<PAGE>
PROSPECTUS
JANUARY 29, 1998
Dean Witter European Growth Fund Inc. (the "Fund") is an open-end,
diversified management investment company whose investment objective is to
maximize the capital appreciation of its investments. The Fund seeks to achieve
this objective by investing primarily in securities issued by issuers located in
Europe.
The Fund offers four classes of shares (each, a "Class"), each
with a different combination of sales charges, ongoing fees and other features.
The different distribution arrangements permit an investor to choose the method
of purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. (See "Purchase of Fund
Shares--Alternative Purchase Arrangements.")
This Prospectus sets forth concisely the information you should
know before investing in the Fund. It should be read and retained for future
reference. Additional information about the Fund is contained in the Statement
of Additional Information, dated January 29, 1998, which has been filed with the
Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone numbers listed on this page. The
Statement of Additional Information is incorporated herein by reference.
DEAN WITTER DISTRIBUTORS INC.
DISTRIBUTOR
TABLE OF CONTENTS
Prospectus Summary/2
Summary of Fund Expenses/4
Financial Highlights/6
The Fund and its Management/9
Investment Objective and Policies/10
Risk Considerations/11
Investment Restrictions/19
Purchase of Fund Shares/20
Shareholder Services/31
Redemptions and Repurchases/34
Dividends, Distributions and Taxes/35
Performance Information/36
Additional Information/37
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Dean Witter European
Growth Fund Inc.
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
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PROSPECTUS SUMMARY
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<TABLE>
<S> <C>
The The Fund is an open-end, diversified management investment company investing primarily in securities issued by
Fund issuers located in Europe.
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Shares Offered Shares of common stock with $0.01 par value (see page 37). The Fund offers four Classes of shares, each with a
different combination of sales charges, ongoing fees and other features (see pages 20-30).
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Minimum The minimum initial investment for each Class is $1,000 ($100 if the account is opened through EasyInvest-SM-).
Purchase Class D shares are only available to persons investing $5 million ($25 million for certain qualified plans) or
more and to certain other limited categories of investors. For the purpose of meeting the minimum $5 million (or
$25 million) investment for Class D shares, and subject to the $1,000 minimum initial investment for each Class
of the Fund, an investor's existing holdings of Class A shares and shares of funds for which Dean Witter
InterCapital Inc. serves as investment manager ("Dean Witter Funds") that are sold with a front-end sales
charge, and concurrent investments in Class D shares of the Fund and other Dean Witter Funds that are multiple
class funds, will be aggregated. The minimum subsequent investment is $100 (see page 20).
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Investment The investment objective of the Fund is to maximize the capital appreciation of its investments (see page 10).
Objective
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Investment Dean Witter InterCapital Inc., the Investment Manager of the Fund, and its wholly-owned subsidiary, Dean Witter
Manager and Services Company Inc., serve in various investment management, advisory, management and administrative
Sub-Adviser capacities to 103 investment companies and other portfolios with net assets under management of approximately
$102.9 billion at December 31, 1997. Morgan Grenfell Investment Services Ltd. has been retained by the
Investment Manager as Sub-Adviser to provide investment advice and manage the Fund's portfolio. Morgan Grenfell
Investment Services Ltd. currently serves as investment adviser for U.S. corporate and public employee benefit
plans, investment companies, endowments and foundations with assets of approximately $16.5 billion at September
30, 1997 (see page 9).
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Management The Investment Manager receives a monthly fee from the Fund at the annual rate of 1.0% of daily net assets on
Fee assets not exceeding $500 million; 0.95% of the daily net assets exceeding $500 million but not exceeding $2
billion; and 0.90% of the daily net assets exceeding $2 billion. The Sub-Adviser receives a monthly fee from the
Investment Manager equal to 40% of the Investment Manager's monthly fee (see page 9). Although the management
fee is higher than that paid by most other investment companies, the fee reflects the specialized nature of the
Fund's investment policies.
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Distributor and Dean Witter Distributors Inc. (the "Distributor"). The Fund has adopted a distribution plan pursuant to Rule
Distribution Fee 12b-1 under the Investment Company Act (the "12b-1 Plan") with respect to the distribution fees paid by the
Class A, Class B and Class C shares of the Fund to the Distributor. The entire 12b-1 fee payable by Class A and
a portion of the 12b-1 fee payable by each of Class B and Class C equal to 0.25% of the average daily net assets
of the Class are currently each characterized as a service fee within the meaning of the National Association of
Securities Dealers, Inc. guidelines. The remaining portion of the 12b-1 fee, if any, is characterized as an
asset-based sales charge (see pages 20 and 29).
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Alternative Four classes of shares are offered:
Purchase
Arrangements - Class A shares are offered with a front-end sales charge, starting at 5.25% and reduced for larger purchases.
Investments of $1 million or more (and investments by certain other limited categories of investors) are not
subject to any sales charge at the time of purchase but a contingent deferred sales charge ("CDSC") of 1.0% may
be imposed on redemptions within one year of purchase. The Fund is authorized to reimburse the Distributor for
specific expenses incurred in promoting the distribution of the Fund's Class A shares and servicing shareholder
accounts pursuant to the Fund's 12b-1 Plan. Reimbursement may in no event exceed an amount equal to payments at
an annual rate of 0.25% of average daily net assets of the Class (see pages 20, 23 and 29).
</TABLE>
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2
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- Class B shares are offered without a front-end sales charge, but will in most cases be subject to a CDSC
(scaled down from 5.0% to 1.0%) if redeemed within six years after purchase. The CDSC will be imposed on any
redemption of shares if after such redemption the aggregate current value of a Class B account with the Fund
falls below the aggregate amount of the investor's purchase payments made during the six years preceding the
redemption. A different CDSC schedule applies to investments by certain qualified plans. Class B shares are also
subject to a 12b-1 fee assessed at the annual rate of 1.0% of the lesser of: (a) the average daily net sales of
the Fund's Class B shares or (b) the average daily net assets of Class B. All shares of the Fund held prior to
July 28, 1997 have been designated Class B shares. Shares held before May 1, 1997 will convert to Class A shares
in May, 2007. In all other instances, Class B shares convert to Class A shares approximately ten years after the
date of the original purchase (see pages 20, 26 and 29).
- Class C shares are offered without a front-end sales charge, but will in most cases be subject to a CDSC of
1.0% if redeemed within one year after purchase. The Fund is authorized to reimburse the Distributor for
specific expenses incurred in promoting the distribution of the Fund's Class C shares and servicing shareholder
accounts pursuant to the Fund's 12b-1 Plan. Reimbursement may in no event exceed an amount equal to payments at
an annual rate of 1.0% of average daily net assets of the Class (see pages 20, 28 and 29).
- Class D shares are offered only to investors meeting an initial investment minimum of $5 million ($25 million
for certain qualified plans) and to certain other limited categories of investors. Class D shares are offered
without a front-end sales charge or CDSC and are not subject to any 12b-1 fee (see pages 20, 28 and 29).
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Dividends and Dividends from net investment income and distributions from net capital gains, if any, are paid at least once
Capital Gains each year. The Fund may, however, determine to retain all or part of any net long-term capital gains in any year
Distributions for reinvestment. Dividends and capital gains distributions paid on shares of a Class are automatically
reinvested in additional shares of the same Class at net asset value unless the shareholder elects to receive
cash. Shares acquired by dividend and distribution reinvestment will not be subject to any sales charge or CDSC
(see pages 31 and 35).
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Redemption Shares are redeemable by the shareholder at net asset value less any applicable CDSC on Class A, Class B or
Class C shares. An account may be involuntarily redeemed if the total value of the account is less than $100 or,
if the account was opened through EasyInvest-SM-, if after twelve months the shareholder has invested less than
$1,000 in the account (see page 34).
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Risk The net asset value of the Fund's shares will fluctuate with changes in the market value of its portfolio
Considerations securities. It should be recognized that the foreign securities and markets in which the Fund invests pose
different and greater risks than those customarily associated with domestic securities and their markets.
Furthermore, investors should consider other risks associated with a portfolio of international securities,
including fluctuations in foreign currency exchange rates (i.e., if a substantial portion of the Fund's assets
is denominated in foreign currencies which decrease in value with respect to the U.S. dollar, the value of the
investor's shares and the distributions made on those shares will, likewise, decrease in value), foreign
securities exchange controls and foreign tax rates, as well as investments in forward currency contracts,
options and futures contracts, repurchase agreements, when-issued and delayed delivery securities and forward
commitments, when, as and if issued securities and lending of portfolio securities (see pages 11-18). The
investor should also note that the Fund intends to invest over 25% of its total assets in securities of issuers
located in the United Kingdom.
</TABLE>
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THE ABOVE IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION APPEARING
ELSEWHERE IN THE PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL
INFORMATION.
3
<PAGE>
SUMMARY OF FUND EXPENSES
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The following table illustrates all expenses and fees that a shareholder of
the Fund will incur. The expenses and fees set forth in the table are based on
the expenses and fees for the fiscal year ended October 31, 1997.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------- ------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
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Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)... 5.25%(1) None None None
Sales Charge Imposed on Dividend Reinvestments.................................. None None None None
Maximum Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds)................................................. None(2) 5.00%(3) 1.00%(4) None
Redemption Fees................................................................. None None None None
Exchange Fee.................................................................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
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Management Fees................................................................. 0.97% 0.97% 0.97% 0.97%
12b-1 Fees (5) (6).............................................................. 0.25% 0.86% 1.00% None
Other Expenses.................................................................. 0.23% 0.23% 0.23% 0.23%
Total Fund Operating Expenses (7)............................................... 1.45% 2.06% 2.20% 1.20%
</TABLE>
- ------------
(1) REDUCED FOR PURCHASES OF $25,000 AND OVER (SEE "PURCHASE OF FUND
SHARES--INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES").
(2) INVESTMENTS THAT ARE NOT SUBJECT TO ANY SALES CHARGE AT THE TIME OF PURCHASE
ARE SUBJECT TO A CDSC OF 1.00% THAT WILL BE IMPOSED ON REDEMPTIONS MADE
WITHIN ONE YEAR AFTER PURCHASE, EXCEPT FOR CERTAIN SPECIFIC CIRCUMSTANCES
(SEE "PURCHASE OF FUND SHARES--INITIAL SALES CHARGE ALTERNATIVE--CLASS A
SHARES").
(3) THE CDSC IS SCALED DOWN TO 1.00% DURING THE SIXTH YEAR, REACHING ZERO
THEREAFTER.
(4) ONLY APPLICABLE TO REDEMPTIONS MADE WITHIN ONE YEAR AFTER PURCHASE (SEE
"PURCHASE OF FUND SHARES--LEVEL LOAD ALTERNATIVE--CLASS C SHARES").
(5) THE 12b-1 FEE IS ACCRUED DAILY AND PAYABLE MONTHLY. THE ENTIRE 12b-1 FEE
PAYABLE BY CLASS A AND A PORTION OF THE 12b-1 FEE PAYABLE BY EACH OF CLASS B
AND CLASS C EQUAL TO 0.25% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS ARE
CURRENTLY EACH CHARACTERIZED AS A SERVICE FEE WITHIN THE MEANING OF NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. ("NASD") GUIDELINES AND ARE PAYMENTS
MADE FOR PERSONAL SERVICE AND/OR MAINTENANCE OF SHAREHOLDER ACCOUNTS. THE
REMAINDER OF THE 12b-1 FEE, IF ANY, IS AN ASSET-BASED SALES CHARGE, AND IS A
DISTRIBUTION FEE PAID TO THE DISTRIBUTOR TO COMPENSATE IT FOR THE SERVICES
PROVIDED AND THE EXPENSES BORNE BY THE DISTRIBUTOR AND OTHERS IN THE
DISTRIBUTION OF THE FUND'S SHARES (SEE "PURCHASE OF FUND SHARES--PLAN OF
DISTRIBUTION").
(6) UPON CONVERSION OF CLASS B SHARES TO CLASS A SHARES, SUCH SHARES WILL BE
SUBJECT TO THE LOWER 12b-1 FEE APPLICABLE TO CLASS A SHARES. NO SALES CHARGE
IS IMPOSED AT THE TIME OF CONVERSION OF CLASS B SHARES TO CLASS A SHARES.
CLASS C SHARES DO NOT HAVE A CONVERSION FEATURE AND, THEREFORE, ARE SUBJECT
TO AN ONGOING 1.00% DISTRIBUTION FEE (SEE "PURCHASE OF FUND
SHARES--ALTERNATIVE PURCHASE ARRANGEMENTS").
(7) THERE WERE NO OUTSTANDING SHARES OF CLASS A, CLASS C OR CLASS D PRIOR TO
JULY 28, 1997. ACCORDINGLY, "TOTAL FUND OPERATING EXPENSES," AS SHOWN ABOVE
WITH RESPECT TO THOSE CLASSES, ARE ESTIMATES BASED UPON THE SUM OF 12b-1
FEES, MANAGEMENT FEES AND ESTIMATED "OTHER EXPENSES."
4
<PAGE>
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<TABLE>
<CAPTION>
EXAMPLES 1 Year 3 Years 5 Years 10 Years
- -------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment assuming (1) a 5% annual
return and (2) redemption at the end of
each time period:
Class A................................. $66 $96 $128 $217
Class B................................. $71 $95 $131 $239
Class C................................. $32 $69 $118 $253
Class D................................. $12 $38 $ 66 $145
You would pay the following expenses on the
same $1,000 investment assuming no
redemption at the end of the period:
Class A................................. $66 $96 $128 $217
Class B................................. $21 $65 $111 $239
Class C................................. $22 $69 $118 $253
Class D................................. $12 $38 $ 66 $145
</TABLE>
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF EACH CLASS MAY BE GREATER OR
LESS THAN THOSE SHOWN.
The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"Purchase of Fund Shares--Plan of Distribution" and "Redemptions and
Repurchases."
Long-term shareholders of Class B and Class C may pay more in sales charges,
including distribution fees, than the economic equivalent of the maximum
front-end sales charges permitted by the NASD.
5
<PAGE>
FINANCIAL HIGHLIGHTS
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The following data and ratios for a share of capital stock outstanding
throughout each period have been audited by Price Waterhouse LLP, independent
accountants. This data should be read in conjunction with the financial
statements, notes thereto, and the unqualified report of independent accountants
which are contained in the Statement of Additional Information. Further
information about the performance of the Fund is contained in the Fund's Annual
Report to Shareholders, which may be obtained without charge upon request of the
Fund.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31 MAY 31, 1990*
--------------------------------------------------------------------- THROUGH
CLASS B SHARES 1997**++ 1996 1995 1994 1993 1992 1991 OCTOBER 31, 1990
---------- -------- -------- -------- -------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................. $ 16.76 $ 14.44 $ 13.49 $ 11.86 $ 8.57 $ 9.22 $ 9.23 $ 10.00
---------- -------- -------- -------- -------- -------- -------- ------
Net investment income (loss)........ 0.04 0.02 0.02 0.02 (0.01) 0.01 0.05 0.05
Net realized and unrealized gain
(loss)............................. 3.02 3.03 2.00 1.84 3.30 (0.23) 0.07 (0.82)
---------- -------- -------- -------- -------- -------- -------- ------
Total from investment operations.... 3.06 3.05 2.02 1.86 3.29 (0.22) 0.12 (0.77)
---------- -------- -------- -------- -------- -------- -------- ------
Less dividends and distributions
from:
Net investment income............ (0.11) -- -- -- -- (0.03) (0.07) --
Net realized gain................ (1.28) (0.73) (1.07) (0.23) -- (0.40) (0.06) --
---------- -------- -------- -------- -------- -------- -------- ------
Total dividends and distributions... (1.39) (0.73) (1.07) (0.23) -- (0.43) (0.13) --
---------- -------- -------- -------- -------- -------- -------- ------
Net asset value, end of period...... $ 18.43 $ 16.76 $ 14.44 $ 13.49 $ 11.86 $ 8.57 $ 9.22 $ 9.23
---------- -------- -------- -------- -------- -------- -------- ------
---------- -------- -------- -------- -------- -------- -------- ------
TOTAL INVESTMENT RETURN+............ 19.40% 22.27% 16.83% 15.61% 38.74% (2.39)% 1.33% (7.70)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses............................ 2.06% 2.13% 2.23% 2.27% 2.38% 2.40% 2.44% 2.45%(2)
Net investment income (loss)........ 0.22% 0.14% 0.13% 0.21% (0.09)% 0.11% 0.51% 1.52%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in
millions........................... $1,707 $1,228 $868 $759 $459 $297 $316 $304
Portfolio turnover rate............. 44% 49% 61% 72% 120% 116% 111% 36%(1)
Average commission rate paid........ $0.0559 $0.0448 -- -- -- -- -- --
</TABLE>
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* COMMENCEMENT OF OPERATIONS.
** PRIOR TO JULY 28, 1997, THE FUND ISSUED ONE CLASS OF SHARES. ALL SHARES OF
THE FUND HELD PRIOR TO THAT DATE HAVE BEEN DESIGNATED CLASS B SHARES.
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
6
<PAGE>
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<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
OCTOBER 31,
CLASS A SHARES 1997++
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 18.64
-------
Net investment loss................................................... (0.02)
Net realized and unrealized loss...................................... (0.16)
-------
Total from investment operations...................................... (0.18)
-------
Net asset value, end of period........................................ $ 18.46
-------
-------
TOTAL INVESTMENT RETURN+.............................................. (0.97)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.48%(2)
Net investment loss................................................... (0.33)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $1,862
Portfolio turnover rate............................................... 44%
Average commission rate paid.......................................... $0.0559
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 18.64
-------
Net investment loss................................................... (0.04)
Net realized and unrealized loss...................................... (0.17)
-------
Total from investment operations...................................... (0.21)
-------
Net asset value, end of period........................................ $ 18.43
-------
-------
TOTAL INVESTMENT RETURN+.............................................. (1.13)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 2.24%(2)
Net investment loss................................................... (0.76)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $ 2,889
Portfolio turnover rate............................................... 44%
Average commission rate paid.......................................... $0.0559
</TABLE>
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* THE DATE SHARES WERE FIRST ISSUED.
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
7
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<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
OCTOBER 31,
CLASS D SHARES 1997++
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 18.64
-------
Net investment income................................................. 0.02
Net realized and unrealized loss...................................... (0.19)
-------
Total from investment operations...................................... (0.17)
-------
Net asset value, end of period........................................ $ 18.47
-------
-------
TOTAL INVESTMENT RETURN+.............................................. (0.91)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.23%(2)
Net investment income................................................. 0.33%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $45
Portfolio turnover rate............................................... 44%
Average commission rate paid.......................................... $0.0559
</TABLE>
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* THE DATE SHARES WERE FIRST ISSUED.
++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE
PERIOD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
8
<PAGE>
THE FUND AND ITS MANAGEMENT
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Dean Witter European Growth Fund Inc. (the "Fund") is an open-end,
diversified management investment company incorporated in the state of Maryland
on February 13, 1990.
Dean Witter InterCapital Inc. ("InterCapital" or the "Investment Manager"),
whose address is Two World Trade Center, New York, New York 10048, is the Fund's
Investment Manager. The Investment Manager, which was incorporated in July,
1992, is a wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover &
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.
InterCapital and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to 103 investment companies (the "Dean Witter Funds"),
29 of which are listed on the New York Stock Exchange, with combined assets of
approximately $98.9 billion at December 31, 1997. The Investment Manager also
manages and advises portfolios of pension plans, other institutions and
individuals which aggregated approximately $4 billion at such date.
The Fund has retained the Investment Manager to provide administrative
services, manage its business affairs and supervise the investment of the Fund's
assets. InterCapital has retained Dean Witter Services Company Inc. to perform
the aforementioned administrative services for the Fund.
Under a Sub-Advisory Agreement between Morgan Grenfell Investment Services
Limited (the "Sub-Adviser") and the Investment Manager, the Sub-Adviser provides
the Fund with investment advice and portfolio management relating to the Fund's
investments in securities issued by issuers located in Europe and in other
countries located elsewhere around the world, subject to the overall supervision
of the Investment Manager. The Fund's Directors review the various services
provided by the Investment Manager and the Sub-Adviser to ensure that the Fund's
general investment policies and programs are being properly carried out and that
administrative services are being provided to the Fund in a satisfactory manner.
The Sub-Adviser, whose address is 20 Finsbury Circus, London, England, as of
September 30, 1997, manages assets of approximately $16.5 billion for U.S.
corporate and public employee benefit plans, investment companies, endowments
and foundations. The Sub-Adviser is an indirect subsidiary of Deutsche Bank AG,
the largest commercial bank in Germany.
As full compensation for the services and facilities furnished to the Fund
and for expenses of the Fund assumed by the Investment Manager, the Fund pays
the Investment Manager monthly compensation calculated by applying the annual
rate of 1.0% of the portion of the Fund's daily net assets not exceeding $500
million; 0.95% of the portion of daily net assets exceeding $500 million but not
exceeding $2 billion; and 0.90% of the portion of daily net assets exceeding $2
billion. As compensation for its services provided pursuant to the Sub-Advisory
Agreement, the Investment Manager pays the Sub-Adviser monthly compensation
equal to 40% of its monthly compensation. For the fiscal year ended October 31,
1997, the Fund accrued total compensation to the Investment Manager amounting to
0.97% of the Fund's average daily net assets (of which 40% was accrued to the
Sub-Adviser by the Investment Manager) and the total expenses of Class B
amounted to 2.06% of the average daily net assets of Class B. Shares of Class A,
Class C and Class D were first issued on July 28, 1997. The expenses of the Fund
include: the fee of the Investment Manager; the fee pursuant to the Plan of
Distribution (see "Purchase of Fund Shares"); taxes; transfer agent, custodian
and auditing fees; certain legal fees; and printing and other expenses relating
to the Fund's operations which are not expressly assumed by the Investment
Manager under its Investment Management Agreement with the Fund.
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
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The investment objective of the Fund is to maximize the capital appreciation
of its investments. There is no assurance that the objective will be achieved.
This objective is fundamental and may not be changed without shareholder
approval. The following policies may be changed by the Board of Directors
without shareholder approval.
The Fund seeks to achieve its investment objective by investing at least 65%
of its total assets in securities issued by issuers located in countries located
in Europe. Such issuers will include companies (i) which are organized under the
laws of a European country and have a principal office in a European country, or
(ii) which derive 50% or more of their total revenues from business in Europe,
or (iii) the equity securities of which are traded principally on a stock
exchange in Europe.
The principal countries in which such issuers will be located are France;
the United Kingdom; Germany; the Netherlands; Spain; Sweden; Switzerland and
Italy. The Fund currently intends to invest more than 25% of its total assets in
the United Kingdom. As such, the investment performance of the Fund will be
subject to social, political and economic events occurring in the United Kingdom
to a greater extent than those occurring in other European countries.
The securities invested in will primarily consist of equity securities
issued by companies based in European countries, but may also include fixed-
income securities issued or guaranteed by European governments (including zero
coupon treasury securities), when it is deemed that such investments are
consistent with the Fund's investment objective. For example, there may be times
when the Sub-Adviser determines that the prices of government securities are
more likely to appreciate than those of equity securities. Such an occasion
might arise when inflation concerns have led to general increases in interest
rates. Such fixed-income securities which will be purchased by the Fund are
likely to be obligations of the treasuries of one of the major European nations.
In addition, the Fund may invest in fixed-income securities which are, either
alone or in combination with a warrant, option or other right, convertible into
the common stock of a European issuer, when the Investment Manager or the
Sub-Adviser determines that such securities are more likely to appreciate in
value than the common stock of such issuers or when the Investment Manager or
Sub-Adviser wishes to hedge the risk inherent in the direct purchase of the
equity of a given issuer. The Fund will select convertible securities of issuers
whose common stock has, in the opinion of the Investment Manager or Sub-Adviser,
a superior investment potential. The Fund may also purchase equity and
fixed-income securities which are issued in private placements and warrants or
other securities conveying the right to purchase common stock.
The remainder of the Fund's portfolio equalling, at times, up to 35% of the
Fund's total assets, may be invested in equity and/or government and convertible
securities issued by issuers located anywhere in the world, including the United
States, subject to the Fund's investment objective. In addition, this portion of
the Fund's portfolio will consist of various other financial instruments such as
forward foreign exchange contracts, futures contracts and options (see below).
It is anticipated that the securities held by the Fund in its portfolio will
be denominated, principally, in liquid European currencies. Such currencies
include the German mark, French franc, British pound, Dutch guilder, Swiss
franc, Swedish krona, Italian lira, and Spanish peseta. In addition, the Fund
may hold securities denominated in the European Currency Unit (a weighted
composite of the currencies of member states of the European Monetary System).
Securities of issuers within a given country may be denominated in the currency
of a different country.
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The Fund may also invest in securities of foreign issuers in the form of
American Depository Receipts (ADRs), European Depository Receipts (EDRs) or
other similar securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by a United States bank or trust company evidencing ownership of the underlying
securities. EDRs are European receipts evidencing a similar arrangement.
Generally, ADRs, in registered form, are designed for use in the United States
securities markets and EDRs, in bearer form, are designed for use in European
securities markets.
There may be periods during which market conditions warrant reduction of
some or all of the Fund's securities holdings. During such periods, the Fund may
adopt a temporary "defensive" posture in which greater than 35% of its net
assets are invested in cash or money market instruments. Under such
circumstances, the money market instruments in which the Fund may invest are
securities issued or guaranteed by the U.S. Government; American bank
obligations; Eurodollar certificates of deposit; obligations of American savings
institutions; fully insured certificates of deposit; and commercial paper of
American issuers rated within the two highest grades by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") 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.
RISK CONSIDERATIONS
FOREIGN SECURITIES. Investors should carefully consider the risks of
investing in securities of foreign issuers and securities denominated in
non-U.S. currencies. Fluctuations in the relative rates of exchange between the
currencies of different nations will affect the value of the Fund's investments.
Changes in foreign currency exchange rates relative to the U.S. dollar will
affect the U.S. dollar value of the Fund's assets denominated in that currency
and thereby impact upon the Fund's total return on such assets.
Foreign currency exchange rates are determined by forces of supply and
demand on the foreign exchange markets. These forces are themselves affected by
the international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. Moreover,
foreign currency exchange rates may be affected by the regulatory control of the
exchanges on which the currencies trade. The foreign currency transactions of
the Fund will be conducted on a spot basis or through forward contracts or
futures contracts (see below). The Fund may incur certain costs in connection
with these currency transactions.
Investments in foreign securities will also occasion risks relating to
political and economic developments abroad, including the possibility of
expropriations or confiscatory taxation, limitations on the use or transfer of
Fund assets and any effects of foreign social, economic or political
instability. Political and economic developments in Europe, especially as they
relate to changes in the structure of the European Economic Community and the
further development of a unified common market, may have profound effects upon
the value of a large segment of the Fund's portfolio. Continued progress in the
evolution of, for example, a united European common market may be slowed by
unanticipated political or social events and may, therefore, adversely affect
the value of certain of the securities held in the Fund's portfolio. Foreign
companies are not subject to the regulatory requirements of U.S. companies and,
as such, there may be less publicly available information about such companies.
Moreover, foreign companies are not subject to uniform accounting, auditing and
financial reporting standards and requirements comparable to those applicable to
U.S. companies.
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
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exchange scrutiny and regulation than their American counterparts. Brokerage
commissions, dealer concessions and other transaction costs may be higher on
foreign markets than in the U.S. In addition, differences in clearance and
settlement procedures on foreign markets may occasion delays in settlements of
Fund trades effected in such markets. Inability to dispose of portfolio
securities due to settlement delays could result in losses to the Fund due to
subsequent declines in value of such securities and the inability of the Fund to
make intended security purchases due to settlement problems could result in a
failure of the Fund to make potentially advantageous investments.
------------
To hedge against adverse price movements in the securities held in its
portfolio and the currencies in which they are denominated (as well as in the
securities it might wish to purchase and their denominated currencies) the Fund
may engage in transactions in forward foreign currency contracts, options on
securities and currencies, and futures contracts and options on futures
contracts on securities, currencies and indexes. The Fund may also purchase
options on securities to facilitate its participation in the potential
appreciation of the value of the underlying securities. A discussion of these
transactions follows and is supplemented by further disclosure in the Statement
of Additional Information.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract ("forward contract") involves an obligation to purchase or
sell a 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. The Fund may enter into forward contracts as a hedge against
fluctuations in future foreign exchange rates.
The Fund will enter into forward contracts under various circumstances. When
the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may, for example, desire to "lock in" the
price of the security in U.S. dollars or some other foreign currency which the
Fund is temporarily holding in its portfolio. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars or other
currency, of the amount of foreign currency involved in the underlying security
transactions, the Fund will 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.
At other times, when, for example, it is believed that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar or some other foreign currency, the Fund may enter into a forward
contract to sell, for a fixed amount of dollars or other currency, the amount of
foreign currency approximating the value of some or all of the Fund's portfolio
securities (or securities which the Fund has purchased for its portfolio)
denominated in such foreign currency. Under identical circumstances, the Fund
may enter into a forward contract to sell, for a fixed amount of U.S. dollars or
other currency, an amount of foreign currency other than the currency in which
the securities to be hedged are denominated approximating the value of some or
all of the portfolio securities to be hedged. This method of hedging, called
"cross-hedging," will be selected when it is determined that the foreign
currency in which the portfolio securities are denominated has insufficient
liquidity or is trading at a discount as compared with some other foreign
currency with which it tends to move in tandem.
In addition, when the Fund anticipates purchasing securities at some time in
the future, and wishes to lock in the current exchange rate of the currency in
which those securities are denominated against the U.S. dollar or some other
foreign currency, it may enter into a forward contract to purchase an amount of
currency equal to some or all of the value of the anticipated purchase, for a
fixed amount of
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U.S. dollars or other currency. The Fund may, however, close out the forward
contract without purchasing the security which was the subject of the
"anticipatory" hedge.
Lastly, the Fund is permitted to enter into forward contracts with respect
to currencies in which certain of its portfolio securities are denominated and
on which options have been written (see "Options and Futures Transactions").
In all of the above circumstances, if the currency in which the Fund's
portfolio securities (or anticipated portfolio securities) are denominated rises
in value with respect to the currency which is being purchased (or sold), then
the Fund will have realized fewer gains than had the Fund not entered into the
forward contracts. Moreover, the precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible,
since the future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The Fund is
not required to enter into such transactions with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Investment Manager and/or Sub-Adviser.
The Fund generally will not enter into a forward contract with a term of
greater than one year, although it may enter into forward contracts for periods
of up to five years. To the extent that the Fund enters into forward foreign
currency contracts to hedge against a decline in the value of portfolio holdings
denominated in a particular foreign currency resulting from currency
fluctuations, there is a risk that the Fund may nevertheless realize a gain or
loss as a result of currency fluctuations after such portfolio holdings are sold
if the Fund is unable to enter into an "offsetting" forward foreign currency
contract with the same party or another party. The Fund may be limited in its
ability to enter into hedging transactions involving forward contracts by the
Internal Revenue Code of 1986 (the "Code") requirements relating to
qualifications as a regulated investment company (see "Dividends, Distributions
and Taxes").
YEAR 2000. The investment management and advisory services provided to the
Fund by the Investment Manager and the Sub-Adviser 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-Adviser, 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.
OPTIONS AND FUTURES TRANSACTIONS
Call and put options on U.S. Treasury notes, bonds and bills, on various
foreign currencies and on equity securities are listed on several U.S. and
foreign securities exchanges and are written in over-the-counter transactions
("OTC options"). Listed options are issued or guaranteed by the exchange on
which they trade or by a clearing corporation such as the Options Clearing
Corporation ("OCC"). Ownership of a listed call option gives the Fund the right
to buy from the OCC (in the U.S.) or other clearing corporation or exchange, the
underlying security or currency covered by the option at the stated exercise
price (the price per unit of the underlying security or currency) 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
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then current market price. Ownership of a listed put option would give the Fund
the right to sell the underlying security or currency to the OCC (in the U.S.)
or other clearing corporation or exchange at the stated exercise price. Upon
notice of exercise of the put option, the writer of the option 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.
OTC OPTIONS. Exchange-listed options are issued by the OCC (in the U.S.) or
other clearing corporation or exchange which assures that all transactions in
such options are properly executed. OTC options are purchased from or sold
(written) to dealers or financial institutions which have entered into direct
agreements with the Fund. With OTC options, such variables as expiration date,
exercise price and premium will be agreed upon between the Fund and the
transacting dealer, without the intermediation of a third party such as the OCC.
If the transacting dealer fails to make or take delivery of the securities or
amount of foreign currency underlying an option it has written, in accordance
with the terms of that option, the Fund would lose the premium paid for the
option as well as any anticipated benefit of the transaction. The Fund will
engage in OTC option transactions only with member banks of the Federal Reserve
System or primary dealers in U.S. Government securities or with affiliates of
such banks or dealers which have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50 million.
COVERED CALL WRITING. The Fund is permitted to write covered call options
on portfolio securities which are denominated in either U.S. dollars or foreign
currencies and on the U.S. dollar and foreign currencies, without limit, in
order to hedge against the decline in the value of a security or currency and to
close out long call option positions. Generally, a call option is "covered" if
the Fund owns the security or the currency underlying the option it has written,
holds a call option on the same underlying security or currency with a similar
exercise price or maintains a sufficient amount of cash, cash equivalents or
liquid securities to purchase the underlying security or to exchange for the
underlying currency. As a writer of a call option, the Fund has the obligation,
upon notice of exercise of the option, to deliver the security or amount of
currency underlying the option (certain listed and OTC call options written by
the Fund will be exercisable by the purchaser only on a specific date).
The Fund will receive from the purchaser, in return for a call it has
written, a "premium"; i.e., the price of the option. The premium received will
offset a portion of the potential loss incurred by the Fund if the securities
underlying the option are ultimately sold by the Fund at a loss. Furthermore, a
premium received on a call written on a foreign currency will ameliorate any
potential loss of value on the portfolio security due to a decline in the value
of the currency. However, 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 exchange rate of the currency in which it is denominated)
increase, but has retained the risk of loss should the price of the underlying
security (or the exchange rate of the currency in which it is denominated)
decline. The size of premiums will fluctuate with varying market conditions.
PURCHASING CALL AND PUT OPTIONS. The Fund may purchase listed and OTC call
and put options in amounts equalling up to 5% of its total assets. The Fund may
purchase call options to close out a covered call position or to protect against
an increase in the price of a security it anticipates purchasing or, in the case
of call options on a foreign currency, to hedge against an adverse exchange rate
change of the currency in which the security it anticipates purchasing is
denominated vis-a-vis the currency in which the exercise price is denominated.
The Fund may purchase put options on securities which it holds in its portfolio
only to protect itself against a decline in the value of the security. If the
value of the underlying security were to fall below the exercise
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<PAGE>
price of the put purchased in an amount greater than the premium paid for the
option, the Fund would incur no additional loss. Similarly, the Fund may
purchase put options on currencies in which securities which it holds are
denominated only to protect itself against a decline in value of such currency
vis-a-vis the currency in which the exercise price is denominated. If the value
of the currency underlying the option were to fall below the exercise price of
the put purchased in an amount greater than the premium paid for the option, the
Fund would incur no additional loss. There are no other limits on the Fund's
ability to purchase call and put options.
FUTURES CONTRACTS. The Fund may purchase and sell futures contracts that
are currently traded, or may in the future be traded, on U.S. and foreign
commodity exchanges on common stocks, such underlying fixed-income securities as
U.S. Treasury bonds, notes, and bills and/or any foreign government fixed-income
security ("interest rate" futures), on various currencies ("currency" futures)
and on such indexes of U.S. or foreign equity and fixed-income securities as may
exist or come into being, such as the Standard & Poor's 500 Index or the
Financial Times Equity Index ("index" futures). As a futures contract purchaser,
the Fund 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. As a seller of a futures contract, the Fund incurs an
obligation to deliver the specified amount of the underlying obligation at a
specified time in return for an agreed upon price.
The Fund will purchase or sell interest rate futures contracts for the
purpose of hedging some or all of the value of its portfolio securities (or
anticipated portfolio securities) against changes in prevailing interest rates.
If it is anticipated that interest rates may rise and, concomitantly, the price
of certain of its portfolio securities fall, the Fund may sell an interest rate
futures contract. If declining interest rates are anticipated, the Fund may
purchase an interest rate futures contract to protect against a potential
increase in the price of securities the Fund intends to purchase. Subsequently,
appropriate securities may be purchased by the Fund in an orderly fashion; as
securities are purchased, corresponding futures positions would be terminated by
offsetting sales of contracts.
The Fund will purchase or sell index futures contracts for the purpose of
hedging some or all of its portfolio (or anticipated portfolio) against changes
in their prices. If it is anticipated that the prices of securities held by the
Fund may fall, the Fund may sell an index futures contract. Conversely, if the
Fund wishes to hedge against anticipated price rises in those securities which
the Fund intends to purchase, the Fund may purchase an index futures contract.
The Fund will purchase or sell currency futures on currencies in which its
portfolio securities (or anticipated portfolio securities) are denominated for
the purposes of hedging against anticipated changes in currency exchange rates.
The Fund will enter into currency futures contracts for the same reasons as set
forth above for entering into forward foreign currency contracts; namely, to
"lock-in" the value of a security purchased or sold in a given currency
vis-a-vis a different currency or to hedge against an adverse currency exchange
rate movement of a portfolio security's (or anticipated portfolio security's)
denominated currency vis-a-vis a different currency.
In addition to the above, interest rate, index and currency futures will be
bought or sold in order to close out a short or long position maintained by the
Fund in a corresponding futures contract.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write call and put
options on futures contracts which are traded on an exchange 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) 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
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<PAGE>
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 Fund will purchase and write options on futures contracts for identical
purposes to those set forth above for the purchase of a futures contract
(purchase of a call option) and the sale of a futures contract (purchase of a
put option or sale of a call option), or to close out a long or short position
in futures contracts. If, for example, the Investment Manager or Sub-Adviser
wished to protect against an increase in interest rates and the resulting
negative impact on the value of a portion of its fixed-income portfolio, it
might write a call option on an interest rate futures contract, the underlying
security of which correlates with the portion of the portfolio the Investment
Manager or Sub-Adviser seeks to hedge. Any premiums received in the writing of
options on futures contracts may, of course, provide a further hedge against
losses resulting from price declines in portions of the Fund's portfolio.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Fund may not
enter into futures contracts or purchase related options thereon if, immediately
thereafter, the amount committed to margin plus the amount paid for premiums for
unexpired options on futures contracts exceeds 5% of the value of the Fund's
total assets, after taking into account unrealized gains and unrealized losses
on such contracts it has entered into, provided, however, that in the case of an
option that is in-the-money (the exercise price of the call (put) option is less
(more) than the market price of the underlying security) at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%.
However, there is no overall limitation on the percentage of the Fund's assets
which may be subject to a hedge position. Except as described above, there are
no other limitations on the use of futures and options thereon by the Fund.
RISKS OF OPTIONS AND FUTURES TRANSACTIONS. The Fund may close out its
position as writer of an option, or as a buyer or seller of a futures contract,
only if a liquid secondary market exists for options or futures contracts of
that series. There is no assurance that such a market will exist, particularly
in the case of OTC options, as such options will generally only be closed out by
entering into a closing purchase transaction with the purchasing dealer.
Exchanges may limit the amount by which the price of many futures contracts
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.
The extent to which the Fund may enter into transactions involving options
and futures contracts may be limited by the Code's requirements for
qualification as a regulated investment company and the Fund's intention to
qualify as such. See "Dividends, Distributions and Taxes."
While the futures contracts and options transactions to be engaged in by the
Fund for the purpose of hedging the Fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such instruments.
One such risk is that the Fund's management could be incorrect in its
expectations as to the direction or extent of various interest rate or price
movements or the time span within which the movements take place. For example,
if the Fund sold futures contracts for the sale of securities in anticipation of
an increase in interest rates, and then interest rates went down instead,
causing bond prices to rise, the Fund would lose money on the sale.
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Another risk which may arise in employing futures contracts to protect
against the price volatility of portfolio securities is that the prices of
securities, currencies and indexes subject to futures contracts (and thereby the
futures contract prices) may correlate imperfectly with the behavior of the U.S.
dollar cash prices of the Fund's portfolio securities and their denominated
currencies. Another such risk is that prices of interest rate futures contracts
may not move in tandem with the changes in prevailing interest rates against
which the Fund seeks a hedge. A correlation may also be distorted by the fact
that the futures market is dominated by short-term traders seeking to profit
from the difference between a contract or security price objective and their
cost of borrowed funds. Such distortions are generally minor and would diminish
as the contract approached maturity.
The Fund, by entering into transactions in foreign futures and options
markets, will also incur risks similar to those discussed above under the
section entitled "Foreign Securities."
Compared to the purchase or sale of futures contracts, the purchase of call
or put options on futures contracts involves less potential risk to the Fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when a purchase of a
call or put option on a futures contract would result in a loss to the Fund when
the purchase or sale of a futures contract would not result in a loss, such as
when there is no movement in the prices of the underlying securities. The
writing of a put or call option on a futures contract involves risks similar to
those relating to transactions in futures contracts, as are described above.
OTHER INVESTMENT POLICIES
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements, which
may be viewed as a type of secured lending by the Fund, and which typically
involve the acquisition by the Fund of debt securities from a selling financial
institution such as a bank, savings and loan association or broker-dealer. The
agreement provides that the Fund will sell back to the institution, and that the
institution will repurchase, the underlying security at a specified price and at
a fixed time in the future, usually not more than seven days from the date of
purchase. While repurchase agreements involve certain risks not associated with
direct investments in debt securities, including the risks of default or
bankruptcy of the selling financial institution, the Fund follows procedures to
minimize such risks. These procedures include effecting repurchase transactions
only with large, well-capitalized and well-established financial institutions
and maintaining adequate collateralization.
ZERO COUPON SECURITIES. A portion of the fixed-income securities purchased
by the Fund may be zero coupon securities. Such securities are purchased at a
discount from their face amount, giving the purchaser the right to receive their
full value at maturity. The interest earned on such securities is, implicitly,
automatically compounded and paid out at maturity. While such compounding at a
constant rate eliminates the risk of receiving lower yields upon reinvestment of
interest if prevailing interest rates decline, the owner of a zero coupon
security will be unable to participate in higher yields upon reinvestment of
interest received on interest-paying securities if prevailing interest rates
rise.
A zero coupon security pays no interest to its holder during its life.
Therefore, to the extent the Fund invests in zero coupon securities, it will not
receive current cash available for distribution to shareholders. In addition,
zero coupon securities are subject to substantially greater price fluctuations
during periods of changing prevailing interest rates than are comparable
securities which pay interest on a current basis. Current federal tax law
requires that a holder (such as the Fund) of a zero coupon security accrue a
portion of the discount at which the security was purchased as income each year
even though the Fund receives no interest payments in cash on the security
during the year.
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WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From
time to time, in the ordinary course of business, the Fund may purchase
securities on a when-issued or delayed delivery basis or may purchase or sell
securities on a forward commitment basis. When such 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 the commitment. There is no overall
limit on the percentage of the Fund's assets which may be committed to the
purchase of securities on a when-issued, delayed delivery or forward commitment
basis. An increase in the percentage of the Fund's assets committed to the
purchase of securities on a when-issued, delayed delivery or forward commitment
basis may increase the volatility of the Fund's net asset value.
WHEN, AS AND IF ISSUED SECURITIES. The Fund may purchase securities on a
"when, as and if issued" basis under which the issuance of the security depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization, leveraged buyout or debt restructuring. If the
anticipated event does not occur and the securities are not issued, the Fund
will have lost an investment opportunity. There is no overall limit on the
percentage of the Fund's assets which may be committed to the purchase of
securities on a "when, as and if issued" basis. An increase in the percentage of
the Fund's assets committed to the purchase of securities on a "when, as and if
issued" basis may increase the volatility of its net asset value.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to brokers, dealers and
other financial institutions, provided that such loans are callable at any time
by the Fund (subject to certain notice provisions described in the Statement of
Additional Information), 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 at least equal to the market value, determined daily,
of the loaned securities.
Except as specifically noted, all investment objectives, policies and
practices discussed above are not fundamental policies of the Fund and, as such,
may be changed without shareholder approval.
PORTFOLIO MANAGEMENT
The Fund's portfolio is actively managed by its Investment Manager and the
Sub-Adviser with a view to achieving the Fund's investment objective. In
determining which securities to purchase for the Fund or hold in the Fund's
portfolio, the Investment Manager and the Sub-Adviser will rely on information
from various sources, including research, analysis and appraisals of brokers and
dealers, including Dean Witter Reynolds Inc. ("DWR"), Morgan Stanley and Co.
Incorporated and other broker-dealer affiliates of the Investment Manager, and
the Investment Manager's and Sub-Adviser's own analysis of factors they deem
relevant. The Fund's primary portfolio manager is Jeremy G. Lodwick, a Director
of the Sub-Adviser. Mr. Lodwick has been the Fund's primary portfolio manager
since April 1, 1994 and has been managing portfolios consisting of equity
securities issued by European issuers for the Sub-Adviser for over five years.
Personnel of the Investment Manager and Sub-Adviser have substantial
experience in the use of the investment techniques described above under the
heading "Options and Futures Transactions," which techniques require skills
different from those needed to select the portfolio securities underlying
various options and futures contracts.
Orders for transactions in portfolio securities and commodities may be
placed for the Fund with a number of brokers and dealers, including DWR, Morgan
Stanley and Co. Incorporated and other broker-dealer affiliates of the
Investment Manager or the Sub-Adviser. Pursuant to an order of the Securities
and Exchange Commission, the Fund may effect principal transactions in certain
money market instruments with DWR. In addition, the Fund
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<PAGE>
may incur brokerage commissions on transactions conducted through DWR, Morgan
Stanley and Co. Incorporated and other brokers and dealers that are affiliates
of the Investment Manager.
The portfolio trading engaged in by the Fund may result in its portfolio
turnover rate exceeding 100%. The Fund is expected to incur higher than normal
brokerage commission costs due to its portfolio turnover rate. Short-term gains
and losses taxable at ordinary income rates may result from such portfolio
transactions. See "Dividends, Distributions and Taxes" for a full discussion of
the tax implica-
tions of the Fund's trading policy. A more extensive discussion of the Fund's
portfolio brokerage policies is set forth in the Statement of Additional
Information.
The expenses of the Fund relating to its portfolio management are likely to
be greater than those incurred by other investment companies investing primarily
in securities issued by domestic issuers as custodial costs, brokerage
commissions and other transaction charges related to investing in foreign
markets are generally higher than in the United States.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The investment restrictions listed below are among the restrictions which
have been adopted by the Fund as fundamental policies. Under the Investment
Company Act of 1940, as amended (the "Act"), a fundamental policy may not be
changed without the vote of a majority of the outstanding voting securities of
the Fund, as defined in the Act. For purposes of the following limitations: (i)
all percentage limitations apply immediately after a purchase or initial
investment, and (ii) any subsequent change in any applicable percentage
resulting from market fluctuations or other changes in total or net assets does
not require elimination of any security from the portfolio.
The Fund may not:
1. As to 75% of its total assets, invest more than 5% of the value of its
total assets in the securities of any one issuer (other than obligations issued,
or guaranteed by, the United States Government, its agencies or
instrumentalities).
2. As to 75% of its total assets, purchase more than 10% of all outstanding
voting securities or any class of securities of any one issuer.
3. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry.
4. 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 obligation issued
or guaranteed by the United States Government, its agencies or
instrumentalities.
5. Purchase or sell commodities or commodities contracts except that the Fund
may purchase or write interest rate, currency and stock and bond index futures
contracts and related options thereon.
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 or variation margin for futures are not deemed to be
pledges of assets.)
7. Purchase securities on margin (but the Fund may obtain short-term loans as
are necessary for the clearance of transactions). The deposit or payment by the
Fund of initial or variation margin in connection with futures contracts or
related options thereon is not considered the purchase of a security on margin.
8. 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
19
<PAGE>
Fund's net assets will be invested in such illiquid securities and foreign
securities not traded on a recognized domestic or foreign exchange.
Generally, OTC options and the assets used as "cover" for written OTC
options are illiquid securities. However, the Fund is permitted to treat the
securities it uses as cover for written OTC options as liquid provided it
follows a procedure whereby it will sell OTC options only to qualified dealers
who agree that the Fund may repurchase such options at a maximum price to be
calculated pursuant to a predetermined formula set forth in the option
agreement. The formula may vary from agreement to agreement, but is generally
based on a multiple of the premium received by the Fund for writing the option
plus the amount, if any, of the option's intrinsic value. An OTC option is
considered an illiquid asset only to the extent that the maximum repurchase
price under the formula exceeds the intrinsic value of the option.
Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objective by investing all or substantially all
of its assets in another investment company having substantially the same
investment objective and policies as the Fund.
PURCHASE OF FUND SHARES
- --------------------------------------------------------------------------------
GENERAL
The Fund offers each class of its shares for sale to the public on a
continuous basis. Pursuant to a Distribution Agreement between the Fund and Dean
Witter Distributors Inc. (the "Distributor"), an affiliate of the Investment
Manager, shares of the Fund are distributed by the Distributor and offered by
DWR and other dealers which have entered into selected dealer agreements with
the Distributor ("Selected Broker-Dealers"). The principal executive office of
the Distributor is located at Two World Trade Center, New York, New York 10048.
The Fund offers four classes of shares (each, a "Class"). Class A shares are
sold to investors with an initial sales charge that declines to zero for larger
purchases; however, Class A shares sold without an initial sales charge are
subject to a contingent deferred sales charge ("CDSC") of 1.0% if redeemed
within one year of purchase, except for certain specific circumstances. Class B
shares are sold without an initial sales charge but are subject to a CDSC
(scaled down from 5.0% to 1.0%) payable upon most redemptions within six years
after purchase. (Class B shares purchased by certain qualified plans are subject
to a CDSC scaled down from 2.0% to 1.0% if redeemed within three years after
purchase.) Class C shares are sold without an initial sales charge but are
subject to a CDSC of 1.0% on most redemptions made within one year after
purchase. Class D shares are sold without an initial sales charge or CDSC and
are available only to investors meeting an initial investment minimum of $5
million ($25 million for certain qualified plans), and to certain other limited
categories of investors. At the discretion of the Board of Directors of the
Fund, Class A shares may be sold to categories of investors in addition to those
set forth in this prospectus at net asset value without a front-end sales
charge, and Class D shares may be sold to certain other categories of investors,
in each case as may be described in the then current prospectus of the Fund. See
"Alternative Purchase Arrangements--Selecting a Particular Class" for a
discussion of factors to consider in selecting which Class of shares to
purchase.
The minimum initial purchase is $1,000 for each Class of shares, although
Class D shares are only available to persons investing $5 million ($25 million
for certain qualified plans) or more and to certain other limited categories of
investors. For the purpose of meeting the minimum $5 million (or $25 million)
initial investment for Class D shares, and subject to the $1,000 minimum initial
investment for each Class of the Fund, an investor's existing holdings of Class
A shares of the Fund and other Dean Witter Funds that are multiple class funds
("Dean Witter Multi-Class Funds") and shares of Dean Witter Funds sold with a
20
<PAGE>
front-end sales charge ("FSC Funds") and concurrent investments in Class D
shares of the Fund and other Dean Witter Multi-Class Funds will be aggregated.
Subsequent purchases of $100 or more may be made by sending a check, payable to
Dean Witter European Growth Fund Inc., directly to Dean Witter Trust FSB (the
"Transfer Agent" or "DWT") at P.O. Box 1040, Jersey City, NJ 07303 or by
contacting an account executive of DWR or other Selected Broker-Dealer. When
purchasing shares of the Fund, investors must specify whether the purchase is
for Class A, Class B, Class C or Class D shares. If no Class is specified, the
Transfer Agent will not process the transaction until the proper Class is
identified. The minimum initial purchase, in the case of investments through
EasyInvest-SM-, an automatic purchase plan (see "Shareholder Services"), is
$100, provided that the schedule of automatic investments will result in
investments totalling at least $1,000 within the first twelve months. The
minimum initial purchase in the case of an "Education IRA" is $500, if the
Distributor has reason to believe that additional investments will increase the
investment in the account to $1,000 within three years. In the case of
investments pursuant to (i) Systematic Payroll Deduction Plans (including
Individual Retirement Plans), (ii) the InterCapital mutual fund asset allocation
program and (iii) fee-based programs approved by the Distributor, pursuant to
which participants pay an asset based fee for services in the nature of
investment advisory or administrative services, the Fund, in its discretion, may
accept investments without regard to any minimum amounts which would otherwise
be required, provided, in the case of Systematic Payroll Deduction Plans, that
the Distributor has reason to believe that additional investments will increase
the investment in all accounts under such Plans to at least $1,000. Certificates
for shares purchased will not be issued unless a request is made by the
shareholder in writing to the Transfer Agent.
Shares of the Fund are sold through the Distributor on a normal three
business day settlement basis; that is, payment is due on the third business day
(settlement date) after the order is placed with the Distributor. Since DWR and
other Selected Broker-Dealers forward investors' funds on settlement date they
will benefit from the temporary use of the funds if payment is made prior
thereto. As noted above, orders placed directly with the Transfer Agent must be
accompanied by payment. Investors will be entitled to receive income dividends
and capital gain distributions if their order is received by the close of
business on the day prior to the record date for such dividends and
distributions. Sales personnel of a Selected Broker-Dealer are compensated for
selling shares of the Fund at the time of their sale by the Distributor or any
of its affiliates and/or the Selected Broker-Dealer. In addition, some sales
personnel of the Selected Broker-Dealer will receive various types of non-cash
compensation as special sales incentives, including trips, educational and/or
business seminars and merchandise. The Fund and the Distributor reserve the
right to reject any purchase orders.
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund offers several Classes of shares to investors designed to provide
them with the flexibility of selecting an investment best suited to their needs.
The general public is offered three Classes of shares: Class A shares, Class B
shares and Class C shares, which differ principally in terms of sales charges
and rate of expenses to which they are subject. A fourth Class of shares, Class
D shares, is offered only to limited categories of investors (see "No Load
Alternative--Class D Shares" below).
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund except that Class A,
Class B and Class C shares bear the expenses of the ongoing shareholder service
fees, Class B and Class C shares bear the expenses of the ongoing distribution
fees and Class A, Class B and Class C shares which are redeemed subject to a
CDSC bear the expense of the additional incremental distribution costs resulting
from the CDSC applicable to shares of those Classes. The ongoing distribution
fees that are imposed on Class A, Class B and Class C shares will be imposed
directly against those Classes and not against all assets of
21
<PAGE>
the Fund and, accordingly, such charges against one Class will not affect the
net asset value of any other Class or have any impact on investors choosing
another sales charge option. See "Plan of Distribution" and "Redemptions and
Repurchases."
Set forth below is a summary of the differences between the Classes and the
factors an investor should consider when selecting a particular Class. This
summary is qualified in its entirety by detailed discussion of each Class that
follows this summary.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.25%. The initial sales charge is reduced for certain
purchases. Investments of $1 million or more (and investments by certain other
limited categories of investors) are not subject to any sales charges at the
time of purchase but are subject to a CDSC of 1.0% on redemptions made within
one year after purchase, except for certain specific circumstances. Class A
shares are also subject to a 12b-1 fee of up to 0.25% of the average daily net
assets of the Class. See "Initial Sales Charge Alternative--Class A Shares."
CLASS B SHARES. Class B shares are offered at net asset value with no
initial sales charge but are subject to a CDSC (scaled down from 5.0% to 1.0%)
if redeemed within six years of purchase. (Class B shares purchased by certain
qualified plans are subject to a CDSC scaled down from 2.0% to 1.0% if redeemed
within three years after purchase.) This CDSC may be waived for certain
redemptions. Class B shares are also subject to an annual 12b-1 fee of 1.0% of
the lesser of: (a) the average daily aggregate gross sales of the Fund's Class B
shares since the inception of the Fund (not including reinvestments of dividends
or capital gains distributions), less the average daily aggregate net asset
value of the Fund's Class B shares redeemed since the Fund's inception upon
which a CDSC has been imposed or waived, or (b) the average daily net assets of
Class B. The Class B shares' distribution fee will cause that Class to have
higher expenses and pay lower dividends than Class A or Class D shares.
After approximately ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund, based on the relative net asset
values of the shares of the two Classes on the conversion date. In addition, a
certain portion of Class B shares that have been acquired through the
reinvestment of dividends and distributions will be converted at that time. See
"Contingent Deferred Sales Charge Alternative--Class B Shares."
CLASS C SHARES. Class C shares are sold at net asset value with no initial
sales charge but are subject to a CDSC of 1.0% on redemptions made within one
year after purchase. This CDSC may be waived for certain redemptions. They are
subject to an annual 12b-1 fee of up to 1.0% of the average daily net assets of
the Class C shares. The Class C shares' distribution fee may cause that Class to
have higher expenses and pay lower dividends than Class A or Class D shares. See
"Level Load Alternative--Class C Shares."
CLASS D SHARES. Class D shares are available only to limited categories of
investors (see "No Load Alternative--Class D Shares" below). Class D shares are
sold at net asset value with no initial sales charge or CDSC. They are not
subject to any 12b-1 fees. See "No Load Alternative--Class D Shares."
SELECTING A PARTICULAR CLASS. In deciding which Class of Fund shares to
purchase, investors should consider the following factors, as well as any other
relevant facts and circumstances:
The decision as to which Class of shares is more beneficial to an investor
depends on the amount and intended length of his or her investment. Investors
who prefer an initial sales charge alternative may elect to purchase Class A
shares. Investors qualifying for significantly reduced or, in the case of
purchases of $1 million or more, no initial sales charges may find Class A
shares particularly attractive because similar sales charge reductions are not
available with respect to Class B or Class C shares. Moreover, Class A shares
are subject to lower ongoing expenses than are Class B or Class C shares over
the term of the investment. As an alternative, Class B and Class C shares are
sold
22
<PAGE>
without any initial sales charge so the entire purchase price is immediately
invested in the Fund. Any investment return on these additional investment
amounts may partially or wholly offset the higher annual expenses of these
Classes. Because the Fund's future return cannot be predicted, however, there
can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, although Class C shares are subject to a significantly lower
CDSC upon redemptions, they do not, unlike Class B shares, convert into Class A
shares after approximately ten years, and, therefore, are subject to an ongoing
12b-1 fee of 1.0% (rather than the 0.25% fee applicable to Class A shares) for
an indefinite period of time. Thus, Class B shares may be more attractive than
Class C shares to investors with longer term investment outlooks. Other
investors, however, may elect to purchase Class C shares if, for example, they
determine that they do not wish to be subject to a front-end sales charge and
they are uncertain as to the length of time they intend to hold their shares.
For the purpose of meeting the $5 million (or $25 million) minimum
investment amount for Class D shares, holdings of Class A shares in all Dean
Witter Multi-Class Funds, shares of FSC Funds and shares of Dean Witter Funds
for which such shares have been exchanged will be included together with the
current investment amount.
Sales personnel may receive different compensation for selling each Class of
shares. Investors should understand that the purpose of a CDSC is the same as
that of the initial sales charge in that the sales charges applicable to each
Class provide for the financing of the distribution of shares of that Class.
Set forth below is a chart comparing the sales charge, 12b-1 fees and
conversion options applicable to each Class of shares:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
CONVERSION
CLASS SALES CHARGE 12b-1 FEE FEATURE
<C> <S> <C> <C>
- -----------------------------------------------------------------
A Maximum 5.25% initial 0.25% No
sales charge reduced
for purchases of
$25,000 and over;
shares sold without an
initial sales charge
generally subject to a
1.0% CDSC during first
year.
- -----------------------------------------------------------------
B Maximum 5.0% CDSC 1.0% B shares convert
during the first year to A shares
decreasing to 0 after automatically
six years after
approximately ten
years
- -----------------------------------------------------------------
C 1.0% CDSC during first 1.0% No
year
- -----------------------------------------------------------------
D None None No
</TABLE>
See "Purchase of Fund Shares" and "The Fund and its Management" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Determination of Net Asset Value," "Dividends,
Distributions and Taxes" and "Shareholder Services--Exchange Privilege" for
other differences between the Classes of shares.
INITIAL SALES CHARGE ALTERNATIVE--
CLASS A SHARES
Class A shares are sold at net asset value plus an initial sales charge. In
some cases, reduced sales charges may be available, as described below.
Investments of $1 million or more (and investments by certain other limited
categories of investors) are not subject to any sales charges at the time of
purchase but are subject to a CDSC of 1.0% on redemptions made within one year
after purchase (calculated from the last day of the month in which the shares
were purchased), except for certain specific circumstances. The CDSC will be
assessed on an amount equal to the lesser of the current market value or the
cost of the shares being redeemed. The CDSC will not be imposed (i) in the
circumstances set forth below in the section "Contingent Deferred Sales Charge
Alternative--Class B
23
<PAGE>
Shares--CDSC Waivers," except that the references to six years in the first
paragraph of that section shall mean one year in the case of Class A shares, and
(ii) in the circumstances identified in the section "Additional Net Asset Value
Purchase Options" below. Class A shares are also subject to an annual 12b-1 fee
of up to 0.25% of the average daily net assets of the Class.
The offering price of Class A shares will be the net asset value per share
next determined following receipt of an order (see "Determination of Net Asset
Value" below), plus a sales charge (expressed as a percentage of the offering
price) on a single transaction as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE
---------------------------------
PERCENTAGE OF APPROXIMATE
AMOUNT OF PUBLIC OFFERING PERCENTAGE OF
SINGLE TRANSACTION PRICE AMOUNT INVESTED
- ---------------------------------------------- --------------- ---------------
<S> <C> <C>
Less than $25,000............................. 5.25% 5.54%
$25,000 but less
than $50,000............................. 4.75% 4.99%
$50,000 but less
than $100,000............................ 4.00% 4.17%
$100,000 but less
than $250,000............................ 3.00% 3.09%
$250,000 but less
than $1 million.......................... 2.00% 2.04%
$1 million and over........................... 0 0
</TABLE>
Upon notice to all Selected Broker-Dealers, the Distributor may reallow up
to the full applicable sales charge as shown in the above schedule during
periods specified in such notice. During periods when 90% or more of the sales
charge is reallowed, such Selected Broker-Dealers may be deemed to be
underwriters as that term is defined in the Securities Act of 1933.
The above schedule of sales charges is applicable to purchases in a single
transaction by, among others: (a) an individual; (b) an individual, his or her
spouse and their children under the age of 21 purchasing shares for his, her or
their own accounts; (c) a trustee or other fiduciary purchasing shares for a
single trust estate or a single fiduciary account; (d) a pension, profit-sharing
or other employee benefit plan qualified or non-qualified under Section 401 of
the Internal Revenue Code; (e) tax-exempt organizations enumerated in Section
501(c)(3) or (13) of the Internal Revenue Code; (f) employee benefit plans
qualified under Section 401 of the Internal Revenue Code of a single employer or
of employers who are "affiliated persons" of each other within the meaning of
Section 2(a)(3)(c) of the Act; and for investments in Individual Retirement
Accounts of employees of a single employer through Systematic Payroll Deduction
plans; or (g) any other organized group of persons, whether incorporated or not,
provided the organization has been in existence for at least six months and has
some purpose other than the purchase of redeemable securities of a registered
investment company at a discount.
COMBINED PURCHASE PRIVILEGE. Investors may have the benefit of reduced
sales charges in accordance with the above schedule by combining purchases of
Class A shares of the Fund in single transactions with the purchase of Class A
shares of other Dean Witter Multi-Class Funds and shares of FSC Funds. The sales
charge payable on the purchase of the Class A shares of the Fund, the Class A
shares of the other Dean Witter Multi-Class Funds and the shares of the FSC
Funds will be at their respective rates applicable to the total amount of the
combined concurrent purchases of such shares.
RIGHT OF ACCUMULATION. The above persons and entities may benefit from a
reduction of the sales charges in accordance with the above schedule if the
cumulative net asset value of Class A shares purchased in a single transaction,
together with shares of the Fund and other Dean Witter Funds previously
purchased at a price including a front-end sales charge (including shares of the
Fund and other Dean Witter Funds acquired in exchange for those shares, and
including in each case shares acquired through reinvestment of dividends and
distributions), which are held at the time of such transaction, amounts to
$25,000 or more. If such investor has a cumulative net asset value of shares of
FSC Funds and Class A and Class D shares that, together with the current
investment amount, is equal to at least $5 million ($25 million for
24
<PAGE>
certain qualified plans), such investor is eligible to purchase Class D shares
subject to the $1,000 minimum initial investment requirement of that Class of
the Fund. See "No Load Alternative--Class D Shares" below.
The Distributor must be notified by DWR or a Selected Broker-Dealer or the
shareholder at the time a purchase order is placed that the purchase qualifies
for the reduced charge under the Right of Accumulation. Similar notification
must be made in writing by the dealer or shareholder when such an order is
placed by mail. The reduced sales charge will not be granted if: (a) such
notification is not furnished at the time of the order; or (b) a review of the
records of the Selected Broker-Dealer or the Transfer Agent fails to confirm the
investor's represented holdings.
LETTER OF INTENT. The foregoing schedule of reduced sales charges will also
be available to investors who enter into a written Letter of Intent providing
for the purchase, within a thirteen-month period, of Class A shares of the Fund
from DWR or other Selected Broker-Dealers. The cost of Class A shares of the
Fund or shares of other Dean Witter Funds which were previously purchased at a
price including a front-end sales charge during the 90-day period prior to the
date of receipt by the Distributor of the Letter of Intent, or of Class A shares
of the Fund or shares of other Dean Witter Funds acquired in exchange for shares
of such funds purchased during such period at a price including a front-end
sales charge, which are still owned by the shareholder, may also be included in
determining the applicable reduction.
ADDITIONAL NET ASSET VALUE PURCHASE OPTIONS. In addition to investments of
$1 million or more, Class A shares also may be purchased at net asset value by
the following:
(1) trusts for which Dean Witter Trust DWT (an affiliate of the Investment
Manager) provides discretionary trustee services;
(2) persons participating in a fee-based program approved by the
Distributor, pursuant to which such persons pay an asset based fee for services
in the nature of investment advisory or administrative services (such
investments are subject to all of the terms and conditions of such programs,
which may include termination fees, mandatory redemption upon termination and
such other circumstances as specified in the programs' agreements, and
restrictions on transferability of Fund shares);
(3) employer-sponsored 401(k) and other plans qualified under Section 401(a)
of the Internal Revenue Code ("Qualified Retirement Plans") with at least 200
eligible employees and for which DWT serves as Trustee or DWR's Retirement Plan
Services serves as recordkeeper pursuant to a written Recordkeeping Services
Agreement;
(4) Qualified Retirement Plans for which DWT serves as Trustee or DWR's
Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement whose Class B shares have converted to Class A
shares, regardless of the plan's asset size or number of eligible employees;
(5) investors who are clients of a Dean Witter account executive who joined
Dean Witter from another investment firm within six months prior to the date of
purchase of Fund shares by such investors, if the shares are being purchased
with the proceeds from a redemption of shares of an open-end proprietary mutual
fund of the account executive's previous firm which imposed either a front-end
or deferred sales charge, provided such purchase was made within sixty days
after the redemption and the proceeds of the redemption had been maintained in
the interim in cash or a money market fund; and
(6) other categories of investors, at the discretion of the Board, as
disclosed in the then current prospectus of the Fund.
No CDSC will be imposed on redemptions of shares purchased pursuant to
paragraphs (1), (2) or (5), above.
25
<PAGE>
For further information concerning purchases of the Fund's shares, contact
DWR or another Selected Broker-Dealer or consult the Statement of Additional
Information.
CONTINGENT DEFERRED SALES CHARGE
ALTERNATIVE--CLASS B SHARES
Class B shares are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Fund. A CDSC, however, will be imposed on
most Class B shares redeemed within six years after purchase. The CDSC will be
imposed on any redemption of shares if after such redemption the aggregate
current value of a Class B account with the Fund falls below the aggregate
amount of the investor's purchase payments for Class B shares made during the
six years (or, in the case of shares held by certain Qualified Retirement Plans,
three years) preceding the redemption. In addition, Class B shares are subject
to an annual 12b-1 fee of 1.0% of the lesser of: (a) the average daily aggregate
gross sales of the Fund's Class B shares since the inception of the Fund (not
including reinvestments of dividends or capital gains distributions), less the
average daily aggregate net asset value of the Fund's Class B shares redeemed
since the Fund's inception upon which a CDSC has been imposed or waived, or (b)
the average daily net assets of Class B.
Except as noted below, Class B shares of the Fund which are held for six
years or more after purchase (calculated from the last day of the month in which
the shares were purchased) will not be subject to any CDSC upon redemption.
Shares redeemed earlier than six years after purchase may, however, be subject
to a CDSC which will be a percentage of the dollar amount of shares redeemed and
will be assessed on an amount equal to the lesser of the current market value or
the cost of the shares being redeemed. The size of this percentage will depend
upon how long the shares have been held, as set forth in the following table:
<TABLE>
<CAPTION>
CDSC AS A
YEAR SINCE PURCHASE PERCENTAGE OF
PAYMENT MADE AMOUNT REDEEMED
- -------------------------------------- ---------------------
<S> <C>
First................................. 5.0%
Second................................ 4.0%
Third................................. 3.0%
Fourth................................ 2.0%
Fifth................................. 2.0%
Sixth................................. 1.0%
Seventh and thereafter................ None
</TABLE>
In the case of Class B shares of the Fund purchased on or after July 28,
1997 by Qualified Retirement Plans for which DWT serves as Trustee or DWR's
Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement, shares held for three years or more after
purchase (calculated as described in the paragraph above) will not be subject to
any CDSC upon redemption. However, shares redeemed earlier than three years
after purchase may be subject to a CDSC (calculated as described in the
paragraph above), the percentage of which will depend on how long the shares
have been held, as set forth in the following table:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE CDSC AS A PERCENTAGE
PAYMENT MADE OF AMOUNT REDEEMED
- -------------------------------------- ---------------------
<S> <C>
First................................. 2.0%
Second................................ 2.0%
Third................................. 1.0%
Fourth and thereafter................. None
</TABLE>
CDSC WAIVERS. A CDSC will not be imposed on: (i) any amount which
represents an increase in value of shares purchased within the six years (or, in
the case of shares held by certain Qualified Retirement Plans, three years)
preceding the redemption; (ii) the current net asset value of shares purchased
more than six years (or, in the case of shares held by certain Qualified
Retirement Plans, three years) prior to the redemption; and (iii) the current
net asset value of shares purchased through reinvestment of dividends or
distributions and/or shares
26
<PAGE>
acquired in exchange for shares of FSC Funds or of other Dean Witter Funds
acquired in exchange for such shares. Moreover, in determining whether a CDSC is
applicable it will be assumed that amounts described in (i), (ii) and (iii)
above (in that order) are redeemed first.
In addition, the CDSC, if otherwise applicable, will be waived in the case
of:
(1) redemptions of shares held at the time a shareholder dies or becomes
disabled, only if the shares are: (a) registered either in the name of an
individual shareholder (not a trust), or in the names of such shareholder and
his or her spouse as joint tenants with right of survivorship; or (b) held in a
qualified corporate or self-employed retirement plan, Individual Retirement
Account ("IRA") or Custodial Account under Section 403(b)(7) of the Internal
Revenue Code ("403(b) Custodial Account"), provided in either case that the
redemption is requested within one year of the death or initial determination of
disability;
(2) redemptions in connection with the following retirement plan
distributions: (a) lump-sum or other distributions from a qualified corporate
or self-employed retirement plan following retirement (or, in the case of a "key
employee" of a "top heavy" plan, following attainment of age 59 1/2); (b)
distributions from an IRA or 403(b) Custodial Account following attainment of
age 59 1/2; or (c) a tax-free return of an excess contribution to an IRA; and
(3) all redemptions of shares held for the benefit of a participant in a
Qualified Retirement Plan which offers investment companies managed by the
Investment Manager or its subsidiary, Dean Witter Services Company Inc., as
self-directed investment alternatives and for which DWT serves as Trustee or
DWR's Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement ("Eligible Plan"), provided that either: (a)
the plan continues to be an Eligible Plan after the redemption; or (b) the
redemption is in connection with the complete termination of the plan involving
the distribution of all plan assets to participants.
With reference to (1) above, for the purpose of determining disability, the
Distributor utilizes the definition of disability contained in Section 72(m)(7)
of the Internal Revenue Code, which relates to the inability to engage in
gainful employment. With reference to (2) above, the term "distribution" does
not encompass a direct transfer of IRA, 403(b) Custodial Account or retirement
plan assets to a successor custodian or trustee. All waivers will be granted
only following receipt by the Distributor of confirmation of the shareholder's
entitlement.
CONVERSION TO CLASS A SHARES. All shares of the Fund held prior to July 28,
1997 have been designated Class B shares. Shares held before May 1, 1997 will
convert to Class A shares in May, 2007. In all other instances Class B shares
will convert automatically to Class A shares, based on the relative net asset
values of the shares of the two Classes on the conversion date, which will be
approximately ten (10) years after the date of the original purchase. The ten
year period is calculated from the last day of the month in which the shares
were purchased or, in the case of Class B shares acquired through an exchange or
a series of exchanges, from the last day of the month in which the original
Class B shares were purchased, provided that shares originally purchased before
May 1, 1997 will convert to Class A shares in May, 2007. The conversion of
shares purchased on or after May 1, 1997 will take place in the month following
the tenth anniversary of the purchase. There will also be converted at that time
such proportion of Class B shares acquired through automatic reinvestment of
dividends and distributions owned by the shareholder as the total number of his
or her Class B shares converting at the time bears to the total number of
outstanding Class B shares purchased and owned by the shareholder. In the case
of Class B shares held by a Qualified Retirement Plan for which DWT serves as
Trustee or DWR's Retirement Plan Services serves as recordkeeper pursuant to a
written Recordkeeping Services
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Agreement, the plan is treated as a single investor and all Class B shares will
convert to Class A shares on the conversion date of the first shares of a Dean
Witter Multi-Class Fund purchased by that plan. In the case of Class B shares
previously exchanged for shares of an "Exchange Fund" (see "Shareholder
Services--Exchange Privilege"), the period of time the shares were held in the
Exchange Fund (calculated from the last day of the month in which the Exchange
Fund shares were acquired) is excluded from the holding period for conversion.
If those shares are subsequently re-exchanged for Class B shares of a Dean
Witter Multi-Class Fund, the holding period resumes on the last day of the month
in which Class B shares are reacquired.
If a shareholder has received share certificates for Class B shares, such
certificates must be delivered to the Transfer Agent at least one week prior to
the date for conversion. Class B shares evidenced by share certificates that are
not received by the Transfer Agent at least one week prior to any conversion
date will be converted into Class A shares on the next scheduled conversion date
after such certificates are received.
Effectiveness of the conversion feature is subject to the continuing
availability of a ruling of the Internal Revenue Service or an opinion of
counsel that (i) the conversion of shares does not constitute a taxable event
under the Internal Revenue Code, (ii) Class A shares received on conversion will
have a basis equal to the shareholder's basis in the converted Class B shares
immediately prior to the conversion, and (iii) Class A shares received on
conversion will have a holding period that includes the holding period of the
converted Class B shares. The conversion feature may be suspended if the ruling
or opinion is no longer available. In such event, Class B shares would continue
to be subject to Class B 12b-1 fees.
LEVEL LOAD ALTERNATIVE--CLASS C SHARES
Class C shares are sold at net asset value next determined without an
initial sales charge but are subject to a CDSC of 1.0% on most redemptions made
within one year after purchase (calculated from the last day of the month in
which the shares were purchased). The CDSC will be assessed on an amount equal
to the lesser of the current market value or the cost of the shares being
redeemed. The CDSC will not be imposed in the circumstances set forth above in
the section "Contingent Deferred Sales Charge Alternative--Class B Shares--CDSC
Waivers," except that the references to six years in the first paragraph of that
section shall mean one year in the case of Class C shares. Class C shares are
subject to an annual 12b-1 fee of up to 1.0% of the average daily net assets of
the Class. Unlike Class B shares, Class C shares have no conversion feature and,
accordingly, an investor that purchases Class C shares will be subject to 12b-1
fees applicable to Class C shares for an indefinite period subject to annual
approval by the Fund's Board of Directors and regulatory limitations.
NO LOAD ALTERNATIVE--CLASS D SHARES
Class D shares are offered without any sales charge on purchase or
redemption and without any 12b-1 fee. Class D shares are offered only to
investors meeting an initial investment minimum of $5 million ($25 million for
Qualified Retirement Plans for which DWT serves as Trustee or DWR's Retirement
Plan Services serves as recordkeeper pursuant to a written Recordkeeping
Services Agreement) and the following categories of investors: (i) investors
participating in the InterCapital mutual fund asset allocation program pursuant
to which such persons pay an asset based fee; (ii) persons participating in a
fee-based program approved by the Distributor, pursuant to which such persons
pay an asset based fee for services in the nature of investment advisory or
administrative services (subject to all of the terms and conditions of such
programs referred to in (i) and (ii) above, which may include termination fees,
mandatory redemption upon termination and such other circumstances as specified
in the programs' agreements, and restrictions on transferability of Fund
shares); (iii) 401(k) plans established by DWR and SPS Transaction
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Services, Inc. (an affiliate of DWR) for their employees; (iv) certain Unit
Investment Trusts sponsored by DWR; (v) certain other open-end investment
companies whose shares are distributed by the Distributor; and (vi) other
categories of investors, at the discretion of the Board, as disclosed in the
then current prospectus of the Fund. Investors who require a $5 million (or $25
million) minimum initial investment to qualify to purchase Class D shares may
satisfy that requirement by investing that amount in a single transaction in
Class D shares of the Fund and other Dean Witter Multi-Class Funds, subject to
the $1,000 minimum initial investment required for that Class of the Fund. In
addition, for the purpose of meeting the $5 million (or $25 million) minimum
investment amount, holdings of Class A shares in all Dean Witter Multi-Class
Funds, shares of FSC Funds and shares of Dean Witter Funds for which such shares
have been exchanged will be included together with the current investment
amount. If a shareholder redeems Class A shares and purchases Class D shares,
such redemption may be a taxable event.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Act with respect to the distribution of Class A, Class B and Class C shares of
the Fund. In the case of Class A and Class C shares, the Plan provides that the
Fund will reimburse the Distributor and others for the expenses of certain
activities and services incurred by them specifically on behalf of those shares.
Reimbursements for these expenses will be made in monthly payments by the Fund
to the Distributor, which will in no event exceed amounts equal to payments at
the annual rates of 0.25% and 1.0% of the average daily net assets of Class A
and Class C, respectively. In the case of Class B shares, the Plan provides that
the Fund will pay the Distributor a fee, which is accrued daily and paid
monthly, at the annual rate of 1.0% of the lesser of: (a) the average daily
aggregate gross sales of the Fund's Class B shares since the inception of the
Fund (not including reinvestments of dividends or capital gains distributions),
less the average daily aggregate net asset value of the Fund's Class B shares
redeemed since the Fund's inception upon which a CDSC has been imposed or
waived, or (b) the average daily net assets of Class B. The fee is treated by
the Fund as an expense in the year it is accrued. In the case of Class A shares,
the entire amount of the fee currently represents a service fee within the
meaning of the NASD guidelines. In the case of Class B and Class C shares, a
portion of the fee payable pursuant to the Plan, equal to 0.25% of the average
daily net assets of each of these Classes, is currently characterized as a
service fee. A service fee is a payment made for personal service and/or the
maintenance of shareholder accounts.
Additional amounts paid under the Plan in the case of Class B and Class C
shares are paid to the Distributor for services provided and the expenses borne
by the Distributor and others in the distribution of the shares of those
Classes, including the payment of commissions for sales of the shares of those
Classes and incentive compensation to and expenses of DWR's account executives
and others who engage in or support distribution of shares or who service
shareholder accounts, including overhead and telephone expenses; printing and
distribution of prospectuses and reports used in connection with the offering of
the Fund's shares to other than current shareholders; and preparation, printing
and distribution of sales literature and advertising materials. In addition, the
Distributor may utilize fees paid pursuant to the Plan in the case of Class B
shares to compensate DWR and other Selected Broker-Dealers for their opportunity
costs in advancing such amounts, which compensation would be in the form of a
carrying charge on any unreimbursed expenses.
For the fiscal year ended October 31, 1997, Class B shares of the Fund
accrued payments under the Plan amounting to $13,514,335, which amount is equal
to 0.86% of the average daily net assets of Class B for the fiscal year. These
payments
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<PAGE>
were calculated pursuant to clause (a) of the compensation formula under the
Plan. All shares held prior to July 28, 1997 have been designated Class B
shares. For the fiscal period July 28 through October 31, 1997, Class A and
Class C shares of the Fund accrued payments under the Plan amounting to $678 and
$4,641, respectively, which amounts on an annualized basis are equal to 0.25%
and 1.00% of the average daily net assets of Class A and Class C, respectively,
for such period.
In the case of Class B shares, at any given time, the expenses in
distributing Class B shares of the Fund may be in excess of the total of (i) the
payments made by the Fund pursuant to the Plan, and (ii) the proceeds of CDSCs
paid by investors upon the redemption of Class B shares. For example, if $1
million in expenses in distributing Class B shares of the Fund had been incurred
and $750,000 had been received as described in (i) and (ii) above, the excess
expense would amount to $250,000. The Distributor has advised the Fund that such
excess amounts, including the carrying charge described above, totalled
$34,179,807 at October 31, 1997, which was equal to 2.00% of the net assets of
Class B on such date. Because there is no requirement under the Plan that the
Distributor be reimbursed for all distribution expenses or any requirement that
the Plan be continued from year to year, such excess amount does not constitute
a liability of the Fund. Although there is no legal obligation for the Fund to
pay expenses incurred in excess of payments made to the Distributor under the
Plan, and the proceeds of CDSCs paid by investors upon redemption of shares, if
for any reason the Plan is terminated the Directors will consider at that time
the manner in which to treat such expenses. Any cumulative expenses incurred,
but not yet recovered through distribution fees or CDSCs, may or may not be
recovered through future distribution fees or CDSCs.
In the case of Class A and Class C shares, expenses incurred pursuant to the
Plan in any calendar year in excess of 0.25% or 1.0% of the average daily net
assets of Class A or Class C, respectively, will not be reimbursed by the Fund
through payments in any subsequent year, except that expenses representing a
gross sales commission credited to account executives at the time of sale may be
reimbursed in the subsequent calendar year. The Distributor has advised the Fund
that unreimbursed expenses representing a gross sales commission credited to
account executives at the time of sale totalled $24,888 in the case of Class C
at December 31, 1997, which amount was equal to 0.74% of the net assets of Class
C on such date, and that there were no such expenses that may be reimbursed in
the subsequent year in the case of Class A on such date. No interest or other
financing charges will be incurred on any Class A or Class C distribution
expenses incurred by the Distributor under the Plan or on any unreimbursed
expenses due to the Distributor pursuant to the Plan.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined once daily at 4:00 p.m., New
York time (or, on days when the New York Stock Exchange closes prior to 4:00
p.m., at such earlier time), on each day that the New York Stock Exchange is
open by taking the net assets of the Fund, dividing by the number of shares
outstanding and adjusting to the nearest cent. The assets belonging to the Class
A, Class B, Class C and Class D shares will be invested together in a single
portfolio. The net asset value of each Class, however, will be determined
separately by subtracting each Class's accrued expenses and liabilities. The net
asset value per share will not be determined on Good Friday and on such other
federal and non-federal holidays as are observed by the New York Stock Exchange.
In the calculation of the Fund's net asset value: (1) an equity portfolio
security listed or traded on the New York or American Stock Exchange or other
domestic or foreign stock exchange is valued at its latest sale price on that
exchange prior to the time when assets are valued (if there were no sales that
day, the security is valued at the latest bid price); and (2) all other
portfolio securities for which over-the-counter market quotations are readily
available
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are valued at the latest available bid price prior to the time of valuation.
When market quotations are not readily available, including circumstances under
which it is determined by the Investment Manager or Sub-Adviser 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 Directors. 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. Dividends receivable are accrued as of the ex-dividend
date or as of the time that the relevant ex-dividend date and amounts become
known.
Short-term debt securities with remaining maturities of sixty days or less
to maturity at the time of purchase are valued at amortized cost, unless the
Directors 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
Directors.
Certain securities in the Fund's portfolio may be valued by an outside
pricing service approved by the Fund's Directors. 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.
SHAREHOLDER SERVICES
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AUTOMATIC INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. All income dividends
and capital gains distributions are automatically paid in full and fractional
shares of the applicable Class of the Fund (or, if specified by the shareholder,
in shares of any other open-end Dean Witter Fund), unless the shareholder
requests that they be paid in cash. Shares so acquired are acquired at net asset
value and are not subject to the imposition of a front-end sales charge or a
CDSC (see "Redemption and Repurchases").
EASYINVEST-SM-. Shareholders may subscribe to EasyInvest, an automatic
purchase plan which provides for any amount from $100 to $5,000 to be
transferred automatically from a checking or savings account or following
redemption of shares of a Dean Witter money market fund, on a semi-monthly,
monthly or quarterly basis, to the Transfer Agent for investment in shares of
the Fund (see "Purchase of Fund Shares" and "Redemptions and
Repurchases--Involuntary Redemption").
INVESTMENT OF DIVIDENDS OR DISTRIBUTIONS RECEIVED IN CASH. Any shareholder
who receives a cash payment representing a dividend or capital gains
distribution may invest such dividend or distribution in shares of the
applicable Class at the net asset value per share next determined after receipt
by the Transfer Agent, by returning the check or the proceeds to the Transfer
Agent within thirty days after the payment date. Shares so acquired are acquired
at net asset value and are not subject to the imposition of a front-end sales
charge or a CDSC (see "Redemptions and Repurchases").
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan (the "Withdrawal
Plan") is available for shareholders who own or purchase shares of the Fund
having a minimum value of $10,000 based upon the then current net asset value.
The Withdrawal Plan provides for monthly or quarterly (March, June, September
and December) checks in any dollar amount, not less than $25, or in any whole
percentage of the account balance, on an annualized basis. Any applicable CDSC
will be imposed on shares redeemed under the Withdrawal Plan (see "Purchase of
Fund Shares"). Therefore, any shareholder participating in the Withdrawal Plan
will have sufficient shares redeemed from his or her account so that the
proceeds (net of any applicable CDSC) to the shareholder will be the designated
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monthly or quarterly amount. Withdrawal plan payments should not be considered
as dividends, yields or income. If periodic withdrawal plan payments
continuously exceed net investment income and net capital gains, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. Each withdrawal constitutes a redemption of shares and any gain or
loss realized must be recognized for federal income tax purposes.
TAX-SHELTERED RETIREMENT PLANS. Retirement plans are available for use by
corporations, the self-employed, Individual Retirement Accounts and Custodial
Accounts under Section 403(b)(7) of the Internal Revenue Code. Adoption of such
plans should be on advice of legal counsel or tax adviser.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about any of the
above services.
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class of any
other Dean Witter Multi-Class Fund without the imposition of any exchange fee.
Shares may also be exchanged for shares of the following funds: Dean Witter
Short-Term U.S. Treasury Trust, Dean Witter Limited Term Municipal Trust, Dean
Witter Short-Term Bond Fund, Dean Witter Intermediate Term U.S. Treasury Trust
and five Dean Witter funds which are money market funds (the "Exchange Funds").
Class A shares may also be exchanged for shares of Dean Witter Multi-State
Municipal Series Trust and Dean Witter Hawaii Municipal Trust, which are Dean
Witter Funds sold with a front-end sales charge ("FSC Funds"). Class B shares
may also be exchanged for shares of Dean Witter Global Short-Term Income Fund
Inc. ("Global Short-Term"), which is a Dean Witter Fund offered with a CDSC.
Exchanges may be made after the shares of the Fund acquired by purchase (not by
exchange or dividend reinvestment) have been held for thirty days. There is no
waiting period for exchanges of shares acquired by exchange or dividend
reinvestment.
An exchange to another Dean Witter Multi-Class Fund, any FSC Fund, Global
Short-Term or any Exchange Fund that is not a money market fund is on the basis
of the next calculated net asset value per share of each fund after the exchange
order is received. When exchanging into a money market fund from the Fund,
shares of the Fund are redeemed out of the Fund at their next calculated net
asset value and the proceeds of the redemption are used to purchase shares of
the money market fund at their net asset value determined the following business
day. Subsequent exchanges between any of the money market funds and any of the
Dean Witter Multi-Class Funds, FSC Funds, Global Short-Term or any Exchange Fund
that is not a money market fund can be effected on the same basis.
No CDSC is imposed at the time of any exchange of shares, although any
applicable CDSC will be imposed upon ultimate redemption. During the period of
time the shareholder remains invested in an Exchange Fund (calculated from the
last day of the month in which the Exchange Fund shares were acquired), the
holding period (for the purpose of determining the rate of the CDSC) is frozen.
If those shares are subsequently re-exchanged for shares of a Dean Witter
Multi-Class Fund or shares of Global Short-Term, the holding period previously
frozen when the first exchange was made resumes on the last day of the month in
which shares of a Dean Witter Multi-Class Fund or shares of Global Short-Term
are reacquired. Thus, the CDSC is based upon the time (calculated as described
above) the shareholder was invested in shares of a Dean Witter Multi-Class Fund
or in shares of Global Short-Term (see "Purchase of Fund Shares"). In the case
of exchanges of Class A shares which are subject to a CDSC, the holding period
also includes the time (calculated as described above) the shareholder was
invested in shares of a FSC Fund. In the case of shares exchanged for shares of
an Exchange Fund on or after April 23, 1990, upon a redemption of shares which
results in a CDSC being
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imposed, a credit (not to exceed the amount of the CDSC) will be given in an
amount equal to the Exchange Fund 12b-1 distribution fees incurred on or after
that date which are attributable to those shares. (Exchange Fund 12b-1
distribution fees are described in the prospectuses for those funds.) Class B
shares of the Fund acquired in exchange for shares of Global Short-Term or Class
B shares of another Dean Witter Multi-Class Fund having a different CDSC
schedule than that of this Fund will be subject to the higher CDSC schedule,
even if such shares are subsequently re-exchanged for shares of the fund with
the lower CDSC schedule.
ADDITIONAL INFORMATION REGARDING EXCHANGES. Purchases and exchanges should
be made for investment purposes only. A pattern of frequent exchanges may be
deemed by the Investment Manager to be abusive and contrary to the best
interests of the Fund's other shareholders and, at the Investment Manager's
discretion, may be limited by the Fund's refusal to accept additional purchases
and/ or exchanges from the investor. Although the Fund does not have any
specific definition of what constitutes a pattern of frequent exchanges, and
will consider all relevant factors in determining whether a particular situation
is abusive and contrary to the best interests of the Fund and its other
shareholders, investors should be aware that the Fund and each of the other Dean
Witter Funds may in their discretion limit or otherwise restrict the number of
times this Exchange Privilege may be exercised by any investor. Any such
restriction will be made by the Fund on a prospective basis only, upon notice to
the shareholder not later than ten days following such shareholder's most recent
exchange. Also, the Exchange Privilege may be terminated or revised at any time
by the Fund and/or any of such Dean Witter Funds for which shares of the Fund
have been exchanged, upon such notice as may be required by applicable
regulatory agencies. Shareholders maintaining margin accounts with DWR or
another Selected Broker-Dealer are referred to their account executive regarding
restrictions on exchange of shares of the Fund pledged in the margin account.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain a copy and examine it carefully
before investing. Exchanges are subject to the minimum investment requirement of
each Class of shares and any other conditions imposed by each fund. In the case
of a shareholder holding a share certificate or certificates, no exchanges may
be made until all applicable share certificates have been received by the
Transfer Agent and deposited in the shareholder's account. In the case of any
shareholder holding a share certificate or certificates, no exchanges may be
made until all applicable share certificates have been received by the Transfer
Agent and deposited in the shareholder's account. An exchange will be treated
for federal income tax purposes the same as a repurchase or redemption of
shares, on which the shareholder may realize a capital gain or loss. However,
the ability to deduct capital losses on an exchange may be limited in situations
where there is an exchange of shares within ninety days after the shares are
purchased. The Exchange Privilege is only available in states where an exchange
may legally be made.
If DWR or another Selected Broker-Dealer is the current dealer of record and
its account numbers are part of the account information, shareholders may
initiate an exchange of shares of the Fund for shares of any of the Dean Witter
Funds (for which the Exchange Privilege is available) pursuant to this Exchange
Privilege by contacting their account executive (no Exchange Privilege
Authorization Form is required). Other shareholders (and those shareholders who
are clients of DWR or another Selected Broker-Dealer but who wish to make
exchanges directly by writing or telephoning the Transfer Agent) must complete
and forward to the Transfer Agent an Exchange Privilege Authorization Form,
copies of which may be obtained from the
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Distributor, to initiate an exchange. If the Authorization Form is used,
exchanges may be made in writing or by contacting the Transfer Agent at (800)
869-NEWS (toll-free).
The Fund will employ reasonable procedures to confirm that exchange
instructions communicated over the telephone are genuine. Such procedures may
include requiring various forms of personal identification such as name, mailing
address, social security or other tax identification number and DWR or other
Selected Broker-Dealer account number (if any). Telephone instructions may also
be recorded. If such procedures are not employed, the Fund may be liable for any
losses due to unauthorized or fraudulent instructions. Telephone exchange
instructions will be accepted if received by the Transfer Agent between 9:00
a.m. and 4:00 p.m. New York time, on any day the New York Stock Exchange is
open. Any shareholder wishing to make an exchange who has previously filed an
Exchange Privilege Authorization Form and who is unable to reach the Fund by
telephone should contact his or her DWR or other Selected Broker-Dealer account
executive, if appropriate, or make a written exchange request. Shareholders are
advised that during periods of drastic economic or market changes, it is
possible that the telephone exchange procedures may be difficult to implement,
although this has not been the case with the Dean Witter Funds in the past.
For further information regarding the Exchange Privilege, shareholders
should contact their DWR or other Selected Broker-Dealer account executive or
the Transfer Agent.
REDEMPTIONS AND REPURCHASES
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REDEMPTION. Shares of each Class of the Fund can be redeemed for cash at
any time at the net asset value per share next determined less the amount of any
applicable CDSC in the case of Class A, Class B or Class C shares (see "Purchase
of Fund Shares"). If shares are held in a shareholder's account without a share
certificate, a written request for redemption to the Fund's Transfer Agent at
P.O. Box 983, Jersey City, NJ 07303 is required. If certificates are held by the
shareholder, the shares may be redeemed by surrendering the certificates with a
written request for redemption, along with any additional documentation required
by the Transfer Agent.
REPURCHASE. DWR and other Selected Broker-Dealers are authorized to
repurchase shares represented by a share certificate which is delivered to any
of their offices. Shares held in a shareholder's account without a share
certificate may also be repurchased by DWR and other Selected Broker-Dealers
upon the telephonic request of the shareholder. The repurchase price is the net
asset value next computed (see "Purchase of Fund Shares") after such repurchase
order is received by DWR or other Selected Broker-Dealer reduced by any
applicable CDSC.
The CDSC, if any, will be the only fee imposed by the Fund or the
Distributor. The offers by DWR and other Selected Broker-Dealers to repurchase
shares may be suspended without notice by them at any time. In that event,
shareholders may redeem their shares through the Fund's Transfer Agent as set
forth above under "Redemption."
PAYMENT FOR SHARES REDEEMED OR REPURCHASED. Payment for shares presented
for repurchase or redemption will be made by check within seven days after
receipt by the Transfer Agent of the certificate and/or written request in good
order. Such payment may be postponed or the right of redemption suspended under
unusual circumstances, e.g., when normal trading is not taking place on the New
York Stock Exchange. If the shares to be redeemed have recently been purchased
by check (including a government, certified or bank cashier's check), payment of
the redemption proceeds may be delayed for the minimum time needed to verify
that the check used for investment has been honored (not more than fifteen days
from
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<PAGE>
the time of receipt of the check by the Transfer Agent). Shareholders
maintaining margin accounts with DWR or another Selected Broker-Dealer are
referred to their account executive regarding restrictions on redemption of
shares of the Fund pledged in the margin account.
REINSTATEMENT PRIVILEGE. A shareholder who has had his or her shares
redeemed or repurchased and has not previously exercised this reinstatement
privilege may, within 35 days after the date of the redemption or repurchase,
reinstate any portion or all of the proceeds of such redemption or repurchase in
shares of the Fund in the same Class from which such shares were redeemed or
repurchased, at net asset value next determined after a reinstatement request,
together with the proceeds, is received by the Transfer Agent and receive a pro-
rata credit for any CDSC paid in connection with such redemption or repurchase.
INVOLUNTARY REDEMPTION. The Fund reserves the right to redeem, on sixty
days' notice and at net asset value, the shares of any shareholder (other than
shares held in an Individual Retirement Account or custodial account under
Section 403(b)(7) of the Code) whose shares due to redemptions by the
shareholder have a value of less than $100 or such lesser amount as may be fixed
by the Directors or, in the case of an account opened through EasyInvest, if
after twelve months the shareholder has invested less than $1,000 in the
account. However, before the Fund redeems such shares and sends the proceeds to
the shareholder, it will notify the shareholder that the value of the shares is
less than the applicable amount and allow the shareholder sixty days to make an
additional investment in an amount which will increase the value of the account
to at least the applicable amount before the redemption is processed. No CDSC
will be imposed on any involuntary redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
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DIVIDENDS AND DISTRIBUTIONS. The Fund declares dividends separately for
each Class of shares and intends to pay dividends and to distribute
substantially all of the Fund's net investment income and net realized
short-term and long-term capital gains, if any, at least once each year. The
Fund may, however, determine either to distribute or to retain all or part of
any long-term capital gains in any year for reinvestment.
All dividends and any capital gains distributions will be paid in additional
shares of the same Class and automatically credited to the shareholder's account
without issuance of a share certificate unless the shareholder requests in
writing that all dividends and/or distributions be paid in cash. Shares acquired
by dividend and distribution reinvestments will not be subject to any front-end
sales charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. Distributions paid on Class A and Class D shares will be higher than
for Class B and Class C shares because distribution fees paid by Class B and
Class C shares are higher. (See "Shareholder Services--Automatic Investment of
Dividends and Distributions.")
TAXES. Because the Fund intends to continue to distribute all of its net
investment income and any net short-term capital gains to shareholders and
otherwise qualify as a regulated investment company under Subchapter M of the
Code, it is not expected that the Fund will be required to pay any federal
income tax on such income and capital gains.
Gains or losses on the Fund's transactions in certain listed options on
securities and on futures and options on futures generally are treated as 60%
long-term gain or loss and 40% short-term gain or loss. When the Fund engages in
options and futures transactions, various tax regulations applicable to the Fund
may have the effect of causing the Fund to
35
<PAGE>
recognize a gain or loss for tax purposes before that gain or loss is realized,
or to defer recognition of a realized loss for tax purposes. Recognition, for
tax purposes, of an unrealized loss may result in a lesser amount of the Fund's
realized net gains being available for distribution.
Shareholders will normally have to pay federal income taxes, and any
applicable state and/or local income taxes, on the dividends and distributions
they receive from the Fund. Such dividends and distributions, to the extent that
they are derived from net investment income and net short-term capital gains,
are taxable to the shareholder as ordinary dividend income regardless of whether
the shareholder receives such distributions in additional shares or in cash. Any
dividends declared in the last quarter of any calendar year which are paid in
the following calendar year prior to February 1, will be deemed, for tax
purposes, to have been received by the shareholder in the prior calendar year.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder has
held the Fund's shares and regardless of whether the distribution is received in
additional shares or in cash. It is anticipated that only a small portion, if
any, of the Fund's distributions will be eligible for the dividends received
deduction to corporate shareholders.
The Fund may at times make payments from sources other than income or net
capital gains. Payments from such sources will, in effect, represent a return of
a portion of each shareholder's investment. All, or a portion, of such payments
will not be taxable to shareholders.
After the end of the year, shareholders will receive full information on
their dividends and capital gains distributions for tax purposes. Shareholders
will also be notified of their proportionate share of long-term capital gains
distributions that are eligible for a reduced rate of tax under the Taxpayer
Relief Act of 1997.
To avoid being subject to a 31% federal backup withholding tax on taxable
dividends, capital gains distributions and the proceeds of redemptions and
repurchases, shareholders' taxpayer identification numbers must be furnished and
certified as to their accuracy.
Dividends, interest and gains received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. If it qualifies for
and has made the appropriate election with the Internal Revenue Service, the
Fund will report annually to its shareholders the amount per share of such
taxes, to enable shareholders to deduct their pro rata portion of such taxes
from their taxable income or claim United States foreign tax credits with
respect to such taxes. In the absence of such an election, the Fund would deduct
foreign tax in computing the amount of its distributable income.
The foregoing discussion relates solely to the federal income tax
consequences of an investment in the Fund. Distributions may also be subject to
state and local taxes; therefore, each shareholder is advised to consult his or
her own tax adviser.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund may quote its "total return" in advertisements
and sales literature. These figures are computed separately for Class A, Class
B, Class C and Class D shares. The total return of the Fund is based on
historical earnings and is not intended to indicate future performance. The
"average annual total return" of the Fund refers to a figure reflecting the
average annualized percentage increase (or decrease) in the value of an initial
investment in a Class of the Fund of $1,000 over a period of one year and five
years, as well as over the life of the Fund. Average annual total return
reflects all income earned by the Fund, any appreciation or depreciation of the
Fund's assets, all
36
<PAGE>
expenses incurred by the applicable Class and all sales charges which would be
incurred by shareholders, for the stated periods. It also assumes reinvestment
of all dividends and distributions paid by the Fund.
In addition to the foregoing, the Fund may advertise its total return for
each Class over different periods of time by means of aggregate, average, and
year-by-year or other types of total return figures. The Fund may also advertise
the growth of hypothetical investments of $10,000, $50,000 and $100,000 in each
Class of shares of the Fund. Such calculations may or may not reflect the
deduction of any sales charge which, if reflected, would reduce the performance
quoted. The Fund from time to time may also advertise its performance relative
to certain performance rankings and indexes compiled by independent
organizations (such as mutual fund performance rankings of Lipper Analytical
Services, Inc.).
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS. All shares of the Fund are of common stock of $0.01 par
value and are equal as to earnings, assets and voting privileges except that
each Class will have exclusive voting privileges with respect to matters
relating to distribution expenses borne solely by such Class or any other matter
in which the interests of one Class differ from the interests of any other
Class. In addition, Class B shareholders will have the right to vote on any
proposed material increase in Class A's expenses, if such proposal is submitted
separately to Class A shareholders. Also, as discussed herein, Class A, Class B
and Class C bear the expenses related to the distribution of their respective
shares. There are no conversion, pre-emptive or other subscription rights. In
the event of liquidation, each share of common stock of the Fund is entitled to
its portion of all of the Fund's assets after all debts and expenses have been
paid. The shares do not have cumulative voting rights.
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
Directors may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Fund's By-Laws.
CODE OF ETHICS. Directors, officers and employees of InterCapital, Dean
Witter Services Company Inc. and the Distributor are subject to a strict Code of
Ethics adopted by those companies. The Code of Ethics is intended to ensure that
the interests of shareholders and other clients are placed ahead of any personal
interest, that no undue personal benefit is obtained from a person's employment
activities and that actual and potential conflicts of interest are avoided. To
achieve these goals and comply with regulatory requirements, the Code of Ethics
requires, among other things, that personal securities transactions by employees
of the companies be subject to an advance clearance process to monitor that no
Dean Witter Fund is engaged at the same time in a purchase or sale of the same
security. The Code of Ethics bans the purchase of securities in an initial
public offering, and also prohibits engaging in futures and options transactions
and profiting on short-term trading (that is, a purchase within sixty days of a
sale or a sale within sixty days of a purchase) of a security. In addition,
investment personnel may not purchase or sell a security for their personal
account within thirty days before or after any transaction in any Dean Witter
Fund managed by them. Any violations of the Code of Ethics are subject to
sanctions, including reprimand, demotion or suspension or termination of
employment. The Code of Ethics comports with regulatory requirements and the
recommendations in the 1994 report by the Investment Company Institute Advisory
Group on Personal Investing.
The Fund's Sub-Adviser also has a Code of Ethics which complies with
regulatory requirements and, insofar as it relates to persons associated with
37
<PAGE>
the Fund, the 1994 report by the Investment Company Institute Advisory Group on
Personal Investing.
MASTER/FEEDER CONVERSION. The Fund reserves the right to seek to achieve
its investment objective by investing all of its investable assets in a
diversified, open-end management investment company having the same investment
objective and policies and substantially the same investment restrictions as
those applicable to the Fund.
SHAREHOLDER INQUIRIES. All inquiries regarding the Fund should be directed
to the Fund at the telephone numbers or address set forth on the front cover of
this Prospectus.
38
<PAGE>
THE DEAN WITTER FAMILY OF FUNDS
MONEY MARKET FUNDS FIXED-INCOME FUNDS
Dean Witter Liquid Asset Fund Inc. Dean Witter High Yield Securities Inc.
Dean Witter Tax-Free Daily Income Trust Dean Witter Tax-Exempt Securities Trust
Dean Witter U.S. Government Money Dean Witter U.S. Government Securities
Market Trust Trust
Dean Witter California Tax-Free Daily Dean Witter Federal Securities Trust
Income Trust Dean Witter Convertible Securities
Dean Witter New York Municipal Money Trust
Market Trust Dean Witter California Tax-Free Income
EQUITY FUNDS Fund
Dean Witter American Value Fund Dean Witter New York Tax-Free Income
Dean Witter Natural Resource Fund
Development Securities Inc. Dean Witter World Wide Income Trust
Dean Witter Dividend Growth Securities Dean Witter Intermediate Income
Inc. Securities
Dean Witter Developing Growth Dean Witter Global Short-Term Income
Securities Trust Fund Inc.
Dean Witter World Wide Investment Trust Dean Witter Multi-State Municipal
Dean Witter Value-Added Market Series Series Trust
Dean Witter Utilities Fund Dean Witter Short-Term U.S. Treasury
Dean Witter Capital Growth Securities Trust
Dean Witter European Growth Fund Inc. Dean Witter Diversified Income Trust
Dean Witter Pacific Growth Fund Inc. Dean Witter Limited Term Municipal
Dean Witter Precious Metals and Trust
Minerals Trust Dean Witter Short-Term Bond Fund
Dean Witter Health Sciences Trust Dean Witter Balanced Income Fund
Dean Witter Global Dividend Growth Dean Witter Hawaii Municipal Trust
Securities Dean Witter Intermediate Term U.S.
Dean Witter Global Utilities Fund Treasury Trust
Dean Witter International SmallCap Fund DEAN WITTER RETIREMENT SERIES
Dean Witter Mid-Cap Growth Fund Liquid Asset Series
Dean Witter Balanced Growth Fund U.S. Government Money Market Series
Dean Witter Capital Appreciation Fund U.S. Government Securities Series
Dean Witter Information Fund Intermediate Income Securities Series
Dean Witter Japan Fund American Value Series
Dean Witter Income Builder Fund Capital Growth Series
Dean Witter Special Value Fund Dividend Growth Series
Dean Witter Financial Services Trust Strategist Series
Dean Witter Market Leader Trust Utilities Series
Dean Witter S&P 500 Index Fund Value-Added Market Series
Dean Witter Fund of Funds Global Equity Series
Morgan Stanley Dean Witter Competitive ACTIVE ASSETS ACCOUNT PROGRAM
Edge Fund, "BEST IDEAS" PORTFOLIO Active Assets Money Trust
ASSET ALLOCATION FUNDS Active Assets Tax-Free Trust
Dean Witter Strategist Fund Active Assets Government Securities
Dean Witter Global Asset Allocation Trust
Fund Active Assets California Tax-Free Trust
<PAGE>
Dean Witter
European Growth Fund Inc.
Two World Trade Center
New York, New York 10048
DIRECTORS
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Thomas F. Caloia
Treasurer
CUSTODIAN
The Chase Manhattan Bank
One Chase Plaza
New York, New York 10005
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
SUB-ADVISER
Morgan Grenfell Investment Services Limited
DEAN WITTER
EUROPEAN
GROWTH FUND
[PHOTO]
PROSPECTUS -- JANUARY 29, 1998
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION DEAN WITTER
JANUARY 29, 1998 EUROPEAN GROWTH
FUND INC.
- --------------------------------------------------------------------------------
Dean Witter European Growth Fund Inc. (the "Fund") is an open-end,
diversified management investment company, whose investment objective is to
maximize the capital appreciation of its investments. The Fund seeks to achieve
its investment objective by investing primarily in securities issued by issuers
located in Europe.
A Prospectus for the Fund dated January 29, 1998, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge from the Fund at the address or telephone numbers listed below or
from the Fund's Distributor, Dean Witter Distributors Inc., or from Dean Witter
Reynolds Inc. at any of its branch offices. This Statement of Additional
Information is not a Prospectus. It contains information in addition to and more
detailed than that set forth in the Prospectus. It is intended to provide
additional information regarding the activities and operations of the Fund, and
should be read in conjunction with the Prospectus.
Dean Witter
European Growth Fund Inc.
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The Fund and its Management............................................................ 3
Directors and Officers................................................................. 7
Investment Practices and Policies...................................................... 13
Investment Restrictions................................................................ 26
Portfolio Transactions and Brokerage................................................... 27
The Distributor........................................................................ 29
Determination of Net Asset Value....................................................... 34
Purchase of Fund Shares................................................................ 34
Shareholder Services................................................................... 37
Redemptions and Repurchases............................................................ 41
Dividends, Distributions and Taxes..................................................... 43
Performance Information................................................................ 44
Description of Common Stock............................................................ 46
Custodian and Transfer Agent........................................................... 46
Independent Accountants................................................................ 47
Reports to Shareholders................................................................ 47
Legal Counsel.......................................................................... 47
Experts................................................................................ 47
Registration Statement................................................................. 47
Financial Statements -- October 31, 1997............................................... 48
Report of Independent Accountants...................................................... 65
</TABLE>
2
<PAGE>
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
THE FUND
The Fund was incorporated under the laws of the state of Maryland on
February 13, 1990.
THE INVESTMENT MANAGER
Dean Witter InterCapital Inc. (the "Investment Manager" or "InterCapital"),
a Delaware corporation, whose address is Two World Trade Center, New York, New
York 10048, is the Fund's Investment Manager. InterCapital is a wholly-owned
subsidiary of Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD"), a Delaware
corporation. In an internal reorganization which took place in January, 1993,
InterCapital assumed the investment advisory, administrative and management
activities previously performed by the InterCapital Division of Dean Witter
Reynolds Inc. ("DWR"), a broker-dealer affiliate of InterCapital. (As
hereinafter used in this Statement of Additional Information, the terms
"InterCapital" and "Investment Manager" refer to DWR's InterCapital Division
prior to the internal reorganization and Dean Witter InterCapital Inc.
thereafter.) The daily management of the Fund is conducted by or under the
direction of officers of the Fund and of the Investment Manager and Sub-Adviser,
subject to review by the Fund's Board of Directors. Information as to these
Directors and Officers is contained under the caption "Directors and Officers."
The Investment Manager is also the investment manager or investment adviser
of the following investment companies: Dean Witter Liquid Asset Fund Inc.,
InterCapital Income Securities Inc., Dean Witter High Yield Securities Inc.,
Dean Witter Tax-Free Daily Income Trust, Dean Witter Developing Growth
Securities Trust, Dean Witter American Value Fund, Dean Witter Dividend Growth
Securities Inc., Dean Witter Natural Resource Development Securities Inc., Dean
Witter U.S. Government Money Market Trust, Dean Witter California Tax-Free
Income Fund, Dean Witter Variable Investment Series, Dean Witter World Wide
Investment Trust, Dean Witter Select Municipal Reinvestment Fund, Dean Witter
U.S. Government Securities Trust, Dean Witter New York Tax-Free Income Fund,
Dean Witter Convertible Securities Trust, Dean Witter Federal Securities Trust,
Dean Witter Value-Added Market Series, High Income Advantage Trust, High Income
Advantage Trust II, High Income Advantage Trust III, Dean Witter Government
Income Trust, Dean Witter California Tax-Free Daily Income Trust, Dean Witter
Utilities Fund, Dean Witter Strategist Fund, Dean Witter World Wide Income
Trust, Dean Witter Intermediate Income Securities, Dean Witter Capital Growth
Securities, Dean Witter European Growth Fund Inc., Dean Witter Pacific Growth
Fund Inc., Dean Witter Precious Metals and Minerals Trust, Dean Witter Global
Short-Term Income Fund Inc., Dean Witter Multi-State Municipal Series Trust,
Dean Witter New York Municipal Money Market Trust, InterCapital Quality
Municipal Investment Trust, Dean Witter Short-Term U.S. Treasury Trust,
InterCapital Insured Municipal Bond Trust, InterCapital Insured Municipal Trust,
InterCapital Quality Municipal Income Trust, Dean Witter Diversified Income
Trust, Dean Witter Health Sciences Trust, Dean Witter Retirement Series,
InterCapital Quality Municipal Securities, InterCapital California Quality
Municipal Securities, InterCapital New York Quality Municipal Securities, Dean
Witter Global Dividend Growth Securities, Dean Witter Global Utilities Fund,
Dean Witter Limited Term Municipal Trust, Dean Witter Short-Term Bond Fund, Dean
Witter International SmallCap Fund, Dean Witter Mid-Cap Growth Fund, Dean Witter
Select Dimensions Series, Dean Witter Balanced Growth Fund, Dean Witter Balanced
Income Fund, Dean Witter Hawaii Municipal Trust, Dean Witter Capital
Appreciation Fund, Dean Witter Intermediate Term U.S. Treasury Trust, Dean
Witter Information Fund, Dean Witter Japan Fund, Dean Witter Income Builder
Fund, Dean Witter Special Value Fund, Dean Witter Financial Services Trust, Dean
Witter Market Leader Trust, Dean Witter S&P 500 Index Fund, Dean Witter Fund of
Funds, Morgan Stanley Dean Witter Competitive Edge Fund--"BEST IDEAS" PORTFOLIO,
InterCapital Insured Municipal Securities, InterCapital Insured California
Municipal Securities, InterCapital Insured Municipal Income Trust, InterCapital
California Insured Municipal Income Trust, Active Assets Money Trust, Active
Assets California Tax-Free Trust, Active Assets Tax-Free Trust, Active Assets
Government Securities Trust, Municipal Income Trust, Municipal Income Trust II,
Municipal Income Trust III, Municipal Income Opportunities Trust, Municipal
Income Opportunities Trust II, Municipal Income Opportunities
3
<PAGE>
Trust III, Municipal Premium Income Trust and Prime Income Trust. The foregoing
investment companies, together with the Fund, are collectively referred to as
the Dean Witter Funds.
In addition, Dean Witter Services Company Inc. ("DWSC"), a wholly-owned
subsidiary of InterCapital, serves as manager for the following companies for
which TCW Funds Management, Inc. is the investment adviser: TCW/DW Core Equity
Trust, TCW/DW North American Government Income Trust, TCW/DW Latin American
Growth Fund, TCW/DW Income and Growth Fund, TCW/DW Small Cap Growth Fund, TCW/DW
Balanced Fund, TCW/DW Total Return Trust, TCW/DW Mid-Cap Equity Trust, TCW/DW
Global Telecom, TCW/DW Strategic Income Trust, TCW/DW Term Trust 2000, TCW/DW
Term Trust 2002, TCW/DW Term Trust 2003 and TCW/DW Emerging Markets
Opportunities Trust (the "TCW/ DW Funds"). InterCapital also serves as: (i)
administrator of The BlackRock Strategic Term Trust Inc., a closed-end
investment company; (ii) sub-administrator of MassMutual Participation Investors
and Templeton Global Governments Income Trust, closed-end investment companies;
and (iii) investment adviser of Offshore Dividend Growth Fund and Offshore Money
Market Fund, mutual funds established under the laws of the Cayman Islands and
available only to investors who are participants in DWR's International Active
Assets Account program and are neither citizens nor residents of the United
States.
Pursuant to an Investment Management Agreement (the "Management Agreement")
with the Investment Manager, the Fund has retained the investment Manager to
supervise the investment of the Fund's assets. The Investment Manager, through
consultation with Morgan Grenfell Investment Services Limited (the
"Sub-Adviser") and through its own portfolio management staff, obtains and
evaluates such information and advice relating to the economy, securities
markets, and specific securities as it considers necessary or useful to
continuously oversee the management of the assets of the Fund in a manner
consistent with its investment objective.
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, such office space, facilities, equipment, clerical help and bookkeeping
and certain legal services as the Fund may reasonably require in the conduct of
its business, including the preparation of prospectuses, statements of
additional information, 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.
Effective December 31, 1993, pursuant to a Services Agreement between
InterCapital and DWSC, DWSC began to provide the administrative services to the
Fund which were previously performed directly by InterCapital. On April 17,
1995, DWSC was reorganized in the State of Delaware, necessitating the entry
into a new Services Agreement by InterCapital on that date. The foregoing
internal reorganizations did not result in any change in the nature or scope of
the administrative services being provided to the Fund or any of the fees being
paid by the Fund for the overall services being performed under the terms of the
existing Management Agreement.
Expenses not expressly assumed by the Investment Manager under the
Management Agreement, by the Sub-Adviser pursuant to the Sub-Advisory Agreement
(see below), or by the Distributor of the Fund's shares, Dean Witter
Distributors Inc. ("Distributors" or the "Distributor") (see "The Distributor")
will be paid by the Fund. These expenses will be allocated among the four
classes of shares of the Fund (each, a "Class") pro rata based on the net assets
of the Fund attributable to each Class, except as described below. Such expenses
include, but are not limited to: expenses of the Plan of Distribution pursuant
to Rule 12b-1 (the "12b-1 fee") (see "The Distributor"), charges and expenses of
any registrar, custodian, stock transfer and dividend disbursing agent;
brokerage commissions; taxes; engraving and printing of share certificates;
registration costs of the Fund and its shares under federal and state securities
laws; the cost and expense of printing, including typesetting, and distributing
Prospectuses and Statements of Additional Information of the Fund and
supplements thereto to the Fund's shareholders; all expenses of shareholders'
and directors' meetings and of preparing, printing and mailing of
4
<PAGE>
proxy statements and reports to shareholders; fees and travel expenses of
directors or members of any advisory board or committee who are not employees of
the Investment Manager or Sub-Adviser or any corporate affiliate of the
Investment Manager or Sub-Adviser; all expenses incident to any dividend,
withdrawal or redemption options; charges and expenses of any outside service
used for pricing of the Fund's shares; fees and expenses of the Fund's legal
counsel, including counsel to the directors who are not interested persons of
the Fund or of the Investment Manager or Sub-Adviser (not including compensation
or expenses of attorneys who are employees of the Investment Manager) and
independent accountants; membership dues of industry associations; interest on
Fund borrowings; postage; insurance premiums on property or personnel (including
officers and directors) of the Fund which inure to its benefit; extraordinary
expenses (including, but not limited to, legal claims and liabilities and
litigation costs and any indemnification relating thereto); and all other costs
of the Fund's operation. The 12b-1 fees relating to a particular Class will be
allocated directly to that Class. In addition, other expenses associated with a
particular Class (except advisory or custodial fees) may be allocated directly
to that Class, provided that such expenses are reasonably identified as
specifically attributable to that Class and the direct allocation to that Class
is approved by the Directors.
The Management Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Investment Manager is not liable to the Fund or any
of its investors for any act or omission by the Investment Manager or for any
losses sustained by the Fund or its investors. The Management Agreement in no
way restricts the Investment Manager from acting as investment manager or
adviser to others.
As full compensation for the services and facilities furnished to the Fund
and expenses of the Fund assumed by the Investment Manager, the Fund pays the
Investment Manager monthly compensation calculated daily by applying the annual
rates of 1.0% of the portion of daily net assets not exceeding $500 million;
0.95% of the portion of daily net assets exceeding $500 million but not
exceeding $2 billion; and 0.90% of the portion of daily net assets exceeding $2
billion. The management fee is allocated among the Classes pro rata based on the
net assets of the Fund attributable to each Class. For the fiscal years ended
October 31, 1995, 1996 and 1997 the Fund accrued to the Investment Manager total
compensation under the Management Agreement in the amounts of $10,714,596,
$13,865,138 and $15,130,951, respectively (of which $7,653,283, $9,903,670 and
$9,078,571 was retained by the Investment Manager, respectively).
Pursuant to a Sub-Advisory Agreement between the Investment Manager and
Sub-Adviser, the Sub-Adviser has been retained, subject to the overall
supervision of the Investment Manager and the Directors of the Fund, to
continuously furnish investment advice concerning individual security
selections, asset allocations and overall economic trends with respect to Europe
and to manage the portion of the Fund's portfolio invested in securities issued
by issuers located in Europe, subject to the supervision of the Investment
Manager. On occasion, the Sub-Adviser will also provide the Investment Manager
with investment advice concerning potential investment opportunities for the
Fund which are available outside of Europe.
Morgan Grenfell Investment Services Limited ("MGIS") was organized as a
British corporation in 1972 and manages, as of September 30, 1997, assets of
approximately $16.5 billion for U.S. corporate and public employee benefit
plans, investment companies, endowments and foundations. MGIS' principal office
is located at 20 Finsbury Circus, London, England. MGIS is a subsidiary of
London based Morgan Grenfell Asset Management Limited, which is itself a
subsidiary of London-based Morgan Grenfell Group plc (which is owned by Deutsche
Bank AG, an international commercial and investment banking group) and is
registered as an investment adviser under the Investment Advisers Act of 1940.
In 1838, Morgan Grenfell was founded to provide merchant banking services,
primarily trade financing between Great Britain and the United States. In 1958,
its investment management arm began operations. In recent years, Morgan Grenfell
Group plc has achieved a prominent position in the securities industry by
providing investment and commercial banking services, financial services, and
discretionary management and advisory services covering all of the world's
leading securities markets. Morgan Grenfell Asset Management Limited, through
its various investment management subsidiaries, which have extensive experience
5
<PAGE>
in global investment management, is managing, as of September 30, 1997,
approximately $146.5 billion worldwide.
Both the Investment Manager and the Sub-Adviser have authorized any of their
directors, officers and employees who have been elected as Directors or officers
of the Fund to serve in the capacities in which they have been elected. Services
furnished by the Investment Manager and the Sub-Adviser may be furnished by
directors, officers and employees of the Investment Manager and the Sub-Adviser.
In connection with the services rendered by the Sub-Adviser, the Sub-Adviser
bears the following expenses: (a) the salaries and expenses of its personnel;
and (b) all expenses incurred by it in connection with performing the services
provided by it as Sub-Adviser, as described above.
As full compensation for the services and facilities furnished to the Fund
and the Investment Manager and expenses of the Fund and the Investment Manager
assumed by the Sub-Adviser, the Investment Manager pays the Sub-Adviser monthly
compensation equal to 40% of the Investment Manager's monthly compensation
payable under the Management Agreement. For the fiscal years ended October 31,
1995, 1996 and 1997, the Investment Manager informed the Fund that it accrued to
the Sub-Adviser total compensation under the Sub-Advisory Agreement of
$3,061,313, $3,961,468, and $6,052,380, respectively.
The Agreements were initially approved by the Board of Directors on February
21, 1997 and by the shareholders of the Fund at a Special Meeting of
Shareholders held on May 21, 1997. The Agreements are substantially identical to
prior investment management and sub-advisory agreements which were initially
approved by the Board of Directors on October 30, 1992 and by the shareholders
of the Fund at a Special Meeting of Shareholders held on January 12, 1993 and
amended by the Board of Directors on April 24, 1997 to reduce the compensation
received by the Investment Manager under the Agreement for assets exceeding $500
million, so that the compensation under the Agreement is calculated by applying
the following annual rates to the Fund's net assets determined as of the close
of each business day: 1.00% of the portion of daily net assets not exceeding
$500 million; 0.95% of the portion of daily net assets exceeding $500 million
but not exceeding $2 billion; and 0.90% of the portion of daily net assets
exceeding $2 billion. The Agreements took effect on May 31, 1997 upon the
consummation of the merger of Dean Witter, Discover & Co. with Morgan Stanley
Group Inc. The Agreements may be terminated at any time, without penalty, on
thirty days' notice by the Board of Directors of the Fund, by the holders of a
majority, as defined in the Investment Company Act of 1940 (the "Act"), of the
outstanding shares of the Fund, or by the Investment Manager. The Agreements
will automatically terminate in the event of their assignment (as defined in the
Act).
Under their terms, the Agreements have an initial term ended April 30, 1999,
and provide that each will continue from year to year thereafter, provided
continuance of the Agreements are approved at least annually by the vote of the
holders of a majority, as defined in the Act, of the outstanding shares of the
Fund, or by the Board of Directors of the Fund; provided that in either event
such continuance is approved annually by the vote of a majority of the Directors
of the Fund who are not parties to the Agreements or "interested persons" (as
defined in the Act) of any such party (the "Independent Directors"), which votes
must be cast in person at a meeting called for the purpose of voting on such
approval.
The following owned 5% or more of the outstanding shares of Class A on
December 31, 1997: Helen K. Copley as Trustee of the Helen K. Copley Rev Trust
DTD, 12/7/83 Acct. #3, P.O. Box 1530, La Jolla, CA 92038 -- 38.7%; and Dean
Witter Trust FSB Trustee For the Benefit Of Alban Charitable Remainder Unitrust,
P.O. Box 957, Jersey City, NJ 07303 -- 12.2%.
The following owned 5% or more of the outstanding shares of Class D on
December 31, 1997: Hare & Co., c/o The Bank of New York, P.O. Box 11203, New
York, NY 10286 -- 92.0%.
The Fund has acknowledged that the name "Dean Witter" is a property right of
DWR. The Fund has agreed that DWR or its parent company may use, or at any time
permit others to use, the name "Dean Witter." The Fund has also agreed that in
the event the investment management contract between InterCapital and the Fund
is terminated, or if the affiliation between InterCapital and its parent company
is
6
<PAGE>
terminated, the Fund will eliminate the name "Dean Witter" from its name if DWR
or its parent company shall so request.
DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
The Directors and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with
InterCapital and with the 84 Dean Witter Funds and the 14 TCW/DW Funds are shown
below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- --------------------------------------------- ------------------------------------------------------------
<S> <C>
Michael Bozic (57) Chairman and Chief Executive Officer of Levitz Furniture
Director Corporation (since November, 1995); Director or Trustee of
c/o Levitz Furniture Corporation the Dean Witter Funds; formerly President and Chief Execu-
6111 Broken Sound Parkway, N.W. tive Officer of Hills Department Stores (May, 1991-July,
Boca Raton, Florida 1995); formerly variously Chairman, Chief Executive Officer,
President and Chief Operating Officer (1987-1991) of the
Sears Merchandise Group of Sears, Roebuck and Co.; Director
of Eaglemark Financial Services, Inc., the United Negro
College Fund and Weirton Steel Corporation.
Charles A. Fiumefreddo* (64) Chairman, Chief Executive Officer and Director of
Chairman of the Board, President, InterCapital, Distributors and DWSC; Director and Executive
Chief Executive Officer and Director Vice President of DWR; Chairman, Director or Trustee, Presi-
Two World Trade Center dent and Chief Executive Officer of the Dean Witter Funds;
New York, New York Chairman, Chief Executive Officer and Trustee of the TCW/DW
Funds; Chairman and Director of Dean Witter Trust FSB
("DWT"); Director and/or officer of various MSDWD
subsidiaries; formerly Executive Vice President and Director
of Dean Witter, Discover & Co. (until February, 1993).
Edwin J. Garn (65) Director or Trustee of the Dean Witter Funds; formerly
Director United States Senator (R-Utah) (1974-1992) and Chairman,
c/o Huntsman Corporation Senate Banking Committee (1980-1986); formerly Mayor of Salt
500 Huntsman Way Lake City, Utah (1971-1974); formerly Astronaut, Space
Salt Lake City, Utah Shuttle Discovery (April 12-19, 1985); Vice Chairman,
Huntsman Corporation (since January, 1993); 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.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- --------------------------------------------- ------------------------------------------------------------
<S> <C>
John R. Haire (72) Chairman of the Audit Committee and Chairman of the
Director Committee of the Independent Directors or Trustees and
Two World Trade Center Director or Trustee of the Dean Witter Funds; Chairman of
New York, New York the Audit Committee and Chairman of the Committee of the
Independent Trustees and Trustee of the TCW/DW Funds;
formerly President, Council for Aid to Education (1978-1989)
and Chairman and Chief Executive Officer of Anchor
Corporation, an Investment Adviser (1964-1978).
Wayne E. Hedien (63) Retired, Director or Trustee of the Dean Witter Funds;
Director Director of The PMI Group, Inc. (private mortgage
c/o Gordon Altman Butowsky insurance); Trustee and Vice Chairman of The Field Museum of
Weitzen Shalov & Wein Natural History; formerly associated with the Allstate
Counsel to the Independent Directors Companies (1966-1994), most recently as Chairman of The
114 West 47th Street Allstate Corporation (March,1993-December, 1994) and
New York, New York Chairman and Chief Executive Officer of its wholly-owned
subsidiary, Allstate Insurance Company (July, 1989-December,
1994); director of various other business and charitable
organizations.
Dr. Manuel H. Johnson (48) Senior Partner, Johnson Smick International, Inc.,
Director Co-Chairman and a founder of the Group of Seven Council
c/o Johnson Smick International, Inc. (G7C), an international economic commission; Director or
1133 Connecticut Avenue, N.W. Trustee of the Dean Witter Funds; Trustee of the TCW/DW
Washington, DC Funds; Director of NASDAQ (since June, 1995); Director of
Greenwich Capital Markets Inc. (broker-dealer); 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 (1982-1986).
Michael E. Nugent (61) General Partner, Triumph Capital, L.P., a private investment
Director partnership; Director or Trustee of the Dean Witter Funds;
c/o Triumph Capital, L.P. Trustee of the TCW/DW Funds; formerly Vice President,
237 Park Avenue Bankers Trust Company and BT Capital Corporation
New York, New York (1984-1988); director of various business organizations.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- --------------------------------------------- ------------------------------------------------------------
<S> <C>
Philip J. Purcell* (54) Chairman of the Board of Directors and Chief Executive
Director Officer of MSDWD, DWR and Novus Credit Services Inc.;
1585 Broadway Director of InterCapital, DWSC and Distributors; Director or
New York, New York Trustee of the Dean Witter Funds; Director and/or officer of
various MSDWD subsidiaries.
John L. Schroeder (67) Retired; Director or Trustee of the Dean Witter Funds;
Director Trustee of the TCW/DW Funds; Director of Citizens Utilities
c/o Gordon Altman Butowsky Company; formerly Executive Vice President and Chief Invest-
Weitzen Shalov & Wein ment Officer of the Home Insurance Company (August,
Counsel to the Independent Directors 1991-September, 1995).
114 West 47th Street
New York, New York
Barry Fink (43) Senior Vice President (since March, 1997) and Secretary and
Vice President, Secretary General Counsel (since February, 1997) of InterCapital and
and General Counsel DWSC; Senior Vice President (since March, 1997) and
Two World Trade Center Assistant Secretary and Assistant General Counsel (since
New York, New York February, 1997) of Distributors; Assistant Secretary of DWR
(since August, 1996); Vice President, Secretary and General
Counsel of the Dean Witter Funds and the TCW/DW Funds (since
February, 1997); previously First Vice President (June,
1993-February, 1997), Vice President (until June, 1993) and
Assistant Secretary and Assistant General Counsel of
InterCapital and DWSC and Assistant Secretary of the Dean
Witter Funds and the TCW/DW Funds.
Thomas F. Caloia (51) First Vice President and Assistant Treasurer of InterCapital
Treasurer and DWSC; Treasurer of the Dean Witter Funds and the TCW/DW
Two World Trade Center Funds.
New York, New York
- ---------
*Denotes Directors who are "interested persons" of the Fund, as defined in the Act.
</TABLE>
In addition, Robert M. Scanlan, President and Chief Operating Officer, of
InterCapital and DWSC, Executive Vice President of Distributors and DWT and
Director of DWT, Mitchell M. Merin, President and Chief Strategic Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWT and
Director of DWT, Executive Vice President and Director of DWR, and Director of
SPS Transaction Services, Inc. and various other MSDWD subsidiaries, Robert S.
Giambrone, Executive Vice President and Chief Administrative Officer of
InterCapital, DWSC, Distributors and DWT and Director of DWT and Joseph J.
McAlinden, Executive Vice President and Chief Investment Officer of InterCapital
and Director of DWT, Mark Bavoso, Kenton J. Hinchliffe, Ira N. Ross and Paul D.
Vance, Senior Vice Presidents of InterCapital, are Vice Presidents of the Fund.
Marilyn K. Cranney, First Vice President and Assistant General Counsel of
InterCapital and DWSC, and Lou Anne D. McInnis, Ruth Rossi and Carsten Otto,
Vice Presidents and Assistant General Counsels of InterCapital and DWSC, and
Frank Bruttomesso and Todd Lebo, staff attorneys with InterCapital, are
Assistant Secretaries of the Fund.
9
<PAGE>
THE BOARD OF DIRECTORS, THE INDEPENDENT DIRECTORS, AND THE COMMITTEES
The Board of Directors consists of nine (9) directors. These same
individuals also serve as directors or trustees for all of the Dean Witter
Funds, and are referred to in this section as Directors. As of the date of this
Statement of Additional Information, there are a total of 84 Dean Witter Funds,
comprised of 128 portfolios. As of December 31, 1997, the Dean Witter Funds had
total net assets of approximately $93.7 billion and more than six million
shareholders.
Seven Directors (77% of the total number) have no affiliation or business
connection with InterCapital or any of its affiliated persons and do not own any
stock or other securities issued by InterCapital's parent company, MSDWD. These
are the "disinterested" or "independent" Directors. The other two Directors (the
"management Directors") are affiliated with InterCapital. Four of the seven
independent Directors are also Independent Trustees of the TCW/DW Funds.
Law and regulation establish both general guidelines and specific duties for
the Independent Directors. The Dean Witter Funds seek as Independent Directors
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 Directors 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 Directors serve as members of the Audit Committee and
the Committee of the Independent Directors. Three of them also serve as members
of the Derivatives Committee. During the calendar year ended December 31, 1997,
the three Committees held a combined total of seventeen meetings. The Committees
hold some meetings at InterCapital's offices and some outside InterCapital.
Management Directors or officers do not attend these meetings unless they are
invited for purposes of furnishing information or making a report.
The Committee of the Independent Directors is charged with recommending to
the full Board approval of management, advisory and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing Fund performance; checking on the pricing of portfolio securities,
brokerage commissions, transfer agent costs and performance, and trading among
Funds in the same complex; and approving fidelity bond and related insurance
coverage and allocations, as well as other matters that arise from time to time.
The Independent Directors are required to select and nominate individuals to
fill any Independent Director vacancy on the Board of any Fund that has a Rule
12b-1 plan of distribution. Most of the Dean Witter Funds have such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of such 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.
Finally, the Board of each Fund has formed a Derivatives Committee to
establish parameters for and oversee the activities of the Fund with respect to
derivative investments, if any, made by the Fund.
DUTIES OF CHAIRMAN OF COMMITTEE OF THE INDEPENDENT DIRECTORS AND AUDIT COMMITTEE
The Chairman of the Committee of the Independent Directors and the Audit
Committee maintains an office at the Funds' headquarters in New York. He is
responsible for keeping abreast of regulatory and industry developments and the
Funds' operations and management. He screens and/or prepares written materials
and identifies critical issues for the Independent Directors to consider,
develops agendas for Committee meetings, determines the type and amount of
information that the Committees will need to form a judgment on various issues,
and arranges to have that information furnished to
10
<PAGE>
Committee members. He also arranges for the services of independent experts and
consults with them in advance of meetings to help refine reports and to focus on
critical issues. Members of the Committees believe that the person who serves as
Chairman of both Committees and guides their efforts is pivotal to the effective
functioning of the Committees.
The Chairman of the Committees also maintains continuous contact with the
Funds' management, with independent counsel to the Independent Directors and
with the Funds' independent auditors. He arranges for a series of special
meetings involving the annual review of investment advisory, management and
other operating contracts of the Funds and, on behalf of the Committees,
conducts negotiations with the Investment Manager and other service providers.
In effect, the Chairman of the Committees serves as a combination of chief
executive and support staff of the Independent Directors.
The Chairman of the Committee of the Independent Directors and the Audit
Committee is not employed by any other organization and devotes his time
primarily to the services he performs as Committee Chairman and Independent
Trustee/Director of the Dean Witter Funds and as an Independent Trustee and as
Chairman of the Committee of the Independent Trustees and the Audit Committee of
the TCW/DW Funds. The current Committee Chairman has had more than 35 years
experience as a senior executive in the investment company industry.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT DIRECTORS FOR ALL DEAN
WITTER FUNDS
The Independent Directors and the Funds' management believe that having the
same Independent Directors for each of the Dean Witter Funds avoids the
duplication of effort that would arise from having different groups of
individuals serving as Independent Directors for each of the Funds or even of
sub-groups of Funds. They believe that having the same individuals serve as
Independent Directors 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 Directors 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 Directors serve on all Fund Boards
enhances the ability of each Fund to obtain, at modest cost to each separate
Fund, the services of Independent Directors, and a Chairman of their Committees,
of the caliber, experience and business acumen of the individuals who serve as
Independent Directors of the Dean Witter Funds.
COMPENSATION OF INDEPENDENT DIRECTORS
The Fund pays each Independent Director an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Directors or committees of the
Board of Directors attended by the Director (the Fund pays the Chairman of the
Audit Committee an annual fee of $750 and pays the Chairman of the Committee of
the Independent Directors an additional annual fee of $1,200). If a Board
meeting and a Committee meeting, or more than one Committee meeting, take place
on a single day, the Directors are paid a single meeting fee by the Fund. The
Fund also reimburses such Directors for travel and other out-of-pocket expenses
incurred by them in connection with attending such meetings. Directors and
officers of the Fund who are or have been employed by the Investment Manager or
an affiliated company receive no compensation or expense reimbursement from the
Fund.
The following table illustrates the compensation paid to the Fund's
Independent Directors by the Fund for the fiscal year ended October 31, 1997.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT DIRECTOR FROM THE FUND
- -------------------------------------------------------------- ---------------
<S> <C>
Michael Bozic................................................. $1,700
Edwin J. Garn................................................. 1,900
John R. Haire................................................. 3,850
Wayne E. Hedien............................................... 482
Dr. Manuel H. Johnson......................................... 1,850
Michael E. Nugent............................................. 1,900
John L. Schroeder............................................. 1,900
</TABLE>
11
<PAGE>
The following table illustrates the compensation paid to the Fund's
Independent Directors for the calendar year ended December 31, 1997 for services
to the 84 Dean Witter Funds and, in the case of Messrs. Haire, Johnson, Nugent
and Schroeder, the 14 TCW/DW Funds that were in operation at December 31, 1997.
With respect to Messrs. Haire, Johnson, Nugent and Schroeder, the TCW/DW Funds
are included solely because of a limited exchange privilege between those Funds
and five Dean Witter Money Market Funds. Mr. Hedien's term as Director or
Trustee of each Dean Witter Fund commenced on September 1, 1997.
CASH COMPENSATION FROM DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
FOR SERVICE AS FOR SERVICE
CHAIRMAN OF AS TOTAL CASH
FOR SERVICE COMMITTEES OF CHAIRMAN OF COMPENSATION
AS DIRECTOR OR INDEPENDENT COMMITTEES OF FOR SERVICES
TRUSTEE AND FOR SERVICE AS DIRECTORS/ INDEPENDENT TO
COMMITTEE TRUSTEE AND TRUSTEES AND TRUSTEES AND 84 DEAN
MEMBER COMMITTEE AUDIT AUDIT WITTER
OF 84 DEAN MEMBER COMMITTEES OF COMMITTEES OF FUNDS AND
NAME OF WITTER OF 14 TCW/DW 84 DEAN WITTER 14 TCW/DW 14 TCW/DW
INDEPENDENT DIRECTOR FUNDS FUNDS FUNDS FUNDS FUNDS
- --------------------------- ---------------- ---------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Michael Bozic.............. $133,602 -- -- -- $133,602
Edwin J. Garn.............. 149,702 -- -- -- 149,702
John R. Haire.............. 149,702 $73,725 $157,463 $ 25,350 406,240
Wayne E. Hedien............ 39,010 -- -- -- 39,010
Dr. Manuel H. Johnson...... 145,702 71,125 -- -- 216,827
Michael E. Nugent.......... 149,702 73,725 -- -- 223,427
John L. Schroeder.......... 149,702 73,725 -- -- 223,427
</TABLE>
As of the date of this Statement of Additional Information, 57 of the Dean
Witter Funds, including the Fund, have adopted a retirement program under which
an Independent Director 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 Dean Witter Fund that has adopted the retirement program (each
such Fund referred to as an "Adopting Fund" and each such Director referred to
as an "Eligible Director") 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 Director
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 25.0% of his or her Eligible
Compensation plus 0.4166666% 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 50.0% after ten years of service. The foregoing
percentages may be changed by the Board.(1)"Eligible Compensation" is one-fifth
of the total compensation earned by such Eligible Director for service to the
Adopting Fund in the five year period prior to the date of the Eligible
Director's retirement. Benefits under the retirement program are not secured or
funded by the Adopting Funds.
- ------------------------------
(1) An Eligible Director may elect alternate payments of his or her retirement
benefits based upon the combined life expectancy of such Eligible Director
and his or her spouse on the date of such Eligible Director's retirement.
The amount estimated to be payable under this method, through the remainder
of the later of the lives of such Eligible Director and spouse, will be the
actuarial equivalent of the Regular Benefit. In addition, the Eligible
Director may elect that the surviving spouse's periodic payment of benefits
will be equal to either 50% or 100% of the previous periodic amount, an
election that, respectively, increases or decreases the previous periodic
amount so that the resulting payments will be the actuarial equivalent of
the Regular Benefit.
12
<PAGE>
The following table illustrates the retirement benefits accrued to the
Fund's Independent Directors by the Fund for the fiscal year ended October 31,
1997 and by the 57 Dean Witter Funds (including the Fund) for the year ended
December 31, 1997, and the estimated retirement benefits for the Fund's
Independent Trustees, to commence upon their retirement, from the Fund as of
October 31, 1997 and from the 57 Dean Witter Funds as of December 31, 1997.
RETIREMENT BENEFITS FROM THE FUND AND ALL DEAN WITTER FUNDS
<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS
-------------------------
ESTIMATED
CREDITED RETIREMENT BENEFITS ESTIMATED ANNUAL
YEARS ACCRUED AS EXPENSES BENEFITS
OF SERVICE ESTIMATED UPON RETIREMENT(2)
AT PERCENTAGE -------------------- ------------------
RETIREMENT OF BY ALL FROM FROM ALL
(MAXIMUM ELIGIBLE BY THE ADOPTING THE ADOPTING
NAME OF INDEPENDENT DIRECTOR 10) COMPENSATION FUND FUNDS FUND FUNDS
- ----------------------------------- ----------- ------------ ------ ------------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic...................... 10 50.0% $ 372 $ 20,499 $ 925 $ 47,025
Edwin J. Garn...................... 10 50.0 534 30,878 925 47,025
John R. Haire...................... 10 50.0 (798) (19,823)(3) 2,246 127,897
Wayne E. Hedien.................... 9 42.5 0 0 794 39,971
Dr. Manuel H. Johnson.............. 10 50.0 225 12,832 925 47,025
Michael E. Nugent.................. 10 50.0 383 22,546 925 47,025
John L. Schroeder.................. 8 41.7 714 39,350 771 39,504
</TABLE>
- ------------------------
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Director's elections described in Footnote (1)
above.
(3) This number reflects the effect of the extension of Mr. Haire's term as
Director or Trustee until June 1, 1998.
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's officers
and Directors as a group was less than 1 percent of the Fund's shares of
beneficial interest outstanding.
INVESTMENT PRACTICES AND POLICIES
- --------------------------------------------------------------------------------
As stated in the Prospectus, while the Fund currently anticipates investing
over 25% of its total assets in securities of issuers located in the United
Kingdom, it may also invest more than 25% of its total assets, at any time, in
the securities of issuers located in each of the following countries: France,
Germany, the Netherlands and Switzerland. While it is not anticipated that the
Fund will invest more than 25% of its total assets in the securities of issuers
located in any such country, the Fund's Registration Statement will be amended
to contain disclosure discussing the risks pertaining to a concentration of the
Fund's assets in such country at such time as the 25% level is exceeded.
PRIVATE PLACEMENTS. The Fund may invest up to 10% 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, as amended (the "Securities
Act"), or which are otherwise not readily marketable. (Securities eligible for
resale pursuant to Rule 144A of the Securities Act, and determined to be liquid
pursuant to the procedures discussed in the following paragraph, are not subject
to the foregoing restriction.) These securities are generally referred to as
private placements or restricted securities. Limitations on the resale of such
securities may have an adverse effect on their marketability, and may prevent
the Fund from disposing of them promptly at reasonable prices. The Fund may have
to bear the expense of registering such securities for resale and the risk of
substantial delays in effecting such registration.
The Securities and Exchange Commission has adopted Rule 144A under the
Securities Act, which permits the Fund to sell restricted securities to
qualified institutional buyers without limitation. The Investment Manager,
pursuant to procedures adopted by the Directors of the Fund, will make a
determination as to the liquidity of each restricted security pruchased by the
Fund. If a restricted security is determined to be "liquid," such security will
not be included within the category "illiquid securities," which is limited by
the Fund's investment restrictions to 10% of the Fund's total assets.
13
<PAGE>
CONVERTIBLE SECURITIES. The Fund may invest in fixed-income securities
which are convertible into common stock. Convertible securities rank senior to
common stocks in a corporation's capital structure and, therefore, entail less
risk than the corporation's common stock. The value of a convertible security is
a function of its "investment value" (its value as if it did not have a
conversion privilege), and its "conversion value" (the security's worth if it
were to be exchanged for the underlying security, at market value, pursuant to
its conversion privilege).
To the extent that a convertible security's investment value is greater than
its conversion value, its price will be primarily a reflection of such
investment value and its price will be likely to increase when interest rates
fall and decrease when interest rates rise, as with a fixed-income security (the
credit standing of the issuer and other factors may also have an effect on the
convertible security's value). If the conversion value exceeds the investment
value, the price of the convertible security will rise above its investment
value and, in addition, will sell at some premium over its conversion value.
(This premium represents the price investors are willing to pay for the
privilege of purchasing a fixed-income security with a possibility of capital
appreciation due to the conversion privilege.) At such times the price of the
convertible security will tend to fluctuate directly with the price of the
underlying equity security. Convertible securities may be purchased by the Fund
at varying price levels above their investment values and/or their conversion
values in keeping with the Fund's objective.
WARRANTS. The Fund may acquire warrants, including warrants which are
attached to fixed-income securities purchased for its portfolio, and hold such
warrants until the Investment Manager and/or the Sub-Adviser determines it is
prudent to sell. Warrants are, in effect, an option to purchase equity
securities at a specific price, generally valid for a specific period of time,
and have no voting rights, pay no dividends and have no rights with respect to
the corporations issuing them.
U.S. GOVERNMENT SECURITIES. Securities issued by the U.S. Government, its
agencies or instrumentalities in which the Fund may invest include:
(1) U.S. Treasury bills (maturities of one year or less), U.S. Treasury
notes (maturities of one to ten years) and U.S. Treasury bonds (generally
maturities of greater than ten years), all of which are direct obligations
of the U.S. Government and, as such, are backed by the "full faith and
credit" of the United States.
(2) Securities issued by agencies and instrumentalities of the U.S.
Government which are backed by the full faith and credit of the United
States. Among the agencies and instrumentalities issuing such obligations
are the Federal Housing Administration, the Government National Mortgage
Association ("GNMA"), the Department of Housing and Urban Development, the
Export-Import Bank, the Farmers Home Administration, the General Services
Administration, the Maritime Administration and the Small Business
Administration. The maturities of such obligations range from three months
to 30 years.
Neither the value nor the yield of the U.S. Government securities which may
be invested in by the Fund are guaranteed by the U.S. Government. Such values
and yield will fluctuate with changes in prevailing interest rates and other
factors. Generally, as prevailing interest rates rise, the value of any U.S.
Government securities held by the Fund will fall. Such securities with longer
maturities generally tend to produce higher yields and are subject to greater
market fluctuation as a result of changes in interest rates than debt securities
with shorter maturities.
ZERO COUPON TREASURY SECURITIES. A portion of the U.S. Government
securities purchased by the Fund may be "zero coupon" Treasury securities. These
are U.S. Treasury bills, notes and bonds which have been stripped of their
unmatured interest coupons and receipts or which are certificates representing
interests in such stripped debt obligations and coupons. Such securities are
purchased at a discount from their face amount, giving the purchaser the right
to receive their full value at maturity. A zero coupon security pays no interest
to its holder during its life. Its value to an investor consists of the
difference between its face value at the time of maturity and the price for
which it was acquired, which is generally an amount significantly less than its
face value (sometimes referred to as a "deep discount" price). The
14
<PAGE>
Fund intends to invest in such zero coupon treasury securities as STRIPS,
Treasury Receipts, Physical Coupons, and Proprietary Receipts. However, the Fund
does not intend, during its current fiscal year, to invest in such securities in
amounts totalling more than 5% of its total assets.
The interest earned on such securities is, implicitly, automatically
compounded and paid out at maturity. While such compounding at a constant rate
eliminates the risk of receiving lower yields upon reinvestment of interest if
prevailing interest rates decline, the owner of a zero coupon security will be
unable to participate in higher yields upon reinvestment of interest received if
prevailing interest rates rise. For this reason, zero coupon securities are
subject to substantially greater market price fluctuations during periods of
changing prevailing interest rates than are comparable debt securities which
make current distributions of interest. Current federal tax law requires that a
holder (such as the Fund) of a zero coupon security accrue a portion of the
discount at which the security was purchased as income each year even though the
Fund receives no interest payments in cash on the security during the year.
Currently the only U.S. Treasury security issued without coupons is the
Treasury bill. However, in the last few years a number of banks and brokerage
firms have separated ("stripped") the principal portions from the coupon
portions of the U.S. Treasury bonds and notes and sold them separately in the
form of receipts or certificates representing undivided interests in these
instruments (which instruments are generally held by a bank in a custodial or
trust account).
As stated in the Prospectus, the money market instruments which the Fund may
purchase include U.S. Government securities, bank obligations, Eurodollar
certificates of deposit, obligations of savings institutions, fully insured
certificates of deposit and commercial paper. Such securities are limited to:
U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed as to
principal and interest by the United States or its agencies (such as the
Export-Import Bank of the United States, Federal Housing Administration and
Government National Mortgage Association) or its instrumentalities (such as the
Federal Home Loan Bank), including Treasury bills, notes and bonds;
BANK OBLIGATIONS. Obligations (including certificates of deposit and
bankers' acceptances) of banks subject to regulation by the U.S. Government and
having total assets of $1,000,000,000 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
$1,000,000,000 or more;
OBLIGATIONS OF SAVINGS INSTITUTIONS. Certificates of deposit of savings
banks and savings and loan associations, having total assets of $1,000,000,000
or more;
FULLY INSURED CERTIFICATES OF DEPOSIT. Certificates of deposit of banks and
savings institutions, having total assets of less than $1,000,000,000, if the
principal amount of the obligation is insured by the Federal Deposit Insurance
Corporation, limited to $100,000 principal amount per certificate and to 10% or
less of the Fund's total assets in all such obligations and in all illiquid
assets, in the aggregate;
COMMERCIAL PAPER. Commercial paper rated within the two highest grades by
Standard & Poor's ("S&P") or 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.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
As discussed in the Prospectus, the Fund may enter into forward foreign
currency exchange contracts ("forward contracts") as a hedge against
fluctuations in future foreign exchange rates. The Fund will 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
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interbank market conducted directly between currency traders (usually large
commercial banks and investment banks) and their customers. Such forward
contracts will only 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.
When management of the Fund believes that the currency of a particular
foreign country may suffer a substantial movement against the U.S. dollar, it
may enter into a forward contract to purchase or sell, for a fixed amount of
dollars or other currency, the amount of foreign currency approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency. The Fund will also not enter into such forward contracts or
maintain a net exposure to such contracts where the consummation of the
contracts would obligate the Fund to deliver an amount of foreign currency in
excess of the value of the Fund's portfolio securities or other assets
denominated in that currency. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
However, the management of the Fund believes that it is important to have the
flexibility to enter into such forward contracts when it determines that the
best interests of the Fund will be served. The Fund's custodian bank will place
cash, U.S. Government securities or other appropriate liquid portfolio
securities in a segregated account of the Fund in an amount equal to the value
of the Fund's total assets committed to the consummation of forward contracts
entered into under the circumstances set forth above. If the value of the
securities placed in the segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of the Fund's commitments with respect to such
contracts.
Where, for example, the Fund is hedging a portfolio position consisting of
foreign fixed-income securities denominated in a foreign currency against
adverse exchange rate moves vis-a-vis the U.S. dollar, at the maturity of the
forward contract for delivery by the Fund of a foreign currency, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency. It is impossible to forecast the market value of
portfolio securities at the expiration of the contract. Accordingly, it may be
necessary for the Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio securities
if its market value exceeds the amount of foreign currency the Fund is obligated
to deliver.
If the Fund retains the portfolio securities and engages in an offsetting
transaction, the Fund will incur a gain or loss to the extent that there has
been movement in spot or forward contract prices. If the Fund engages in an
offsetting transaction, it may subsequently enter into a new forward contract to
sell the foreign currency. Should forward prices decline during the period
between the Fund's entering into a forward contract for the sale of a foreign
currency and the date it enters into an offsetting contract for the purchase of
the foreign currency, the Fund will realize a gain to the extent the price of
the currency it has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should forward prices increase, the Fund will suffer a loss
to the extent the price of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell.
If the Fund purchases a fixed-income security which is denominated in U.S.
dollars but which will pay out its principal based upon a formula tied to the
exchange rate between the U.S. dollar and a foreign currency, it may hedge
against a decline in the principal value of the security by entering into a
forward contract to sell an amount of the relevant foreign currency equal to
some or all of the principal value of the security.
At times when the Fund has written a call option on a fixed-income security
or the currency in which it is denominated, it may wish to enter into a forward
contract to purchase or sell the foreign currency in
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which the security is denominated. A forward contract would, for example, hedge
the risk of the security on which a call option has been written declining in
value to a greater extent than the value of the premium received for the option.
The Fund will maintain with its Custodian at all times cash, U.S. Government
securities and liquid portfolio securities in a segregated account equal in
value to all forward contract obligations and option contract obligations
entered into in hedge situations such as this.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. It will, however, do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the spread
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
OPTIONS AND FUTURES TRANSACTIONS
As discussed in the Prospectus, the Fund may write covered call options
against securities held in its portfolio and purchase options of the same series
to effect closing transactions, and may hedge against potential changes in the
market value of its investments (or anticipated investments) by purchasing put
and call options on portfolio (or eligible portfolio) securities (and the
currencies in which they are denominated) and engaging in transactions involving
futures contracts and options on such contracts.
OPTIONS ON FOREIGN CURRENCIES. The Fund may purchase and write options on
foreign currencies for purposes similar to those involved with investing in
forward foreign currency exchange contracts. For example, in order to protect
against declines in the dollar value of portfolio securities which are
denominated in a foreign currency, the Fund may purchase put options on an
amount of such foreign currency equivalent to the current value of the portfolio
securities involved. As a result, the Fund would be enabled to sell the foreign
currency for a fixed amount of U.S. dollars, thereby "locking in" the dollar
value of the portfolio securities (less the amount of the premiums paid for the
options). Conversely, the Fund may purchase call options on foreign currencies
in which securities it anticipates purchasing are denominated to secure a set
U.S. dollar price for such securities and protect against a decline in the value
of the U.S. dollar against such foreign currency. The Fund may also purchase
call and put options to close out written option positions.
The Fund may also write call options on foreign currency to protect against
potential declines in its portfolio securities which are denominated in foreign
currencies. If the U.S. dollar value of the portfolio securities falls as a
result of a decline in the exchange rate between the foreign currency in which
it is denominated and the U.S. dollar, then a loss to the Fund occasioned by
such value decline would be ameliorated by receipt of the premium on the option
sold. At the same time, however, the Fund gives up the benefit of any rise in
value of the relevant portfolio securities above the exercise price of the
option and, in fact, only receives a benefit from the writing of the option to
the extent that the value of the portfolio securities falls below the price of
the premium received. The Fund may also write options to close out long call
option positions.
The markets in foreign currency options are relatively new and the Fund's
ability to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. Although the Fund will not purchase or
write such options unless and until, in the opinion of the management of the
Fund, the market for them has developed sufficiently to ensure that the risks in
connection with such options are not greater than the risks in connection with
the underlying currency, there can be no assurance that a liquid secondary
market will exist for a particular option at any specific time. In addition,
options on foreign currencies are affected by all of those factors which
influence foreign exchange rates and investments generally.
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
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both currencies and have no relationship to the investment merits of a foreign
security, including foreign securities held in a "hedged" investment portfolio.
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.
COVERED CALL WRITING. As stated in the Prospectus, the Fund is permitted to
write covered call options on portfolio securities and on the U.S. Dollar and
foreign currencies, without limit, in order to aid in achieving its investment
objectives. Generally, a call option is "covered" if the Fund owns, or has the
right to acquire, without additional cash consideration (or for additional cash
consideration held for the Fund by its Custodian in a segregated account) the
underlying security (currency) subject to the option except that in the case of
call options on U.S. Treasury Bills, the Fund might own U.S. Treasury Bills of a
different series from those underlying the call option, but with a principal
amount and value corresponding to the exercise price and a maturity date no
later than that of the security (currency) deliverable under the call option. A
call option is also covered if the Fund holds a call on the same security as the
underlying security (currency) of the written option, where the exercise price
of the call used for coverage is equal to or less than the exercise price of the
call written or greater than the exercise price of the call written if the
mark-to-market difference is maintained by the Fund in cash, U.S. Government
securities or other liquid portfolio securities which the Fund holds in a
segregated account maintained with its Custodian.
The Fund will receive from the purchaser, in return for a call it has
written, a "premium"; i.e., the price of the option. Receipt of these premiums
may better enable the Fund to earn a higher level of current income than it
would earn from holding the underlying securities (currencies) alone. Moreover,
the premium received will offset a portion of the potential loss incurred by the
Fund if the securities (currencies) underlying the option are ultimately sold
(exchanged) by the Fund at a loss. The premium received will fluctuate with
varying economic market conditions. If the market value of the portfolio
securities (or the currencies in which they are denominated) upon which call
options have been written increases, the Fund may receive a lower total return
from the portion of its portfolio upon which calls have been written than it
would have had such calls not been written.
As regards listed options and certain over-the-counter ("OTC") options,
during the option period, the Fund may be required, at any time, to deliver the
underlying security (currency) against payment of the exercise price on any
calls it has written (exercise of certain listed and OTC options may be limited
to specific expiration dates). 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 Fund has been assigned an exercise notice, the Fund will be
unable to effect a closing purchase transaction.
Closing purchase transactions are ordinarily effected to realize a profit on
an outstanding call option, to prevent an underlying security (currency) from
being called, to permit the sale of an underlying security (or the exchange of
the underlying currency) or to enable the Fund to write another call option on
the underlying security (currency) with either a different exercise price or
expiration date or both. The Fund may realize a net gain or loss from a closing
purchase transaction depending upon whether the
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amount of the premium received on the call option is more or less than the cost
of effecting the closing purchase transaction. Any loss incurred in a closing
purchase transaction may be wholly or partially offset by unrealized
appreciation in the market value of the underlying security (currency).
Conversely, a gain resulting from a closing purchase transaction could be offset
in whole or in part or exceeded by a decline in the market value of the
underlying security (currency).
If a call option expires unexercised, the Fund realizes a gain in the amount
of the premium on the option less the commission paid. Such a gain, however, may
be offset by depreciation in the market value of the underlying security
(currency) during the option period. If a call option is exercised, the Fund
realizes a gain or loss from the sale of the underlying security (currency)
equal to the difference between the purchase price of the underlying security
(currency) and the proceeds of the sale of the security (currency) plus the
premium received for the option less the commission paid.
Options written by the Fund will normally have expiration dates of 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.
PURCHASING CALL AND PUT OPTIONS. As stated in the Prospectus, the Fund may
purchase listed and OTC call and put options in amounts equalling up to 5% of
its total assets. The Fund may purchase a call option in order to close out a
covered call position (see "Covered Call Writing" above), to protect against an
increase in price of a security it anticipates purchasing or, in the case of a
call option on foreign currency, to hedge against an adverse exchange rate move
of the currency in which the security it anticipates purchasing is denominated
vis-a-vis the currency in which the exercise price is denominated. The purchase
of the call option to effect a closing transaction on a call written
over-the-counter may be a listed or an OTC option. In either case, the call
purchased is likely to be on the same securities (currencies) and have the same
terms as the written option. If purchased over-the-counter, the option would
generally be acquired from the dealer or financial institution which purchased
the call written by the Fund.
The Fund may purchase put options on securities (currencies) which it holds
in its portfolio only to protect itself against a decline in the value of the
security. If the value of the underlying security (currency) were to fall below
the exercise price of the put purchased in an amount greater than the premium
paid for the option, the Fund would incur no additional loss. In addition, the
Fund may sell a put option which it has previously purchased prior to the sale
of the securities (currencies) underlying such option. Such a sale would result
in a net gain or loss depending on whether the amount received on the sale is
more or less than the premium and other transaction costs paid on the put option
which is sold. And such gain or loss could be offset in whole or in part by a
change in the market value of the underlying security (currency). If a put
option purchased by the Fund expired without being sold or exercised, the
premium would be lost.
RISKS OF OPTIONS TRANSACTIONS. The successful use of options depends on the
ability of the Investment Manager to forecast correctly interest rates and
market movements. If the market value of the portfolio securities upon which
call options have been written increases, the Fund may receive a lower total
return from the portion of its portfolio upon which calls have been written than
it would have had such calls not been written. In writing puts, the Fund assumes
the risk of loss should the market value of the underlying securities decline
below the exercise price of the option (any loss being decreased by the receipt
of the premium on the option 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 writer has no
control over the time when it may be required to fulfill its obligation as a
writer of the option. 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.
Prior to exercise or expiration, an option position can only be terminated
by entering into a closing purchase or sale transaction. If a covered call
option writer is unable to effect a closing purchase
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transaction or to purchase an offsetting OTC option, it cannot sell the
underlying security until the option expires or the option is exercised.
Accordingly, a covered call option writer may not be able to sell an underlying
security at a time when it might otherwise be advantageous to do so.
As discussed in the Prospectus, the Fund's ability to close out its position
as a writer of an option is dependent upon the existence of a liquid secondary
market on Option Exchanges. There is no assurance that such a market will exist,
particularly in the case of OTC options, as such options will generally only be
closed out by entering into a closing purchase transaction with the purchasing
dealer. However, the Fund may be able to purchase an offsetting option which
does not close out its position as a writer but constitutes an asset of equal
value to the obligation under the option written. If the Fund is not able to
either enter into a closing purchase transaction or purchase an offsetting
position, it will be required to maintain the securities subject to the call, or
the collateral underlying the put, even though it might not be advantageous to
do so, until a closing transaction can be entered into (or the option is
exercised or expires).
Among the possible reasons for the absence of a liquid secondary market on
an exchange are: (i) insufficient trading interest in certain options; (ii)
restrictions on transactions imposed by an exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (iv) interruption of the normal
operations on an exchange; (v) inadequacy of the facilities of an exchange or
the Options Clearing Corporation ("OCC") to handle current trading volume; or
(vi) a decision by one or more exchanges to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist, although outstanding options on that exchange that had been issued by the
OCC as a result of trades on that Exchange would generally continue to be
excercisable in accordance with their terms.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in options, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by the Fund,
the Fund could experience a loss of all or part of the value of the option.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the Fund's management.
Each of the exchanges has established limitations governing the maximum
number of options on the same underlying security or futures contract (whether
or not covered) 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 exchange or are held or written on one or more accounts or
through one or more brokers). An exchange may order the liquidation of positions
found to be in violation of these limits and it may impose other sanctions or
restrictions. These position limits may restrict the number of listed options
which the Fund may write.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
FUTURES CONTRACTS. As stated in the Prospectus, the Fund may purchase and
sell interest rate, currency, and index futures contracts ("futures contracts"),
that are traded on U.S. and foreign commodity exchanges, on such underlying
securities as U.S. Treasury bonds, notes and bills and/or any foreign government
fixed-income security ("interest rate" futures), on various currencies
("currency futures") and on such indexes of U.S. and foreign securities as may
exist or come into being ("index" futures).
Although most interest rate 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. 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
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the offsetting purchase price, the seller would be paid the difference and would
realize a gain. If the offsetting purchase price exceeds the sale price, the
seller would pay the difference and would realize a loss. Similarly, a futures
contract purchase is closed out by effecting a futures contract sale for the
same aggregate amount of the specific type of security (currency) and the same
delivery date. If the offsetting sale price exceeds the purchase price, the
purchaser would realize a gain, whereas if the purchase price exceeds the
offsetting sale price, the purchaser would realize a loss. There is no assurance
that the Fund will be able to enter into a closing transaction.
INTEREST RATE FUTURES CONTRACTS. When the Fund enters into an interest rate
futures contract, it is initially required to deposit with the Fund's Custodian,
in a segregated account in the name of the broker performing the transaction, an
"initial margin" of cash or U.S. Government securities or other liquid portfolio
securities equal to approximately 3% 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.
In addition, if the Fund holds a long position in a futures contract it will
hold cash, U.S. Government securities or other liquid portfolio securities equal
to the purchase price of the contract (less the amount of initial or variation
margin on deposit) in a segregated account maintained for the Fund by its
Custodian. Alternatively, the Fund could cover its long position by purchasing a
put option on the same futures contract with an exercise price as high or higher
than the price of the contract held by the Fund.
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 brokers' client but is, rather, a good faith deposit on the futures
contract which will be returned to the Fund upon the proper termination of the
futures contract. The margin deposits made are marked to market daily and the
Fund may be required to make subsequent deposits of cash or U.S. Government
securities called "variation margin," with the Fund's futures contract clearing
broker, which are reflective of price fluctuations in the futures contract.
Currently, interest rate futures contracts can be purchased on debt securities
such as U.S. Treasury Bills and Bonds, U.S. Treasury Notes with Maturities
between 6 1/2 and 10 years, GNMA Certificates and Bank Certificates of Deposit.
CURRENCY FUTURES. Generally, foreign currency futures provide for the
delivery of a specified amount of a given currency, on the delivery date, for a
set exercise price denominated in U.S. dollars or other currency. Foreign
currency futures contracts would be entered into for the same reason and under
the same circumstances as forward foreign currency exchange contracts. The
Investment Manager will assess such factors as cost spreads, liquidity and
transaction costs in determining whether to utilize futures contracts or forward
contracts its in foreign currency transactions and hedging strategy. Currently,
currency futures exist for, among other foreign currencies, the Japanese yen,
German marks, Canadian dollars, British pound, Swiss franc and European currency
unit.
Purchasers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the buying and selling of futures generally. In
addition, there are risks associated with foreign currency futures contracts and
their use as a hedging device similar to those associated with options on
foreign currencies described above. Further, settlement of a foreign currency
futures contract must occur within the country issuing the underlying currency.
Thus, the Fund must accept or make delivery of the underlying foreign currency
in accordance with any U.S. or foreign restrictions or regulation regarding the
maintenance of foreign banking arrangements by U.S. residents and may be
required to pay any fees, taxes or charges associated with such delivery which
are assessed in the issuing country.
Options on foreign currency futures contracts may involve certain additional
risks. The ability to establish and close out positions on such options is
subject to the maintenance of a liquid secondary market. To reduce this risk,
the Fund will not purchase or write options on foreign currency futures
contracts unless and until, in the Investment Manager's opinion, the market for
such options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with transactions in the
underlying foreign currency futures contracts.
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INDEX FUTURES CONTRACTS. As discussed in the Prospectus, the Fund may
invest in index futures contracts. An index futures contract sale creates an
obligation by the Fund, as seller, to deliver cash at a specified future time.
An index futures contract purchase would create an obligation by the Fund, as
purchaser, to take delivery of cash at a specified future time. Futures
contracts on indexes do not require the physical delivery of securities, but
provide for a final cash settlement on the expiration date which reflects
accumulated profits and losses credited or debited to each party's account.
The Fund is required to maintain margin deposits with brokerage firms
through which it effects index futures contracts in a manner similar to that
described above for interest rate futures contracts. Currently, the initial
margin requirements range from 3% to 10% of the contract amount for index
futures. In addition, due to current industry practice, daily variations in
gains and losses on open contracts are required to be reflected in cash in the
form of variation margin payments. The Fund may be required to make additional
margin payments during the term of the contract.
At any time prior to expiration of the futures contract, the Fund may elect
to close the position by taking an opposite position which will operate to
terminate the Fund's position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid by or
released to the Fund and the Fund realizes a loss or gain.
OPTIONS ON FUTURES CONTRACTS. 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.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. The
successful use of futures and related options depends on the ability of the
Investment Manager to accurately predict market and interest rate movements. As
stated in the Prospectus, the Fund may sell a futures contract to protect
against the decline in the value of securities (or the currency in which they
are denominated) held by the Fund. However, it is possible that the futures
market may advance and the value of securities (or the currency in which they
are denominated) held in the portfolio of the Fund may decline. If this
occurred, the Fund would lose money on the futures contract and also experience
a decline in value of its portfolio securities. However, while this could occur
for a very brief period or to a very small degree, over time the value of a
diversified portfolio will tend to move in the same direction as the futures
contracts.
If the Fund purchases a futures contract to hedge against the increase in
value of securities it intends to buy (or the currency in which they are
denominated), and the value of such securities (currencies) decreases, then the
Fund may determine not to invest in the securities as planned and will realize a
loss on the futures contract that is not offset by a reduction in the price of
the securities.
In order to assure that the Fund is entering into transactions in futures
contracts for hedging purposes as such is defined by the Commodity Futures
Trading Commission either: 1) a substantial majority (i.e., approximately 75%)
of all anticipatory hedge transactions (transactions in which the Fund does not
own at the time of the transaction, but expects to acquire, the securities
underlying the relevant futures contract) involving the purchase of futures
contracts will be completed by the purchase of securities which are the subject
of the hedge or 2) the underlying value of all long positions in futures
contracts will not exceed the total value of a) all short-term debt obligations
held by the Fund; b) cash held by the Fund; c) cash proceeds due to the Fund on
investments within thirty days; d) the margin deposited on the contracts; and e)
any unrealized appreciation in the value of the contracts.
If the Fund has sold a call option on a futures contract, it will cover this
position by holding, in a segregated account maintained at its Custodian, cash,
U.S. Government securities or other liquid portfolio securities equal in value
(when added to any initial or variation margin on deposit) to the market value
of the securities (currencies) underlying the futures contract or the exercise
price of the option. Such a position may also be covered by owning the
securities (currencies) underlying the futures contract, or by holding a call
option permitting the Fund to purchase the same contract at a price no higher
than the price at which the short position was established.
22
<PAGE>
Exchanges limit the amount by which the price of a futures contract may move
on any day. If the price moves equal the daily limit on successive days, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, the Fund would continue to
be required to make daily cash payments of variation margin on open futures
positions. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. In addition, the Fund may be required
to take or make delivery of the instruments underlying interest rate futures
contracts it holds at a time when it is disadvantageous to do so. The inability
to close out options and futures positions could also have an adverse impact on
the Fund's ability to effectively hedge its portfolio.
Futures contracts and options thereon which are purchased or sold on foreign
commodities exchanges may have greater price volatility than their U.S.
counterparts. Furthermore, foreign commodities exchanges may be less regulated
and under less governmental scrutiny than U.S. exchanges. Brokerage commissions,
clearing costs and other transaction costs may be higher on foreign exchanges.
Greater margin requirements may limit the Fund's ability to enter into certain
commodity transactions on foreign exchanges. Moreover, differences in clearance
and delivery requirements on foreign exchanges may occasion delays in the
settlement of the Fund's transactions effected on foreign exchanges.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
Similarly, in the event of the bankruptcy of the writer of an OTC option
purchased by the Fund, the Fund could experience a loss of all or part of the
value of the option. Transactions are entered into by the Fund only with brokers
or financial institutions deemed creditworthy by the Investment Manager.
While the futures contracts and options transactions to be engaged in by the
Fund for the purpose of hedging the Fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such instruments.
One such risk which may arise in employing futures contracts to protect against
the price volatility of portfolio securities (and the currencies in which they
are denominated) is that the prices of securities and indexes subject to futures
contracts (and thereby the futures contract prices) may correlate imperfectly
with the behavior of the cash prices of the Fund's portfolio securities (and the
currencies in which they are denominated). Another such risk is that prices of
interest rate futures contracts may not move in tandem with the changes in
prevailing interest rates against which the Fund seeks a hedge. A correlation
may also be distorted by the fact that the futures market is dominated by
short-term traders seeking to profit from the difference between a contract or
security price objective and their cost of borrowed funds. Such distortions are
generally minor and would diminish as the contract approached maturity.
As stated in the Prospectus, there may exist an imperfect correlation
between the price movements of futures contracts purchased by the Fund and the
movements in the prices of the securities (currencies) which are the subject of
the hedge. If participants in the futures market elect to close out their
contracts through offsetting transactions rather than meet margin deposit
requirements, distortions in the normal relationship between the debt securities
or currency markets and futures markets could result. Price distortions could
also result if investors in futures contracts opt to make or take delivery of
underlying securities rather than engage in closing transactions due to the
resultant reduction in the liquidity of the futures market. In addition, due to
the fact that, from the point of view of speculators, the deposit requirements
in the futures markets are less onerous than margin requirements in the cash
market, increased participation by speculators in the futures market could cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and because of the imperfect correlation between movements in the
prices of securities and movements in the prices of futures contracts, a correct
forecast of interest rate trends may still not result in a successful hedging
transaction.
23
<PAGE>
As stated in the Prospectus, there is no assurance that a liquid secondary
market will exist for futures contracts and related options in which the Fund
may invest. In the event a liquid market does not exist, it may not be possible
to close out a futures position, and in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In addition, limitations imposed by an exchange or board of trade on
which futures contracts are traded may compel or prevent the Fund from closing
out a contract which may result in reduced gain or increased loss to the Fund.
The absence of a liquid market in futures contracts might cause the Fund to make
or take delivery of the underlying securities (currencies) at a time when it may
be disadvantageous to do so.
Compared to the purchase or sale of futures contracts, the purchase of call
or put options on futures contracts involves less potential risk to the Fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a futures contract would result in a loss to the Fund
notwithstanding that the purchase or sale of a futures contract would not result
in a loss, as in the instance where there is no movement in the prices of the
futures contract or underlying securities (currencies).
OTHER INVESTMENT POLICIES
REPURCHASE AGREEMENTS. When cash may be available for only a few days, it
may be invested by the Fund in repurchase agreements until such time as it may
otherwise be invested or used for payments of obligations of the Fund. A
repurchase agreement may be viewed as a type of secured lending by the Fund
which typically involves the acquisition by the Fund of government securities
from a selling financial institution such as a bank, savings and loan
association or broker-dealer. The agreement provides that the Fund will sell
back to the institution, and that the institution will repurchase, the
underlying security ("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 maintained in a segregated account and will be
marked-to-market daily to determine that the full value of the collateral, as
specified in the agreement, is always at least equal to the purchase price plus
accrued interest. If required, additional collateral will be added to the
account to maintain full collateralization. In the event the original seller
defaults on its obligations to repurchase, as a result of its bankruptcy or
otherwise, the Fund will seek to sell the collateral, which action could involve
costs or delays. In such case, the Fund's ability to dispose of the collateral
to recover its investment may be restricted or delayed.
The Fund will accrue interest from the institution until the time when the
repurchase is to occur. Although such date is deemed by the Fund to be the
maturity date of a repurchase agreement, the maturities of securities subject to
repurchase agreements are not subject to any limits and may exceed one year.
While repurchase agreements involve certain risks not associated with direct
investments in debt securities, the Fund follows procedures designed to minimize
such risks. Repurchase agreements will be transacted only with large,
well-capitalized and well-established financial institutions whose financial
condition will be continuously monitored by the management of the Fund subject
to procedures established by the Directors. The procedures also require that the
collateral underlying the agreement be specified. The Fund has not to date nor
does it presently intend to enter into repurchase agreements so that more than
5% of the Fund's net assets are subject to such agreements.
REVERSE REPURCHASE AGREEMENTS. The Fund may also use reverse repurchase
agreements for purposes of meeting redemptions or as part of its investment
strategy. Reverse repurchase agreements involve sales by the Fund of portfolio
assets concurrently with an agreement by the Fund to repurchase the same assets
at a later date at a fixed price. Generally, the effect of such a transaction is
that the Fund can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are only advantageous if the interest cost to the
Fund of the reverse repurchase transaction is less than the cost of obtaining
the cash otherwise. Opportunities to achieve this advantage may not always be
available, and the Fund intends to use the reverse repurchase technique only
when it will be to its advantage to do so. The Fund will establish a segregated
account
24
<PAGE>
with its custodian bank in which it will maintain cash or cash equivalents or
other portfolio securities (i.e., U.S. Government securities) equal in value to
its obligations in respect of reverse repurchase agreements. Reverse repurchase
agreements are considered borrowings by the Fund and, in accordance with legal
requirements, the Fund will maintain an asset coverage (including the proceeds)
of at least 300% with respect to all reverse repurchase agreements. Reverse
repurchase agreements may not exceed 10% of the Fund's total assets. The Fund
will make no purchases, during its current fiscal year, of portfolio securities
while it is still subject to a reverse repurchase agreement. The Fund has not to
date nor does it presently intend to enter into any reverse repurchase
agreements.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. As
discussed in the Prospectus, from time to time, in the ordinary course of
business, the Fund may purchase securities on a when-issued or delayed delivery
basis and may purchase or sell securities on a forward commitment basis. When
such 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 the commitment. The securities so purchased are subject to market
fluctuation and no interest accrues to the purchaser during this period. While
the Fund will only purchase securities on a when-issued, delayed delivery or
forward commitment basis with the intention of acquiring the securities, the
Fund may sell the securities before the settlement date, if it is deemed
advisable. At the time the Fund makes the commitment to purchase securities on a
when-issued or delayed delivery basis, the Fund will record the transaction and
thereafter reflect the value, each day, of such security in determining the net
asset value of the Fund. At the time of delivery of the securities, the value
may be more or less than the purchase price. The Fund will also establish a
segregated account with the Fund's custodian bank in which it will continuously
maintain cash or U.S. Government securities or other liquid portfolio securities
equal in value to commitments for such when-issued or delayed delivery
securities; subject to this requirement, the Fund may purchase securities on
such basis without limit. An increase in the percentage of the Fund's assets
committed to the purchase of securities on a when-issued or delayed delivery
basis may increase the volatility of the Fund's net asset value. The Fund's
management and the Directors do not believe that the Fund's net asset value or
income will be adversely affected by its purchase of securities on such basis.
WHEN, AS AND IF ISSUED SECURITIES. As discussed in the Prospectus, the Fund
may purchase securities on a "when, as and if issued" basis under which the
issuance of the security depends upon the occurrence of a subsequent event, such
as approval of a merger, corporate reorganization, leveraged buyout or debt
restructuring. The commitment for the purchase of any such security will not be
recognized in the portfolio of the Fund until the Investment Manager determines
that issuance of the security is probable. At such time, the Fund will record
the transaction and, in determining its net asset value, will reflect the value
of the security daily. At such time, the Fund will also establish a segregated
account with its custodian bank in which it will continuously maintain cash or
U.S. Government securities or other liquid portfolio securities equal in value
to recognized commitments for such securities. Settlement of the trade will
occur within five business days of the occurrence of the subsequent event. The
value of the Fund's commitments to purchase the securities of any one issuer,
together with the value of all securities of such issuer owned by the Fund, may
not exceed 5% of the value of the Fund's total assets at the time the initial
commitment to purchase such securities is made (see "Investment Restrictions").
Subject to the foregoing restrictions, the Fund may purchase securities on such
basis without limit. An increase in the percentage of the Fund's assets
committed to the purchase of securities on a "when, as and if issued" basis may
increase the volatility of its net asset value. The Fund's management and the
Directors do not believe that the net asset value of the Fund will be adversely
affected by its purchase of securities on such basis. The Fund may also sell
securities on a "when, as and if issued" basis provided that the issuance of the
security will result automatically from the exchange or conversion of a security
owned by the Fund at the time of the sale.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to brokers, dealers and
other financial institutions, provided that such loans are callable at any time
by the Fund (subject to notice provisions described below), and are at all times
secured by cash or appropriate high-grade debt obligations, which are maintained
in a segregated
25
<PAGE>
account pursuant to applicable regulations and that are at least equal to the
market value, determined daily, of the loaned securities. The advantage of such
loans is that the Fund continues to receive the income on the loaned securities
while at the same time earning interest on the cash amounts deposited as
collateral, which will be invested in short-term obligations. The Fund will not
lend its portfolio securities if such loans are not permitted by the laws or
regulations of any state in which its shares are qualified for sale and will not
lend more than 25% of the value of its total assets. A loan may be terminated by
the borrower on one business days' notice, or by the Fund on two business days'
notice. If the borrower fails to deliver the loaned securities within two days
after receipt of notice, the Fund could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will only be made to firms deemed by the Fund's management to be
creditworthy and when the income which can be earned from such loans justifies
the attendant risks. Upon termination of the loan, the borrower is required to
return the securities to the Fund. Any gain or loss in the market price during
the loan period would inure to the Fund. The creditworthiness of firms to which
the Fund lends its portfolio securities will be monitored on an ongoing basis by
the Fund's management pursuant to procedures adopted and reviewed, on an ongoing
basis, by the Board of Directors of the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of such rights
if the matters involved would have a material effect on the Fund's investment in
such loaned securities. The Fund will pay reasonable finder's, administrative
and custodial fees in connection with a loan of its securities. The Fund has not
to date nor does it presently intend to lend any of its portfolio securities.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
In addition to the investment restrictions enumerated in the Prospectus, the
investment restrictions listed below have been adopted by the Fund as
fundamental policies, except as otherwise indicated. Under the Act, a
fundamental policy may not be changed without the vote of a majority of the
outstanding voting securities of the Fund, as defined in the Act. Such a
majority is defined as the lesser of (a) 67% or more of the shares present at a
meeting of shareholders, if the holders of 50% of the outstanding shares of the
Fund are present or represented by proxy or (b) more than 50% of the outstanding
shares of the Fund.
The Fund may not:
1. Purchase or sell real estate or interests therein, although the Fund
may purchase securities of issuers which engage in real estate operations
and securities secured by real estate or interests therein.
2. Purchase oil, gas or other mineral leases, rights or royalty
contracts or exploration or development programs, except that the Fund may
invest in the securities of companies which operate, invest in, or sponsor
such programs.
3. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets or in accordance with the provisions of Section 12(d) of the Act and
any Rules promulgated thereunder. The Fund, however, has no present
intention to make any investments, during the current fiscal year, in
securities issued by other investment companies.
The Fund anticipates that it will incur any indirect expenses incurred
through investment in an investment company, such as the payment of a
management fee. Furthermore, it should be noted that foreign investment
companies are not subject to the U.S. securities laws and may be subject to
fewer or less stringent regulations than U.S. investment companies.
26
<PAGE>
4. Borrow money (except insofar as the Fund may be deemed to have
borrowed by entrance into a reverse repurchase agreement up to an amount not
exceeding 10% of the Fund's total assets), except that the Fund may borrow
from a bank for temporary or emergency purposes in amounts not exceeding 5%
(taken at the lower of cost or current value) of its total assets (not
including the amount borrowed).
5. Issue senior securities as defined in the Act except insofar as the
Fund may be deemed to have issued a senior security by reason of (a)
entering into any repurchase or reverse repurchase agreement; (b) purchasing
any securities on a when-issued or delayed delivery basis; (c) purchasing or
selling futures contracts, forward foreign exchange contracts or options;
(d) borrowing money in accordance with restrictions described above; or (e)
lending portfolio securities.
6. Make loans of money or securities, except: (a) by the purchase of
publicly distributed debt obligations in which the Fund may invest
consistent with its investment objectives and policies; (b) by investment in
repurchase or reverse repurchase agreements; or (c) by lending its portfolio
securities.
7. Make short sales of securities or maintain a short position, unless
at all times when a short position is open it either owns an equal amount of
such securities or owns securities which, without payment of any further
consideration, are convertible into or exchangeable for securities of the
same issue as, and equal in amount to, the securities sold short.
8. Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security.
9. Invest for the purpose of exercising control or management of any
other issuer.
As a nonfundamental policy, the Fund will not invest in other investment
companies in reliance on Sections 12(d)(1)(F), 12(d)(1)(G) or 12(d)(1)(J) of the
Act.
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.
Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objective by investing all or substantially all
of its assets in another investment company having substantially the same
investment objective and policies as the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
- --------------------------------------------------------------------------------
Subject to the general supervision of the Fund's Directors, the Investment
Manager and the Sub-Adviser are responsible for decisions to buy and sell
securities of the Fund, the selection of brokers and dealers to effect the
transactions, and the negotiation of brokerage commissions, if any. Purchases
and sales of securities on a stock exchange are effected through brokers who
charge a commission for their services. In the over-the-counter market,
securities are generally traded on a "net" basis with non-affiliated 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. In the underwritten offerings,
securities are purchased at a fixed price which includes an amount of
compensation equal to the underwriter's concession. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid. During the fiscal years ended October 31,
1995, 1996 and 1997, the Fund paid $1,887,191, $2,545,689 and $3,392,662,
respectively, in brokerage commissions.
27
<PAGE>
The Investment Manager and the Sub-Adviser currently serve as investment
advisors to a number of clients, including, in the case of the Investment
Manager, other investment companies, and may in the future act as investment
manager or adviser to others. It is the practice of each the Investment Manager
and the Sub-Adviser to cause purchase and sale transactions to be allocated
among the Fund and others whose assets it manages in such manner as it deems
equitable. In making such allocations among the Fund and other client accounts,
various factors may be considered, including the respective investment
objectives, the relative size of portfolio holdings of the same or comparable
securities, the availability of cash for investment, the size of investment
commitments generally held and the opinions of the persons responsible for
managing the portfolios of the Fund and other client accounts. In the case of
certain initial and secondary public offerings, the Investment Manager may
utilize a pro rata allocation process based on the size of the Dean Witter Funds
involved and the number of shares available from the public offering.
The policy of the Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid in
all circumstances. The Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Investment Manager and the Sub-Adviser 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 and the Sub-Adviser rely upon their experience and knowledge regarding
commissions generally charged by various brokers and on their judgment in
evaluating the brokerage and research services received from the broker
effecting the transaction. Such determinations are necessarily subjective and
imprecise, as in most cases an exact dollar value for those services is not
ascertainable.
The Fund anticipates that certain of its transactions involving foreign
securities will be effected on securities exchanges. Fixed commissions on such
transactions are generally higher than negotiated commissions on domestic
transactions. There is also generally less government supervision and regulation
of foreign securities exchanges and brokers than in the United States.
In seeking to implement the Fund's policies, the Investment Manager and the
Sub-Adviser effect transactions with those brokers and dealers who the
Investment Manager and the Sub-Adviser believe provide the most favorable prices
and are capable of providing efficient executions. If the Investment Manager
and/or the Sub-Adviser believe such prices and executions are obtainable from
more than one broker or dealer, they 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 and/or the Sub-Adviser. Such
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 and the
Sub-Adviser from brokers and dealers may be of benefit to the Investment Manager
and the Sub-Adviser in the management of accounts of some of their other clients
and may not in all cases benefit the Fund directly. While the receipt of such
information and services is useful in varying degrees and would generally reduce
the amount of research or services otherwise performed by the Investment Manager
and the Sub-Adviser and thereby reduce their expenses, it is of indeterminable
value and the fees paid to the Investment Manager and the Sub-Adviser are not
reduced by any amount that may be attributable to the value of such services.
Pursuant to an order of the Securities and Exchange Commission, the Fund may
effect principal transactions in certain money market instruments with DWR. The
Fund will limit its transactions with DWR to U.S. Government and Government
Agency Securities, Bank Money Instruments (i.e.,
Certifi-
28
<PAGE>
cates of Deposit and Bankers' Acceptances) and Commercial Paper. Such
transactions will be effected with DWR only when the price available from DWR is
better than that available from other dealers.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may be
effected through DWR, Morgan Stanley and Co. Incorporated ("MS & Co.") and other
affiliated brokers and dealers. In order for an affiliated broker or dealer to
effect any portfolio transactions for the Fund, the commissions, fees or other
remuneration received by the affiliated broker or dealer must be reasonable and
fair compared to the commissions, fees or other remuneration paid to other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on an exchange during a comparable period of time. This
standard would allow the affiliated broker or dealer to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker in
a commensurate arm's-length transaction. Furthermore, the Directors of the Fund,
including a majority of the Directors who are not "interested" persons of the
Fund, as defined in the Act, have adopted procedures which are reasonably
designed to provide that any commissions, fees or other remuneration paid to an
affiliated broker or dealer are consistent with the foregoing standard. The Fund
does not reduce the management fee it pays to the Investment Manager by any
amount of the brokerage commissions it may pay to an affiliated broker or
dealer. During the period May 31 through October 31, 1997, the Fund paid a total
of $21,602 in brokerage commissions to MS & 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. The
brokerage commissions paid to MS & Co. represented approximately 0.64% of the
total brokerage commissions paid by the Fund for this period and were paid on
account of transactions having an aggregate dollar value equal to approximately
1.19% of the aggregate dollar value of all portfolio transactions of the Fund
during the period for which commissions were paid.
The Fund paid brokerage commission to affiliates of the Sub-Adviser in the
amount of $20,677 for the fiscal year ended October 31, 1997. The Fund did not
pay any brokerage commission to affiliates of the Sub-Adviser during the fiscal
years ended October 31, 1995 and October 31, 1996. During the fiscal year ended
October 31, 1997, the Fund paid affiliated broker-dealers of the Sub-Adviser for
transactions as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE DOLLAR
AMOUNT OF
EXECUTED TRADES
BROKERAGE PERCENTAGE OF ON WHICH
COMMISSIONS PAID AGGREGATE BROKERAGE
TO AFFILIATED BROKERAGE COMMISSIONS
BROKER OF SUB-ADVISER COMMISSIONS FOR WERE PAID FOR
FOR FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
NAME OF BROKER 10/31/97 10/31/97 10/31/97
- ---------------------------------------------------- ---------------------- ------------------- -------------------
<S> <C> <C> <C>
Deutsche Bank AG.................................... $ 8,463 0.25% 0.23%
Morgan Grenfell & Co. Limited....................... 12,214 0.36 0.40
</TABLE>
THE DISTRIBUTOR
- --------------------------------------------------------------------------------
As discussed in the Prospectus, shares of the Fund are distributed by Dean
Witter Distributors Inc. (the "Distributor"). The Distributor has entered into a
selected dealer agreement with DWR, which through its own sales organization
sells shares of the Fund. In addition, the Distributor may enter into selected
dealer agreements with other selected broker-dealers. The Distributor, a
Delaware corporation, is a wholly-owned subsidiary of MSDWD. The Directors of
the Fund, including a majority of the Directors who are not, and were not at the
time they voted, interested persons of the Fund, as defined in the Act (the
"Independent Directors"), approved, at their meeting held on June 30, 1997, the
current Distribution Agreement appointing the Distributor as exclusive
distributor of the Fund's shares and providing for the Distributor to bear
distribution expenses not borne by the Fund. By its terms, the Distribution
Agreement
29
<PAGE>
has an initial term ending April 30, 1998 and will remain in effect from year to
year thereafter if approved by the Board.
The Distributor bears all expenses it may incur in providing services under
the Distribution Agreement. Such expenses include the payment of commissions for
sales of the Fund's shares and incentive compensation to account executives. The
Distributor also pays certain expenses in connection with the distribution of
the Fund's shares, including the costs of preparing, printing and distributing
advertising or promotional materials, and the costs of printing and distributing
prospectuses and supplements thereto used in connection with the offering and
sale of the Fund's shares. The Fund bears the costs of initial typesetting,
printing and distribution of prospectuses and supplements thereto to
shareholders. The Fund also bears the costs of registering the Fund and its
shares under federal securities laws and pays filing fees in accordance with
state securities laws. The Fund and the Distributor have agreed to indemnify
each other against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. 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.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Act (the "Plan") pursuant to which each Class, other than Class D, pays the
Distributor compensation accrued daily and payable monthly at the following
annual rates: 0.25% and 1.0% of the average daily net assets of Class A and
Class C, respectively, and, with respect to Class B, 1.0% of the lesser of: (a)
the average daily aggregate gross sales of the Fund's Class B shares since the
inception of the Fund (not including reinvestments of dividends or capital gains
distributions), less the average daily aggregate net asset value of the Fund's
Class B shares redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of Class B. The Distributor also
receives the proceeds of front-end sales charges and of contingent deferred
sales charges imposed on certain redemptions of shares, which are separate and
apart from payments made pursuant to the Plan (see "Purchase of Fund Shares" in
the Prospectus). The Distributor has informed the Fund that it and/or DWR
received (a) approximately $1,628,209, $1,047,000 and $1,853,492 in contingent
deferred sales charges from Class B for the fiscal years ended October 31, 1995,
1996 and 1997, respectively, (b) approximately $0 and $440 in contingent
deferred sales charges from Class A and Class C, respectively, for the fiscal
year ended October 31, 1997, and (c) approximately $34,000 in front-end sales
charges from Class A for the fiscal year ended October 31, 1997, none of which
was retained by the Distributor.
The Distributor has informed the Fund that the entire fee payable by Class A
and a portion of the fees payable by each of Class B and Class C each year
pursuant to the Plan equal to 0.25% of such Class's average daily net assets are
currently each characterized as a "service fee" under the Rules of the
Association of the National Association of Securities Dealers, Inc. (of which
the Distributor is a member). The "service fee" is a payment made for personal
service and/or the maintenance of shareholder accounts. The remaining portion of
the Plan fees payable by a Class, if any, is characterized as an "asset-based
sales charge" as defined in the aforementioned Rules of the Association.
The Plan was adopted by a majority vote of the Board of Directors, including
all of the Directors of the Fund who are not "interested persons" of the Fund
(as defined in the Act) and who have no direct or indirect financial interest in
the operation of the Plan (the "Independent 12b-1 Directors"), cast in person at
a meeting called for the purpose of voting on the Plan, on March 16, 1990 and by
DWR, as sole stockholder of the Fund on March 28, 1990.
At their meeting held on October 30, 1992, the Directors of the Fund,
including all of the independent 12b-1 Directors, had approved certain
amendments to the Plan which took effect in January, 1993 and were designed to
reflect the facts that, upon an internal reorganization, the share distribution
activities theretofore performed for the Fund by DWR were assumed by the
Distributor and that DWR's
30
<PAGE>
sales activities are now being performed pursuant to the terms of a selected
dealer agreement between the Distributor rather than by DWR as they had been
before the amendment, and that the Distributor in turn is authorized to make
payments to DWR, its affiliates or other selected broker-dealers (or direct that
the Fund pay such entities directly). The Distributor is also authorized to
retain part of such fee as compensation for its own distribution-related
expenses. At their meeting held on April 28, 1993, the Directors, including a
majority of the independent 12b-1 Directors, had also approved certain technical
amendments to the Plan in connection with amendments adopted by the National
Association of Securities Dealers, Inc. to its Rules of the Association. At
their meeting held on October 26, 1995, the Directors of the Fund, including all
of the Independent 12b-1 Directors, approved an amendment to the Plan to permit
payments to be made under the Plan with respect to certain distribution expenses
incurred in connection with the distribution of shares, including personal
services to shareholders with respect to holdings of such shares, of an
investment company whose assets are acquired by the Fund in a tax-free
reorganization. At their meeting held on June 30, 1997, the Directors, including
a majority of the Independent 12b-1 Directors, approved amendments to the Plan
to reflect the multiple-class structure for the Fund, which took effect on July
28, 1997.
Under the Plan and as required by Rule 12b-1, the Directors receive and
review promptly after the end of each calendar quarter a written report provided
by the Distributor of the amounts expended by the Distributor under the Plan and
the purpose for which such expenditures were made. Class B shares of the Fund
accrued amounts payable to the Distributor under the Plan, during the fiscal
year ended October 31, 1997 of $13,514,335. This amount is equal to 0.86% of the
average daily net assets of Class B for the fiscal year and was calculated
pursuant to clause (a) of the compensation formula under the Plan. For the
fiscal period July 28 through October 31, 1997, Class A and Class C shares of
the Fund accrued payments under the Plan amounting to $678 and $4,641,
respectively, which amounts are equal to 0.25% and 1.00% of the average daily
net assets of Class A and Class C, respectively, for such period.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method the Fund offers four
Classes of shares, each with a different distribution arrangement as set forth
in the Prospectus.
With respect to Class A shares, DWR compensates its account executives by
paying them, from proceeds of the front-end sales charge, commissions for the
sale of Class A shares, currently a gross sales credit of up to 5.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.25% of the current value of
the respective accounts for which they are the account executives or dealers of
record in all cases. On orders of $1 million or more (for which no sales charge
was paid) or net asset value purchases by employer-sponsored 401(k) and other
plans qualified under Section 401(a) of the Internal Revenue Code ("Qualified
Retirement Plans") for which Dean Witter Trust FSB ("DWT" or "Transfer Agent")
serves as Trustee or DWR's Retirement Plan Services serves as recordkeeper
pursuant to a written Recordkeeping Services Agreement, the Investment Manager
compensates DWR's account executives by paying them, from its own funds, a gross
sales credit of 1.0% of the amount sold.
With respect to Class B shares, DWR compensates its account executives by
paying them, from its own funds, commissions for the sale of Class B shares,
currently a gross sales credit of up to 5.0% of the amount sold (except as
provided in the following sentence) and an annual residual commission, currently
a residual of up to 0.25% of the current value (not including reinvested
dividends or distributions) of the amount sold in all cases. In the case of
Class B shares purchased on or after July 28, 1997 by Qualified Retirement Plans
for which DWT serves as Trustee or DWR's Retirement Plan Services serves as
recordkeeper pursuant to a written Recordkeeping Services Agreement, DWR
compensates its account executives by paying them, from its own funds, a gross
sales credit of 3.0% of the amount sold.
With respect to Class C shares, DWR compensates its account executives by
paying them, from its own funds, commissions for the sale of Class C shares,
currently a gross sales credit of up to 1.0% of the
31
<PAGE>
amount sold and an annual residual commission, currently a residual of up to
1.0% of the current value of the respective accounts for which they are the
account executives of record.
With respect to Class D shares other than shares held by participants in
InterCapital's mutual fund asset allocation program, the Investment Manager
compensates DWR's account executives by paying them, from its own funds,
commissions for the sale of Class D shares, currently a gross sales credit of up
to 1.0% of the amount sold. There is a chargeback of 100% of the amount paid if
the Class D shares are redeemed in the first year and a chargeback of 50% of the
amount paid if the Class D shares are redeemed in the second year after
purchase. The Investment Manager also compensates DWR's account executives by
paying them, from its own funds, an annual residual commission, currently a
residual of up to 0.10% of the current value of the respective accounts for
which they are the account executives of record (not including accounts of
participants in the InterCapital mutual fund asset allocation program).
The gross sales credit is a charge which reflects commissions paid by DWR to
its account executives and DWR's Fund associated distribution-related expenses,
including sales compensation, and overhead and other branch office
distribution-related expenses including: (a) the expenses of operating DWR's
branch offices in connection with the sale of Fund shares, including lease
costs, the salaries and employee benefits of operations and sales support
personnel, utility costs, communications costs and the costs of stationery and
supplies; (b) the costs of client sales seminars; (c) travel expenses of mutual
fund sales coordinators to promote the sale of Fund shares; and (d) other
expenses relating to branch promotion of Fund share sales. The distribution fee
that the Distributor receives from the Fund under the Plan, in effect, offsets
distribution expenses incurred on behalf of the Fund and, in the case of Class B
shares, opportunity costs, such as the gross sales credit and an assumed
interest charge thereon ("carrying charge"). In the Distributor's reporting of
its distribution expenses to the Fund, in the case of Class B shares, such
assumed interest (computed at the "broker's call rate") has been calculated on
the gross sales credit as it is reduced by amounts received by the Distributor
under the Plan and any contingent deferred sales charges received by the
Distributor upon redemption of shares of the Fund. No other interest charge is
included as a distribution expense in the Distributor's calculation of its
distribution costs for this purpose. The broker's call rate is the interest rate
charged to securities brokers on loans secured by exchange-listed securities.
The Fund is authorized to reimburse expenses incurred or to be incurred in
promoting the distribution of the Fund's Class A and Class C shares and in
servicing shareholder accounts. Reimbursement will be made through payments at
the end of each month. The amount of each monthly payment may in no event exceed
an amount equal to a payment at the annual rate of 0.25%, in the case of Class
A, and 1.0%, in the case of Class C, of the average net assets of the respective
Class during the month. No interest or other financing charges, if any, incurred
on any distribution expenses on behalf of Class A and Class C will be
reimbursable under the Plan. With respect to Class A, in the case of all
expenses other than expenses representing the service fee, and, with respect to
Class C, in the case of all expenses other than expenses representing a gross
sales credit or a residual to account executives, such amounts shall be
determined at the beginning of each calendar quarter by the Directors, including
a majority of the Independent 12b-1 Directors. Expenses representing the service
fee (for Class A) or a gross sales credit or a residual to account executives
(for Class C) may be reimbursed without prior determination. In the event that
the Distributor proposes that monies shall be reimbursed for other than such
expenses, then in making quarterly determinations of the amounts that may be
reimbursed by the Fund, the Distributor will provide and the Directors will
review a quarterly budget of projected distribution expenses to be incurred on
behalf of the Fund, together with a report explaining the purposes and
anticipated benefits of incurring such expenses. The Directors will determine
which particular expenses, and the portions thereof, that may be borne by the
Fund, and in making such a determination shall consider the scope of the
Distributor's commitment to promoting the distribution of the Fund's Class A and
Class C shares.
Each Class paid 100% of the amounts accrued under the Plan with respect to
that Class for the fiscal year ended October 31, 1997 to the Distributor. The
Distributor and DWR estimate that they have spent,
32
<PAGE>
pursuant to the Plan, $90,165,006 on behalf of Class B since the inception of
the Plan. It is estimated that this amount was spent in approximately the
following ways; (i) 7.81% ($7,042,454) -- advertising and promotional expenses;
(ii) 0.44% ($400,606) -- printing of prospectuses for distribution to other than
current shareholders; and (iii) 91.75% ($82,721,946) -- other expenses,
including the gross sales credit and the carrying charge, of which 7.98%
($6,601,671) represents carrying charges, 36.42% ($30,128,405) represents
commission credits to DWR branch offices for payments of commissions to account
executives and 55.60% ($45,991,870) represents overhead and other branch office
distribution-related expenses. The amounts accrued by Class A and Class C for
distribution during the fiscal period July 28 through October 31, 1997 were for
expenses which relate to compensation of sales personnel and associated overhead
expenses.
In the case of Class B shares, at any given time, the expenses of
distributing shares of the Fund may be more or less than the total of (i) the
payments made by the Fund pursuant to the Plan and (ii) the proceeds of
contingent deferred sales charges paid by investors upon redemption of shares.
The Distributor has advised the Fund that in the case of Class B shares such
excess amount, including the carrying charge designed to approximate the
opportunity costs incurred by DWR which arise from it having advanced monies
without having received the amount of any sales charges imposed at the time of
sale of the Fund's Class B shares, totalled $34,179,807 as of October 31, 1997.
Because there is no requirement under the Plan that the Distributor be
reimbursed for all distribution expenses with respect to Class B shares or any
requirement that the Plan be continued from year to year, this excess amount
does not constitute a liability of the Fund. Although there is no legal
obligation for the Fund to pay expenses in excess of payments made to the
Distributor under the Plan and the proceeds of contingent deferred sales charges
paid by investors upon redemption of shares, if for any reason the Plan is
terminated, the Directors will consider at that time the manner in which to
treat such expenses. Any cumulative expenses incurred, but not yet recovered
through future distribution fees or contingent deferred sales charges, may or
may not be recovered through future distribution fees or contingent deferred
sales charges.
No interested person of the Fund, nor any Director of the Fund who is not an
interested person of the Fund, as defined in the Act, has any direct or indirect
financial interest in the operation of the Plan except to the extent that the
Distributor, InterCapital, DWR, DWSC or certain of its employees may be deemed
to have such an interest as a result of benefits derived from the successful
operation of the Plan or as a result of receiving a portion of the amounts
expended thereunder by the Fund.
Under its terms, the Plan had an initial term ending April 30, 1990, and
provided that it will remain in effect from year to year thereafter, provided
such continuance is approved annually by a vote of the Directors in the manner
described above. Prior of the Board's amendments to the Plan to reflect the
multi-class structure of the Fund, the Plan was most recently submitted to and
approved for continuance by the Directors of the Fund, including a majority of
the Independent 12b-1 Directors, at their meeting held on April 24, 1997, after
evaluating all the information they deemed necessary to make an informed
determination of whether the Plan should be continued. In making their
determination to continue the Plan, the Directors considered: (1) the Fund's
experience under the Plan and whether such experience indicates that the Plan is
operating as anticipated; (2) the benefits the Fund had obtained, was obtaining
and would be likely to obtain under the Plan; and (3) what services had been
provided and were continuing to be provided under the Plan to the Fund and its
shareholders. Based upon their review, the Directors of the Fund, including each
of the Independent 12b-1 Directors, determined that continuation of the Plan
would be in the best interest of the Fund and would have a reasonable likelihood
of continuing to benefit the Fund and its shareholders. In the Directors'
quarterly review of the Plan, they will consider its continued appropriateness
and the level of compensation provided therein.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval of the shareholders of the
affected Class or Classes of the Fund, and all material amendments of the Plan
must also be approved by the Directors in the manner described above. The Plan
may be terminated at any time, without payment of any penalty, by vote of a
majority of the Independent 12b-1 Directors or by a vote of a majority of the
outstanding voting securities of the
33
<PAGE>
Fund (as defined in the Act) on not more than thirty days' written notice to any
other party to the Plan. So long as the Plan is in effect, the election and
nomination of Independent Directors shall be committed to the discretion of the
Independent Directors.
DETERMINATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value per share for each Class of shares of the Fund is
determined once daily at 4:00 p.m., New York time (or, on days when the New York
Stock Exchange closes prior to 4:00 p.m., at such earlier time) on each day that
the New York Stock Exchange is open. The New York Stock Exchange currently
observes the following holidays: New Year's Day, Reverend Dr. Martin Luther
King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
Short-term debt securities with remaining maturities of sixty days or less
at the time of purchase are valued at amortized cost, unless the Directors
determine such does not reflect the securities' fair value, in which case these
securities will be valued at their fair value as determined by the Directors.
Other short-term debt securities will be valued on a mark-to-market basis until
such time as they reach a remaining maturity of 60 days, whereupon they will be
valued at amortized cost using their value on the 61st day unless the Directors
determine such does not reflect the securities' fair value, in which case these
securities will be valued at their fair value as determined by the Directors.
Options are valued at the mean between their latest bid and asked prices.
Futures are valued at the last sale price as of the close of the commodities
exchange on which they trade unless the Directors determine that such price does
not reflect their market value, in which case they will be valued at their fair
value as determined by the Directors. All other securities and other assets are
valued at their fair value as determined in good faith under procedures
established by and under the supervision of the Directors.
Generally, trading in foreign securities, as well as corporate bonds, United
States government securities and money market instruments, is substantially
completed each day at various times prior to 4:00 p.m., New York time. 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 4:00 p.m., New York time. 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 4:00 p.m., New York time, and
will therefore not be reflected in the computation of the Fund's net asset
value. If events that may affect the value of such securities occur during such
period, then these securities may be valued at their fair value as determined in
good faith under procedures established by and under the supervision of the
Directors.
PURCHASE OF FUND SHARES
- --------------------------------------------------------------------------------
As discussed in the Prospectus, the Fund offers four Classes of shares as
follows:
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
Class A shares are sold to investors with an initial sales charge that
declines to zero for larger purchases; however, Class A shares sold without an
initial sales charge are subject to a contingent deferred sales charge ("CDSC")
of 1.0% if redeemed within one year of purchase, except in the circumstances
discussed in the Prospectus.
RIGHT OF ACCUMULATION. As discussed in the Prospectus, investors may
combine the current value of shares purchased in separate transactions for
purposes of benefitting from the reduced sales charges available for purchases
of shares of the Fund totalling at least $25,000 in net asset value. For
example, if any person or entity who qualifies for this privilege holds Class A
shares of the Fund and/or other Dean Witter Funds that are multiple class funds
("Dean Witter Multi-Class Funds") or shares of other Dean Witter Funds sold with
a front-end sales charge purchased at a price including a front-end sales charge
having a current value of $5,000, and purchases $20,000 of additional shares of
the Fund, the sales charge applicable to the $20,000 purchase would be 4.75% of
the offering price.
34
<PAGE>
The Distributor must be notified by the selected broker-dealer or the
shareholder at the time a purchase order is placed that the purchase qualifies
for the reduced charge under the Right of Accumulation. Similar notification
must be made in writing by the selected broker-dealer or shareholder when such
an order is placed by mail. The reduced sales charge will not be granted if: (a)
such notification is not furnished at the time of the order; or (b) a review of
the records of the Distributor or Dean Witter Trust FSB (the "Transfer Agent")
fails to confirm the investor's represented holdings.
LETTER OF INTENT. As discussed in the Prospectus, reduced sales charges are
available to investors who enter into a written Letter of Intent providing for
the purchase, within a thirteen-month period, of Class A shares of the Fund from
the Distributor or from a single Selected Broker-Dealer.
A Letter of Intent permits an investor to establish a total investment goal
to be achieved by any number of purchases over a thirteen-month period. Each
purchase of Class A shares made during the period will receive the reduced sales
commission applicable to the amount represented by the goal, as if it were a
single purchase. A number of shares equal in value to 5% of the dollar amount of
the Letter of Intent will be held in escrow by the Transfer Agent, in the name
of the shareholder. The initial purchase under a Letter of Intent must be equal
to at least 5% of the stated investment goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the investor is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and sales charges actually paid. Such payment may be
made directly to the Distributor or, if not paid, the Distributor is authorized
by the shareholder to liquidate a sufficient number of his or her escrowed
shares to obtain such difference.
If the goal is exceeded and purchases pass the next sales charge level, the
sales charge on the entire amount of the purchase that results in passing that
level and on subsequent purchases will be subject to further reduced sales
charges in the same manner as set forth above under "Right of Accumulation," but
there will be no retroactive reduction of sales charges on previous purchases.
For the purpose of determining whether the investor is entitled to a further
reduced sales charge applicable to purchases at or above a sales charge level
which exceeds the stated goal of a Letter of Intent, the cumulative current net
asset value of any shares owned by the investor in any other Dean Witter Funds
held by the shareholder which were previously purchased at a price including a
front-end sales charge (including shares of the Fund and other Dean Witter Funds
acquired in exchange for those shares, and including in each case shares
acquired through reinvestment of dividends and distributions) will be added to
the cost or net asset value of shares of the Fund owned by the investor.
However, shares of "Exchange Funds" (see "Shareholder Services--Exchange
Privilege") and the purchase of shares of other Dean Witter Funds will not be
included in determining whether the stated goal of a Letter of Intent has been
reached.
At any time while a Letter of Intent is in effect, a shareholder may, by
written notice to the Distributor, increase the amount of the stated goal. In
that event, only shares purchased during the previous 90-day period and still
owned by the shareholder will be included in the new sales charge reduction. The
5% escrow and minimum purchase requirements will be applicable to the new stated
goal. Investors electing to purchase shares of the Fund pursuant to a Letter of
Intent should carefully read such Letter of Intent.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Class B shares are sold without an initial sales charge but are subject to a
CDSC payable upon most redemptions within six years after purchase. As stated in
the Prospectus, a CDSC will be imposed on any redemption by an investor if after
such redemption the current value of the investor's Class B shares of the Fund
is less than the dollar amount of all payments by the shareholder for the
purchase of Class B shares during the preceding six years (or, in the case of
shares held by certain Qualified Retirement Plans, three years). However, no
CDSC will be imposed to the extent that the net asset value of the shares
redeemed does not exceed: (a) the current net asset value of shares purchased
more than six
35
<PAGE>
years (or, in the case of shares held by certain Qualified Retirement Plans,
three years) prior to the redemption, plus (b) the current net asset value of
shares purchased through reinvestment of dividends or distributions of the Fund
or another Dean Witter Fund (see "Shareholder Services--Targeted Dividends"),
plus (c) the current net asset value of shares acquired in exchange for (i)
shares of Dean Witter front-end sales charge funds, or (ii) shares of other Dean
Witter Funds for which shares of front-end sales charge funds have been
exchanged (see "Shareholder Services--Exchange Privilege"), plus (d) increases
in the net asset value of the investor's shares above the total amount of
payments for the purchase of Fund shares made during the preceding six (three)
years. The CDSC will be paid to the Distributor.
In determining the applicability of the CDSC to each redemption, the amount
which represents an increase in the net asset value of the investor's shares
above the amount of the total payments for the purchase of shares within the
last six years (or, in the case of shares held by certain Qualified Retirement
Plans, three years) will be redeemed first. In the event the redemption amount
exceeds such increase in value, the next portion of the amount redeemed will be
the amount which represents the net asset value of the investor's shares
purchased more than six (three) years prior to the redemption and/or shares
purchased through reinvestment of dividends or distributions and/or shares
acquired in exchange for shares of Dean Witter front-end sales charge funds, or
for shares of other Dean Witter funds for which shares of front-end sales charge
funds have been exchanged. A portion of the amount redeemed which exceeds an
amount which represents both such increase in value and the value of shares
purchased more than six years (or, in the case of shares held by certain
Qualified Retirement Plans, three years) prior to the redemption and/or shares
purchased through reinvestment of dividends or distributions and/ or shares
acquired in the above-described exchanges will be subject to a CDSC.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Class B shares of the Fund until
the time of redemption of such shares. For purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments made
during a month will be aggregated and deemed to have been made on the last day
of the month. The following table sets forth the rates of the CDSC applicable to
most Class B shares of the Fund:
<TABLE>
<CAPTION>
CDSC AS A
YEAR SINCE PERCENTAGE
PURCHASE OF AMOUNT
PAYMENT MADE REDEEMED
- ---------------------------------------- ------------
<S> <C>
First................................... 5.0%
Second.................................. 4.0%
Third................................... 3.0%
Fourth.................................. 2.0%
Fifth................................... 2.0%
Sixth................................... 1.0%
Seventh and thereafter.................. None
</TABLE>
The following table sets forth the rates of the CDSC applicable to Class B
shares of the Fund purchased on or after July 28, 1997 by Qualified Retirement
Plans for which DWT serves as Trustee or DWR's Retirement Plan Services serves
as recordkeeper pursuant to a written Recordkeeping Services Agreement:
<TABLE>
<CAPTION>
CDSC AS A
YEAR SINCE PERCENTAGE
PURCHASE OF AMOUNT
PAYMENT MADE REDEEMED
- ---------------------------------------- ------------
<S> <C>
First................................... 2.0%
Second.................................. 2.0%
Third................................... 1.0%
Fourth and thereafter................... None
</TABLE>
In determining the rate of the CDSC, it will be assumed that a redemption is
made of shares held by the investor for the longest period of time within the
applicable six-year or three-year period. This will
36
<PAGE>
result in any such CDSC being imposed at the lowest possible rate. The CDSC will
be imposed, in accordance with the table shown above, on any redemptions within
six years (or, in the case of shares held by certain Qualified Retirement Plans,
three years) of purchase which are in excess of these amounts and which
redemptions do not qualify for waiver of the CDSC, as described in the
Prospectus.
LEVEL LOAD ALTERNATIVE--CLASS C SHARES
Class C shares are sold without a sales charge but are subject to a CDSC of
1.0% on most redemptions made within one year after purchase, except in the
circumstances discussed in the Prospectus.
NO LOAD ALTERNATIVE--CLASS D SHARES
Class D shares are offered without any sales charge on purchase or
redemption. Class D shares are offered only to those persons meeting the
qualifications set forth in the Prospectus.
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
Upon the purchase of shares of the Fund, a Shareholder Investment Account is
opened for the investor on the books of the Fund and maintained by the Transfer
Agent. This is an open account in which shares owned by the investor are
credited by the Transfer Agent in lieu of issuance of a share certificate. If a
share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares and may be redeposited
in the account at any time. There is no charge to the investor for issuance of a
certificate. Whenever a shareholder instituted transaction takes place in the
Shareholder Investment Account, the shareholder will be mailed a confirmation of
the transaction from the Fund or from DWR or other selected broker-dealer.
AUTOMATIC INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. As stated in the
Prospectus, all income dividends and capital gains distributions are
automatically paid in full and fractional shares of the applicable Class of the
Fund, unless the shareholder requests that they be paid in cash. Each purchase
of shares of the Fund is made upon the condition that the Transfer Agent is
thereby automatically appointed as agent of the investor to receive all
dividends and capital gains distributions on shares owned by the investor. Such
dividends and distributions will be paid, at the net asset value per share in
shares of the applicable Class of the Fund (or in cash if the shareholder so
requests) as of the close of business on the record date. At any time an
investor may request the Transfer Agent, in writing, to have subsequent
dividends and/or capital gains distributions paid to him or her in cash rather
than shares. To assure sufficient time to process the change, such request
should be received by the Transfer Agent at least five business days prior to
the record date of the dividend or distribution. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payments will be made to DWR or other selected
broker-dealer, and will be forwarded to the shareholder, upon the receipt of
proper instructions. It has been and remains the Fund's policy and practice
that, if checks for dividends or distributions paid in cash remain uncashed, no
interest will accrue on amounts represented by such uncashed checks.
TARGETED DIVIDENDS-SM-. In states where it is legally permissible,
shareholders may also have all income dividends and capital gains distributions
automatically invested in shares of any Class of an open-end Dean Witter Fund
other than Dean Witter European Growth Fund Inc. or in another Class of Dean
Witter European Growth Fund Inc. Such investment will be made as described above
for automatic investment in shares of the applicable Class of the Fund, at the
net asset value per share of the selected Dean Witter Fund as of the close of
business on the payment date of the dividend or distribution and will begin to
earn dividends, if any, in the selected Dean Witter Fund the next business day.
To participate in the Targeted Dividends program, shareholders should contact
their DWR or other selected broker-dealer account executive or the Transfer
Agent. Shareholders of the Fund must be shareholders of the selected Class of
the Dean Witter Fund targeted to receive investments from dividends at the time
they enter the Targeted Dividends program. Investors should review the
prospectus of the targeted Dean Witter Fund before entering the program.
37
<PAGE>
EASYINVEST-SM-. Shareholders may subscribe to EasyInvest, an automatic
purchase plan which provides for any amount from $100 to $5,000 to be
transferred automatically from a checking or savings account or following
redemption of shares of a Dean Witter money market fund, on a semi-monthly,
monthly or quarterly basis, to the Transfer Agent for investment in shares of
the Fund. Shares purchased through EasyInvest will be added to the shareholder's
existing account at the net asset value calculated the same business day the
transfer of funds is effected (subject to any applicable sales charges). Shares
of the Dean Witter money market funds redeemed in connection with EasyInvest are
redeemed on the business day preceding the transfer of funds. For further
information or to subscribe to EasyInvest, shareholders should contact their DWR
or other selected broker-dealer account executive or the Transfer Agent.
INVESTMENT OF DIVIDENDS OR DISTRIBUTIONS RECEIVED IN CASH. As discussed in
the Prospectus, any shareholder who receives a cash payment representing a
dividend or distribution may invest such dividend or distribution in shares of
the applicable Class at the net asset value next determined after receipt by the
Transfer Agent, without the imposition of a CDSC upon redemption, by returning
the check or the proceeds to the Transfer Agent within 30 days after the payment
date. If the shareholder returns the proceeds of a dividend or distribution,
such funds must be accompanied by a signed statement indicating that the
proceeds constitute a dividend or distribution to be invested. Such investment
will be made at the net asset value per share next determined after receipt of
the check or proceeds by the Transfer Agent.
SYSTEMATIC WITHDRAWAL PLAN. As discussed in the Prospectus, a withdrawal
plan (the "Withdrawal Plan") is available for shareholders who own or purchase
shares of the Fund having a minimum value of $10,000 based upon the then current
net asset value. The Withdrawal Plan provides for monthly or quarterly (March,
June, September and December) checks in any dollar amount, not less than $25, or
in any whole percentage of the account balance, on an annualized basis. Any
applicable CDSC will be imposed on shares redeemed under the Withdrawal Plan
(see "Purchase of Fund Shares"). Therefore, any shareholder participating in the
Withdrawal Plan will have sufficient shares redeemed from his or her account so
that the proceeds (net of any applicable CDSC) to the shareholder will be the
designated monthly or quarterly amount.
The Transfer Agent acts as agent for the shareholder in tendering to the
Fund for redemption sufficient full and fractional shares to provide the amount
of the periodic withdrawal payment designated in the application. The shares
will be redeemed at their net asset value determined, at the shareholder's
option, on the tenth or twenty-fifth day (or next following business day) of the
relevant month or quarter and normally a check for the proceeds will be mailed
by the Transfer Agent within five business days after the date of redemption.
The Withdrawal Plan may be terminated at any time by the Fund.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic Withdrawal Plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted.
Each withdrawal constitutes a redemption of shares and any gain or loss
realized must be recognized for federal income tax purposes. Although the
shareholder may make additional investments of $2,500 or more under the
Withdrawal Plan, withdrawals made concurrently with purchases of additional
shares may be inadvisable because of sales charges which may be applicable to
purchases or redemptions of shares (see "Purchase of Fund Shares").
Any shareholder who wishes to have payments under the Withdrawal Plan made
to a third party or sent to an address other than the one listed on the account
must send complete written instructions to the Transfer Agent to enroll in the
Withdrawal Plan. The shareholder's signature on such instructions must be
guaranteed by a commercial bank or trust company (not a savings bank), or by a
member of a national securities exchange. A shareholder may, at any time, change
the amount and interval of withdrawal payments through his or her Account
Executive or by written notification to the Transfer Agent. In addition, the
party and/or the address to which checks are mailed may be changed by written
notification to the Transfer Agent, with signature guarantees required in the
manner described above.
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The shareholder may also terminate the Withdrawal Plan at any time by written
notice to the Transfer Agent. In the event of such termination, the account will
be continued as a regular shareholder investment account.
DIRECT INVESTMENTS THROUGH TRANSFER AGENT. As discussed in the Prospectus,
a shareholders may make additional investments in any Class of shares of the
Fund for which they qualify at any time by sending a check in any amount, not
less than $100, payable to Dean Witter European Growth Fund Inc., and indicating
the selected Class, directly to the Fund's Transfer Agent. In the case of Class
A shares, after deduction of any applicable sales charge, the balance will be
applied to the purchase of Fund shares, and, in the case of shares of the other
Classes, the entire amount will be applied to the purchase of Fund shares, at
the net asset value per share next computed after receipt of the check or
purchase payment by the Transfer Agent. The shares so purchased will be credited
to the investor's account.
EXCHANGE PRIVILEGE
As discussed in the Prospectus, the Fund makes available to its shareholders
an Exchange Privilege whereby shareholders of each Class of shares of the Fund
may exchange their shares for shares of the same Class of shares of any other
Dean Witter Multi-Class Fund without the imposition of any exchange fee. Shares
may also be exchanged for shares of any of the following funds: Dean Witter
Short-Term U.S. Treasury Trust, Dean Witter Limited Term Municipal Trust, Dean
Witter Short-Term Bond Fund, Dean Witter Intermediate Term U.S. Treasury Trust
and five Dean Witter Funds which are money market funds (the foregoing nine
non-CDSC funds are referred to hereinafter as "Exchange Funds"). Class A shares
may also be exchanged for shares of Dean Witter Multi-State Municipal Series
Trust and Dean Witter Hawaii Municipal Trust, which are Dean Witter Funds sold
with a front-end sales charge ("FSC Funds"). Class B shares may also be
exchanged for shares of Dean Witter Global Short-Term Income Fund Inc. ("Global
Short-Term"), which is a Dean Witter Fund offered with a CDSC. Exchanges may be
made after the shares of the Fund acquired by purchase (not by exchange or
dividend reinvestment) have been held for thirty days. There is no waiting
period for exchanges of shares acquired by exchange or dividend reinvestment. An
exchange will be treated for federal income tax purposes the same as a
repurchase or redemption of shares, on which the shareholder may realize a
capital gain or loss.
Any new account established through the Exchange Privilege will have the
same registration and cash dividend or dividend reinvestment plan as the present
account, unless the Transfer Agent receives written notification to the
contrary. For telephone exchanges, the exact registration of the existing
account and the account number must be provided.
Any shares held in certificate form cannot be exchanged but must be
forwarded to the Transfer Agent and deposited into the shareholder's account
before being eligible for exchange. (Certificates mailed in for deposit should
not be endorsed.)
As described below, and in the Prospectus under the caption "Purchase of
Fund Shares," a CDSC may be imposed upon a redemption, depending on a number of
factors, including the number of years from the time of purchase until the time
of redemption or exchange ("holding period"). When shares of a Dean Witter
Multi-Class Fund or Global Short-Term are exchanged for shares of an Exchange
Fund, the exchange is executed at no charge to the shareholder without the
imposition of the CDSC at the time of the exchange. During the period of time
the shareholder remains in the Exchange Fund (calculated from the last day of
the month in which the Exchange Fund shares were acquired), the holding period
or "year since purchase payment made" is frozen. When shares are redeemed out of
the Exchange Fund, they will be subject to a CDSC which would be based upon the
period of time the shareholder held shares in a Dean Witter Multi-Class Fund or
in Global Short-Term. However, in the case of shares exchanged for shares of an
Exchange Fund on or after April 23, 1990, upon a redemption of shares which
results in a CDSC being imposed, a credit (not to exceed the amount of the CDSC)
will be given in an amount equal to the Exchange Fund 12b-1 distribution fees
incurred on or after that date which are attributable to those shares.
Shareholders acquiring shares of the Exchange Fund pursuant to this exchange
privilege may exchange those shares back into a Dean Witter Multi-Class Fund or
Global Short-Term from the money
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market fund, with no CDSC being imposed on such exchange. The investment period
previously frozen when shares were first exchanged for shares of the Exchange
Fund resumes on the last day of the month in which shares of a Dean Witter
Multi-Class Fund or of Global Short-Term are reacquired. A CDSC is imposed only
upon an ultimate redemption, based upon the time (calculated as described above)
the shareholder was invested in a Dean Witter Multi-Class Fund or in Global
Short-Term. In the case of exchanges of Class A shares which are subject to a
CDSC, the holding period also includes the time (calculated as described above)
the shareholder was invested in a FSC Fund.
When shares initially purchased in a Dean Witter Multi-Class Fund or in
Global Short-Term are exchanged for shares of a Dean Witter Multi-Class Fund,
shares of Global Short-Term, shares of a FSC Fund, or for shares of an Exchange
Fund, the date of purchase of the shares of the fund exchanged into, for
purposes of the CDSC upon redemption, will be the last day of the month in which
the shares being exchanged were originally purchased. In allocating the purchase
payments between funds for purposes of the CDSC, the amount which represents the
current net asset value of shares at the time of the exchange which were (i)
purchased more than one, three or six years (depending on the CDSC schedule
applicable to the shares) prior to the exchange, (ii) originally acquired
through reinvestment of dividends or distributions and (iii) acquired in
exchange for shares of FSC Funds, or for shares of other Dean Witter Funds for
which shares of FSC Funds have been exchanged (all such shares called "Free
Shares"), will be exchanged first. Shares of Dean Witter Strategist Fund
acquired prior to November 8, 1989, shares of Dean Witter American Value Fund
acquired prior to April 30, 1984, and shares of Dean Witter Dividend Growth
Securities Inc. and Dean Witter Natural Resource Development Securities Inc.
acquired prior to July 2, 1984, will be the first Free Shares to be exchanged.
After an exchange, all dividends earned on shares in an Exchange Fund will be
considered Free Shares. If the exchanged amount exceeds the value of such Free
Shares, an exchange is made, on a block-by-block basis, of non-Free Shares held
for the longest period of time (except that, with respect to Class B shares, if
shares held for identical periods of time but subject to different CDSC
schedules are held in the same Exchange Privilege account, the shares of that
block that are subject to a lower CDSC rate will be exchanged prior to the
shares of that block that are subject to a higher CDSC rate). Shares equal to
any appreciation in the value of non-Free Shares exchanged will be treated as
Free Shares, and the amount of the purchase payments for the non-Free Shares of
the fund exchanged into will be equal to the lesser of (a) the purchase payments
for, or (b) the current net asset value of, the exchanged non-Free Shares. If an
exchange between funds would result in exchange of only part of a particular
block of non-Free Shares, then shares equal to any appreciation in the value of
the block (up to the amount of the exchange) will be treated as Free Shares and
exchanged first, and the purchase payment for that block will be allocated on a
pro-rata basis between the non-Free Shares of that block to be retained and the
non-Free Shares to be exchanged. The prorated amount of such purchase payment
attributable to the retained non-Free Shares will remain as the purchase payment
for such shares, and the amount of purchase payment for the exchanged non-Free
Shares will be equal to the lesser of (a) the prorated amount of the purchase
payment for, or (b) the current net asset value of, those exchanged non-Free
Shares. Based upon the procedures described in the Prospectus under the caption
"Purchase of Fund Shares," any applicable CDSC will be imposed upon the ultimate
redemption of shares of any fund, regardless of the number of exchanges since
those shares were originally purchased.
With respect to the redemption or repurchase of shares of the Fund, the
application of proceeds to the purchase of new shares in the Fund or any other
of the funds and the general administration of the Exchange Privilege, the
Transfer Agent acts as agent for the Distributor and for the shareholder's
selected broker-dealer, if any, in the performance of such functions. With
respect to exchanges, redemptions or repurchases, the Transfer Agent shall be
liable for its own negligence and not for the default or negligence of its
correspondents or for losses in transit. The Fund shall not be liable for any
default or negligence of the Transfer Agent, the Distributor or any selected
broker-dealer.
The Distributor and any selected broker-dealer have authorized and appointed
the Transfer Agent to act as their agent in connection with the application of
proceeds of any redemption of Fund shares to the purchase of shares of any other
fund and the general administration of the Exchange Privilege. No
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commission or discounts will be paid to the Distributor or any selected
broker-dealer for any transactions pursuant to this Exchange Privilege.
Exchanges are subject to the minimum investment requirement and any other
conditions imposed by each fund. (The minimum initial investment for the
Exchange Privilege account of each Class is $5,000 for Dean Witter Liquid Asset
Fund Inc., Dean Witter New York Municipal Money Market Trust, Dean Witter
Tax-Free Daily Income Trust and Dean Witter California Tax-Free Daily Income
Trust although those funds may, at their discretion, accept initial investments
of as low as $1,000. The minimum initial investment for the Exchange Privilege
account of each Class is $10,000 for Dean Witter Short-Term U.S. Treasury Trust,
although that fund, in its discretion, may accept initial purchases of as low as
$5,000. The minimum investment for the Exchange Privilege account of each Class
is $5,000 for Dean Witter Special Value Fund. The minimum initial investment for
the Exchange Privilege account of each Class for all other Dean Witter Funds for
which the Exchange Privilege is available is $1,000.) Upon exchange into an
Exchange Fund, the shares of that fund will be held in a special Exchange
Privilege Account separately from accounts of those shareholders who have
acquired their shares directly from that fund. As a result, certain services
normally available to shareholders of money market funds, including the check
writing feature, will not be available for funds held in that account.
The Fund and each of the other Dean Witter Funds may limit the number of
times this Exchange Privilege may be exercised by any investor within a
specified period of time. Also, the Exchange Privilege may be terminated or
revised at any time by the Fund and/or any of the Dean Witter Funds for which
shares of the Fund have been exchanged, upon such notice as may be required by
applicable regulatory agencies (presently sixty days for termination or material
revision), provided that six months' prior written notice of termination will be
given to the shareholders who hold shares of Exchange Funds, pursuant to the
Exchange Privilege, and provided further that the Exchange Privilege may be
terminated or materially revised without notice at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on that Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, (d) during any other period when the Securities and
Exchange Commission by order so permits (provided that applicable rules and
regulations of the Securities and Exchange Commission shall govern as to whether
the conditions prescribed in (b) or (c) exist) or (e) if the Fund would be
unable to invest amounts effectively in accordance with its investment
objective(s), policies and restrictions.
For further information regarding the Exchange Privilege, shareholders
should contact their DWR or other selected broker-dealer account executive or
the Transfer Agent.
REDEMPTIONS AND REPURCHASES
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REDEMPTION. As stated in the Prospectus, shares of each Class of the Fund
can be redeemed for cash at any time at the net asset value per share next
determined; however, such redemption proceeds will be reduced by the amount of
any applicable CDSC. If shares are held in a shareholder's account without a
share certificate, a written request for redemption to the Fund's Transfer Agent
at P.O. Box 983, Jersey City, NJ 07303 is required. If certificates are held by
the shareholder, the shares may be redeemed by surrendering the certificates
with a written request for redemption. The share certificate, or an accompanying
stock power, and the request for redemption, must be signed by the shareholder
or shareholders exactly as the shares are registered. Each request for
redemption, whether or not accompanied by a share certificate, must be sent to
the Fund's Transfer Agent, which will redeem the shares at their net asset value
next computed (see "Purchase of Fund Shares") after it receives the request, and
certificate, if any, in good order. Any redemption request received after such
computation will be redeemed at the next determined net asset value. The term
"good order" means that the share certificate, if any, and request for
redemption are properly signed, accompanied by any documentation required by the
Transfer Agent, and bear signature guarantees when required by the Fund or the
Transfer Agent. If redemption is requested by a corporation, partnership, trust
or fiduciary, the Transfer
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Agent may require that written evidence of authority acceptable to the Transfer
Agent be submitted before such request is accepted.
Whether certificates are held by the shareholder or shares are held in a
shareholder's account, if the proceeds are to be paid to any person other than
the record owner, or if the proceeds are to be paid to a corporation (other than
the Distributor or a selected broker-dealer for the account of the shareholder),
partnership, trust or fiduciary, or sent to the shareholder at an address other
than the registered address, signatures must be guaranteed by an eligible
guarantor acceptable to the Transfer Agent (shareholders should contact the
Transfer Agent for a determination as to whether a particular institution is
such an eligible guarantor). A stock power may be obtained from any dealer or
commercial bank. The Fund may change the signature guarantee requirements from
time to time upon notice to shareholders, which may be by means of a supplement
to the prospectus or a new prospectus.
REPURCHASE. As stated in the Prospectus, DWR and other selected
broker-dealers are authorized to repurchase shares represented by a share
certificate which is delivered to any of their offices. Shares held in a
shareholder's account without a share certificate may also be repurchased by DWR
and other selected broker-dealers upon the telephonic request of the
shareholder. The repurchase price is the net asset value next computed after
such purchase order is received by DWR or other selected broker-dealer reduced
by any applicable CDSC.
PAYMENT FOR SHARES REDEEMED OR REPURCHASED. As discussed in the Prospectus,
payment for shares of any Class presented for repurchase or redemption will be
made by check within seven days after receipt by the Transfer Agent of the
certificate and/or written request in good order. Such payment may be postponed
or the right of redemption suspended at times (a) when the New York Stock
Exchange is closed for other than customary weekends and holidays, (b) when
trading on that Exchange is restricted, (c) when an emergency exists as a result
of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the Securities
and Exchange Commission by order so permits; provided that applicable rules and
regulations of the Securities and Exchange Commission shall govern as to whether
the conditions prescribed in (b) or (c) exist. If the shares to be redeemed have
recently been purchased by check (including a certified or bank cashier's
check), payment of the redemption proceeds may be delayed for the minimum time
needed to verify that the check used for investment has been honored (not more
than fifteen days from the time of receipt of the check by the Transfer Agent).
It has been and remains the Fund's policy and practice that, if checks for
redemption proceeds remain uncashed, no interest will accrue on amounts
represented by such uncashed checks. Shareholders maintaining margin accounts
with DWR or another selected broker-dealer are referred to their account
executive regarding restrictions on redemption of shares of the Fund pledged in
the margin account.
TRANSFERS OF SHARES. In the event a shareholder requests a transfer of any
shares to a new registration, such shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the CDSC or free of such charge (and with regard to the length
of time shares subject to the charge have been held), any transfer involving
less than all of the shares in an account will be made on a pro rata basis (that
is, by transferring shares in the same proportion that the transferred shares
bear to the total shares in the account immediately prior to the transfer). The
transferred shares will continue to be subject to any applicable CDSC as if they
had not been so transferred.
REINSTATEMENT PRIVILEGE. As discussed in the Prospectus, a shareholder who
has had his or her shares redeemed or repurchased and has not previously
exercised this reinstatement privilege may within 35 days after the date of
redemption or repurchase reinstate any portion or all of the proceeds of such
redemption or repurchase in shares of the Fund in the same Class at the net
asset value next determined after a reinstatement request, together with such
proceeds, is received by the Transfer Agent.
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Exercise of the reinstatement privilege will not affect the federal income
tax treatment of any gain or loss realized upon the redemption or repurchase,
except that if the redemption or repurchase resulted in a loss and reinstatement
is made in shares of the Fund, some or all of the loss, depending on the amount
reinstated, will not be allowed as a deduction for federal income tax purposes,
but will be applied to adjust the cost basis of the shares acquired upon
reinstatement.
DIVIDENDS, DISTRIBUTIONS AND TAXES
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As discussed in the Prospectus, the Fund will determine either to distribute
or to retain all or part of any net long-term capital gains in any year for
reinvestment. If any such gains are retained, the Fund will pay federal income
tax thereon, and, if the Fund makes an election, the shareholders would include
such undistributed gains in their income and shareholders will be able to claim
their share of the tax paid by the Fund as a credit against their individual
federal income tax.
Gains or losses on sales of securities by the Fund will generally be
long-term capital gains or losses if the securities have been held by the Fund
for more than twelve months. Gains or losses on the sale of securities held for
twelve months or less will be generally short-term gains or losses.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder has
held the Fund's shares and regardless of whether the distribution is received in
additional shares or in cash. Capital gains distributions are not eligible for
the dividends received deduction. Treasury intends to issue regulations to
permit shareholders to take into account their proportionate share of the Fund's
capital gains distributions that will be subject to a reduced rate under the
Taxpayer Relief Act of 1997. The Taxpayer Relief Act reduces the maximum tax on
long-term capital gains from 28% to 20%; however, it also lengthens the required
holding period to obtain the lower rate from more than 12 months to more than 18
months. The lower rates do not apply to collectibles and certian other assets.
Additionally, the maximum capital gain rate for assets that are held more than
five years and that are acquired after December 31, 2000 is 18%.
The Fund intends to remain qualified as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986 (the "Code"). As such, the
Fund will not be subject to federal income tax on its net investment income and
capital gains, if any, realized during any fiscal year in which it distributes
such income and capital gains to its shareholders. In addition, the Fund intends
to distribute to its shareholders each calendar year a sufficient amount of
ordinary income and capital gains to avoid the imposition of a 4% excise tax.
Shareholders will normally have to pay federal income taxes, and any state
and/or local income taxes, on the dividends and distributions they receive from
the Fund. Such dividends and distributions, to the extent that they are derived
from net investment income or short-term capital gains, are taxable to the
shareholder as ordinary income regardless of whether the shareholder receives
such payments in additional shares or in cash. Any dividends declared in the
last quarter of any calendar year which are paid in the following year prior to
February 1 will be deemed received by the shareholder in the prior year.
Any dividend or capital gains distribution received by a shareholder from
any investment company will have the effect of reducing the net asset value of
the shareholder's stock in that company by the exact amount of the dividend or
capital gains distribution. Furthermore, capital gains distributions and
dividends are subject to federal income taxes. If the net asset value of the
shares should be reduced below a shareholder's cost as a result of the payment
of dividends or the distribution of realized net long-term capital gains, such
payment or distribution would be in part a return of the shareholder's
investment to the extent of such reduction below the shareholder's cost, but
nonetheless would be fully taxable. Therefore, an investor should consider the
tax implications of purchasing Fund shares immediately prior to a distribution
record date.
Any loss realized by shareholders upon a redemption of shares within six
months of the date of their purchase will be treated as a long-term capital loss
to the extent of any distributions of net long-term capital gains during the
six-month period.
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Dividends, interest and capital gains received by the Fund may give rise to
withhholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. Investors may be entitled to claim United States foreign tax credits with
respect to such taxes, subject to certain provisions and limitations contained
in the Code. If more than 50% of the Fund's total assets at the close of its
fiscal year consist of securities of foreign corporations, the Fund would be
eligible and would determine whether or not to file an election with the
Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their respective pro rata portions of such withholding taxes
in their United States income tax returns as gross income, treat such respective
pro rata portions as taxes paid by them, and deduct such respective pro rata
portions in computing their taxable income or, alternatively, use them as
foreign tax credits against their United States income taxes. If the Fund does
elect to file the election with the Internal Revenue Service, the Fund will
report annually to its shareholders the amount per share of such withholding.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS. In general, gains
from foreign currencies and from foreign currency options, foreign currency
futures and forward foreign exchange contracts relating to investments in stock,
securities or foreign currencies are currently considered to be qualifying
income for purposes of determining whether the Fund qualifies as a regulated
investment company. It is currently unclear, however, who will be treated as the
issuer of certain foreign currency instruments or how foreign currency options,
futures, or forward foreign currency contracts will be valued for purposes of
the regulated investment company diversification requirements applicable to the
Fund.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (I.E.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from forward contracts, from futures
contracts that are not "regulated futures contracts", and from unlisted options
will be treated as ordinary income or loss under Code Section 988. Also, certain
foreign exchange gains or losses derived with respect to foreign fixed-income
securities are also subject to Section 988 treatment. In general, therefore,
Code Section 988 gains or losses will increase or decrease the amount of the
Fund's investment company taxable income available to be distributed to
shareholders as ordinary income, rather than increasing or decreasing the amount
of the Fund's net capital gain. Additionally, if Code Section 988 losses exceed
other investment company taxable income during a taxable year, the Fund would
not be able to make any ordinary dividend distributions.
The Fund may be subject to taxes in foreign countries in which it invests.
In addition, if the Fund were deemed to be a resident of the United Kingdom for
United Kingdom tax purposes or if the Fund were treated as being engaged in a
trading activity through an agent in the United Kingdom, there is a risk that
the United Kingdom would attempt to tax all or a portion of the Fund's gains or
income. In light of the structure of the Fund and the terms and conditions of
the Investment Management and Sub-Advisory Agreements, it is believed that any
such risk is minimal.
If the Fund invests in an entity which is classified as a "passive foreign
investment company" ("PFIC") for U.S. tax purposes, the application of certain
technical tax provisions applying to such companies could result in the
imposition of federal income tax with respect to such investments at the Fund
level which could not be eliminated by distributions to shareholders. The
Taxpayer Relief Act of 1997 establishes a mark-to-market regime which allows
taxpayers investing in PFIC's to avoid most, if not all of the difficulties
posed by the PFIC rules. In any event, it is not anticipated that any taxes on
the Fund with respect to investments in PFIC's would be significant.
Shareholders are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, state or local taxes.
PERFORMANCE INFORMATION
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As discussed in the Prospectus, from time to time the Fund may quote its
"total return" in advertisements and sales literature. These figures are
computed for Class A, Class B, Class C, and Class D
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shares. The Fund's "average annual total return" represents an annualization of
the Fund's total return over a particular period and is computed by finding the
annual percentage rate which will result in the ending redeemable value of a
hypothetical $1,000 investment made at the beginning of a one, five or ten year
period, or for the period from the date of commencement of the Fund's
operations, if shorter than any of the foregoing. The ending redeemable value is
reduced by any CDSC at the end of the one, five or ten year or other period. For
the purpose of this calculation, it is assumed that all dividends and
distributions are reinvested. The formula for computing the average annual total
return involves a percentage obtained by dividing the ending redeemable value by
the amount of the initial investment, 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 of Class B for the one year and
five year period ended October 31, 1997 and the period from June 1, 1990
(commencement of operations) through October 31, 1997 were 14.40%, 22.12% and
13.14%, respectively.
For periods of less than one year, the Fund quotes its total return on a
non-annualized basis. Accordingly, the Fund may compute its aggregate total
return for each of Class A, Class C and Class D 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 by the initial $1,000
investment and subtracting 1 from the result. The ending redeemable value is
reduced by any CDSC at the end of the period. Based on the foregoing
calculations, the total returns for the period July 28, 1997 through October 31,
1997 were -6.16%, -2.12% and -0.91% for Class A, Class C and Class D,
respectively.
In addition to the foregoing, the Fund may advertise its total return for
each Class over different periods of time by means of aggregate, average,
year-by-year or other types of total return figures. Such calculations may or
may not reflect the imposition of the maximum front-end sales charge for Class A
or the deduction of the CDSC for each of Class B and Class C which, if
reflected, would reduce the performance quoted. For example, the average annual
total return of the Fund may be calculated in the manner described above, but
without deduction for any applicable sales charge. Based on this calculation,
the average annual total returns of Class B for the one year and five year
period ended October 31, 1997 and the period from June 1, 1990 (commencement of
operations) through October 31, 1997 were 19.40%, 22.30% and 13.14%,
respectively.
In addition, the Fund may compute its aggregate total return for each Class
for specified periods by determining the aggregate percentage rate which will
result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is assumed that
all dividends and distributions are reinvested. The formula for computing
aggregate total return involves a percentage obtained by dividing the ending
value (without the reduction for any sales charge) by the initial $1,000
investment and subtracting 1 from the result. Based on the foregoing
calculation, the total returns for Class B for the one year and five year period
ended October 31, 1997 and the period from June 1, 1990 (commencement of
operations) through October 31, 1997 were 19.40%, 173.59% and 149.76%,
respectively. Based on the foregoing calculations, the total returns for Class
A, Class C and Class D for the period July 28 through October 31, 1997 were
- -0.97%, -1.13% and -0.91%, respectively.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in each class of shares of the Fund by adding 1 to
the Fund's aggregate total return to date (expressed as a decimal and without
taking into account the effect of any applicable CDSC) and multiplying by
$9,475, $48,000 and $97,000 in the case of Class A (investments of $10,000,
$50,000 and $100,000 adjusted for the initial sales charge) or by $10,000,
$50,000 and $100,000 in the case of each of Class B, Class C and Class D, as the
case may be. Investments of $10,000, $50,000 and $100,000 in
45
<PAGE>
each Class at inception of the Class would have grown (or declined) to the
following amounts at October 31, 1997:
<TABLE>
<CAPTION>
INVESTMENT AT INCEPTION OF
INCEPTION -----------------------------------
CLASS DATE: $10,000 $50,000 $100,000
- ------------------------------------------------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Class A................................................ 7/28/97 $ 9,384 $ 47,534 $ 96,059
Class B................................................ 6/01/90 24,976 124,880 249,760
Class C................................................ 7/28/97 9,887 49,435 98,870
Class D................................................ 7/28/97 9,909 49,545 99,090
</TABLE>
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent organizations.
DESCRIPTION OF COMMON STOCK
- --------------------------------------------------------------------------------
The Fund is authorized to issue 2,000,000,000 shares of common stock of
$0.01 par value. Shares of the Fund, when issued, are fully paid,
non-assessable, fully transferable and redeemable at the option of the holder.
All shares are equal as to earnings, assets and voting privileges. There are no
conversion, preemptive or other subscription rights. In the event of
liquidation, each share of common stock of the Fund is entitled to its portion
of all of the Fund's assets after all debts and expenses have been paid. Except
for agreements entered into by the Fund in its ordinary course of business
within the limitations of the Fund's fundamental investment policies (which may
be modified only by shareholder vote), the Fund will not issue any securities
other than common stock.
The shares of the Fund do not have cumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors if they choose to do so, and in such
event, the holders of the remaining less than 50% of the shares voting for the
election of directors will not be able to elect any person or persons to the
Board of Directors.
The Fund's By-Laws provide that one or more of the Fund's Directors may be
removed, either with or without cause, at any time by the affirmative vote of
the Fund's shareholders holding a majority of the outstanding shares entitled to
vote for the election of Directors. A special meeting of the shareholders of the
Fund will be called by the Fund's Secretary upon the written request of
shareholders entitled to vote at least 25% of the Fund's outstanding shares.
CUSTODIAN AND TRANSFER AGENT
- --------------------------------------------------------------------------------
The Chase Manhattan Bank, One Chase Plaza, New York, New York 10005 is the
Custodian of the Fund's assets in the United States and around the world. As
Custodian, The Chase Manhattan Bank has contracted with various foreign banks
and depositaries to hold portfolio securities of non-U.S. issuers on behalf of
the Fund. Any of the Fund's cash balances with the Custodian in excess of
$100,000 are unprotected by federal deposit insurance. Such balances may, at
times, be substantial.
Dean Witter Trust FSB, Harborside Financial Center, Plaza Two, Jersey City,
New Jersey 07311 is the Transfer Agent of the Fund's shares and Dividend
Disbursing Agent for payment of dividends and distributions on Fund shares and
Agent for shareholders under various investment plans described herein. Dean
Witter Trust FSB is an affiliate of Dean Witter InterCapital Inc., the Fund's
Investment Manager and Dean Witter Distributors Inc., the Fund's Distributor. As
Transfer Agent and Dividend Disbursing Agent, Dean Witter Trust FSB's
responsibilities include maintaining shareholder accounts, disbursing cash
dividends and reinvesting dividends, processing account registration changes,
handling purchase and redemption transactions, mailing prospectuses and reports,
mailing and tabulating proxies, processing share certificate transactions, and
maintaining shareholder records and lists. For these services Dean Witter Trust
FSB receives a per shareholder account fee.
46
<PAGE>
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
Price Waterhouse LLP serves as the independent accountants of the Fund. The
independent accountants are responsible for auditing the annual financial
statements of the Fund.
REPORTS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports showing
the Fund's portfolio and other information. An annual report containing
financial statements audited by independent accountants will be sent to
shareholders each year.
The Fund's fiscal year ends on October 31. The financial statements of the
Fund must be audited at least once a year by independent accountants whose
selection is made annually by the Fund's Board of Directors.
LEGAL COUNSEL
- --------------------------------------------------------------------------------
Barry Fink, Esq., who is an officer and the General Counsel of the
Investment Manager, is an officer and the General Counsel of the Fund.
EXPERTS
- --------------------------------------------------------------------------------
The financial statements of the Fund for the fiscal year ended October 31,
1997 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 Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
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 Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
47
<PAGE>
DEAN WITTER EUROPEAN GROWTH FUND INC.
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON AND PREFERRED STOCKS (96.8%)
DENMARK (2.3%)
PHARMACEUTICALS
195,300 Novo-Nordisk AS (Series B).......................................................... $ 21,123,162
--------------
TRANSPORTATION
150,375 Kobenhavns Lufthavne AS............................................................. 17,982,234
--------------
TOTAL DENMARK....................................................................... 39,105,396
--------------
FINLAND (1.7%)
INSURANCE
223,558 Pohjola Insurance Co. "B"........................................................... 8,548,568
--------------
PAPER PRODUCTS
920,200 UPM-Kymmene Oy...................................................................... 20,454,813
--------------
TOTAL FINLAND....................................................................... 29,003,381
--------------
FRANCE (14.1%)
BANKING
298,931 Banque Nationale De Paris........................................................... 13,201,837
223,559 Credit Commercial de France......................................................... 12,653,114
--------------
25,854,951
--------------
ELECTRICAL EQUIPMENT
219,400 Alcatel Alsthom..................................................................... 26,446,553
--------------
ELECTRONICS - SEMICONDUCTORS
286,900 SGS-Thomson Microelectronics N.V.*.................................................. 20,397,030
--------------
FINANCIAL SERVICES
81,969 Cetelem............................................................................. 9,085,584
--------------
FOOD, BEVERAGE, TOBACCO & HOUSEHOLD PRODUCTS
174,610 Societe BIC S.A..................................................................... 11,932,994
--------------
INSURANCE
454,100 AXA-UAP............................................................................. 31,065,033
--------------
LEISURE
114,900 Accor S.A........................................................................... 21,372,116
110,000 Canal Plus.......................................................................... 19,127,122
--------------
40,499,238
--------------
OIL RELATED
197,400 Elf Aquitaine S.A................................................................... 24,410,045
192,000 Total S.A. (B Shares)............................................................... 21,281,607
--------------
45,691,652
--------------
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
PHARMACEUTICALS
89,000 Sanofi S.A.......................................................................... $ 8,446,831
--------------
STEEL & IRON
591,000 Usinor Sacilor...................................................................... 9,774,939
--------------
TIRE & RUBBER GOODS
241,914 Michelin (C.G.D.E.) Class "B"....................................................... 12,397,359
--------------
TOTAL FRANCE........................................................................ 241,592,164
--------------
GERMANY (6.2%)
APPAREL
5,457 Hugo Boss AG (Pref.)................................................................ 6,896,383
--------------
AUTOMOTIVE
22,724 Bayerische Motoren Werke (BMW) AG................................................... 16,427,147
--------------
CHEMICALS
536,000 Hoechst AG.......................................................................... 20,383,536
--------------
HEALTH & PERSONAL CARE
452 Rhoen-Klinikum AG................................................................... 43,235
534 Rhoen-Klinikum AG (Pref.)........................................................... 50,459
--------------
93,694
--------------
STEEL & IRON
130,715 SGL Carbon AG....................................................................... 18,337,988
92,515 Thyssen AG.......................................................................... 20,406,932
--------------
38,744,920
--------------
UTILITIES
410,600 Veba AG............................................................................. 22,874,585
--------------
TOTAL GERMANY....................................................................... 105,420,265
--------------
ITALY (4.8%)
HOUSEHOLD FURNISHINGS & APPLIANCES
408,000 Industrie Natuzzi SpA (ADR)......................................................... 9,129,000
--------------
OIL & GAS PRODUCTS
2,825,500 Ente Nazionale Idrocarburi SpA...................................................... 15,891,601
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
48
<PAGE>
DEAN WITTER EUROPEAN GROWTH FUND INC.
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
TELECOMMUNICATIONS
6,034,050 Telecom Italia Mobile SpA........................................................... $ 22,387,415
5,500,750 Telecom Italia SpA.................................................................. 34,480,432
--------------
56,867,847
--------------
TOTAL ITALY......................................................................... 81,888,448
--------------
NETHERLANDS (13.7%)
CHEMICALS
140,615 Akzo Nobel NV....................................................................... 24,745,057
--------------
ELECTRICAL EQUIPMENT
497,150 Philips Electronics NV.............................................................. 38,871,811
--------------
INSURANCE
298,056 Aegon NV............................................................................ 23,458,111
621,502 ING Groep NV........................................................................ 26,055,768
--------------
49,513,879
--------------
MEDIA
435,000 PolyGram NV......................................................................... 24,703,704
--------------
PUBLISHING
1,115,000 Ver Ned Uitgev Ver Bezit NV......................................................... 26,383,745
204,230 Wolters Kluwer NV................................................................... 25,045,490
--------------
51,429,235
--------------
RETAIL
847,515 Koninklijke Ahold NV................................................................ 21,667,436
--------------
SEMICONDUCTOR EQUIPMENT
169,000 ASM Lithography Holding NV*......................................................... 12,257,716
--------------
STEEL & IRON
269,986 Koninklijke Hoogovens NV............................................................ 12,360,470
--------------
TOTAL NETHERLANDS................................................................... 235,549,308
--------------
SPAIN (4.0%)
BANKS
876,503 Banco Bilbao Vizcaya S.A............................................................ 23,398,275
438,408 Banco Popular Espanol S.A........................................................... 25,843,568
--------------
49,241,843
--------------
TELECOMMUNICATIONS
686,291 Telefonica de Espana................................................................ 18,697,333
--------------
TOTAL SPAIN......................................................................... 67,939,176
--------------
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
SWEDEN (7.9%)
BUSINESS SERVICES
759,650 Securitas AB
(Series "B" Free)................................................................. $ 20,247,884
--------------
INSURANCE
696,992 Scandia Forsakrings AB.............................................................. 32,511,122
--------------
MULTI-INDUSTRY
550,000 Assa Abloy AB (Series B)............................................................ 12,534,151
--------------
PHARMACEUTICALS
920,000 Astra AB (B Shares)................................................................. 14,222,696
513,100 Astra AB (Series "A" Free).......................................................... 8,274,152
--------------
22,496,848
--------------
RETAIL
279,685 Hennes & Mauritz AB (B Shares)...................................................... 11,424,462
--------------
TELECOMMUNICATION EQUIPMENT
826,730 Ericsson (L.M.) Telephone Co. AB (Series "B" Free).................................. 36,359,152
--------------
TOTAL SWEDEN........................................................................ 135,573,619
--------------
SWITZERLAND (7.5%)
FOODS & BEVERAGES
13,685 Nestle S.A.......................................................................... 19,299,861
--------------
MULTI-INDUSTRY
17,187 ABB AG - Bearer..................................................................... 22,420,497
--------------
PHARMACEUTICALS
22,281 Novartis AG......................................................................... 34,926,542
6,000 Novartis AG - Bearer................................................................ 9,469,621
3,877 Roche Holdings AG................................................................... 34,100,418
--------------
78,496,581
--------------
TRANSPORTATION
6,800 Sairgroup*.......................................................................... 9,123,374
--------------
TOTAL SWITZERLAND................................................................... 129,340,313
--------------
UNITED KINGDOM (34.6%)
AEROSPACE & DEFENSE
572,222 British Aerospace PLC............................................................... 15,144,920
3,550,000 Rolls-Royce PLC*.................................................................... 12,709,781
498,000 Smiths Industries PLC............................................................... 7,206,782
--------------
35,061,483
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
49
<PAGE>
DEAN WITTER EUROPEAN GROWTH FUND INC.
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
AUTOMOTIVE
2,096,910 BBA Group PLC....................................................................... $ 14,102,684
--------------
BANKING
1,553,000 Abbey National PLC.................................................................. 24,630,642
728,000 Barclays Bank PLC................................................................... 18,183,904
94,124 HSBC Holdings PLC................................................................... 2,338,421
925,000 Lloyds TSB Group PLC................................................................ 11,529,061
635,060 Northern Rock PLC*.................................................................. 5,099,786
--------------
61,781,814
--------------
BREWERS
815,000 Scottish & Newcastle Breweries PLC.................................................. 9,196,774
828,042 Vaux Group PLC...................................................................... 3,324,754
--------------
12,521,528
--------------
BROADCAST MEDIA
761,274 Flextech PLC*....................................................................... 7,450,627
--------------
BUILDING & CONSTRUCTION
1,626,000 Blue Circle Industries PLC.......................................................... 9,521,043
2,249,000 Redland PLC......................................................................... 12,868,013
--------------
22,389,056
--------------
BUSINESS SERVICES
905,000 Reuters Holdings PLC................................................................ 9,796,001
--------------
CHEMICALS
1,326,000 Albright & Wilson PLC............................................................... 3,604,897
--------------
COMPUTER SOFTWARE & SERVICES
1,000,000 Sage Group (The) PLC................................................................ 12,045,600
--------------
COMPUTERS
568,090 SEMA Group PLC...................................................................... 12,726,051
--------------
CONGLOMERATES
1,871,857 BTR PLC............................................................................. 6,302,379
2,020,000 Tomkins PLC......................................................................... 10,341,148
--------------
16,643,527
--------------
ELECTRICAL EQUIPMENT
1,481,818 BICC Group (The) PLC................................................................ 4,115,275
979,000 General Electric Co. PLC............................................................ 6,236,179
--------------
10,351,454
--------------
FOOD PROCESSING
950,000 Associated British Foods PLC........................................................ 7,628,880
--------------
FOOD, BEVERAGE, TOBACCO & HOUSEHOLD PRODUCTS
684,600 Grand Metropolitan PLC.............................................................. 6,161,907
900,000 Guinness PLC........................................................................ 8,025,381
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
836,000 Tate & Lyle PLC..................................................................... $ 6,356,764
--------------
20,544,052
--------------
FOREST PRODUCTS, PAPER & PACKING
489,000 De La Rue PLC....................................................................... 3,460,550
--------------
HEALTH & PERSONAL CARE
4,008,000 London International Group PLC...................................................... 10,259,238
--------------
INSURANCE
319,000 Britannic Assurance PLC............................................................. 5,062,021
619,884 Commercial Union PLC................................................................ 8,711,354
1,519,800 Prudential Corp. PLC................................................................ 16,171,098
1,526,246 Royal & Sun Alliance Insurance Group PLC............................................ 14,592,736
--------------
44,537,209
--------------
LEISURE
777,000 Granada Group PLC................................................................... 10,685,351
2,445,000 Ladbroke Group PLC.................................................................. 10,921,595
2,338,000 Rank Group PLC...................................................................... 13,025,208
--------------
34,632,154
--------------
NATURAL GAS
1,904,110 BG PLC*............................................................................. 8,346,209
--------------
OIL RELATED
3,630,000 Lasmo PLC........................................................................... 16,700,722
5,664,000 Shell Transport & Trading Co. PLC................................................... 40,059,249
--------------
56,759,971
--------------
PHARMACEUTICALS
959,620 British Biotech PLC*................................................................ 1,669,662
1,529,325 Glaxo Wellcome PLC.................................................................. 32,698,406
1,351,823 SmithKline Beecham PLC.............................................................. 12,778,039
--------------
47,146,107
--------------
PUBLISHING
911,000 United News & Media PLC............................................................. 11,430,772
--------------
REAL ESTATE
1,000,000 Hammerson PLC....................................................................... 8,080,590
--------------
RETAIL
685,000 Great Universal Stores PLC.......................................................... 8,096,525
2,211,000 Morrison (W.M.) Supermarkets PLC.................................................... 7,287,036
1,030,000 Next PLC............................................................................ 12,234,649
803,194 Tesco PLC........................................................................... 6,412,344
--------------
34,030,554
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
50
<PAGE>
DEAN WITTER EUROPEAN GROWTH FUND INC.
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
RETAIL - DEPARTMENT STORES
914,000 Kingfisher PLC...................................................................... $ 13,119,867
--------------
RETAIL - MERCHANDISING
1,258,000 Vendome Luxury Group PLC (Units)++.................................................. 7,639,821
--------------
TELECOMMUNICATIONS
3,798,000 British Telecommunications PLC...................................................... 28,783,865
2,099,000 General Cable PLC*.................................................................. 4,284,185
1,776,330 Securicor PLC....................................................................... 8,009,001
820,000 Vodafone Group PLC.................................................................. 4,458,545
--------------
45,535,596
--------------
TRANSPORTATION
1,032,800 British Airways PLC................................................................. 10,056,229
--------------
UTILITIES - ELECTRIC
1,293,000 National Power PLC.................................................................. 10,751,049
--------------
TOTAL UNITED KINGDOM................................................................ 592,433,570
--------------
TOTAL COMMON AND PREFERRED STOCKS
(IDENTIFIED COST $1,294,119,006).................................................... 1,657,845,640
--------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (a) (1.0%)
U.S. GOVERNMENT AGENCY
$ 17,000 Federal Home Loan Mortgage Corp. 5.65% due 11/03/97 (AMORTIZED COST $16,994,664)..... $ 16,994,664
--------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $1,311,113,670) (B).................................................... 97.8 % 1,674,840,304
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES.......................................... 2.2 37,389,240
------ ---------------
NET ASSETS.............................................................................. 100.0 % $ 1,712,229,544
------ ---------------
------ ---------------
</TABLE>
- ---------------------
ADR American Depository Receipt.
* Non-income producing security.
++ Consists of more than one class of securities traded together as a unit;
stocks with attached warrants.
(a) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $403,550,792 and the
aggregate gross unrealized depreciation is $39,824,158, resulting in net
unrealized appreciation of $363,726,634.
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT OCTOBER 31, 1997:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS TO IN DELIVERY APPRECIATION
RECEIVE EXCHANGE FOR DATE (DEPRECIATION)
- ----------------------------------------------------
<S> <C> <C> <C>
GBP 172,288 $ 287,893 11/03/97 $ 345
$ 3,307,933 DEM 5,692,292 11/04/97 $8,054
FIM 7,691,000 $ 1,486,614 11/04/97 ($1,292)
GBP 1,738,761 $ 2,896,480 11/04/97 1$2,466
$ 259,017 SEK 1,942,914 11/04/97 $ 83
-------
Net unrealized
appreciation........................ 1$9,656
-------
-------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
51
<PAGE>
DEAN WITTER EUROPEAN GROWTH FUND INC.
SUMMARY OF INVESTMENTS OCTOBER 31, 1997
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Aerospace & Defense............................................................. $ 35,061,483 2.0 %
Apparel......................................................................... 6,896,383 0.4
Automotive...................................................................... 30,529,831 1.8
Banking......................................................................... 87,636,765 5.1
Banks........................................................................... 49,241,843 2.9
Brewers......................................................................... 12,521,528 0.7
Broadcast Media................................................................. 7,450,627 0.4
Building & Construction......................................................... 22,389,056 1.3
Business Services............................................................... 30,043,885 1.8
Chemicals....................................................................... 48,733,490 2.8
Computer Software & Services.................................................... 12,045,600 0.7
Computers....................................................................... 12,726,051 0.7
Conglomerates................................................................... 16,643,527 1.0
Electrical Equipment............................................................ 75,669,818 4.4
Electronics - Semiconductors.................................................... 20,397,030 1.2
Financial Services.............................................................. 9,085,584 0.5
Food Processing................................................................. 7,628,880 0.5
Food, Beverage, Tobacco & Household Products.................................... 32,477,046 1.9
Foods & Beverages............................................................... 19,299,861 1.1
Forest Products, Paper & Packing................................................ 3,460,550 0.2
Health & Personal Care.......................................................... 10,352,932 0.6
Household Furnishings & Appliances.............................................. 9,129,000 0.5
Insurance....................................................................... 166,175,811 9.7
Leisure......................................................................... 75,131,392 4.4
Media........................................................................... 24,703,704 1.5
Multi-Industry.................................................................. 34,954,648 2.0
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Natural Gas..................................................................... $ 8,346,209 0.5 %
Oil & Gas Products.............................................................. 15,891,601 0.9
Oil Related..................................................................... 102,451,623 6.0
Paper Products.................................................................. 20,454,813 1.2
Pharmaceuticals................................................................. 177,709,529 10.4
Publishing...................................................................... 62,860,007 3.7
Real Estate..................................................................... 8,080,590 0.5
Retail.......................................................................... 67,122,452 4.0
Retail - Department Stores...................................................... 13,119,867 0.8
Retail - Merchandising.......................................................... 7,639,821 0.5
Semiconductor Equipment......................................................... 12,257,716 0.7
Steel & Iron.................................................................... 60,880,329 3.5
Telecommunication Equipment..................................................... 36,359,152 2.1
Telecommunications.............................................................. 121,100,776 7.1
Tire & Rubber Goods............................................................. 12,397,359 0.7
Transportation.................................................................. 37,161,837 2.2
U.S. Government Agency.......................................................... 16,994,664 1.0
Utilities....................................................................... 22,874,585 1.3
Utilities - Electric............................................................ 10,751,049 0.6
-------------- -----
$1,674,840,304 97.8 %
-------------- -----
-------------- -----
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
TYPE OF INVESTMENT VALUE NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Common Stocks................................................................... $1,650,898,798 96.4 %
Preferred Stocks................................................................ 6,946,842 0.4
Short-Term Investments.......................................................... 16,994,664 1.0
-------------- -----
$1,674,840,304 97.8 %
-------------- -----
-------------- -----
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
52
<PAGE>
DEAN WITTER EUROPEAN GROWTH FUND INC.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $1,311,113,670).......................................................... $1,674,840,304
Cash (including $1,204,232 in foreign currency)............................................. 2,061,597
Receivable for:
Investments sold........................................................................ 40,295,758
Capital stock sold...................................................................... 4,319,844
Foreign withholding taxes reclaimed..................................................... 3,324,008
Dividends............................................................................... 2,446,190
Prepaid expenses and other assets........................................................... 147,212
--------------
TOTAL ASSETS........................................................................... 1,727,434,913
--------------
LIABILITIES:
Payable for:
Investments purchased................................................................... 10,146,253
Capital stock repurchased............................................................... 1,695,292
Investment management fee............................................................... 1,472,814
Plan of distribution fee................................................................ 1,317,493
Accrued expenses and other payables......................................................... 573,517
--------------
TOTAL LIABILITIES...................................................................... 15,205,369
--------------
NET ASSETS............................................................................. $1,712,229,544
--------------
--------------
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................. $1,187,357,588
Net unrealized appreciation................................................................. 363,905,991
Accumulated undistributed net investment income............................................. 14,361,039
Accumulated undistributed net realized gain................................................. 146,604,926
--------------
NET ASSETS............................................................................. $1,712,229,544
--------------
--------------
CLASS A SHARES:
Net Assets.................................................................................. $1,862,434
Shares Outstanding (500,000,000 authorized, $.01 par value)................................. 100,883
NET ASSET VALUE PER SHARE.............................................................. $18.46
--------------
--------------
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE)............................... $19.48
--------------
--------------
CLASS B SHARES:
Net Assets.................................................................................. $1,707,433,455
Shares Outstanding (500,000,000 authorized, $.01 par value)................................. 92,665,249
NET ASSET VALUE PER SHARE.............................................................. $18.43
--------------
--------------
CLASS C SHARES:
Net Assets.................................................................................. $2,888,969
Shares Outstanding (500,000,000 authorized, $.01 par value)................................. 156,779
NET ASSET VALUE PER SHARE.............................................................. $18.43
--------------
--------------
CLASS D SHARES:
Net Assets.................................................................................. $44,686
Shares Outstanding (500,000,000 authorized, $.01 par value)................................. 2,419
NET ASSET VALUE PER SHARE.............................................................. $18.47
--------------
--------------
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1997*
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INCOME
Dividends (net of $5,733,956 foreign withholding tax)......................................... $ 33,003,757
Interest...................................................................................... 2,676,462
------------
TOTAL INCOME............................................................................. 35,680,219
------------
EXPENSES
Investment management fee..................................................................... 15,130,951
Plan of distribution fee (Class A shares)..................................................... 678
Plan of distribution fee (Class B shares)..................................................... 13,514,335
Plan of distribution fee (Class C shares)..................................................... 4,641
Transfer agent fees and expenses.............................................................. 1,779,397
Custodian fees................................................................................ 1,249,937
Professional fees............................................................................. 201,870
Registration fees............................................................................. 168,133
Shareholder reports and notices............................................................... 139,751
Directors' fees and expenses.................................................................. 15,444
Other......................................................................................... 26,225
------------
TOTAL EXPENSES........................................................................... 32,231,362
------------
NET INVESTMENT INCOME.................................................................... 3,448,857
------------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain on:
Investments............................................................................... 156,158,183
Foreign exchange transactions............................................................. 7,713,210
------------
NET GAIN................................................................................. 163,871,393
------------
Net change in unrealized appreciation on:
Investments............................................................................... 93,587,684
Translation of forward foreign currency contracts, other assets and liabilities
denominated in foreign currencies....................................................... 1,635,677
------------
NET APPRECIATION......................................................................... 95,223,361
------------
NET GAIN................................................................................. 259,094,754
------------
NET INCREASE.................................................................................. $262,543,611
------------
------------
</TABLE>
- ---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
53
<PAGE>
DEAN WITTER EUROPEAN GROWTH FUND INC.
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31,1997* OCTOBER 31, 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................................... $ 3,448,857 $ 1,415,101
Net realized gain....................................................... 163,871,393 98,442,961
Net change in unrealized appreciation................................... 95,223,361 106,832,263
---------------- ----------------
NET INCREASE....................................................... 262,543,611 206,690,325
---------------- ----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class B shares........................................................ (8,287,857) --
Net realized gain
Class B shares........................................................ (97,160,987) (44,251,712)
---------------- ----------------
TOTAL DIVIDENDS AND DISTRIBUTIONS.................................. (105,448,844) (44,251,712)
---------------- ----------------
Net increase from capital stock transactions............................ 327,284,817 197,680,851
---------------- ----------------
NET INCREASE....................................................... 484,379,584 360,119,464
---------------- ----------------
NET ASSETS:
Beginning of period..................................................... 1,227,849,960 867,730,496
---------------- ----------------
END OF PERIOD
(INCLUDING AN ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF
$14,361,039 AND $1,933,547, RESPECTIVELY)........................... $ 1,712,229,544 $ 1,227,849,960
---------------- ----------------
---------------- ----------------
</TABLE>
- ---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
54
<PAGE>
DEAN WITTER EUROPEAN GROWTH FUND INC.
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1997
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter European Growth Fund Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is to
maximize the capital appreciation of its investments. The Fund was incorporated
in Maryland on February 13, 1990 and commenced operations on May 31, 1990. On
July 28, 1997, the Fund commenced offering three classes of shares, with the
then current shares designated as Class B shares.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase, some Class
A shares, and most Class B shares and Class C shares are subject to a contingent
deferred sales charge imposed on shares redeemed within one year, six years and
one year, respectively. Class D shares are not subject to a sales charge.
Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price (in
cases where securities are traded on more than one exchange; the securities are
valued on the exchange designated as the primary market pursuant to procedures
adopted by the Directors); (2) listed options 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 are valued at the mean between
their latest bid and asked price; (3) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest available bid price prior to the time of valuation; (4) when market
quotations are not readily available, including circumstances under which it is
determined by Dean Witter InterCapital Inc. (the "Investment Manager") or Morgan
Grenfell Investment Services Limited (the "Sub-Adviser") that sale and 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 Directors (valuation of
debt securities for which market quotations are not readily available may be
based upon current
55
<PAGE>
DEAN WITTER EUROPEAN GROWTH FUND INC.
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1997, CONTINUED
market prices of securities which are comparable in coupon, rating and maturity
or an appropriate matrix utilizing similar factors); and (5) short-term debt
securities having a maturity date of more than sixty days at time of purchase
are valued on a mark-to-market basis until sixty days prior to maturity and
thereafter at amortized cost based on their value on the 61st day. Short-term
debt securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date
except for certain dividends on foreign securities which are recorded as soon as
the Fund is informed after the ex-dividend date. Discounts are accreted over the
life of the respective securities. Interest income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. OPTION ACCOUNTING PRINCIPLES -- When the Fund writes a call option, an amount
equal to the premium received is included in the Fund's Statement of Assets and
Liabilities as a liability which is subsequently marked-to-market to reflect the
current market value of the option written. If a written option either expires
or the Fund enters into a closing purchase transaction, the Fund realizes a gain
or loss without regard to any unrealized gain or loss on the underlying security
or currency and the liability related to such option is extinguished. If a
written call option is exercised, the Fund realizes a gain or loss from the sale
of the underlying security or currency and the proceeds from such sale are
increased by the premium originally received.
When the Fund purchases a call or put option, the premium paid is recorded as an
investment and is subsequently marked-to-market to reflect the current market
value. If a purchased option expires, the Fund will realize a loss to the extent
of the premium paid. If the Fund enters into a closing sale transaction, a gain
or loss is realized for the difference between the proceeds from the sale and
the cost of the option. If a put option is exercised, the cost of the security
or currency sold upon exercise will be increased by the premium originally paid.
If a call option is exercised, the cost of the security purchased upon exercise
will be increased by the premium originally paid.
56
<PAGE>
DEAN WITTER EUROPEAN GROWTH FUND INC.
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1997, CONTINUED
E. FOREIGN CURRENCY TRANSLATION -- The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, other assets and liabilities and forward foreign currency
contracts are translated at the exchange rates prevailing at the end of the
period; and (2) purchases, sales, income and expenses are translated at the
exchange rates prevailing on the respective dates of such transactions. The
resultant exchange gains and losses are included in the Statement of Operations.
Pursuant to U.S. Federal income tax regulations, certain foreign exchange
gains/losses included in realized and unrealized gain/loss are included in or
are a reduction of ordinary income for federal income tax purposes. The Fund
does not isolate that portion of the results of operations arising as a result
of changes in the foreign exchange rates from the changes in the market prices
of the securities.
F. FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may enter into forward foreign
currency contracts which are valued daily at the appropriate exchange rates. The
resultant unrealized exchange gains and losses are included in the Statement of
Operations as unrealized gain/loss on foreign exchange transactions. The Fund
records realized gains or losses on delivery of the currency or at the time the
forward contract is extinguished (compensated) by entering into a closing
transaction prior to delivery.
G. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
57
<PAGE>
DEAN WITTER EUROPEAN GROWTH FUND INC.
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1997, CONTINUED
2. INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
following annual rates to the net assets of the Fund determined as of the close
of each business day: 1.0% of the portion of net assets not exceeding $500
million and 0.95% to the portion of daily net assets exceeding $500 million.
Effective May 1, 1997, the Agreement was amended to reduce the annual rate to
0.90% of the portion of daily net assets in excess of $2 billion.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
Under a Sub-Advisory Agreement between the Sub-Adviser and the Investment
Manager, the Sub-Adviser provides the Fund with investment advice and portfolio
management relating to the Fund's investments in securities, subject to the
overall supervision of the Investment Manager. As compensation for its services
provided pursuant to the Sub-Advisory Agreement, the Investment Manager pays the
Sub-Adviser compensation equal to 40% of its monthly compensation.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Fund has adopted a
Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan
provides that the Fund will pay the Distributor a fee which is accrued daily and
paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the
average daily net assets of Class A; (ii) Class B -- 1.0% of the lesser of: (a)
the average daily aggregate gross sales of the Class B shares since inception of
the Fund (not including reinvestment of dividends or capital gain distributions)
less the average net asset value of the Class B shares redeemed since the Fund's
inception upon which a contingent deferred sales charge has been imposed or
waived; or (b) the average daily net assets of Class B; and (iii) Class C -- up
to 1.0% of the average daily net assets of Class C. In the case of Class A
shares, amounts paid under the Plan are paid to the Distributor for services
provided. In the case of Class B and Class C shares, amounts paid under the Plan
are paid to the Distributor for services provided and the expenses borne by it
and others in the distribution of the shares of these Classes, including the
payment of commissions
58
<PAGE>
DEAN WITTER EUROPEAN GROWTH FUND INC.
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1997, CONTINUED
for sales of these Classes and incentive compensation to, and expenses of, the
account executives of Dean Witter Reynolds Inc. ("DWR"), an affiliate of the
Investment Manager and Distributor, and others who engage in or support
distribution of the shares or who service shareholder accounts, including
overhead and telephone expenses; printing and distribution of prospectuses and
reports used in connection with the offering of these shares to other than
current shareholders; and preparation, printing and distribution of sales
literature and advertising materials. In addition, the Distributor may utilize
fees paid pursuant to the Plan, in the case of Class B shares, to compensate DWR
and other selected broker-dealers for their opportunity costs in advancing such
amounts, which compensation would be in the form of a carrying charge on any
unreimbursed expenses.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts, including
carrying charges, totaled $34,179,807 at October 31, 1997.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to account executives may be reimbursed in the subsequent
calendar year. For the period ended October 31, 1997, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.25% and
1.0%, respectively.
The Distributor has informed the Fund that for the year ended October 31, 1997,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $1,853,492 and $440, respectively,
and received approximately $34,000 in front-end sales charges from sales of the
Fund's Class A shares. The respective shareholders pay such charges which are
not an expense of the Fund.
59
<PAGE>
DEAN WITTER EUROPEAN GROWTH FUND INC.
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1997, CONTINUED
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended October 31, 1997 aggregated
$873,504,950 and $662,190,848, respectively.
For the period May 31, 1997 through October 31, 1997, the Fund incurred
brokerage commissions of $21,602 with Morgan Stanley & Co., Inc., an affiliate
of the Investment Manager since May 31, 1997, for portfolio transactions
executed on behalf of the Fund. At October 31, 1997, the Fund's payable for
investments purchased included unsettled trades with Morgan Stanley & Co., Inc.,
of $3,576,164.
Dean Witter Trust FSB, an affiliate of the Investment Manager and Distributor,
is the Fund's transfer agent. At October 31, 1997, the Fund had transfer agent
fees and expenses payable of approximately $100.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Directors of the Fund who will have served as independent
Directors for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended October 31, 1997 included
in Directors' fees and expenses in the Statement of Operations amounted to
$1,925. At October 31, 1997, the Fund had an accrued pension liability of
$47,077 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. FEDERAL INCOME TAX STATUS
As of October 31, 1997, the Fund had temporary book/tax differences primarily
attributable to income from the mark-to-market of passive foreign investment
companies ("PFICs") and permanent book/tax differences attributable to tax
adjustments on PFICs sold by the Fund and foreign currency gains. To reflect
reclassifications arising from the permanent differences, accumulated
undistributed net realized gain was charged and accumulated undistributed net
investment income was credited $17,266,492.
6. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward foreign currency contracts ("forward contracts")
to facilitate settlement of foreign currency denominated portfolio transactions
or to manage foreign currency exposure associated with foreign currency
denominated securities.
60
<PAGE>
DEAN WITTER EUROPEAN GROWTH FUND INC.
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1997, CONTINUED
Forward contracts involve elements of market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the foreign exchange rates underlying the forward
contracts. Risks may also arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
At October 31, 1997, there were outstanding forward contracts used to facilitate
settlement of foreign currency denominated portfolio transactions.
At October 31, 1997, investments in securities of issuers in the United Kingdom
represented 34.6% of the Fund's net assets. These investments, which involve
risks and considerations not present with respect to U.S. securities, may be
affected by economic or political developments in this region.
7. CAPITAL STOCK
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
CLASS A SHARES*
Sold............................................................. 102,145 $ 1,884,214 -- --
Redeemed......................................................... (1,262) (23,880) -- --
----------- -------------- ----------- ------------
Net increase -- Class A.......................................... 100,883 1,860,334 -- --
----------- -------------- ----------- ------------
CLASS B SHARES
Sold............................................................. 42,082,583 738,349,917 24,444,448 $371,386,556
Reinvestment of dividends and distributions...................... 6,087,300 98,796,887 3,030,461 41,577,920
Redeemed......................................................... (28,751,620) (514,693,020) (14,340,465) (215,283,625)
----------- -------------- ----------- ------------
Net increase -- Class B.......................................... 19,418,263 322,453,784 13,134,444 197,680,851
----------- -------------- ----------- ------------
CLASS C SHARES*
Sold............................................................. 168,016 3,136,766 -- --
Redeemed......................................................... (11,237) (210,091) -- --
----------- -------------- ----------- ------------
Net increase -- Class C.......................................... 156,779 2,926,675 -- --
----------- -------------- ----------- ------------
CLASS D SHARES*
Sold............................................................. 2,419 44,024 -- --
Redeemed......................................................... -- -- -- --
----------- -------------- ----------- ------------
Net increase -- Class D.......................................... 2,419 44,024 -- --
----------- -------------- ----------- ------------
Net increase in Fund............................................. 19,678,344 $ 327,284,817 13,134,444 $197,680,851
----------- -------------- ----------- ------------
----------- -------------- ----------- ------------
<FN>
- ---------------------
* For the period July 28, 1997 (issue date) through October 31, 1997.
</TABLE>
61
<PAGE>
DEAN WITTER EUROPEAN GROWTH FUND INC.
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of capital stock outstanding
throughout each period:
<TABLE>
<CAPTION>
FOR THE
PERIOD
MAY 31,
1990*
FOR THE YEAR ENDED OCTOBER 31 THROUGH
------------------------------------------------------------------------------ OCTOBER
1997**++ 1996 1995 1994 1993 1992 1991 31, 1990
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 16.76 $ 14.44 $ 13.49 $ 11.86 $ 8.57 $ 9.22 $ 9.23 $ 10.00
---------- --------- --------- ---------- --------- ----- --------- ----------
Net investment income
(loss).................. 0.04 0.02 0.02 0.02 (0.01) 0.01 0.05 0.05
Net realized and
unrealized gain
(loss).................. 3.02 3.03 2.00 1.84 3.30 (0.23) 0.07 (0.82)
---------- --------- --------- ---------- --------- ----- --------- ----------
Total from investment
operations.............. 3.06 3.05 2.02 1.86 3.29 (0.22) 0.12 (0.77)
---------- --------- --------- ---------- --------- ----- --------- ----------
Less dividends and
distributions from:
Net investment
income................ (0.11) -- -- -- -- (0.03) (0.07) --
Net realized gain..... (1.28) (0.73) (1.07) (0.23) -- (0.40) (0.06) --
---------- --------- --------- ---------- --------- ----- --------- ----------
Total dividends and
distributions........... (1.39) (0.73) (1.07) (0.23) -- (0.43) (0.13) --
---------- --------- --------- ---------- --------- ----- --------- ----------
Net asset value, end of
period.................. $ 18.43 $ 16.76 $ 14.44 $ 13.49 $ 11.86 $ 8.57 $ 9.22 $ 9.23
---------- --------- --------- ---------- --------- ----- --------- ----------
---------- --------- --------- ---------- --------- ----- --------- ----------
TOTAL INVESTMENT
RETURN+.................. 19.40% 22.27% 16.83% 15.61% 38.74% (2.39)% 1.33% (7.70)%(1)
RATIOS TO AVERAGE NET
ASSETS:
Expenses................. 2.06%(3) 2.13% 2.23% 2.27% 2.38% 2.40% 2.44% 2.45%(2)
Net investment income
(loss).................. 0.22% 0.14% 0.13% 0.21% (0.09)% 0.11% 0.51% 1.52%(2)
SUPPLEMENTAL DATA:
Net assets, end of
period, in millions $1,707 $1,228 $868 $759 $459 $297 $316 $304
Portfolio turnover
rate.................... 44% 49% 61% 72% 120% 116% 111% 36%(1)
Average commission rate
paid.................... $0.0559 $0.0448 -- -- -- -- -- --
<FN>
- ---------------------
* Commencement of operations.
** Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date have been designated Class B shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Revised from annual report.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
62
<PAGE>
DEAN WITTER EUROPEAN GROWTH FUND INC.
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
OCTOBER 31,
1997++
- ----------------------------------------------------------------------------------------
<S> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 18.64
------
Net investment loss................................................... (0.02)
Net realized and unrealized loss...................................... (0.16)
------
Total from investment operations...................................... (0.18)
------
Net asset value, end of period........................................ $ 18.46
------
------
TOTAL INVESTMENT RETURN+.............................................. (0.97)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.48% (2)(3)
Net investment loss................................................... (0.33)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $ 1,862
Portfolio turnover rate............................................... 44%
Average commission rate paid.......................................... $0.0559
</TABLE>
<TABLE>
<S> <C>
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 18.64
------
Net investment loss................................................... (0.04)
Net realized and unrealized loss...................................... (0.17)
------
Total from investment operations...................................... (0.21)
------
Net asset value, end of period........................................ $ 18.43
------
------
TOTAL INVESTMENT RETURN+.............................................. (1.13)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 2.24% (2)(3)
Net investment loss................................................... (0.76)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $ 2,889
Portfolio turnover rate............................................... 44%
Average commission rate paid.......................................... $0.0559
<FN>
- ---------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Revised from annual report.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
63
<PAGE>
DEAN WITTER EUROPEAN GROWTH FUND INC.
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
OCTOBER 31,
1997++
- ----------------------------------------------------------------------------------------
<S> <C>
CLASS D SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 18.64
------
Net investment income................................................. 0.02
Net realized and unrealized loss...................................... (0.19)
------
Total from investment operations...................................... (0.17)
------
Net asset value, end of period........................................ $ 18.47
------
------
TOTAL INVESTMENT RETURN+.............................................. (0.91)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.23% (2)(3)
Net investment income................................................. 0.33% (2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $45
Portfolio turnover rate............................................... 44%
Average commission rate paid.......................................... $0.0559
<FN>
- ---------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Revised from annual report.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
64
<PAGE>
DEAN WITTER EUROPEAN GROWTH FUND INC.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF DEAN WITTER EUROPEAN GROWTH FUND INC.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dean Witter European Growth Fund
Inc. (the "Fund") at October 31, 1997, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 1997 by correspondence with the custodian and brokers, and the application
of alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
DECEMBER 17, 1997
1997 FEDERAL TAX NOTICE (UNAUDITED)
During the year ended October 31, 1997, the Fund paid to
shareholders $1.28 per share from long-term capital gains. For the
year ended October 31, 1997, the Fund has elected, pursuant to
Section 853 of the Internal Revenue Code, to pass through foreign
taxes of $0.04 per share. The Fund generated net foreign source
income of $0.06 per share with respect to this election.
65
