET PORTFOLIO'S annualized effective yield, as may be quoted
from time to time in advertisements and other communications to shareholders and
potential investors, is computed by determining (for the same stated seven-day
period as for the current yield), the net change, exclusive of capital changes
and including the value of additional shares purchased with dividends and any
dividends declared therefrom, in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from shareholder
accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
compounding the based period return by adding 1, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result.
The yields quoted in any advertisement or other communication should not be
considered a representation of the yields of the MONEY MARKET PORTFOLIO in the
future since the yield is not fixed. Actual yields will depend not only on the
type, quality and maturities of the investments held by the MONEY MARKET
PORTFOLIO and changes in interest rates on such investments, but also on changes
in the Portfolio's expenses during the period.
Yield information may be useful in reviewing the performance of the Money
Market Portfolio and for providing a basis for comparison with other investment
alternatives. However, unlike bank deposits or other investments which typically
pay a fixed yield for a stated period of time, the Money Market
40
<PAGE>
Portfolio's yield fluctuates. Furthermore, the quoted yield does not reflect
charges which may be imposed on the Contracts by the applicable Account and
therefore is not equivalent to total return under a Contract. (For a description
of such charges, see the Prospectus for the Contracts which accompanies the
PROSPECTUS for the Fund.)
The current yield of the MONEY MARKET PORTFOLIO for the seven days ending
December 31, 1998 was 4.82%. The effective annual yield on % is %,
assuming daily compounding.
From time to time the Fund may quote the "yield" of each of the SHORT-TERM
BOND PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO, the HIGH YIELD PORTFOLIO and
the UTILITIES PORTFOLIO in advertising and sales literature. Yield is calculated
for any 30-day period as follows: the amount of interest and/or dividend income
for each security in the Portfolio is determined in accordance with regulatory
requirements; the total for the entire portfolio constitutes the Portfolio's
gross income for the period. Expenses accrued during the period are subtracted
to arrive at "net investment income." The resulting amount is divided by the
product of the net asset value per share on the last day of the period
multiplied by the average number of Portfolio shares outstanding during the
period that were entitled to dividends. This amount is added to 1 and raised to
the sixth power. 1 is then subtracted from the result and the difference is
multiplied by 2 to arrive at the annualized yield. The "yield" of a Portfolio
does not reflect the deduction of any charges which may be imposed on the
Contracts by the applicable Account which, if quoted, would reduce the yield
quoted. For the 30-day period ended December 31, 1998, the yield of the QUALITY
INCOME PLUS PORTFOLIO, calculated pursuant to this formula, was %, the yield
of the HIGH YIELD PORTFOLIO, calculated pursuant to this formula, was %, and
the yield of the UTILITIES PORTFOLIO, calculated pursuant to this formula, was
%. The SHORT-TERM BOND PORTFOLIO did not commence operations prior to the
date of this STATEMENT OF ADDITIONAL INFORMATION.
From time to time the Fund may quote the "total return" of each Portfolio in
advertising and sales literature. A Portfolio's "average annual total return"
represents an annualization of the Portfolio'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 the Portfolio's operations, if shorter than any of the
foregoing. For the purpose of this calculation, it is assumed that all dividends
and distributions are reinvested. However, average annual total return does not
reflect the deduction of any charges which may be imposed on the Contracts by
the applicable Account which, if quoted, would reduce the performance quoted.
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, 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 the one, five and ten year periods
ended December 31, 1998 were 5.18%, 5.00% and 5.38%, respectively, for the MONEY
MARKET PORTFOLIO; 8.67%, 7.31% and 9.55%, respectively, for the QUALITY INCOME
PLUS PORTFOLIO; -6.20%, 5.66% and 7.15%, respectively, for the HIGH YIELD
PORTFOLIO; 30.45%, 22.25% and 19.54%, respectively, for the EQUITY PORTFOLIO;
and 26.55%, 13.48% and 12.38%, respectively, for the STRATEGIST PORTFOLIO. The
average annual total returns of the UTILITIES PORTFOLIO and the DIVIDEND GROWTH
PORTFOLIO for the one and five year periods ended December 31, 1998 and for the
period from March 1, 1990 (commencement of these Portfolios' operations) through
December 31, 1998 were 14.28%, 18.61% and 14.93%, respectively, for the
UTILITIES PORTFOLIO and 23.76%, 14.89% and 14.42%, respectively, for the
DIVIDEND GROWTH PORTFOLIO. The average annual total returns of the CAPITAL
GROWTH PORTFOLIO and the EUROPEAN GROWTH PORTFOLIO for one and five year periods
ended December 31, 1998 and for the period from March 1, 1991 (commencement of
these Portfolios' operations) through December 31, 1998 were 23.96%, 20.60% and
18.53%, respectively, for the CAPITAL GROWTH PORTFOLIO and 19.63%, 16.88% and
13.23%, respectively, for the EUROPEAN GROWTH PORTFOLIO. The average annual
total returns of the GLOBAL DIVIDEND GROWTH PORTFOLIO and the PACIFIC GROWTH
PORTFOLIO for the one year period ended December 31, 1998 and for the period
from February 23, 1994 (commencement of these Portfolios' operations) through
December 31, 1998 were 12.53% and 13.06%, respectively, for the GLOBAL DIVIDEND
GROWTH PORTFOLIO and -10.40% and -10.88%, respectively, for the PACIFIC
41
<PAGE>
GROWTH PORTFOLIO. The average annual total returns of the INCOME BUILDER
PORTFOLIO for the year ended December 31, 1998 and for the period from January
21, 1997 (commencement of the Portfolio's operations) through December 31, 1998,
were 3.21% and 12.79%, respectively. The SHORT-TERM BOND PORTFOLIO and the
AGGRESSIVE EQUITY PORTFOLIO did not commence operations prior to the date of
this STATEMENT OF ADDITIONAL INFORMATION.
The Fund quotes the "total return" of a Portfolio that has been in operation
for less than one year on an non-annualized basis. The Fund may compute the
aggregate total return of each of the S&P 500 INDEX PORTFOLIO and the
COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO (which commenced operations on May 18,
1998) and the SHORT-TERM BOND PORTFOLIO and the AGGRESSIVE EQUITY PORTFOLIO
(which did not commence operations prior to the date of this STATEMENT OF
ADDITIONAL INFORMATION) for specified periods by determining the aggregate
percentage rate that 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 by the initial $1,000 investment and subtracting 1
from the result. Based on the foregoing calculation, the total returns of the
S&P 500 INDEX PORTFOLIO and the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO for the
period May 18, 1998 through December 31, 1998 were 12.20% and -1.90%,
respectively. The Investment Manager had undertaken to assume all operating
expenses of each of the S&P 500 INDEX PORTFOLIO and the COMPETITIVE EDGE "BEST
IDEAS" PORTFOLIO until the earlier of April 30, 1999 or the attainment by the
respective Portfolio of $50 million of net assets. The S&P 500 INDEX PORTFOLIO
attained $50 million of net assets on January 5, 1999. Without the waiver of
fees and assumption of expenses by the Investment Manager, the total returns of
the S&P 500 INDEX PORTFOLIO and the COMPETITIVE EDGE "BEST IDEAS" PORTFOLIO
would have been 12.00% and -2.20%, respectively.
In addition to the foregoing, the Fund may advertise the total return of the
Portfolios over different periods of time by means of aggregate, average,
year-by-year or other types of total return figures. Such calculations similarly
do not reflect the deduction of any charges which may be imposed on the
Contracts by an Account. The Fund may also compute the aggregate total returns
of the Portfolios 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 the reduction for any charges imposed on the Contracts by
the applicable Account) by the initial $1,000 investment and subtracting 1 from
the result. Based on the foregoing calculation, the total returns of the MONEY
MARKET PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO, the HIGH YIELD PORTFOLIO,
the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO for the one, five and ten year
periods ended December 31, 1998 were 5.18%, 27.63% and 68.82%, respectively, for
the MONEY MARKET PORTFOLIO, 8.67%, 42.30% and 149.05%, respectively, for the
QUALITY INCOME PLUS PORTFOLIO; -6.20%, 31.71% and 99.48%, respectively, for the
HIGH YIELD PORTFOLIO, 30.45%, 173.01% and 886.46%, respectively, for the EQUITY
PORTFOLIO; and 26.55%, 88.20% and 266.69%, respectively, for the STRATEGIST
PORTFOLIO, the total returns of the UTILITIES PORTFOLIO and the DIVIDEND GROWTH
PORTFOLIO for the one and five year periods ended December 31, 1998 and for the
period from March 1, 1990 through December 31, 1998 were 23.76%, 100.17% and
228.72%, respectively, for the UTILITIES PORTFOLIO and 14.28%, 134.73% and
241.92%, respectively, for the DIVIDEND GROWTH PORTFOLIO, the total returns of
the CAPITAL GROWTH PORTFOLIO and the EUROPEAN GROWTH PORTFOLIO for the one and
five year periods ended December 31, 1998 and for the period from March 1, 1991
through December 31, 1998 were 19.63%, 118.08% and 164.73%, respectively, for
the CAPITAL GROWTH PORTFOLIO and 23.96%, 155.15% and 278.84%, respectively, for
the EUROPEAN GROWTH PORTFOLIO, the total returns of the GLOBAL DIVIDEND GROWTH
PORTFOLIO and the PACIFIC GROWTH PORTFOLIO for the one year period ended
December 31, 1998 and for the period from February 23, 1994 through December 31,
1998 were 12.53% and 81.41%, respectively, for the GLOBAL DIVIDEND GROWTH
PORTFOLIO and -10.40% and -42.80%, respectively, for the PACIFIC GROWTH
PORTFOLIO, and the total returns of the INCOME BUILDER PORTFOLIO for the year
ended December 31, 1998 and for the period from January 21, 1997 (commencement
of the Portfolio's operations) through December 31, 1998, were 3.21% and 26.32%,
respectively.
42
<PAGE>
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in shares of a Portfolio by adding 1 to the
Portfolio's aggregate total return to date (expressed as a decimal) and
multiplying by $10,000, $50,000 or $100,000, as the case may be. Investments of
$10,000, $50,000 and $100,000 in each Portfolio of the Fund at inception of the
Portfolio would have grown (or declined) to the following amounts at December
31, 1998:
<TABLE>
<CAPTION>
INVESTMENT AT COMMENCEMENT OF
OPERATIONS OF
-------------------------------
NAME OF PORTFOLIO $10,000 $50,000 $100,000
- -------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Money Market Portfolio.......................................................... 23,752 118,760 237,520
Quality Income Plus Portfolio................................................... 27,430 137,150 274,300
High Yield Portfolio............................................................ 38,145 180,725 361,450
Utilities Portfolio............................................................. 32,872 164,360 328,720
Income Builder Portfolio........................................................ 12,632 63,160 126,320
Dividend Growth Portfolio....................................................... 34,192 170,960 341,920
Capital Growth Portfolio........................................................ 26,473 132,365 264,730
Global Dividend Growth Portfolio................................................ 18,141 90,705 181,410
European Growth Portfolio....................................................... 37,884 189,420 378,840
Pacific Growth Portfolio........................................................ 5,720 28,600 57,200
Equity Portfolio................................................................ 98,646 493,230 986,480
S&P 500 Index Portfolio......................................................... 11,220 56,100 112,200
Competitive Edge "Best Ideas" Portfolio......................................... 9,810 49,050 98,100
Strategist Portfolio............................................................ 36,889 183,345 366,690
</TABLE>
The Fund from time to time may also advertise the performance of the
Portfolios 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 , 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.
43
<PAGE>
MORGAN STANLEY DEAN WITTER VARIABLE INVESTMENT SERIES
PART C OTHER INFORMATION
Item 23. Exhibits
1. Form of Instrument Establishing and Designating Additional
Series of Shares.
2. Amended and Restated By-Laws of the Registrant dated
January 28, 1999.
5. Form of Instrument Adding New Portfolios to Investment
Management Agreement.
27. Financial Data Schedules - to be filed by amendment.
All other exhibits were previously filed Via EDGAR and are hereby
incorporated by reference.
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
None
Item 25. INDEMNIFICATION.
Pursuant to Section 5.3 of the Registrant's Declaration of Trust and under
Section 4.8 of the Registrant's By-Laws, the indemnification of the Registrant's
trustees, officers, employees and agents is permitted if it is determined that
they acted under the belief that their actions were in or not opposed to the
best interest of the Registrant, and, with respect to any criminal proceeding,
they had reasonable cause to believe their conduct was not unlawful. In
addition, indemnification is permitted only if it is determined that the actions
in question did not render them liable by reason of willful misfeasance, bad
faith or gross negligence in the performance of their duties or by reason of
reckless disregard of their obligations and duties to the Registrant. Trustees,
officers, employees and agents will be indemnified for the expense of litigation
if it is determined that they are entitled to indemnification against any
liability established in such litigation. The Registrant may also advance money
for these expenses provided that they give their undertakings to repay the
Registrant unless their conduct is later determined to permit indemnification.
Pursuant to Section 5.2 of the Registrant's Declaration of Trust and
paragraph 8 of the Registrant's Investment Management Agreement, neither the
Investment Manager nor any trustee, officer, employee or agent of the Registrant
shall be liable for any action or failure to act, except in the case of bad
faith, willful misfeasance, gross negligence or reckless disregard of duties to
the Registrant.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a trustee,
<PAGE>
officer, or controlling person of the Registrant in connection with the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such trustee, officer or controlling person in connection with
the shares being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act, and will be governed
by the final adjudication of such issue.
The Registrant hereby undertakes that it will apply the indemnification
provision of its by-laws in a manner consistent with Release 11330 of the
Securities and Exchange Commission under the Investment Company Act of 1940, so
long as the interpretation of Sections 17(h) and 17(i) of such Act remains in
effect.
Registrant, in conjunction with the Investment Manager, Registrant's
Trustees, and other registered investment management companies managed by the
Investment Manager, maintains insurance on behalf of any person who is or was a
Trustee, officer, employee, or agent of Registrant, or who is or was serving at
the request of Registrant as a trustee, director, officer, employee or agent of
another trust or corporation, against any liability asserted against him and
incurred by him or arising out of his position. However, in no event will
Registrant maintain insurance to indemnify any such person for any act for which
Registrant itself is not permitted to indemnify him.
Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
See "The Fund and Its Management" in the Prospectus regarding the business
of the investment advisor. The following information is given regarding
officers of Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors"). MSDW
Advisors is a wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. The
principal address of the Morgan Stanley Dean Witter Funds is Two World Trade
Center, New York, New York 10048.
The term "Morgan Stanley Dean Witter Funds" refers to the following
registered investment companies:
CLOSED-END INVESTMENT COMPANIES
(1) Morgan Stanley Dean Witter California Insured Municipal Income Trust
(2) Morgan Stanley Dean Witter California Quality Municipal Securities
(3) Morgan Stanley Dean Witter Government Income Trust
(4) Morgan Stanley Dean Witter High Income Advantage Trust
(5) Morgan Stanley Dean Witter High Income Advantage Trust II
(6) Morgan Stanley Dean Witter High Income Advantage Trust III
(7) Morgan Stanley Dean Witter Income Securities Inc.
(8) Morgan Stanley Dean Witter Insured California Municipal Securities
(9) Morgan Stanley Dean Witter Insured Municipal Bond Trust
(10) Morgan Stanley Dean Witter Insured Municipal Income Trust
(11) Morgan Stanley Dean Witter Insured Municipal Securities
(12) Morgan Stanley Dean Witter Insured Municipal Trust
(13) Morgan Stanley Dean Witter Municipal Income Opportunities Trust
(14) Morgan Stanley Dean Witter Municipal Income Opportunities Trust II
(15) Morgan Stanley Dean Witter Municipal Income Opportunities Trust III
(16) Morgan Stanley Dean Witter Municipal Income Trust
2
<PAGE>
(17) Morgan Stanley Dean Witter Municipal Income Trust II
(18) Morgan Stanley Dean Witter Municipal Income Trust III
(19) Morgan Stanley Dean Witter Municipal Premium Income Trust
(20) Morgan Stanley Dean Witter New York Quality Municipal Securities
(21) Morgan Stanley Dean Witter Prime Income Trust
(22) Morgan Stanley Dean Witter Quality Municipal Income Trust
(23) Morgan Stanley Dean Witter Quality Municipal Investment Trust
(24) Morgan Stanley Dean Witter Quality Municipal Securities
OPEN-END INVESTMENT COMPANIES
(1) Active Assets California Tax-Free Trust
(2) Active Assets Government Securities Trust
(3) Active Assets Money Trust
(4) Active Assets Tax-Free Trust
(5) Morgan Stanley Dean Witter Aggressive Equity Fund
(6) Morgan Stanley Dean Witter American Value Fund
(7) Morgan Stanley Dean Witter Balanced Growth Fund
(8) Morgan Stanley Dean Witter Balanced Income Fund
(9) Morgan Stanley Dean Witter California Tax-Free Daily Income Trust
(10) Morgan Stanley Dean Witter California Tax-Free Income Fund
(11) Morgan Stanley Dean Witter Capital Appreciation Fund
(12) Morgan Stanley Dean Witter Capital Growth Securities
(13) Morgan Stanley Dean Witter Competitive Edge Fund, "Best Ideas Portfolio"
(14) Morgan Stanley Dean Witter Convertible Securities Trust
(15) Morgan Stanley Dean Witter Developing Growth Securities Trust
(16) Morgan Stanley Dean Witter Diversified Income Trust
(17) Morgan Stanley Dean Witter Dividend Growth Securities Inc.
(18) Morgan Stanley Dean Witter Equity Fund
(19) Morgan Stanley Dean Witter European Growth Fund Inc.
(20) Morgan Stanley Dean Witter Federal Securities Trust
(21) Morgan Stanley Dean Witter Financial Services Trust
(22) Morgan Stanley Dean Witter Fund of Funds
(23) Morgan Stanley Dean Witter Global Dividend Growth Securities
(24) Morgan Stanley Dean Witter Global Short-Term Income Fund Inc.
(25) Morgan Stanley Dean Witter Global Utilities Fund
(26) Morgan Stanley Dean Witter Growth Fund
(27) Morgan Stanley Dean Witter Hawaii Municipal Trust
(28) Morgan Stanley Dean Witter Health Sciences Trust
(29) Morgan Stanley Dean Witter High Yield Securities Inc.
(30) Morgan Stanley Dean Witter Income Builder Fund
(31) Morgan Stanley Dean Witter Information Fund
(32) Morgan Stanley Dean Witter Intermediate Income Securities
(33) Morgan Stanley Dean Witter International SmallCap Fund
(34) Morgan Stanley Dean Witter Japan Fund
(35) Morgan Stanley Dean Witter Limited Term Municipal Trust
(36) Morgan Stanley Dean Witter Liquid Asset Fund Inc.
(37) Morgan Stanley Dean Witter Market Leader Trust
(38) Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities
(39) Morgan Stanley Dean Witter Mid-Cap Growth Fund
3
<PAGE>
(40) Morgan Stanley Dean Witter Multi-State Municipal Series Trust
(41) Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
(42) Morgan Stanley Dean Witter New York Municipal Money Market Trust
(43) Morgan Stanley Dean Witter New York Tax-Free Income Fund
(44) Morgan Stanley Dean Witter Pacific Growth Fund Inc.
(45) Morgan Stanley Dean Witter Precious Metals and Minerals Trust
(46) Morgan Stanley Dean Witter S&P 500 Index Fund
(47) Morgan Stanley Dean Witter S&P 500 Select Fund
(48) Morgan Stanley Dean Witter Select Dimensions Investment Series
(49) Morgan Stanley Dean Witter Select Municipal Reinvestment Fund
(50) Morgan Stanley Dean Witter Short-Term Bond Fund
(51) Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
(52) Morgan Stanley Dean Witter Special Value Fund
(53) Morgan Stanley Dean Witter Strategist Fund
(54) Morgan Stanley Dean Witter Tax-Exempt Securities Trust
(55) Morgan Stanley Dean Witter Tax-Free Daily Income Trust
(56) Morgan Stanley Dean Witter U.S. Government Money Market Trust
(57) Morgan Stanley Dean Witter U.S. Government Securities Trust
(58) Morgan Stanley Dean Witter Utilities Fund
(59) Morgan Stanley Dean Witter Value-Added Market Series
(60) Morgan Stanley Dean Witter Value Fund
(61) Morgan Stanley Dean Witter Variable Investment Series
(62) Morgan Stanley Dean Witter World Wide Income Trust
The term "TCW/DW Funds" refers to the following registered investment
companies:
OPEN-END INVESTMENT COMPANIES
(1) TCW/DW Emerging Markets Opportunities Trust
(2) TCW/DW Global Telecom Trust
(3) TCW/DW Income and Growth Fund
(4) TCW/DW Latin American Growth Fund
(5) TCW/DW Mid-Cap Equity Trust
(6) TCW/DW North American Government Income Trust
(7) TCW/DW Small Cap Growth Fund
(8) TCW/DW Total Return Trust
CLOSED-END INVESTMENT COMPANIES
(1) TCW/DW Term Trust 2000
(2) TCW/DW Term Trust 2002
(3) TCW/DW Term Trust 2003
4
<PAGE>
<TABLE>
<CAPTION>
<S><C>
NAME AND POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
MORGAN STANLEY DEAN OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
WITTER ADVISORS INC. AND NATURE OF CONNECTION
- -------------------- ------------------------------------------------
Mitchell M. Merin President and Chief Operating Officer of Asset
President, Chief Management of Morgan Stanley Dean Witter & Co.
Executive Officer and ("MSDW"); Chairman and Director of Morgan Stanley Dean
Director Witter Distributors Inc. ("MSDW Distributors") and
Morgan Stanley Dean Witter Trust FSB ("MSDW Trust");
President, Chief Executive Officer and Director of
Morgan Stanley Dean Witter Services Company Inc.
("MSDW Services"); Executive Vice President and
Director of Dean Witter Reynolds Inc. ("DWR");
Director of various MSDW subsidiaries.
Thomas C. Schneider Executive Vice President and Chief Strategic and
Executive Vice Administrative Officer of MSDW; Executive Vice
President and Chief President and Chief Financial Officer of MSDW Services;
Financial Officer Director of DWR and MSDW.
Joseph J. McAlinden Vice President of the Morgan Stanley Dean Witter Funds
Executive Vice President and Director of MSDW Trust.
and Chief Investment
Officer
Ronald E. Robison Executive Vice President and Chief Administrative Officer
Executive Vice President of MSDW Services; Vice President of the Morgan Stanley
and Chief Administrative Dean Witter Funds and the TCW/DW Funds.
Officer
Edward C. Oelsner, III
Executive Vice President
Barry Fink Assistant Secretary of DWR; Senior Vice President,
Senior Vice President, Secretary, General Counsel and Director of MSDW
Secretary, General Services; Senior Vice President, Assistant
Counsel and Director Secretary and Assistant General Counsel of MSDW
Distributors; Vice President, Secretary and
General Counsel of the Morgan Stanley Dean Witter
Funds and the TCW/DW Funds.
Peter M. Avelar Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Mark Bavoso Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Rosalie Clough
Senior Vice President
and Director of Marketing
5
<PAGE>
NAME AND POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
MORGAN STANLEY DEAN OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
WITTER ADVISORS INC. AND NATURE OF CONNECTION
- -------------------- ------------------------------------------------
Richard Felegy
Senior Vice President
Edward F. Gaylor Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Robert S. Giambrone Senior Vice President of MSDW Services, MSDW
Senior Vice President Distributors and MSDW Trust and Director of MSDW Trust; Vice
President of the Morgan Stanley Dean Witter Funds and the
TCW/DW Funds.
Rajesh K. Gupta Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Kenton J. Hinchliffe Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Kevin Hurley Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Margaret Iannuzzi
Senior Vice President
Jenny Beth Jones Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
John B. Kemp, III President of MSDW Distributors.
Senior Vice President
Anita H. Kolleeny Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Jonathan R. Page Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Ira N. Ross Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Guy G. Rutherfurd, Jr. Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Rochelle G. Siegel Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
6
<PAGE>
NAME AND POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
MORGAN STANLEY DEAN OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
WITTER ADVISORS INC. AND NATURE OF CONNECTION
- -------------------- ------------------------------------------------
James Solloway
Senior Vice President
Jayne M. Stevlingson Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Paul D. Vance Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Elizabeth A. Vetell
Senior Vice President
and Director of Shareholder
Communication
James F. Willison Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Douglas Brown
First Vice President
Thomas F. Caloia First Vice President and Assistant Treasurer of
First Vice President MSDW Services; Assistant Treasurer of MSDW
and Assistant Distributors; Treasurer and Chief Financial Officer of the
Treasurer Morgan Stanley Dean Witter Funds and the TCW/DW Funds.
Thomas Chronert
First Vice President
Marilyn K. Cranney Assistant Secretary of DWR; First Vice President and
First Vice President Assistant Secretary of MSDW Services; Assistant
and Assistant Secretary Secretary of the Morgan Stanley Dean Witter Funds and the
TCW/DW Funds.
Salvatore DeSteno Vice President of MSDW Services.
First Vice President
Michael Interrante First Vice President and Controller of MSDW Services;
First Vice President Assistant Treasurer of MSDW Distributors; First Vice
and Controller President and Treasurer of MSDW Trust.
David Johnson
First Vice President
7
<PAGE>
NAME AND POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
MORGAN STANLEY DEAN OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
WITTER ADVISORS INC. AND NATURE OF CONNECTION
- -------------------- ------------------------------------------------
Stanley Kapica
First Vice President
Carsten Otto First Vice President and Assistant Secretary of MSDW
First Vice President Services; Assistant Secretary of the Morgan Stanley
and Assistant Secretary Dean Witter Funds and the TCW/DW Funds.
Robert Zimmerman
First Vice President
Dale Albright
Vice President
Joan G. Allman
Vice President
Andrew Arbenz
Vice President
Joseph Arcieri Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
Nancy Belza
Vice President
Maurice Bendrihem
Vice President and
Assistant Controller
Frank Bruttomesso Vice President and Assistant Secretary of MSDW
Vice President and Services; Assistant Secretary of the Morgan Stanley Dean
Assistant Secretary Witter Funds and the TCW/DW Funds.
Ronald Caldwell
Vice President
Joseph Cardwell
Vice President
Philip Casparius
Vice President
David L. Dineen
Vice President
8
<PAGE>
NAME AND POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
MORGAN STANLEY DEAN OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
WITTER ADVISORS INC. AND NATURE OF CONNECTION
- -------------------- ------------------------------------------------
Bruce Dunn
Vice President
Michael Durbin
Vice President
Sheila Finnerty Vice President of Morgan Stanley Dean Witter
Vice President Prime Income Trust.
Jeffrey D. Geffen
Vice President
Sandra Gelpieryn
Vice President
Michael Geringer
Vice President
Ellen Gold
Vice President
Stephen Greenhut
Vice President
Peter W. Gurman
Vice President
Matthew Haynes Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
Peter Hermann Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
David Hoffman
Vice President
Christopher Jones
Vice President
Kevin Jung
Vice President
Carol Espejo Kane
Vice President
9
<PAGE>
NAME AND POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
MORGAN STANLEY DEAN OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
WITTER ADVISORS INC. AND NATURE OF CONNECTION
- -------------------- ------------------------------------------------
Michelle Kaufman Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
Paula LaCosta Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
Thomas Lawlor
Vice President
Gerard J. Lian Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
Nancy Login
Vice President
Steven MacNamara
Vice President
Catherine Maniscalco Vice President of Morgan Stanley Dean Witter Natural
Vice President Resource Development Securities Inc.
Albert McGarity
Vice President
LouAnne D. McInnis Vice President and Assistant Secretary of MSDW
Vice President and Services; Assistant Secretary of the Morgan Stanley Dean
Assistant Secretary Witter Funds and the TCW/DW Funds.
Teresa McRoberts Vice President of Morgan Stanley Dean Witter S&P 500
Vice President Select Fund
Sharon K. Milligan
Vice President
Mark Mitchell
Vice President
Julie Morrone
Vice President
Mary Beth Mueller
Vice President
David Myers Vice President of Morgan Stanley Dean Witter Natural
Vice President Resource Development Securities Inc.
10
<PAGE>
NAME AND POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
MORGAN STANLEY DEAN OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
WITTER ADVISORS INC. AND NATURE OF CONNECTION
- -------------------- ------------------------------------------------
Richard Norris
Vice President
George Paoletti Vice President of Morgan Stanley Dean Witter Information
Vice President Fund.
Anne Pickrell Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
Michael Roan
Vice President
John Roscoe
Vice President
Hugh Rose
Vice President
Robert Rossetti Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
Ruth Rossi Vice President and Assistant Secretary of MSDW
Vice President and Services; Assistant Secretary of the Morgan Stanley Dean
Assistant Secretary Witter Funds and the TCW/DW Funds.
Carl F. Sadler
Vice President
Deborah Santaniello
Vice President
Howard A. Schloss Vice President of Morgan Stanley Dean Witter Federal
Vice President Securities Trust.
Peter J. Seeley Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
Robert Stearns
Vice President
Naomi Stein
Vice President
Michael Strayhorn
Vice President
11
<PAGE>
NAME AND POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
MORGAN STANLEY DEAN OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
WITTER ADVISORS INC. AND NATURE OF CONNECTION
- -------------------- ------------------------------------------------
Kathleen H. Stromberg Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
Marybeth Swisher
Vice President
Robert Vanden Assem
Vice President
James P. Wallin
Vice President
Alice Weiss Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
John Wong
Vice President
</TABLE>
Item 27. PRINCIPAL UNDERWRITERS
Morgan Stanley Dean Witter Distributors Inc. ("MSDW Distributors"), a Delaware
corporation, is the principal underwriter of the Registrant. MSDW Distributors
is also the principal underwriter of the following investment companies:
(1) Active Assets California Tax-Free Trust
(2) Active Assets Government Securities Trust
(3) Active Assets Money Trust
(4) Active Assets Tax-Free Trust
(5) Morgan Stanley Dean Witter Aggressive Equity Fund
(6) Morgan Stanley Dean Witter American Value Fund
(7) Morgan Stanley Dean Witter Balanced Growth Fund
(8) Morgan Stanley Dean Witter Balanced Income Fund
(9) Morgan Stanley Dean Witter California Tax-Free Daily Income Trust
(10) Morgan Stanley Dean Witter California Tax-Free Income Fund
(11) Morgan Stanley Dean Witter Capital Appreciation Fund
(12) Morgan Stanley Dean Witter Capital Growth Securities
(13) Morgan Stanley Dean Witter Competitive Edge Fund, "Best Ideas Portfolio"
(14) Morgan Stanley Dean Witter Convertible Securities Trust
(15) Morgan Stanley Dean Witter Developing Growth Securities Trust
(16) Morgan Stanley Dean Witter Diversified Income Trust
(17) Morgan Stanley Dean Witter Dividend Growth Securities Inc.
(18) Morgan Stanley Dean Witter Equity Fund
(19) Morgan Stanley Dean Witter European Growth Fund Inc.
(20) Morgan Stanley Dean Witter Federal Securities Trust
(21) Morgan Stanley Dean Witter Financial Services Trust
12
<PAGE>
(22) Morgan Stanley Dean Witter Fund of Funds
(23) Morgan Stanley Dean Witter Global Dividend Growth Securities
(24) Morgan Stanley Dean Witter Global Short-Term Income Fund Inc.
(25) Morgan Stanley Dean Witter Global Utilities Fund
(26) Morgan Stanley Dean Witter Growth Fund
(27) Morgan Stanley Dean Witter Hawaii Municipal Trust
(28) Morgan Stanley Dean Witter Health Sciences Trust
(29) Morgan Stanley Dean Witter High Yield Securities Inc.
(30) Morgan Stanley Dean Witter Income Builder Fund
(31) Morgan Stanley Dean Witter Information Fund
(32) Morgan Stanley Dean Witter Intermediate Income Securities
(33) Morgan Stanley Dean Witter International SmallCap Fund
(34) Morgan Stanley Dean Witter Japan Fund
(35) Morgan Stanley Dean Witter Limited Term Municipal Trust
(36) Morgan Stanley Dean Witter Liquid Asset Fund Inc.
(37) Morgan Stanley Dean Witter Market Leader Trust
(38) Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities
(39) Morgan Stanley Dean Witter Mid-Cap Growth Fund
(40) Morgan Stanley Dean Witter Multi-State Municipal Series Trust
(41) Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
(42) Morgan Stanley Dean Witter New York Municipal Money Market Trust
(43) Morgan Stanley Dean Witter New York Tax-Free Income Fund
(44) Morgan Stanley Dean Witter Pacific Growth Fund Inc.
(45) Morgan Stanley Dean Witter Precious Metals and Minerals Trust
(46) Morgan Stanley Dean Witter Prime Income Trust
(47) Morgan Stanley Dean Witter S&P 500 Index Fund
(48) Morgan Stanley Dean Witter S&P 500 Select Fund
(49) Morgan Stanley Dean Witter Short-Term Bond Fund
(50) Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
(51) Morgan Stanley Dean Witter Special Value Fund
(52) Morgan Stanley Dean Witter Strategist Fund
(53) Morgan Stanley Dean Witter Tax-Exempt Securities Trust
(54) Morgan Stanley Dean Witter Tax-Free Daily Income Trust
(55) Morgan Stanley Dean Witter U.S. Government Money Market Trust
(56) Morgan Stanley Dean Witter U.S. Government Securities Trust
(57) Morgan Stanley Dean Witter Utilities Fund
(58) Morgan Stanley Dean Witter Value-Added Market Series
(59) Morgan Stanley Dean Witter Value Fund
(60) Morgan Stanley Dean Witter Variable Investment Series
(61) Morgan Stanley Dean Witter World Wide Income Trust
(1) TCW/DW Emerging Markets Opportunities Trust
(2) TCW/DW Global Telecom Trust
(3) TCW/DW Income and Growth
(4) TCW/DW Latin American Growth Fund
(5) TCW/DW Mid-Cap Equity Trust
(6) TCW/DW North American Government Income Trust
(7) TCW/DW Small Cap Growth Fund
(8) TCW/DW Total Return Trust
13
<PAGE>
(b) The following information is given regarding directors and officers of
MSDW Distributors not listed in Item 26 above. The principal address of
MSDW Distributors is Two World Trade Center, New York, New York 10048.
Other than Mr. Purcell, who is a Trustee of the Registrant, none of the
following persons has any position or office with the Registrant.
NAME POSITIONS AND OFFICE WITH MSDW DISTRIBUTORS
Christine Edwards Executive Vice President, Secretary, Director and Chief
Legal Officer.
Michael T. Gregg Vice President and Assistant Secretary.
James F. Higgins Director
Fredrick K. Kubler Senior Vice President, Assistant Secretary and Chief
Compliance Officer.
Philip J. Purcell Director
John Schaeffer Director
Charles Vidala Senior Vice President and Financial Principal
Item 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder are
maintained by the Investment Manager at its offices, except records relating to
holders of shares issued by the Registrant, which are maintained by the
Registrant's Transfer Agent, at its place of business as shown in the
prospectus.
Item 29. MANAGEMENT SERVICES
Registrant is not a party to any such management-related service
contract.
Item 30. UNDERTAKINGS
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York on the 9th day of February, 1999.
MORGAN STANLEY DEAN WITTER VARIABLE INVESTMENT SERIES
By /s/Barry Fink
-----------------------------
Barry Fink
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 25 has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S><C>
Signatures Title Date
---------- ----- ----
(1) Principal Executive Officer President, Chief
Executive Officer,
Trustee and Chairman
By /s/Charles A. Fiumefreddo 2/9/99
-------------------------------
Charles A. Fiumefreddo
(2) Principal Financial Officer Treasurer and Principal
Accounting Officer
By /s/Thomas F. Caloia 2/9/99
-------------------------------
Thomas F. Caloia
(3) Majority of the Trustees
Charles A. Fiumefreddo (Chairman)
Philip J. Purcell
By /s/Barry Fink 2/9/99
-------------------------------
Barry Fink
Attorney-in-Fact
Michael Bozic
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Manuel H. Johnson
Michael E. Nugent
John L. Schroeder
By /s/David M. Butowsky 2/9/99
-------------------------------
David M. Butowsky
Attorney-in-Fact
</TABLE>
<PAGE>
MORGAN STANLEY DEAN WITTER VARIABLE INVESTMENT SERIES
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
1. -- Form of Instrument Establishing and Designating
Additional Series of Shares.
2. -- Amended and Restated By-Laws of the Registrant
dated January 28, 1999.
5. -- Form of Instrument Adding New Portfolios to Investment
Management Agreement.
27. -- Financial Data Schedules - to be filed by amendment.
<PAGE>
CERTIFICATE
The undersigned hereby certifies that he is the Secretary of Morgan Stanley
Dean Witter Variable Investment Series (the "Trust"), an unincorporated business
trust organized under the laws of the Commonwealth of Massachusetts, that
annexed hereto is an Instrument Establishing and Designating Additional Series
of Shares of the Trust adopted by the Trustees of the Trust on February 8, 1999
as provided in Section 6.8(h) of the said Declaration, said Instrument to take
effect immediately, and I do hereby further certify that such Instrument has not
been amended and is on the date hereof in full force and effect.
Dated this day of February, 1999.
-------------------------------
Barry Fink
Secretary
secs/allfnds/variable instrument establishing and designating
additional series of shares 2-99
<PAGE>
MORGAN STANLEY DEAN WITTER VARIABLE INVESTMENT SERIES
INSTRUMENT ESTABLISHING AND DESIGNATING
ADDITIONAL SERIES OF SHARES
WHEREAS, Morgan Stanley Dean Witter Variable Investment Series (the "Trust") was
established by the Declaration of Trust dated February 24, 1983, as amended from
time to time (the "Declaration"), under the laws of the Commonwealth of
Massachusetts; and
WHEREAS, Section 6.9(h) of the Declaration provides that the establishment and
designation of any additional Series of Shares shall be effective upon the
execution by a majority of the then Trustees of an instrument setting forth such
establishment and designation and the relative rights, preferences, voting
powers, restrictions, limitations as to dividends, qualifications, and terms and
conditions of such Series, or as otherwise provided in such instrument, which
instrument shall have the status of an amendment to the Declaration, and the
Trustees of the Trust have deemed it advisable to establish two additional
Series of Shares.
NOW, THEREFORE, pursuant to Section 6.9(h) of the Declaration, there are hereby
established and designated two additional Series of Shares, to be known as the
Aggressive Equity Portfolio and the Short-Term Bond Portfolio, which shall be
subject to the same relative rights, preferences, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption as provided in the Declaration with respect to the initial Series of
Shares established in Section 6.1 of the Declaration.
This instrument may be executed in more than one counterpart, each of which
shall be deemed an original, but all of which together shall constitute one and
the same document.
<PAGE>
IN WITNESS WHEREOF, the undersigned, the Trustees of the Trust, have executed
this instrument this day of February, 1999.
- ----------------------------------- --------------------------------
Michael Bozic, as Trustee Manuel H. Johnson, as Trustee
and not individually and not individually
c/o Kmart Corporation Inc. c/o Johnson Smick International
3100 West Big Beaver Road 1133 Connecticut Avenue, NW
Troy, MI 48084 Washington, D.C. 20036
- ----------------------------------- --------------------------------
Charles A. Fiumefreddo, as Trustee Michael E. Nugent, as Trustee
and not individually and not individually
Two World Trade Center c/o Triumph Capital, L.P.
New York, NY 10048 237 Park Avenue
New York, NY 10017
- ----------------------------------- --------------------------------
Edwin J. Garn, as Trustee Philip J. Purcell, as Trustee
and not individually and not individually
c/o Huntsman Corporation 1585 Broadway
500 Huntsman Way New York, NY 10036
Salt Lake City, UT 84111
- ----------------------------------- --------------------------------
John R. Haire, as Trustee John L. Schroeder, as Trustee
and not individually and not individually
Two World Trade Center c/o Gordon Altman Butowsky
New York, NY 10048 Weitzen Shalov & Wein
Counsel to the Independent
Trustees
114 West 47th Street
New York, NY 10036
- -----------------------------------
Wayne E. Hedien, as Trustee
and not individually
c/o Gordon Altman Butowsky Weitzen
Shalov & Wein
Counsel to the Independent Trustees
114 West 47th Street
New York, NY 10036
<PAGE>
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK)
On this ___ day of February, 1999, MICHAEL BOZIC, CHARLES A. FIUMEFREDDO,
EDWIN J. GARN, JOHN R. HAIRE, WAYNE E. HEDIEN, MANUEL H. JOHNSON, MICHAEL E.
NUGENT, PHILIP J. PURCELL and JOHN L. SCHROEDER, known to me to be the
individuals described in and who executed the foregoing instrument, personally
appeared before me and they severally acknowledged the foregoing instrument to
be their free act and deed.
--------------------------
Notary Public
<PAGE>
BY-LAWS
OF
MORGAN STANLEY DEAN WITTER VARIABLE INVESTMENT SERIES
AMENDED AND RESTATED AS OF JANUARY 28, 1999
ARTICLE I
DEFINITIONS
The terms "COMMISSION," "DECLARATION," "DISTRIBUTOR," "INVESTMENT
ADVISER," "MAJORITY SHAREHOLDER VOTE," "1940 ACT," "SHAREHOLDER," "SHARES,"
"TRANSFER AGENT," "TRUST," "TRUST PROPERTY," and "TRUSTEES" have the respective
meanings given them in the Declaration of Trust of Morgan Stanley Dean Witter
Variable Investment Series dated February 24, 1983, as amended from time to
time.
ARTICLE II
OFFICES
SECTION 2.1. PRINCIPAL OFFICE. Until changed by the Trustees, the
principal office of the Trust in the Commonwealth of Massachusetts shall be in
the City of Boston, County of Suffolk.
SECTION 2.2. OTHER OFFICES. In addition to its principal office in the
Commonwealth of Massachusetts, the Trust may have an office or offices in the
City of New York, State of New York, and at such other places within and
without the Commonwealth as the Trustees may from time to time designate or the
business of the Trust may require.
ARTICLE III
SHAREHOLDERS' MEETINGS
SECTION 3.1. PLACE OF MEETINGS. Meetings of Shareholders shall be held at
such place, within or without the Commonwealth of Massachusetts, as may be
designated from time to time by the Trustees.
SECTION 3.2. MEETINGS. Meetings of Shareholders of the Trust shall be held
whenever called by the Trustees or the President of the Trust and whenever
election of a Trustee or Trustees by Shareholders is required by the provisions
of Section 16(a) of the 1940 Act, for that purpose. Meetings of Shareholders
shall also be called by the Secretary upon the written request of the holders
of Shares entitled to vote not less than twenty-five percent (25%) of all the
votes entitled to be cast at such meeting. Such request shall state the purpose
or purposes of such meeting and the matters proposed to be acted on thereat.
The Secretary shall inform such Shareholders of the reasonable estimated cost
of preparing and mailing such notice of the meeting, and upon payment to the
Trust of such costs, the Secretary shall give notice stating the purpose or
purposes of the meeting to all entitled to vote at such meeting. No meeting
need be called upon the request of the holders of Shares entitled to cast less
than a majority of all votes entitled to be cast at such meeting, to consider
any matter which is substantially the same as a matter voted upon at any
meeting of Shareholders held during the preceding twelve months.
SECTION 3.3. NOTICE OF MEETINGS. Written or printed notice of every
Shareholders' meeting stating the place, date, and purpose or purposes thereof,
shall be given by the Secretary not less than ten (10) nor more than ninety
(90) days before such meeting to each Shareholder entitled to vote at such
meeting. Such notice shall be deemed to be given when deposited in the United
States mail, postage prepaid, directed to the Shareholder at his address as it
appears on the records of the Trust.
SECTION 3.4. QUORUM AND ADJOURNMENT OF MEETINGS. Except as otherwise
provided by law, the Declaration or by these By-Laws, at all meetings of
Shareholders, the holders of a majority of the Shares issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
be requisite and shall constitute a quorum for the transaction of business. In
the absence of a quorum, the
<PAGE>
Shareholders present or represented by proxy and entitled to vote thereat shall
have the power to adjourn the meeting from time to time. The Shareholders
present in person or represented by proxy at any meeting and entitled to vote
thereat also shall have the power to adjourn the meeting from time to time if
the vote required to approve or reject any proposal described in the original
notice of such meeting is not obtained (with proxies being voted for or against
adjournment consistent with the votes for and against the proposal for which
the required vote has not been obtained). The affirmative vote of the holders
of a majority of the Shares then present in person or represented by proxy
shall be required to adjourn any meeting. Any adjourned meeting may be
reconvened without further notice. At any reconvened meeting at which a quorum
shall be present, any business may be transacted that might have been
transacted at the meeting as originally called.
SECTION 3.5. VOTING RIGHTS, PROXIES. At each meeting of Shareholders, each
holder of record of Shares entitled to vote thereat shall be entitled to one
vote in person or by proxy for each Share of beneficial interest of the Trust
and for the fractional portion of one vote for each fractional Share entitled
to vote so registered in his or her name on the records of the Trust on the
date fixed as the record date for the determination of Shareholders entitled to
vote at such meeting. Without limiting the manner in which a Shareholder may
authorize another person or persons to act for such Shareholder as proxy
pursuant hereto, the following shall constitute a valid means by which a
Shareholder may grant such authority:
(i) A Shareholder may execute a writing authorizing another person or
persons to act for such Shareholder as proxy. Execution may be accomplished
by the Shareholder or such Shareholder's authorized officer, director,
employee, attorney-in-fact or another agent signing such writing or causing
such person's signature to be affixed to such writing by any reasonable
means including, but not limited to, by facsimile or telecopy signature. No
written evidence of authority of a Shareholder's authorized officer,
director, employee, attorney-in-fact or other agent shall be required; and
(ii) A Shareholder may authorize another person or persons to act for
such Shareholder as proxy by transmitting or authorizing the transmission
of a telegram or cablegram or by other means of telephonic, electronic or
computer transmission to the person who will be the holder of the proxy or
to a proxy solicitation firm, proxy support service organization or like
agent duly authorized by the person who will be the holder of the proxy to
receive such transmission, provided that any such telegram or cablegram or
other means of telephonic, electronic or computer transmission must either
set forth or be submitted with information from which it can be determined
that the telegram, cablegram or other transmission was authorized by the
Shareholder.
No proxy shall be valid after eleven months from its date, unless otherwise
provided in the proxy. At all meetings of Shareholders, unless the voting is
conducted by inspectors, all questions relating to the qualification of voters
and the validity of proxies and the acceptance or rejection of votes shall be
decided by the chairman of the meeting. In determining whether a telegram,
cablegram or other electronic transmission is valid, the chairman or inspector,
as the case may be, shall specify the information upon which he or she relied.
Pursuant to a resolution of a majority of the Trustees, proxies may be
solicited in the name of one or more Trustees or Officers of the Trust. Proxy
solicitations may be made in writing or by using telephonic or other electronic
solicitation procedures that include appropriate methods of verifying the
identity of the Shareholder and confirming any instructions given thereby.
SECTION 3.6. VOTE REQUIRED. Except as otherwise provided by law, by the
Declaration of Trust, or by these By-Laws, at each meeting of Shareholders at
which a quorum is present, all matters shall be decided by Majority Shareholder
Vote.
SECTION 3.7. INSPECTORS OF ELECTION. In advance of any meeting of
Shareholders, the Trustees may appoint Inspectors of Election to act at the
meeting or any adjournment thereof. If Inspectors of Election are not so
appointed, the chairman of any meeting of Shareholders may, and on the request
of any Shareholder or his proxy shall, appoint Inspectors of Election of the
meeting. In case any person appointed as Inspector fails to appear or fails or
refuses to act, the vacancy may be filled by appointment made by the Trustees
in advance of the convening of the meeting or at the meeting by the person
acting as chairman. The Inspectors of Election shall determine the number of
Shares outstanding, the Shares
2
<PAGE>
represented at the meeting, the existence of a quorum, the authenticity,
validity and effect of proxies, shall receive votes, ballots or consents, shall
hear and determine all challenges and questions in any way arising in
connection with the right to vote, shall count and tabulate all votes or
consents, determine the results, and do such other acts as may be proper to
conduct the election or vote with fairness to all Shareholders. On request of
the chairman of the meeting, or of any Shareholder or his proxy, the Inspectors
of Election shall make a report in writing of any challenge or question or
matter determined by them and shall execute a certificate of any facts found by
them.
SECTION 3.8. INSPECTION OF BOOKS AND RECORDS. Shareholders shall have such
rights and procedures of inspection of the books and records of the Trust as
are granted to Shareholders under Section 32 of the Business Corporation
Law of the Commonwealth of Massachusetts.
SECTION 3.9. ACTION BY SHAREHOLDERS WITHOUT MEETING. Except as otherwise
provided by law, the provisions of these By-Laws relating to notices and
meetings to the contrary notwithstanding, any action required or permitted to
be taken at any meeting of Shareholders may be taken without a meeting if a
majority of the Shareholders entitled to vote upon the action consent to the
action in writing and such consents are filed with the records of the Trust.
Such consent shall be treated for all purposes as a vote taken at a meeting of
Shareholders.
SECTION 3.10. PRESENCE AT MEETINGS. Presence at meetings of shareholders
requires physical attendance by the shareholder or his or her proxy at the
meeting site and does not encompass attendance by telephonic or other
electronic means.
ARTICLE IV
TRUSTEES
SECTION 4.1. MEETINGS OF THE TRUSTEES. The Trustees may in their
discretion provide for regular or special meetings of the Trustees. Regular
meetings of the Trustees may be held at such time and place as shall be
determined from time to time by the Trustees without further notice. Special
meetings of the Trustees may be called at any time by the President and shall
be called by the President or the Secretary upon the written request of any two
(2) Trustees.
SECTION 4.2. NOTICE OF SPECIAL MEETINGS. Written notice of special
meetings of the Trustees, stating the place, date and time thereof, shall be
given not less than two (2) days before such meeting to each Trustee,
personally, by telegram, by mail, or by leaving such notice at his place of
residence or usual place of business. If mailed, such notice shall be deemed to
be given when deposited in the United States mail, postage prepaid, directed to
the Trustee at his address as it appears on the records of the Trust. Subject
to the provisions of the 1940 Act, notice or waiver of notice need not specify
the purpose of any special meeting.
SECTION 4.3. TELEPHONE MEETINGS. Subject to the provisions of the 1940
Act, any Trustee, or any member or members of any committee designated by the
Trustees, may participate in a meeting of the Trustees, or any such committee,
as the case may be, by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time. Participation in a meeting by these means
constitutes presence in person at the meeting.
SECTION 4.4. QUORUM, VOTING AND ADJOURNMENT OF MEETINGS. At all meetings
of the Trustees, a majority of the Trustees shall be requisite to and shall
constitute a quorum for the transaction of business. If a quorum is present,
the affirmative vote of a majority of the Trustees present shall be the act of
the Trustees, unless the concurrence of a greater proportion is expressly
required for such action by law, the Declaration or these By-Laws. If at any
meeting of the Trustees there be less than a quorum present, the Trustees
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall have been obtained.
SECTION 4.5. ACTION BY TRUSTEES WITHOUT MEETING. The provisions of these
By-Laws covering notices and meetings to the contrary notwithstanding, and
except as required by law, any action required
3
<PAGE>
or permitted to be taken at any meeting of the Trustees may be taken without a
meeting if a consent in writing setting forth the action shall be signed by all
of the Trustees entitled to vote upon the action and such written consent is
filed with the minutes of proceedings of the Trustees.
SECTION 4.6. EXPENSES AND FEES. Each Trustee may be allowed expenses, if
any, for attendance at each regular or special meeting of the Trustees, and
each Trustee who is not an officer or employee of the Trust or of its
investment manager or underwriter or of any corporate affiliate of any of said
persons shall receive for services rendered as a Trustee of the Trust such
compensation as may be fixed by the Trustees. Nothing herein contained shall be
construed to preclude any Trustee from serving the Trust in any other capacity
and receiving compensation therefor.
SECTION 4.7. EXECUTION OF INSTRUMENTS AND DOCUMENTS AND SIGNING OF CHECKS
AND OTHER OBLIGATIONS AND TRANSFERS. All instruments, documents and other
papers shall be executed in the name and on behalf of the Trust and all checks,
notes, drafts and other obligations for the payment of money by the Trust shall
be signed, and all transfer of securities standing in the name of the Trust
shall be executed, by the Chairman, the President, any Vice President or the
Treasurer or by any one or more officers or agents of the Trust as shall be
designated for that purpose by vote of the Trustees; notwithstanding the above,
nothing in this Section 4.7 shall be deemed to preclude the electronic
authorization, by designated persons, of the Trust's Custodian (as described
herein in Section 9.1) to transfer assets of the Trust, as provided for herein
in Section 9.1.
SECTION 4.8. INDEMNIFICATION OF TRUSTEES, OFFICERS, EMPLOYEES AND
AGENTS. (a) The Trust shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Trust) by reason of the fact
that he is or was a Trustee, officer, employee, or agent of the Trust. The
indemnification shall be against expenses, including attorneys' fees,
judgments, fines, and amounts paid in settlement, actually and reasonably
incurred by him in connection with the action, suit, or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Trust, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Trust, and, with respect to any criminal action or proceeding,
had reasonable cause to believe that his conduct was unlawful.
(b) The Trust shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or on behalf of the Trust to obtain a judgment or decree in its favor
by reason of the fact that he is or was a Trustee, officer, employee, or agent
of the Trust. The indemnification shall be against expenses, including
attorneys' fees actually and reasonably incurred by him in connection with the
defense or settlement of the action or suit, if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Trust; except that no indemnification shall be made in respect of any
claim, issue, or matter as to which the person has been adjudged to be liable
for negligence or misconduct in the performance of his duty to the Trust,
except to the extent that the court in which the action or suit was brought, or
a court of equity in the county in which the Trust has its principal office,
determines upon application that, despite the adjudication of liability but in
view of all circumstances of the case, the person is fairly and reasonably
entitled to indemnity for those expenses which the court shall deem proper,
provided such Trustee, officer, employee or agent is not adjudged to be liable
by reason of his willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
(c) To the extent that a Trustee, officer, employee, or agent of the Trust
has been successful on the merits or otherwise in defense of any action, suit
or proceeding referred to in subsection (a) or (b) or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses, including
attorneys' fees, actually and reasonably incurred by him in connection
therewith.
4
<PAGE>
(d) (1) Unless a court orders otherwise, any indemnification under
subsections (a) or (b) of this section may be made by the Trust only as
authorized in the specific case after a determination that indemnification of
the Trustee, officer, employee, or agent is proper in the circumstances because
he has met the applicable standard of conduct set forth in subsections (a) or
(b).
(2) The determination shall be made:
(i) By the Trustees, by a majority vote of a quorum which
consists of Trustees who were not parties to the action, suit or
proceeding; or
(ii) If the required quorum is not obtainable, or if a quorum of
disinterested Trustees so directs, by independent legal counsel in a
written opinion; or
(iii) By the Shareholders.
(3) Notwithstanding any provision of this Section 4.8, no person shall
be entitled to indemnification for any liability, whether or not there is
an adjudication of liability, arising by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of duties as described
in Section 17(h) and (i) of the Investment Company Act of 1940 ("disabling
conduct"). A person shall be deemed not liable by reason of disabling
conduct if, either:
(i) a final decision on the merits is made by a court or other
body before whom the proceeding was brought that the person to be
indemnified ("indemnitee") was not liable by reason of disabling conduct; or
(ii) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the indemnitee was not
liable by reason of disabling conduct, is made by either--
(A) a majority of a quorum of Trustees who are neither
"interested persons" of the Trust, as defined in Section 2(a)(19) of the
Investment Company Act of 1940, nor parties to the action, suit or
proceeding, or
(B) an independent legal counsel in a written opinion.
(e) Expenses, including attorneys' fees, incurred by a Trustee, officer,
employee or agent of the Trust in defending a civil or criminal action, suit or
proceeding may be paid by the Trust in advance of the final disposition thereof
if:
(1) authorized in the specific case by the Trustees; and
(2) the Trust receives an undertaking by or on behalf of the Trustee,
officer, employee or agent of the Trust to repay the advance if it is not
ultimately determined that such person is entitled to be indemnified by
the Trust; and
(3) either, (i) such person provides a security for his undertaking, or
(ii) the Trust is insured against losses by reason of any lawful
advances, or
(iii) a determination, based on a review of readily available
facts, that there is reason to believe that such person ultimately will
be found entitled to indemnification, is made by either--
(A) a majority of a quorum which consists of Trustees who are
neither "interested persons" of the Trust, as defined in Section
2(a)(19) of the Investment Company Act of 1940, nor parties to the
action, suit or proceeding, or
(B) an independent legal counsel in a written opinion.
(f) The indemnification provided by this Section shall not be deemed
exclusive of any other rights to which a person may be entitled under any
by-law, agreement, vote of Shareholders or disinterested Trustees or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding the office, and shall continue as to a person who has ceased to
be a Trustee, officer, employee, or agent and inure to the benefit of the
heirs, executors and administrators of such person; provided that no
5
<PAGE>
person may satisfy any right of indemnity or reimbursement granted herein or to
which he may be otherwise entitled except out of the property of the Trust, and
no Shareholder shall be personally liable with respect to any claim for
indemnity or reimbursement or otherwise.
(g) The Trust may purchase and maintain insurance on behalf of any person
who is or was a Trustee, officer, employee, or agent of the Trust, against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such. However, in no event will the Trust purchase
insurance to indemnify any officer or Trustee against liability for any act for
which the Trust itself is not permitted to indemnify him.
(h) Nothing contained in this Section shall be construed to protect any
Trustee or officer of the Trust against any liability to the Trust or to its
security holders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
ARTICLE V
COMMITTEES
SECTION 5.1. EXECUTIVE AND OTHER COMMITTEES. The Trustees, by resolution
adopted by a majority of the Trustees, may designate an Executive Committee
and/or committees, each committee to consist of two (2) or more of the Trustees
of the Trust and may delegate to such committees, in the intervals between
meetings of the Trustees, any or all of the powers of the Trustees in the
management of the business and affairs of the Trust. In the absence of any
member of any such committee, the members thereof present at any meeting,
whether or not they constitute a quorum, may appoint a Trustee to act in place
of such absent member. Each such committee shall keep a record of its
proceedings.
The Executive Committee and any other committee shall fix its own rules or
procedure, but the presence of at least fifty percent (50%) of the members of
the whole committee shall in each case be necessary to constitute a quorum of
the committee and the affirmative vote of the majority of the members of the
committee present at the meeting shall be necessary to take action.
All actions of the Executive Committee shall be reported to the Trustees
at the meeting thereof next succeeding to the taking of such action.
SECTION 5.2. ADVISORY COMMITTEE. The Trustees may appoint an advisory
committee which shall be composed of persons who do not serve the Trust in any
other capacity and which shall have advisory functions with respect to the
investments of the Trust but which shall have no power to determine that any
security or other investment shall be purchased, sold or otherwise disposed of
by the Trust. The number of persons constituting any such advisory committee
shall be determined from time to time by the Trustees. The members of any such
advisory committee may receive compensation for their services and may be
allowed such fees and expenses for the attendance at meetings as the Trustees
may from time to time determine to be appropriate.
SECTION 5.3. COMMITTEE ACTION WITHOUT MEETING. The provisions of these
By-Laws covering notices and meetings to the contrary notwithstanding, and
except as required by law, any action required or permitted to be taken at any
meeting of any Committee of the Trustees appointed pursuant to Section 5.1 of
these By-Laws may be taken without a meeting if a consent in writing setting
forth the action shall be signed by all members of the Committee entitled to
vote upon the action and such written consent is filed with the records of the
proceedings of the Committee.
ARTICLE VI
OFFICERS
SECTION 6.1. EXECUTIVE OFFICERS. The executive officers of the Trust shall
be a Chairman, a President, one or more Vice Presidents, a Secretary and a
Treasurer. The Chairman shall be selected from among the Trustees but none of
the other executive officers need be a Trustee. Two or more offices, except
those of President and any Vice President, may be held by the same person, but
no officer shall execute,
6
<PAGE>
acknowledge or verify any instrument in more than one capacity. The executive
officers of the Trust shall be elected annually by the Trustees and each
executive officer so elected shall hold office until his successor is elected
and has qualified.
SECTION 6.2. OTHER OFFICERS AND AGENTS. The Trustees may also elect one or
more Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers
and may elect, or may delegate to the President the power to appoint, such
other officers and agents as the Trustees shall at any time or from time to
time deem advisable.
SECTION 6.3. TERM, REMOVAL AND VACANCIES. Each officer of the Trust shall
hold office until his successor is elected and has qualified. Any officer or
agent of the Trust may be removed by the Trustees whenever, in their judgment,
the best interests of the Trust will be served thereby, but such removal shall
be without prejudice to the contractual rights, if any, of the person so
removed.
SECTION 6.4. COMPENSATION OF OFFICERS. The compensation of officers and
agents of the Trust shall be fixed by the Trustees, or by the President to the
extent provided by the Trustees with respect to officers appointed by the
President.
SECTION 6.5. POWER AND DUTIES. All officers and agents of the Trust, as
between themselves and the Trust, shall have such authority and perform such
duties in the management of the Trust as may be provided in or pursuant to
these By-Laws, or to the extent not so provided, as may be prescribed by the
Trustees; provided, that no rights of any third party shall be affected or
impaired by any such By-Law or resolution of the Trustees unless he has
knowledge thereof.
SECTION 6.6. THE CHAIRMAN. The Chairman shall preside at all meetings of
the Shareholders and of the Trustees, shall be a signatory on all Annual and
Semi-Annual Reports as may be sent to shareholders, and he shall perform such
other duties as the Trustees may from time to time prescribe.
SECTION 6.7. THE PRESIDENT. (a) The President shall be the chief executive
officer of the Trust; he shall have general and active management of the
business of the Trust, shall see that all orders and resolutions of the Board
of Trustees are carried into effect, and, in connection therewith, shall be
authorized to delegate to one or more Vice Presidents such of his powers and
duties at such times and in such manner as he may deem advisable.
(b) In the absence of the Chairman, the President shall preside at all
meetings of the shareholders and the Board of Trustees; and he shall perform
such other duties as the Board of Trustees may from time to time prescribe.
SECTION 6.8. THE VICE PRESIDENTS. The Vice Presidents shall be of such
number and shall have such titles as may be determined from time to time by the
Trustees. The Vice President, or, if there be more than one, the Vice
Presidents in the order of their seniority as may be determined from time to
time by the Trustees or the President, shall, in the absence or disability of
the President, exercise the powers and perform the duties of the President, and
he or they shall perform such other duties as the Trustees or the President may
from time to time prescribe.
SECTION 6.9. THE ASSISTANT VICE PRESIDENTS. The Assistant Vice President,
or, if there be more than one, the Assistant Vice Presidents, shall perform
such duties and have such powers as may be assigned them from time to time by
the Trustees or the President.
SECTION 6.10. THE SECRETARY. The Secretary shall attend all meetings of
the Trustees and all meetings of the Shareholders and record all the
proceedings of the meetings of the Shareholders and of the Trustees in a book
to be kept for that purpose, and shall perform like duties for the standing
committees when required. He shall give, or cause to be given, notice of all
meetings of the Shareholders and special meetings of the Trustees, and shall
perform such other duties and have such powers as the Trustees, or the
President, may from time to time prescribe. He shall keep in safe custody the
seal of the Trust and affix or cause the same to be affixed to any instrument
requiring it, and, when so affixed, it shall be attested by his signature or by
the signature of an Assistant Secretary.
SECTION 6.11. THE ASSISTANT SECRETARIES. The Assistant Secretary, or, if
there be more than one, the Assistant Secretaries in the order determined by
the Trustees or the President, shall in the absence or disability of the
Secretary, perform the duties and exercise the powers of the Secretary and
shall perform such duties and have such other powers as the Trustees or the
President may from time to time prescribe.
7
<PAGE>
SECTION 6.12. THE TREASURER. The Treasurer shall be the chief financial
officer of the Trust. He shall keep or cause to be kept full and accurate
accounts of receipts and disbursements in books belonging to the Trust, and he
shall render to the Trustees and the President, whenever any of them require
it, an account of his transactions as Treasurer and of the financial condition
of the Trust; and he shall perform such other duties as the Trustees, or the
President, may from time to time prescribe.
SECTION 6.13. THE ASSISTANT TREASURERS. The Assistant Treasurer, or, if
there shall be more than one, the Assistant Treasurers in the order determined
by the Trustees or the President, shall, in the absence or disability of the
Treasurer, perform the duties and exercise the powers of the Treasurer and
shall perform such other duties and have such other powers as the Trustees, or
the President, may from time to time prescribe.
SECTION 6.14. DELEGATION OF DUTIES. Whenever an officer is absent or
disabled, or whenever for any reason the Trustees may deem it desirable, the
Trustees may delegate the powers and duties of an officer or officers to any
other officer or officers or to any Trustee or Trustees.
ARTICLE VII
DIVIDENDS AND DISTRIBUTIONS
Subject to any applicable provisions of law and the Declaration, dividends
and distributions upon the Shares may be declared at such intervals as the
Trustees may determine, in cash, in securities or other property, or in Shares,
from any sources permitted by law, all as the Trustees shall from time to time
determine.
Inasmuch as the computation of net income and net profits from the sales
of securities or other properties for federal income tax purposes may vary from
the computation thereof on the records of the Trust, the Trustees shall have
power, in their discretion, to distribute as income dividends and as capital
gain distributions, respectively, amounts sufficient to enable the Trust to
avoid or reduce liability for federal income taxes.
ARTICLE VIII
CERTIFICATES OF SHARES
SECTION 8.1. CERTIFICATES OF SHARES. Certificates for Shares of each
series or class of Shares shall be in such form and of such design as the
Trustees shall approve, subject to the right of the Trustees to change such
form and design at any time or from time to time, and shall be entered in the
records of the Trust as they are issued. Each such certificate shall bear a
distinguishing number; shall exhibit the holder's name and certify the number
of full Shares owned by such holder; shall be signed by or in the name of the
Trust by the President, or a Vice President, and countersigned by the Secretary
or an Assistant Secretary or the Treasurer and an Assistant Treasurer of the
Trust; shall be sealed with the seal; and shall contain such recitals as may be
required by law. Where any certificate is signed by a Transfer Agent or by a
Registrar, the signature of such officers and the seal may be facsimile,
printed or engraved. The Trust may, at its option, determine not to issue a
certificate or certificates to evidence Shares owned of record by any
Shareholder.
In case any officer or officers who shall have signed, or whose facsimile
signature or signatures shall appear on, any such certificate or certificates
shall cease to be such officer or officers of the Trust, whether because of
death, resignation or otherwise, before such certificate or certificates shall
have been delivered by the Trust, such certificate or certificates shall,
nevertheless, be adopted by the Trust and be issued and delivered as though the
person or persons who signed such certificate or certificates or whose
facsimile signature or signatures shall appear therein had not ceased to be
such officer or officers of the Trust.
No certificate shall be issued for any share until such share is fully
paid.
SECTION 8.2. LOST, STOLEN, DESTROYED AND MUTILATED CERTIFICATES. The
Trustees may direct a new certificate or certificates to be issued in place of
any certificate or certificates theretofore issued by the Trust alleged to have
been lost, stolen or destroyed, upon satisfactory proof of such loss, theft, or
8
<PAGE>
destruction; and the Trustees may, in their discretion, require the owner of
the lost, stolen or destroyed certificate, or his legal representative, to give
to the Trust and to such Registrar, Transfer Agent and/or Transfer Clerk as may
be authorized or required to countersign such new certificate or certificates,
a bond in such sum and of such type as they may direct, and with such surety or
sureties, as they may direct, as indemnity against any claim that may be
against them or any of them on account of or in connection with the alleged
loss, theft or destruction of any such certificate.
ARTICLE IX
CUSTODIAN
SECTION 9.1. APPOINTMENT AND DUTIES. The Trust shall at times employ a
bank or trust company having capital, surplus and undivided profits of at least
five million dollars ($5,000,000) as custodian with authority as its agent, but
subject to such restrictions, limitations and other requirements, if any, as
may be contained in these By-Laws and the 1940 Act:
(1) to receive and hold the securities owned by the Trust and deliver
the same upon written or electronically transmitted order.
(2) to receive and receipt for any moneys due to the Trust and deposit
the same in its own banking department or elsewhere as the Trustees may
direct;
(3) to disburse such funds upon orders or vouchers;
all upon such basis of compensation as may be agreed upon between the Trustees
and the custodian. If so directed by a Majority Shareholder Vote, the custodian
shall deliver and pay over all property of the Trust held by it as specified in
such vote.
The Trustees may also authorize the custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of
the custodian and upon such terms and conditions, as may be agreed upon between
the custodian and such sub-custodian and approved by the Trustees, provided
that in every case such sub-custodian shall be a bank or trust company
organized under the laws of the United States or one of the states thereof and
having capital, surplus and undivided profits of at least five million dollars
($5,000,000).
SECTION 9.2. CENTRAL CERTIFICATE SYSTEM. Subject to such rules,
regulations and orders as the Commission may adopt, the Trustees may direct the
custodian to deposit all or any part of the securities owned by the Trust in a
system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, or such other person as
may be permitted by the Commission, or otherwise in accordance with the 1940
Act, pursuant to which system all securities of any particular class or series
of any issuer deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal only
upon the order of the Trust.
ARTICLE X
WAIVER OF NOTICE
Whenever any notice of the time, place or purpose of any meeting of
Shareholders, Trustees, or of any committee is required to be given in
accordance with law or under the provisions of the Declaration or these
By-Laws, a waiver thereof in writing, signed by the person or persons entitled
to such notice and filed with the records of the meeting, whether before or
after the holding thereof, or actual attendance at the meeting of Shareholders,
Trustees or committee, as the case may be, in person, shall be deemed
equivalent to the giving of such notice to such person.
ARTICLE XI
MISCELLANEOUS
SECTION 11.1. LOCATION OF BOOKS AND RECORDS. The books and records of the
Trust may be kept outside the Commonwealth of Massachusetts at such place or
places as the Trustees may from time to time determine, except as otherwise
required by law.
9
<PAGE>
SECTION 11.2. RECORD DATE. The Trustees may fix in advance a date as the
record date for the purpose of determining the Shareholders entitled to (i)
receive notice of, or to vote at, any meeting of Shareholders, or (ii) receive
payment of any dividend or the allotment of any rights, or in order to make a
determination of Shareholders for any other proper purpose. The record date, in
any case, shall not be more than ninety (90) days, and in the case of a meeting
of Shareholders not less than ten (10) days, prior to the date on which such
meeting is to be held or the date on which such other particular action
requiring determination of Shareholders is to be taken, as the case may be. In
the case of a meeting of Shareholders, the meeting date set forth in the notice
to Shareholders accompanying the proxy statement shall be the date used for
purposes of calculating the 90 day or 10 day period, and any adjourned meeting
may be reconvened for up to 60 days from the original meeting without a change
in record date. In lieu of fixing a record date, the Trustees may provide that
the transfer books shall be closed for a stated period but not to exceed, in
any case, twenty (20) days. If the transfer books are closed for the purpose of
determining Shareholders entitled to notice of a vote at a meeting of
Shareholders, such books shall be closed for at least ten (10) days immediately
preceding the meeting.
SECTION 11.3. SEAL. The Trustees shall adopt a seal, which shall be in
such form and shall have such inscription thereon as the Trustees may from time
to time provide. The seal of the Trust may be affixed to any document, and the
seal and its attestation may be lithographed, engraved or otherwise printed on
any document with the same force and effect as if it had been imprinted and
attested manually in the same manner and with the same effect as if done by a
Massachusetts business corporation under Massachusetts law.
SECTION 11.4. FISCAL YEAR. The fiscal year of the Trust shall end on such
date as the Trustees may by resolution specify, and the Trustees may by
resolution change such date for future fiscal years at any time and from time
to time.
SECTION 11.5. ORDERS FOR PAYMENT OF MONEY. All orders or instructions for
the payment of money of the Trust, and all notes or other evidences of
indebtedness issued in the name of the Trust, shall be signed by such officer
or officers or such other person or persons as the Trustees may from time to
time designate, or as may be specified in or pursuant to the agreement between
the Trust and the bank or trust company appointed as Custodian of the
securities and funds of the Trust.
ARTICLE XII
COMPLIANCE WITH FEDERAL REGULATIONS
The Trustees are hereby empowered to take such action as they may deem to
be necessary, desirable or appropriate so that the Trust is or shall be in
compliance with any federal or state statute, rule or regulation with which
compliance by the Trust is required.
ARTICLE XIII
AMENDMENTS
These By-Laws may be amended, altered, or repealed, or new By-Laws may be
adopted, (a) by a Majority Shareholder Vote, or (b) by the Trustees; provided,
however, that no By-Law may be amended, adopted or repealed by the Trustees if
such amendment, adoption or repeal requires, pursuant to law, the Declaration,
or these By-Laws, a vote of the Shareholders. The Trustees shall in no event
adopt By-Laws which are in conflict with the Declaration, and any apparent
inconsistency shall be construed in favor of the related provisions in the
Declaration.
ARTICLE XIV
DECLARATION OF TRUST
The Declaration of Trust establishing Morgan Stanley Dean Witter Variable
Investment Series, dated February 24, 1983, a copy of which, together with all
amendments thereto, is on file in the office of the Secretary of the
Commonwealth of Massachusetts, provides that the name Morgan Stanley Dean
Witter
10
<PAGE>
Variable Investment Series refers to the Trustees under the Declaration
collectively as Trustees, but not as individuals or personally; and no Trustee,
Shareholder, officer, employee or agent of Morgan Stanley Dean Witter Variable
Investment Series shall be held to any personal liability, nor shall resort be
had to their private property for the satisfaction of any obligation or claim
or otherwise, in connection with the affairs of said Morgan Stanley Dean Witter
Variable Investment Series, but the Trust Estate only shall be liable.
11
<PAGE>
MORGAN STANLEY DEAN WITTER VARIABLE INVESTMENT SERIES
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
__________, 1999
To Morgan Stanley Dean Witter Advisors Inc.:
The Investment Management Agreement between you and this Fund (the
"Agreement") provides that in the event the Fund establishes additional
Portfolios with respect to which it desires to retain you to render
investment advisory services under the Agreement, it shall notify you in
writing, and further provides that if you are willing to render such
services, you shall notify the Fund in writing, whereupon such Portfolios
shall become Portfolios under the Agreement.
The Fund hereby informs you that it has established two additional
Portfolios, designated as the AGGRESSIVE EQUITY PORTFOLIO and the SHORT-TERM
BOND PORTFOLIO, and that it desires to retain you to render investment
advisory services to those Portfolios under the Agreement, for which the Fund
shall pay you monthly compensation determined by applying the annual rate of
0.75% to the net assets of the AGGRESSIVE EQUITY PORTFOLIO and 0.45% to the
net assets of the SHORT-TERM BOND PORTFOLIO, in each case determined as of
the close of each business day.
Very truly yours,
MORGAN STANLEY DEAN WITTER
VARIABLE INVESTMENT SERIES
by:
--------------------------
Morgan Stanley Dean Witter Advisors Inc. hereby notifies Morgan Stanley Dean
Witter Variable Investment Series of its willingness to render investment
advisory services to the AGGRESSIVE EQUITY PORTFOLIO and the SHORT-TERM BOND
PORTFOLIO under the Agreement, with the fees as specified above.
MORGAN STANLEY DEAN WITTER
ADVISORS INC.
by:
--------------------------
vis/letters/investment management for new portfolios 2-99
