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PROSPECTUS
JANUARY 29, 1998
Dean Witter Capital Appreciation Fund (the "Fund") is an open-end,
diversified management investment company whose investment objective is
long-term capital appreciation. The Fund seeks to meet its investment objective
by investing primarily in the common stocks of U.S. companies that, in the
opinion of the Investment Manager, offer the potential for either superior
earnings growth and/or appear to be undervalued. Current income is not an
objective of the Fund. (See "Investment Objective and Policies.")
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/9
Risk Considerations/11
Investment Restrictions/17
Purchase of Fund Shares/18
Shareholder Services/29
Redemptions and Repurchases/32
Dividends, Distributions and Taxes/33
Performance Information/34
Additional Information/34
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
Capital Appreciation Fund
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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The The Fund is organized as a Trust, commonly known as a Massachusetts business trust, and is an open-end,
Fund diversified management investment company. The Fund invests primarily in the common stocks of U.S. companies
that, in the opinion of the Investment Manager, offer the potential for either superior earnings growth and/or
appear to be undervalued. Current income is not an objective of the Fund.
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Shares Offered Shares of beneficial interest with $.01 par value (see page 34). The Fund offers four Classes of shares, each
with a different combination of sales charges, ongoing fees and other features (see pages 18-28).
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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 18).
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Investment The investment objective of the Fund is long-term capital appreciation (see page 9).
Objective
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Investment Dean Witter InterCapital Inc., the Investment Manager of the Fund, and its wholly-owned subsidiary, Dean Witter
Manager Services Company Inc., serve in various investment management, advisory, management and administrative
capacities to 103 investment companies and other portfolios with net assets under management of approximately
$102.9 billion at December 31, 1997 (see page 9).
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Management The Investment Manager receives a monthly fee at the annual rate of 0.75% of the portion of daily net assets not
Fee exceeding $500 million; and 0.725% of the portion of daily net assets exceeding $500 million (see page 9).
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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 18 and 27).
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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 18, 21 and 27).
- 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
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2
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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 18, 23 and 27).
- 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 18, 26 and 27).
- 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 18, 26 and 27).
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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 32).
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Dividends and Dividends from net investment income are paid quarterly and distributions from net capital gains, if any, are
Capital Gains paid at least annually. The Fund may, however, determine to retain all or part of any net long-term capital
Distributions gains in any year 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 29 and 33).
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Risks The net asset value of the Fund's shares will fluctuate with changes in the market value of its portfolio
securities. The market value of the Fund's portfolio securities will increase or decrease due to a variety of
economic, market or political factors which cannot be predicted. The Fund is intended for long-term investors
who can accept the risks involved in seeking long-term capital appreciation through the investment primarily in
the securities of companies that offer the potential for either superior earnings growth and/or appear to be
undervalued. In selecting investments for the Fund, the Investment Manager has no general criteria as to a
company's asset size, earnings or industry type. It should be recognized that investing in such companies
involves greater risk than is customarily associated with investing in more established companies. The Fund may
invest in the securities of foreign issuers which entails additional risks. The Fund may also invest in futures
and options which may be considered speculative in nature and may involve greater risks than those customarily
assumed by other investment companies which do not invest in such instruments. An investment in shares of the
Fund should not be considered a complete investment program and is not appropriate for all investors. Investors
should carefully consider their ability to assume these risks and the risks outlined under the heading "Risk
Considerations," before making an investment in the Fund (see pages 11-16).
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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
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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 November 30, 1997.
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<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................................................................. 0.75% 0.75% 0.75% 0.75%
12b-1 Fees (5) (6).............................................................. 0.25% 1.00% 1.00% None
Other Expenses.................................................................. 0.25% 0.25% 0.25% 0.25%
Total Fund Operating Expenses (7)............................................... 1.25% 2.00% 2.00% 1.00%
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(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 UPON THE SUM OF 12B-1 FEES,
MANAGEMENT FEES AND ESTIMATED "OTHER EXPENSES."
4
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3 5 10
EXAMPLES 1 Year Years Years 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....................................... $65 $90 $118 $196
Class B....................................... $70 $93 $128 $233
Class C....................................... $30 $63 $108 $233
Class D....................................... $10 $32 $55 $123
You would pay the following expenses on the same
$1,000 investment assuming no redemption at the
end of the period:
Class A....................................... $65 $90 $118 $196
Class B....................................... $20 $63 $108 $233
Class C....................................... $20 $63 $108 $233
Class D....................................... $10 $32 $55 $123
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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
"The Fund and its Management," "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
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FINANCIAL HIGHLIGHTS
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The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by Price Waterhouse LLP,
independent accountants. The financial highlights 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 to the Fund.
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<CAPTION>
FOR THE YEAR ENDED FOR THE PERIOD
NOVEMBER 30, OCTOBER 27, 1995*
-------------------- THROUGH
CLASS B SHARES 1997**++ 1996 NOVEMBER 30, 1995
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<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $12.99 $10.53 $10.00
-------- -------- --------
Net investment loss................... (0.24) (0.15) (0.01)
Net realized and unrealized gain...... 1.47 2.61 0.54
-------- -------- --------
Total from investment operations...... 1.23 2.46 0.53
-------- -------- --------
Net asset value, end of period........ $14.22 $12.99 $10.53
-------- -------- --------
-------- -------- --------
TOTAL INVESTMENT RETURN+................ 9.47% 23.36% 5.30%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................. 2.00% 2.00% 2.87%(2)
Net investment loss................... (1.79)% (1.72)% (0.79)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands............................ $365,484 $310,809 $102,009
Portfolio turnover rate............... 184% 108% 7%(1)
Average commission rate paid.......... $0.0570 $0.0570 --
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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
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<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
NOVEMBER 30,
CLASS A SHARES 1997++
-----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 14.34
-------
Net investment loss................................................... (0.06)
Net realized and unrealized loss...................................... (0.02)
-------
Total from investment operations...................................... (0.08)
-------
Net asset value, end of period........................................ $ 14.26
-------
-------
TOTAL INVESTMENT RETURN+.............................................. (0.56)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.27%(2)
Net investment loss................................................... (1.08)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $345
Portfolio turnover rate............................................... 184%(1)
Average commission rate paid.......................................... $0.0570
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 14.34
-------
Net investment loss................................................... (0.09)
Net realized and unrealized loss...................................... (0.03)
-------
Total from investment operations...................................... (0.12)
-------
Net asset value, end of period........................................ $ 14.22
-------
-------
TOTAL INVESTMENT RETURN+.............................................. (0.84)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 2.03%(2)
Net investment loss................................................... (1.82)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $1,288
Portfolio turnover rate............................................... 184%(1)
Average commission rate paid.......................................... $0.0570
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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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<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
NOVEMBER 30,
CLASS D SHARES 1997++
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 14.34
-------
Net investment loss................................................... (0.04)
Net realized and unrealized loss...................................... (0.03)
-------
Total from investment operations...................................... (0.07)
-------
Net asset value, end of period........................................ $ 14.27
-------
-------
TOTAL INVESTMENT RETURN+.............................................. (0.49)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.01%(2)
Net investment loss................................................... (0.82)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $136
Portfolio turnover rate............................................... 184%(1)
Average commission rate paid.......................................... $0.0570
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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
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THE FUND AND ITS MANAGEMENT
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Dean Witter Capital Appreciation Fund (the "Fund") is an open-end,
diversified, management investment company. The Fund is a trust of the type
commonly known as a "Massachusetts business trust" and was organized under the
laws of The Commonwealth of Massachusetts on July 31, 1995.
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, 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 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 manage the investment of the Fund's
assets, including the placing of orders for the purchase and sale of portfolio
securities. InterCapital has retained Dean Witter Services Company Inc. to
perform the aforementioned administrative services for the Fund.
The Fund's Trustees review the various services provided by or under the
direction of the Investment Manager 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.
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 0.75% to the Fund's net assets not exceeding $500 million and 0.725% to
the Fund's net assets exceeding $500 million. This fee is greater than that paid
by most other investment companies. For the fiscal year ended November 30, 1997,
the Fund accrued total compensation to the Investment Manager amounting to 0.75%
of the Fund's average net assets and the total expenses of Class B amounted to
2.00% 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.
INVESTMENT OBJECTIVE AND POLICIES
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The investment objective of the Fund is long-term capital appreciation. The
objective is a fundamental policy of the Fund and may not be changed without
shareholder approval. There is no assurance that the objective will be achieved.
The Fund seeks to achieve its investment objective by investing, under
normal circumstances, at least 65% of its total assets in the common stocks of
U.S. companies that, in the opinion of the Investment Manager, offer the
potential for either
9
<PAGE>
superior earnings growth and/or appear to be undervalued.
The Investment Manager will base the selection of stocks for the Fund's
portfolio on research and analysis, taking into account, among other factors, a
company's price/earnings ratio (that is whether the current stock price appears
undervalued in relation to earnings, projected cash flow, or asset value per
share; or the price-to-earnings ratio is attractive relative to the company's
underlying earnings growth rate), growth in sales, market-to-book ratio, the
quality of a company's balance sheet, sales-per-share and profitability in order
to determine whether the current market valuation is less than the Investment
Manager's view of a company's intrinsic value. Also, when reviewing investments
for selection, the Investment Manager will consider the following
characteristics of a company: capable management; attractive business niches;
pricing flexibility; sound financial and accounting practices and a demonstrated
ability or prospects to consistently grow revenues, earnings and cash flow.
Stocks may also be selected on the basis of whether the Investment Manager
believes that the potential exists for some catalyst (such as increased investor
attention, asset sales, a new product/innovation, or a change in management) to
cause the stock's price to rise. Such factors are part of the Investment
Manager's overall investment selection process.
The Investment Manager has no general criteria as to asset size, earnings or
industry type which would make an investment unsuitable for purchase by the
Fund. In addition, since the Investment Manager is seeking investments in
companies whose securities may appear to be undervalued, there is no limitation
on the stock price of any particular investment. However, as a result of the
selection process, which focuses on fundamentals in relation to prices, such
review of investments will include companies with low-priced stocks. In this
category are large companies with low-priced stocks (so called "fallen angels")
which, in the opinion of the Investment Manager, may appear to be undervalued
because they are overlooked by many investors; may not be closely followed
through investment research and/or their prices may reflect pessimism about the
companies' (and/or their industries') outlook. Such companies, by virtue of
their stock price, may be takeover candidates. Low-priced stocks are also
associated with smaller companies whose securities' value may reflect a discount
because of smaller size and lack of research coverage, emerging growth companies
and private companies undergoing their initial public offering. The Fund will
invest in companies of all sizes. For a discussion of the risks of investing in
the securities of such companies, see "Risk Considerations" below.
Consequently, the Fund looks for quality businesses with an investment
outlook based upon a mix of growth potential, financial strength and fundamental
value. The focus on price and fundamentals sets the Fund apart from pure
"growth" or pure "value" funds. The Fund's holdings will be widely diversified
by industry and company and under most circumstances, at the time of initial
purchase, the average position will be less than 1.5% of the Fund's net assets.
In addition to U.S. common stock, up to 35% of the Fund's total assets may
be invested in debt or preferred equity securities convertible into or
exchangeable for equity securities, rights and warrants, when considered by the
Investment Manager to be consistent with the Fund's investment objective. (For a
discussion of the risks of investing in each of these securities, see "Risk
Considerations" below.)
The Fund may also invest in other debt securities without regard to quality
or rating, if in the opinion of the Investment Manager such securities meet the
investment criteria of the Fund. The Fund will not purchase a non-investment
grade debt security (or junk bond) if, immediately after such purchase, the Fund
would have more than 5% of its total assets invested in such securities.
10
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The Fund may invest up to 10% of its assets in foreign securities, including
non-dollar denominated securities traded outside of the U.S. and U.S.
dollar-denominated securities such as ADRs. (For a discussion of the risks of
investing in foreign securities, see "Risk Considerations" below.)
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant a 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 total assets are invested in money
market instruments or cash, including obligations issued or guaranteed as to
principal or interest by the United States Government, its agencies or
instrumentalities, certificates of deposit, bankers' acceptances and other
obligations of domestic banks having total assets of $1 billion or more, and
short-term commercial paper of corporations organized under the laws of any
state or political subdivision of the United States.
The securities in which the Fund invests may or may not be listed on a
national stock exchange, but if they are not so listed, will generally have an
established over-the-counter market.
RISK CONSIDERATIONS
Given the investment risks described below, an investment in shares of the
Fund should not be considered a complete investment program and is not
appropriate for all investors. Investors should carefully consider their ability
to assume these risks before making an investment in the Fund.
The net asset value of the Fund's shares will fluctuate with changes in the
market value of its portfolio securities. The market value of the Fund's
portfolio securities will increase or decrease due to a variety of economic,
market or political factors which cannot be predicted. The Fund is intended for
long-term investors who can accept the risks involved in seeking long-term
capital appreciation through the investment primarily in the securities of
companies that offer the potential for either superior earnings growth and/or
appear to be undervalued. In selecting investments for the Fund, the Investment
Manager has no general criteria as to a company's asset size, earnings or
industry type. It should be recognized that investing in such companies involves
greater risk than is customarily associated with investing in more established
companies.
The Fund may invest in securities of companies that are not well known to
the investing public or followed by many securities analysts, with the result
that there may be less publicly available information concerning such
securities. Also, these securities may be more volatile in price and have lower
trading volumes. In addition, while companies in which the Fund may invest often
have sales and earnings growth rates which may exceed those of large companies
and may be reflected in more rapid share price appreciation, such companies may
have limited operating histories, product lines, markets or financial resources
and they may be dependent upon one-person management. These companies may be
subject to intense competition from larger companies. The securities of such
companies may have limited marketability and may be subject to more abrupt or
erratic movements in price than securities of larger companies or in the market
averages in general. In the case of securities of large companies with
lower-priced stock (the so-called "fallen angels"), the risk associated with
such investment is that the price may continue to fall.
RIGHTS AND WARRANTS. The Fund may acquire rights and/or warrants which are
attached to other securities in its portfolio, or which are issued as a
distribution by the issuer of a security held in its portfolio. Rights and/or
warrants are, in effect, options 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 corporation issuing
them.
CONVERTIBLE SECURITIES. The Fund may acquire, through purchase or a
distribution by the issuer of a security held in its portfolio, a fixed-income
security which is convertible into common
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stock of the issuer. 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. A portion of the convertible securities in which the
Fund may invest may be unrated or, if rated, rated below investment grade by a
nationally recognized statistical rating organization.
FOREIGN SECURITIES. The Fund may invest up to 10% of its total assets in
foreign securities. Foreign securities investments may be affected by changes in
currency rates or exchange control regulations, changes in governmental
administration or economic or monetary policy (in the United States and abroad)
or changed circumstances in dealings between nations. Fluctuations in the
relative rates of exchange between the currencies of different nations will
affect the value of the Fund's investments denominated in foreign currency.
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 foreign currency
exchange contracts (described below). The Fund will 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. 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 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 the Fund's trades effected in such markets. As such, the
inability to dispose of portfolio securities due to settlement delays could
result in
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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.
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.
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. 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.
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.
INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in real
estate investment trusts, which pool investors' funds for investments primarily
in commercial real estate properties. Investment in real estate investment
trusts may be the most practical available means for the Fund to invest in the
real estate industry (the Fund is prohibited from investing in real estate
directly). As a shareholder in a real estate investment trust, the Fund would
bear its ratable share of the real estate investment trust's expenses, including
its advisory and administration fees. At the same time the Fund would continue
to pay its own investment management fees and other expenses, as a result of
which the Fund and its shareholders in effect will be absorbing duplicate levels
of fees with respect to investments in real estate investment trusts.
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
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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.
PRIVATE PLACEMENTS. The Fund may invest up to 5% of its total assets in
securities which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), or which are otherwise not readily marketable. (Securities eligible for
resale pursuant to Rule 144A under the Securities Act, and determined to be
liquid pursuant to the procedures discussed in the following paragraph, are not
subject to the foregoing restriction.) These securities are generally referred
to as private placements or restricted securities. Limitations on the resale of
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 Trustees of the Fund, will make a
determination as to the liquidity of each restricted security purchased by the
Fund. If a restricted security is determined to be "liquid," such security will
not be included within the category "illiquid securities," which under current
policy may not exceed 10% of the Fund's net assets. However, investing in Rule
144A securities could have the effect of increasing the level of Fund
illiquidity to the extent the Fund, at a particular point in time, may be unable
to find qualified institutional buyers interested in purchasing such securities.
OPTIONS AND FUTURES TRANSACTIONS. The Fund may purchase and sell (write)
call and put options on portfolio securities which are denominated in either
U.S. dollars or foreign currencies and on the U.S. dollar and foreign
currencies, which are or may in the future be listed on several U.S. and foreign
securities exchanges or are written in over-the-counter transactions ("OTC
options"). OTC options are purchased from or sold (written) to dealers or
financial institutions which have entered into direct agreements with the Fund.
The Fund is permitted to write covered call options on portfolio securities
and the U.S. dollar and foreign currencies, without limit, in order to hedge
against the decline in the value of a security or currency in which such
security is denominated and to close out long call option positions. The Fund
may write covered put options, under which the Fund incurs an obligation to buy
the security (or currency) underlying the option from the purchaser of the put
at the option's exercise price at any time during the option period, at the
purchaser's election.
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
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<PAGE>
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 to protect itself against a decline
in the value of the security and to close out written put positions in a manner
similar to call option closing purchase transactions. There are no other limits
on the Fund's ability to purchase call and put options.
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
underlying portfolio securities, on any currency ("currency" futures), on U.S.
and foreign fixed-income securities ("interest rate" futures) and on such
indexes of U.S. or foreign equity or fixed-income securities as may exist or
come into being ("index" futures). The Fund may 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. The Fund may purchase or sell index futures contracts
for the purpose of hedging some or all of its portfolio (or anticipated
portfolio) securities against changes in their prices (or the currency in which
they are denominated). 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 also 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.
New futures contracts, options and other financial products and various
combinations thereof continue to be developed. The Fund may invest in any such
futures, options or products as may be developed, to the extent consistent with
its investment objective and applicable regulatory requirements.
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 may
generally only be closed out by entering into a closing purchase transaction
with the purchasing dealer. Also, exchanges may limit the amount by which the
price of many futures contracts may move on any day. If the price moves equal to
the daily limit on successive days, then it may prove impossible to liquidate a
futures position until the daily limit moves have ceased.
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 Investment Manager or Sub-Adviser 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.
Another risk which will 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.
See the Statement of Additional Information for a further discussion of risks.
INVESTMENT IN OTHER INVESTMENT VEHICLES. Under the Investment Company Act of
1940, as amended, the Fund generally may invest up to 10%
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of its total assets in the aggregate in shares of other investment companies and
up to 5% of its total assets in any one investment company. The Fund may not own
more than 3% of the outstanding voting stock of any investment company.
Investment in foreign investment companies may be the sole or most practical
means by which the Fund may participate in certain foreign securities markets,
and investment in real estate investment trusts may be the most practical
available means for the Fund to invest in the real estate industry (the Fund is
prohibited from investing in real estate directly). As a shareholder in an
investment company or real estate investment trust, the Fund would bear its
ratable share of that entity's expenses, including its advisory and
administration fees. At the same time the Fund would continue to pay its own
investment management fees and other expenses, as a result of which the Fund and
its shareholders in effect will be absorbing duplicate levels of fees with
respect to investments in other investment companies and in real estate
investment trusts.
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 money market
instruments, which are maintained in a segregated account pursuant to applicable
regulations and that are equal to at least the market value, determined daily,
of the loaned securities. 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, loans of portfolio
securities will only be made to firms deemed by the Investment Manager to be
creditworthy and when the income which can be earned from such loans justifies
the attendant risks.
YEAR 2000. The investment management services provided to the Fund by the
Investment Manager and the services provided to shareholders by the Distributor
and the Transfer Agent depend on the smooth functioning of their computer
systems. Many computer software systems in use today cannot recognize the year
2000, but revert to 1900 or some other date, due to the manner in which dates
were encoded and calculated. That failure could have a negative impact on the
handling of securities trades, pricing and account services. The Investment
Manager, the Distributor and the Transfer Agent have been actively working on
necessary changes to their own computer systems to prepare for the year 2000 and
expect that their systems will be adapted before that date, but there can be no
assurance that they will be successful, or that interaction with other
non-complying computer systems will not impair their services at that time.
For additional risk disclosure, please refer to the "Investment Objective
and Policies" section of the Prospectus and to the "Investment Practices and
Policies" section of the Statement of Additional Information.
PORTFOLIO MANAGEMENT
The Fund's portfolio is actively managed by its Investment Manager 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 will rely on information from various sources, including
research, analysis and appraisals of brokers and dealers, including Dean Witter
Reynolds Inc. ("DWR"), Morgan Stanley & Co. Incorporated and other broker-dealer
affiliates of InterCapital, the view of others regarding economic developments
and interest rate trends, and the Investment Manager's own analysis of factors
they deem relevant. The Fund's portfolio is managed within InterCapital's Growth
Group, which manages 33 funds and fund portfolios, with approximately $14.5
billion in assets as of December 31, 1997. Ronald J. Worobel, Senior Vice
President of InterCapital and a member of InterCapital's Growth Group, is the
primary portfolio manager of the Fund and has been a portfolio manager at
InterCapital for over five years.
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Personnel of the Investment Manager 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 & Co. Incorporated and other brokers and dealers that are affiliates of
InterCapital. The Fund may incur brokerage commissions on transactions conducted
through such affiliates. Pursuant to an order of the Securities and Exchange
Commission, the Fund may effect principal transactions in certain money market
instruments with DWR, a broker-dealer affiliate of the Investment Manager.
Although the Fund does not intend to engage in short-term trading, it may
sell portfolio securities without regard to the length of time they have been
held when such sale will, in the opinion of the Investment Manager, contribute
to the Fund's investment objective. It is not anticipated that the Fund's
portfolio turnover rate will exceed 300% in any one year.
The Fund will incur brokerage costs commensurate with its portfolio turnover
rate. Short term gains and losses may result from such portfolio transactions.
See "Dividends, Distributions and Taxes" for a discussion of the tax
implications 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.
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. 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. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry. This restriction does not apply to obligations
issued or guaranteed by the United States Government, its agencies or
instrumentalities.
3. 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.
4. The Fund may not, as to 75% of its total assets, purchase more than 10% of
the voting securities of any issuer.
Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objective by investing all or substantially all
of its assets in another investment company having substantially the same
investment objective and policies as the Fund.
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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 who 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 Trustees 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
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 Capital Appreciation Fund, 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 purchases
pursuant to (i) Systematic
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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 such purchases 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 amount of the purchase of shares
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 gains 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 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.
19
<PAGE>
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 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
20
<PAGE>
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% 0.25% No
initial 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 to A shares
year decreasing to automatically
0 after six years after
approximately
ten years
- -----------------------------------------------------------
C 1.0% CDSC during 1.0% No
first 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 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:
21
<PAGE>
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------------------
PERCENTAGE OF APPROXIMATE
AMOUNT OF PUBLIC OFFERING PERCENTAGE OF AMOUNT
SINGLE TRANSACTION PRICE 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 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
22
<PAGE>
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 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.
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
23
<PAGE>
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>
YEAR SINCE PURCHASE CDSC AS A PERCENTAGE
PAYMENT MADE OF 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 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
24
<PAGE>
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 to which DWT serves as
DWR's Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services 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.
25
<PAGE>
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 Trustees 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 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
26
<PAGE>
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 November 30, 1997, Class B shares of the Fund
accrued payments under the Plan amounting to $3,434,993, which amount is equal
to 1.00% of the average daily net assets of Class B for the fiscal year. These
payments were calculated pursuant to clause (b) 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 November 30, 1997, Class A
and Class C shares of the Fund accrued payments under the Plan amounting to $197
and $2,400, 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.
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
27
<PAGE>
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 $12,299,293 at November 30, 1997, which was equal to
3.37% 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 Trustees will
consider at that time the manner in which to treat such expenses. Any cumulative
expenses incurred, but not yet recovered through distribution fees or CDSCs, may
or may not be recovered through future distribution fees or CDSCs.
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 $12,499 in the case of Class C
at December 31, 1997, which amount was equal to 0.62% 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, on each day that the New York Stock Exchange is open (or, on days
when the New York Stock Exchange closes prior to 4:00 p.m., at such earlier
time), by taking 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 assets are valued; if there were no sales that day,
the security is valued at the latest bid price (in cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market pursuant to procedures adopted by the
Trustees); and (2) all other portfolio securities for which over-the-counter
market quotations are readily available are valued at the latest bid price. When
market quotations are not readily available, including circumstances under which
it is determined by the Investment Manager that sale 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 Board of Trustees. For valuation purposes,
quotations of foreign portfolio securities, other assets and liabilities and
forward contracts stated in foreign currency are translated into U.S. dollar
equivalents at the prevailing market rates
28
<PAGE>
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
at the time of purchase are valued at amortized cost, unless the Trustees
determine such does not reflect the securities' market value, in which case
these securities will be valued at their fair value as determined by the
Trustees.
Certain of the Fund's portfolio securities may be valued by an outside
pricing service approved by the Fund's Trustees. The pricing service may utilize
a matrix system incorporating security quality, maturity and coupon as the
evaluation model parameters, and/or research evaluations by its staff, including
review of broker-dealer market price quotations, in determining what it believes
is the fair valuation of the portfolio securities valued by such pricing
service.
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
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 as 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").
INVESTMENT OF DIVIDENDS AND 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 upon their redemption (see "Redemptions 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").
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
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.
29
<PAGE>
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.
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.
For further information regarding plan administration, custodial fees and
other details, investors should contact their DWR or other Selected Broker-
Dealer account executive or the Transfer Agent.
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 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 into 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. (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
30
<PAGE>
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 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 Transfer Agent, 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.
31
<PAGE>
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. Share-
holders 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 experience with the Dean Witter Funds
in the past.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about the
Exchange Privilege.
REDEMPTIONS AND REPURCHASES
- --------------------------------------------------------------------------------
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 sent 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 information
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 or telegraphic 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 offer by DWR and other Selected Broker-Dealers to repurchase
shares may be suspended without notice by the Distributor 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, 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).
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
32
<PAGE>
at their 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 Internal Revenue 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 Trustees or, in the case of an account opened through
EasyInvest-SM-, 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 him or her sixty days
to make an additional investment in an amount which will increase the value of
his or her 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
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. The Fund declares dividends separately for
each Class of Shares and intends to pay quarterly income dividends and to
distribute net short-term and net 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 distribute all of its net investment
income and net short-term capital gains to shareholders and otherwise qualify as
a regulated investment company under Subchapter M of the Internal Revenue Code,
it is not expected that the Fund will be required to pay any Federal income tax
on any such income and capital gains. Shareholders will normally have to pay
Federal income taxes, and any state and local income taxes, on the dividends and
distributions they receive from the Fund. Such dividends and distributions, to
the extent 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 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,
for tax purposes, to have been received by the shareholder in the prior 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. Capital gains distributions are not eligible for
the dividends received deduction.
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
33
<PAGE>
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 calendar year, shareholders will be sent 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 makes 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 claim United States foreign tax credits or deductions
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.
Shareholders should consult their tax advisers as to the applicability of
the foregoing to their current situation.
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 periods of one, five
and ten years, or over the life of the Fund, if less than any of the foregoing.
Average annual total return reflects all income earned by the Fund, any
appreciation or depreciation of the Fund's assets, all 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. Such calculations may or
may not reflect the deduction of any sales charge which, if reflected, would
reduce the performance quoted. 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. 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., the S&P Stock Index and the Dow Jones Industrial
Average.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS. All shares of beneficial interest of the Fund are of $0.01
par value and are equal as to earnings, assets and voting privileges except that
each Class will have exclusive voting privileges with respect to matters
relating to distribution expenses borne solely by such Class or any other matter
in which the interests of one Class differ from the interests of any other
Class. In addition, Class B
34
<PAGE>
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.
The Fund is not required to hold Annual Meetings of Shareholders and, in
ordinary circumstances, the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances the Trustees may be removed by action of the Trustees or by the
shareholders.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for obligations of the
Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that Fund
obligations include such disclaimer, and provides for indemnification and
reimbursement of expenses out of the Fund's property for any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability, and
the nature of the Fund's assets and operations, in the opinion of Massachusetts
counsel to the Fund, the risk to shareholders of personal liability is remote.
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.
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.
35
<PAGE>
THE DEAN WITTER FAMILY OF FUNDS
<TABLE>
<S> <C>
MONEY MARKET FUNDS ACTIVE ASSETS ACCOUNT PROGRAM
Dean Witter Liquid Asset Fund Inc. Active Assets Money Trust
Dean Witter Tax-Free Daily Income Active Assets Tax-Free Trust
Trust Active Assets Government Securities
Dean Witter New York Municipal Trust
Money Market Active Assets California Tax-Free
Trust Trust
Dean Witter California Tax-Free FIXED-INCOME FUNDS
Daily Income Trust Dean Witter High Yield Securities
Dean Witter U.S. Government Money Inc.
Market Trust Dean Witter Tax-Exempt Securities
EQUITY FUNDS Trust
Dean Witter American Value Fund Dean Witter U.S. Government
Dean Witter Natural Resource Securities Trust
Development Dean Witter California Tax-Free
Securities Inc. Income Fund
Dean Witter Dividend Growth Dean Witter New York Tax-Free
Securities Inc. Income Fund
Dean Witter Developing Growth Dean Witter Convertible Securities
Securities Trust Trust
Dean Witter World Wide Investment Dean Witter Federal Securities
Trust Trust
Dean Witter Value-Added Market Dean Witter World Wide Income Trust
Series Dean Witter Intermediate Income
Dean Witter Utilities Fund Securities
Dean Witter Precious Metals and Dean Witter Global Short-Term
Minerals Trust Income Fund Inc.
Dean Witter Capital Growth Dean Witter Multi-State Municipal
Securities Series Trust
Dean Witter European Growth Fund Dean Witter Short-Term U.S.
Inc. Treasury Trust
Dean Witter Pacific Growth Fund Dean Witter Diversified Income
Inc. Trust
Dean Witter Health Sciences Trust Dean Witter Limited Term Municipal
Dean Witter Global Dividend Growth Trust
Securities Dean Witter Short-Term Bond Fund
Dean Witter Global Utilities Fund Dean Witter Balanced Income Fund
Dean Witter International SmallCap Dean Witter Hawaii Municipal Trust
Fund Dean Witter Intermediate Term U.S.
Dean Witter Mid-Cap Growth Fund Treasury
Dean Witter Balanced Growth Fund Trust
Dean Witter Capital Appreciation DEAN WITTER RETIREMENT SERIES
Fund Liquid Asset Series
Dean Witter Information Fund U.S. Government Money Market Series
Dean Witter Special Value Fund U.S. Government Securities Series
Dean Witter Financial Services Intermediate Income Securities
Trust Series
Dean Witter Market Leader Trust American Value Series
Dean Witter S&P 500 Index Fund Capital Growth Series
Dean Witter Fund of Funds Dividend Growth Series
Morgan Stanley Dean Witter Strategist Series
Competitive Edge Fund, Utilities Series
"Best Ideas" Portfolio Value-Added Market Series
ASSET ALLOCATION FUNDS Global Equity Series
Dean Witter Strategist Fund
Dean Witter Global Asset Allocation
Fund
</TABLE>
<PAGE>
Dean Witter
Capital Appreciation Fund
Two World Trade Center
New York, New York 10048
TRUSTEES
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
Ronald J. Worobel
Vice President
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286
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.
DEAN WITTER
CAPITAL APPRECIATION
FUND
[PHOTO]
PROSPECTUS -- JANUARY 29, 1998
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DEAN WITTER
JANUARY 29, 1998
CAPITAL APPRECIATION
FUND
- --------------------------------------------------
Dean Witter Capital Appreciation Fund (the "Fund") is an open-end,
diversified management investment company whose investment objective is
long-term capital appreciation. The Fund seeks to achieve its objective by
investing primarily in the common stocks of U.S. companies that, in the opinion
of the Investment Manager, offer the potential for either superior earnings
growth and/or appear to be undervalued. Current income is not an objective of
the Fund. (See "Investment Objective and Policies.")
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 its 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
Capital Appreciation Fund
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<S> <C>
The Fund and its Management............................................................ 3
Trustees and Officers.................................................................. 6
Investment Practices and Policies...................................................... 13
Investment Restrictions................................................................ 26
Portfolio Transactions and Brokerage................................................... 27
The Distributor........................................................................ 29
Determination of Net Asset Value....................................................... 33
Purchase of Fund Shares................................................................ 34
Shareholder Services................................................................... 36
Redemptions and Repurchases............................................................ 41
Dividends, Distributions and Taxes..................................................... 42
Performance Information................................................................ 44
Description of Shares.................................................................. 45
Custodian and Transfer Agent........................................................... 46
Independent Accountants................................................................ 46
Reports to Shareholders................................................................ 46
Legal Counsel.......................................................................... 47
Experts................................................................................ 47
Registration Statement................................................................. 47
Financial Statements -- November 30, 1997.............................................. 48
Report of Independent Accountants...................................................... 66
</TABLE>
2
<PAGE>
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
THE FUND
The Fund is a trust of the type commonly known as a "Massachusetts business
trust" and was organized under the laws of the Commonwealth of Massachusetts on
July 31, 1995.
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 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 to Dean Witter InterCapital Inc. thereafter.) The daily
management of the Fund and research relating to the Fund's portfolio are
conducted by or under the direction of officers of the Fund and of the
Investment Manager, subject to review by the Fund's Trustees. Information as to
these Trustees and officers is contained under the caption "Trustees and
Officers."
InterCapital is the investment manager or investment adviser of the
following management investment companies: Active Assets Money Trust, Active
Assets Tax-Free Trust, Active Assets California Tax-Free Trust, Active Assets
Government Securities Trust, InterCapital Income Securities Inc., InterCapital
Insured Municipal Bond Trust, InterCapital Insured Municipal Trust, InterCapital
Insured Municipal Income Trust, InterCapital Insured Municipal Securities,
InterCapital California Insured Municipal Income Trust, InterCapital Insured
California Municipal Securities, InterCapital Quality Municipal Investment
Trust, InterCapital Quality Municipal Income Trust, InterCapital Quality
Municipal Securities, InterCapital California Quality Municipal Securities,
InterCapital New York Quality Municipal Securities, High Income Advantage Trust,
High Income Advantage Trust II, High Income Advantage Trust III, Dean Witter
Government Income Trust, Dean Witter High Yield Securities Inc., Dean Witter
Tax-Free Daily Income Trust, Dean Witter Tax-Exempt Securities Trust, Dean
Witter Dividend Growth Securities Inc., Dean Witter Natural Resource Development
Securities Inc., Dean Witter American Value Fund, Dean Witter Developing Growth
Securities Trust, Dean Witter U.S. Government Money Market Trust, 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 World Wide Income Trust, Dean Witter California Tax-Free
Income Fund, Dean Witter New York Tax-Free Income Fund, Dean Witter Convertible
Securities Trust, Dean Witter Federal Securities Trust, Dean Witter Value-Added
Market Series, Dean Witter Utilities Fund, Dean Witter California Tax-Free Daily
Income Trust, Dean Witter Strategist Fund, Dean Witter Intermediate Income
Securites, Dean Witter Capital Growth Securities, Dean Witter Precious Metals
and Minerals Trust, Dean Witter New York Municipal Money Market Trust, Dean
Witter European Growth Fund Inc., Dean Witter Global Short-Term Income Fund
Inc., Dean Witter Pacific Growth Fund Inc., Dean Witter Multi-State Municipal
Series Trust, Dean Witter Short-Term U.S. Treasury Trust, Dean Witter
Diversified Income Trust, Dean Witter Health Sciences Trust, Dean Witter
Retirement Series, Dean Witter Global Dividend Growth Securities, Dean Witter
Limited Term Municipal Trust, Dean Witter Short-Term Bond Fund, Dean Witter
Global Utilities Fund, Dean Witter International SmallCap Fund, Dean Witter
Mid-Cap Growth Fund, Dean Witter Select Dimensions Investment Series, Dean
Witter Global Asset Allocation Fund, Dean Witter Balanced Growth Fund, Dean
Witter Balanced Income Fund, Dean Witter Hawaii Municipal Trust, Dean Witter
Japan Fund, Dean Witter Income Builder Fund, Dean Witter Special Value Fund,
Dean Witter Financial Services Trust, Dean Witter Market Leader, Dean Witter S&P
500 Index Fund, Dean Witter Fund of Funds, Morgan Stanley Dean Witter
Competitive Edge Fund -- "Best Ideas" Portfolio, Dean Witter Capital
Appreciation Fund, Dean Witter Information Fund, Dean Witter Intermediate Term
U.S. Treasury Trust, Municipal Income Trust, Municipal Income Trust II,
Municipal Income Trust III, Municipal Income Opportunities Trust, Municipal
Income Opportunities Trust II, Municipal Income Opportunities Trust III,
Municipal Premium Income Trust
3
<PAGE>
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 investment
companies for which TCW Funds Management, Inc. is the investment adviser: TCW/DW
Core Equity Trust, TCW/DW Mid-Cap Equity 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 North American Government Income Trust, TCW/DW Total
Return Trust, TCW/DW Global Telecom Trust, TCW/DW Strategic Income Trust, TCW/DW
Emerging Markets Opportunities Trust, TCW/DW Term Trust 2000, TCW/DW Term Trust
2002 and TCW/DW Term Trust 2003 (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 advisor 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
manage the investment of the Fund's assets, including the placing of orders for
the purchase and sale of portfolio securities. The Investment Manager obtains
and evaluates such information and advice relating to the economy, securities
markets and specific securities as it considers necessary or useful to
continuously manage the assets of the Fund in a manner consistent with its
investment objective.
Under the terms of the Management Agreement, the Investment Manager
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. The Investment Manager has retained DWSC to perform its administrative
services under the Agreement.
Expenses not expressly assumed by the Investment Manager under the
Management Agreement 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 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 trustees' meetings and of preparing, printing and mailing of proxy
statements and reports to shareholders; fees and travel expenses of trustees or
members of any advisory board or committee who are not employees of the
Investment Manager or any corporate affiliate of the Investment Manager; all
expenses incident to any dividend, withdrawal or redemption options; charges and
expenses of any outside service used for pricing of the Fund's shares; fees and
expenses of legal counsel, including counsel to the trustees who are not
interested persons of the Fund or of the Investment Manager (not including
compensation or expenses of attorneys who are employees of the Investment
Manager) and independent accountants; membership dues of industry
4
<PAGE>
associations; interest on the Fund's borrowings; postage; insurance premiums on
property or personnel (including officers and trustees) of the Fund which inure
to its benefit; extraordinary expenses including, but not limited to, legal
claims and liabilities and litigation costs and any indemnification relating
thereto (depending upon the nature of the legal claim, liability or lawsuit) and
all other costs of the Fund's operations properly payable by the Fund. The 12b-1
fees relating to a particular Class will be allocated directly to that Class. In
addition, other expenses associated with a particular Class (except advisory or
custodial fees) may be allocated directly to that Class, provided that such
expenses are reasonably identified as specifically attributable to that Class
and the direct allocation to that Class is approved by the Trustees.
The Management Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its obligation
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 a
percentage rate of 0.75% to the portion of daily net assets not exceeding $500
million and 0.725% to the portion of daily net assets exceeding $500 million.
The management fee is allocated among the Class pro rata based on the net assets
of the Fund attributable to each Class. For the period October 27, 1995
(commencement of operations) through November 30, 1995 and the fiscal years
ended November 30, 1996 and 1997, the Fund accrued $62,692, $1,607,148 and
$2,578,896, respectively, to the Investment Manager pursuant to the Agreement.
The Investment Manager paid the organizational expenses of the Fund, in the
amount of $179,000, incurred prior to the offering of the Fund's shares. The
Fund has reimbursed the Investment Manager for such expenses in accordance with
the terms of the Underwriting Agreement between the Fund and Distributors. The
Fund is deferring and amortizing the organizational expenses on the straight
line method over a period not to exceed five years from the date of commencement
of the Fund's operations.
The Management Agreement was initially approved by the Board of Trustees on
February 21, 1997 and by the shareholders of the Fund at a Special Meeting of
Shareholders held on May 21, 1997. The Agreement is substantially identical to a
prior investment management agreement which was initially approved by the Board
of Trustees on August 24, 1995 and by InterCapital, as the then sole shareholder
of the Fund on August 24, 1995 and amended by the Board of Trustees 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 daily by applying the following annual rates to the
Fund's net assets determined as of the close of each business day: 0.75% of the
portion of daily net assets not exceeding $500 million; and 0.725% of the
portion of daily net assets exceeding $500 million. The Agreement took effect on
May 31, 1997 upon consummation of the merger of Dean Witter, Discover & Co. with
Morgan Stanley Group Inc. The Agreement may be terminated at any time, without
penalty, on thirty days' notice by the Board of Trustees of the Fund, by the
holder 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
Agreement will automatically terminate in the event of its assignment (as
defined in the Act).
Under its terms, the Agreement will continue in effect until April 30, 1999,
and will remain in effect from year to year thereafter, provided continuance of
the Agreement is approved at least annually by the vote of the holders of a
majority of the outstanding shares of the Fund, as defined in the Act, or by the
Trustees of the Fund; provided that in either event such continuance is approved
annually by the vote of a majority of the Trustees of the Fund who are not
parties to the Agreement or "interested persons" (as defined in the Act) of any
such party (the "Independent Trustees"), which vote must be cast in person at a
meeting called for the purpose of voting on such approval.
5
<PAGE>
The following owned 5% or more of the outstanding shares of Class A on
November 30, 1997:
Dean Witter Reynolds Custodian for Robert M. Portnoff, IRA Rollover, 285
Francisco Street, Henderson, NV 89014-6027 -- 20.1%; William H. Thrower, Rev.
Trust, William H. Thrower Trustee, P.O. Box 426, Debary, FL 32713-0426 -- 15.7%;
Fry/Mac Inc., Profit Sharing Plan & Trust, 164 Marco Way, South San Francisco,
94080-6916 -- 11.6%; Larry L. Cole, Rev. Trust, Larry L. Cole Trustee, 1322
Sweetbriar Rd., Orlando, FL 32806-7064 -- 9.0%.
The following owned 5% or more of the outstanding shares of Class C on
November 30, 1997:
O. H. Davison, Jr. & Philip Burton Trs. ULWT Marie V. Brunschwiler, 55
Iroquois Trail, Pontola Valley, CA 94028-76076 -- 7.4%; James J. Monks MD FACS
PA Employees Pension Plan; 26 Bayberry Drive, Saddle River, NJ 07458-2610 --
5.4%.
The following owned 5% or more of the outstanding shares of Class D on
November 30, 1997:
Hare & Co., c/o The Bank of New York, P.O. Box 11203, New York, NY
10286-1203 -- 88.6%; Dean Witter Reynolds Custodian for Baruch S. Blumberg, IRA
Rollover, 7701 Burholme Avenue Philadelphia, PA 19111-2412 -- 5.2%.
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 Agreement is terminated, or if the affiliation between
InterCapital and its parent company is terminated, the Fund will eliminate the
name "Dean Witter" from its name if DWR or its parent company shall so request.
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The Trustees 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 OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
<S> <C>
Michael Bozic (57) ................................... Chairman and Chief Executive Officer of Levitz Furniture
Trustee Corporation (since November, 1995); Director or Trustee of
c/o Levitz Furniture Corporation the Dean Witter Funds; formerly President and Chief
6111 Broken Sound Parkway, N.W. Executive Officer of Hills Department Stores (May,
Boca Raton, Florida 1991-July, 1995); formerly variously Chairman, Chief
Executive Officer, President and Chief Operating Officer
(1987-1991) of the Sears Merchandise Group of Sears,
Roebuck and Co.; Director of Eaglemark Financial Services,
Inc., the United Negro College Fund and Weirton Steel
Corporation.
Charles A. Fiumefreddo* (64) ......................... Chairman, Chief Executive Officer and Director of
Chairman of the Board, InterCapital, Distributors and DWSC; Executive Vice
President and Chief Executive President and Director of DWR; Chairman, Director or
Officer and Trustee Trustee, President and Chief Executive Officer of the Dean
Two World Trade Center Witter Funds; Chairman, Chief Executive Officer and
New York, New York Trustee of the TCW/DW Funds; Chairman and Director of Dean
Witter Trust Company FSB ("DWT"); Director and/or officer
of various MSDWD subsidiaries; formerly Executive Vice
President and Director of Dean Witter Discover & Co.
(until February, 1993).
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
<S> <C>
Edwin J. Garn (65) ................................... Director or Trustee of the Dean Witter Funds; formerly
Trustee United States Senator (R-Utah) (1974-1992) and Chairman,
c/o Huntsman Corporation Senate Banking Committee (1980-1986); formerly Mayor of
500 Huntsman Way Salt Lake City, Utah (1972-1974); formerly Astronaut,
Salt Lake City, Utah Space 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.
John R. Haire (72) ................................... Chairman of the Audit Committee and Chairman of the
Trustee 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;
Trustee Director of The PMI Group, Inc. (private mortgage
c/o Gordon Altman Butowsky insurance); Trustee and Vice Chairman of The Field Museum
Weitzen Shalov & Wein of Natural History; formerly associated with the Allstate
Counsel to the Independent Trustees 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., a
Trustee consulting firm; Co-Chairman and a founder of the Group of
c/o Johnson Smick International, Inc. Seven Council (G7C), an international economic commission;
1133 Connecticut Avenue, N.W. Director or Trustee of the Dean Witter Funds; Trustee of
Washington, DC the TCW/DW Funds; Director of NASDAQ (since June, 1995);
Chairman and Trustee of the Financial Accounting
Foundation (oversight organization for the Financial
Accounting Standards Board); Director of Greenwich Capital
Markets Inc. (broker-dealer); 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).
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
<S> <C>
Michael E. Nugent (61) ............................... General Partner, Triumph Capital, L.P., a private
Trustee investment partnership; Director or Trustee of the Dean
c/o Triumph Capital, L.P. Witter Funds; Trustee of the TCW/DW Funds; formerly Vice
237 Park Avenue President, Bankers Trust Company and BT Capital
New York, New York Corporation (1984-1988); Director of various business
organizations.
Philip J. Purcell* (54) .............................. Chairman of the Board of Directors and Chief Executive
Trustee Officer of MSDWD, DWR and Novus Credit Services Inc.;
1585 Broadway Director of InterCapital, DWSC and Distributors; Director
New York, New York or 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;
Trustee Trustee of the TCW/DW Funds; Director of Citizens
c/o Gordon Altman Butowsky Utilities Company; formerly Executive Vice President and
Weitzen Shalov & Wein Chief Investment Officer of the
Counsel to the Independent Trustees Home Insurance Company (August, 1991-
114 West 47th Street September, 1995).
New York, New York
Barry Fink (43) ...................................... Senior Vice President (since March, 1997) and Secretary
Vice President, Secretary and General Counsel (since February, 1997) of InterCapital
and General Counsel and 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.
Ronald J. Worobel (54) ............................... Senior Vice President, Vice President of various Dean
Vice President Witter Funds.
Two World Trade Center
New York, New York
Thomas F. Caloia (51) ................................ First Vice President and Assistant Treasurer of
Treasurer InterCapital and DWSC; Treasurer of the Dean Witter Funds
Two World Trade Center and the TCW/DW Funds.
New York, New York
</TABLE>
- ------------
* Denotes Trustees who are "interested persons" of the Fund, as defined in the
Act.
8
<PAGE>
In addition, Robert M. Scanlan, President and Chief Operating Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWT and a
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, Senior Vice President of InterCapital, DWSC, Distributors and DWT and
a Director of DWT, Joseph J. McAlinden, Executive Vice President and Chief
Investment Officer of InterCapital and a Director of DWT, and Kenton J.
Hinchliffe and Jayne Stevlingson, Senior Vice Presidents of InterCapital, are
Vice Presidents of the Fund. In addition, Marilyn K. Cranney, First Vice
President and Assistant General Counsel of InterCapital and DWSC, Lou Anne D.
McInnis, Carsten Otto and Ruth Rossi, 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.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees currently consists of nine (9) trustees. These same
individuals also serve as directors or trustees for all of the Dean Witter
Funds, and are referred to in this section as Trustees. 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 Trustees (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" Trustees. The other two Trustees (the
"management Trustees") are affiliated with InterCapital. Four of the seven
independent Trustees are also Independent Trustees of the TCW/DW Funds.
Law and regulation establish both general guidelines and specific duties for
the Independent Trustees. The Dean Witter Funds seek as Independent Trustees
individuals of distinction and experience in business and finance, government
service or academia; these are people whose advice and counsel are in demand by
others and for whom there is often competition. To accept a position on the
Funds' Boards, such individuals may reject other attractive assignments because
the Funds make substantial demands on their time. Indeed, by serving on the
Funds' Boards, certain Trustees who would otherwise be qualified and in demand
to serve on bank boards would be prohibited by law from doing so.
All of the Independent Trustees serve as members of the Audit Committee and
the Committee of the Independent Trustees. 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 Trustees 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 Trustees 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 Trustees are required to select and nominate individuals to fill
any Independent Trustee vacancy on the Board of any Fund that has a Rule 12b-1
plan of distribution. Most of the 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
9
<PAGE>
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 TRUSTEES AND AUDIT COMMITTEE
The Chairman of the Committee of the Independent Trustees 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 Trustees 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 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 Trustees 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 Trustees.
The Chairman of the Committee of the Independent Trustees 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 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 TRUSTEES FOR ALL DEAN
WITTER FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the Dean Witter Funds avoids the
duplication of effort that would arise from having different groups of
individuals serving as Independent Trustees for each of the Funds or even of
sub-groups of Funds. They believe that having the same individuals serve as
Independent Trustees of all the Funds tends to increase their knowledge and
expertise regarding matters which affect the Fund complex generally and enhances
their ability to negotiate on behalf of each Fund with the Fund's service
providers. This arrangement also precludes the possibility of separate groups of
Independent Trustees arriving at conflicting decisions regarding operations and
management of the Funds and avoids the cost and confusion that would likely
ensue. Finally, having the same Independent Trustees serve on all Fund Boards
enhances the ability of each Fund to obtain, at modest cost to each separate
Fund, the services of Independent Trustees, and a Chairman of their Committees,
of the caliber, experience and business acumen of the individuals who serve as
Independent Trustees of the Dean Witter Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Fund pays each Independent Trustee an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Trustees or committees of the
Board of Trustees attended by the Trustee (the Fund pays the Chairman of the
Audit Committee an annual fee of $750 and pays the Chairman of the Committee of
the Independent Trustees 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 Trustees are paid a single meeting fee by the Fund. The Fund
also reimburses such Trustees for travel and other out-
10
<PAGE>
of-pocket expenses incurred by them in connection with attending such meetings.
Trustees and officers of the Fund who are or have been employed by the
Investment Manager or an affiliated company receive no compensation or expense
reimbursement from the Fund.
The following table illustrates the compensation paid to the Fund's
Independent Trustees by the Fund for the fiscal year ended November 30, 1997.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- -------------------------------------------------------------- ---------------
<S> <C>
Michael Bozic................................................. $1,650
Edwin J. Garn................................................. 1,850
John R. Haire................................................. 3,800
Wayne E. Hedien............................................... 482
Dr. Manuel H. Johnson......................................... 1,800
Michael E. Nugent............................................. 1,850
John L. Schroeder............................................. 1,850
</TABLE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees 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
COMMITTEES OF CHAIRMAN OF TOTAL CASH
FOR SERVICE FOR SERVICE INDEPENDENT COMMITTEES OF COMPENSATION
AS DIRECTOR OR AS DIRECTORS/ INDEPENDENT FOR SERVICES
TRUSTEE AND TRUSTEE AND TRUSTEES AND TRUSTEES AND TO
COMMITTEE COMMITTEE AUDIT AUDIT 84 DEAN WITTER
MEMBER MEMBER COMMITTEES OF COMMITTEES OF FUNDS AND
NAME OF OF 84 DEAN WITTER OF 14 TCW/DW 84 DEAN WITTER 14 TCW/DW 14 TCW/DW
INDEPENDENT TRUSTEE 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, not including the Fund, have adopted a retirement program under
which an Independent Trustee who retires after serving for at least five years
(or such lesser period as may be determined by the Board) as an Independent
Director or Trustee of any Dean Witter Fund that has adopted the retirement
program (each such Fund referred to as an "Adopting Fund" and each such Trustee
referred to as an "Eligible Trustee") is entitled to retirement payments upon
reaching the eligible retirement age (normally, after attaining age 72). Annual
payments are based upon length of service. Currently, upon retirement, each
Eligible Trustee is entitled to receive from the Adopting Fund, commencing as of
his or her retirement date and continuing for the remainder of his or her life,
an annual retirement benefit (the "Regular Benefit") equal
11
<PAGE>
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 Trustee for service to the Adopting Fund in the five year
period prior to the date of the Eligible Trustee's retirement. Benefits under
the retirement program are not secured or funded by the Adopting Funds.
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the 57 Dean Witter Funds (not 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 57
Dean Witter Funds as of December 31, 1997.
RETIREMENT BENEFITS FROM ALL DEAN WITTER FUNDS
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED RETIREMENT ANNUAL
CREDITED BENEFITS BENEFITS
YEARS ESTIMATED ACCRUED AS UPON
OF SERVICE PERCENTAGE EXPENSES RETIREMENT
AT OF BY ALL FROM ALL
RETIREMENT ELIGIBLE ADOPTING ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUNDS FUNDS(2)
- ---------------------------------------------------------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Michael Bozic....................................... 10 50.0% $ 20,499 $ 47,025
Edwin J. Garn....................................... 10 50.0 30,878 47,025
John R. Haire....................................... 10 50.0 (19,823)(3) 127,897
Wayne E. Hedien..................................... 9 42.5 0 39,971
Dr. Manuel H. Johnson............................... 10 50.0 12,832 47,025
Michael E. Nugent................................... 10 50.0 22,546 47,025
John L. Schroeder................................... 8 41.7 39,350 39,504
</TABLE>
- ------------------------
(1) An Eligible Trustee may elect alternate payments of his or her retirement
benefits based upon the combined life expectancy of such Eligible Trustee
and his or her spouse on the date of such Eligible Trustee's retirement. The
amount estimated to be payable under this method, through the remainder of
the later of the lives of such Eligible Trustee and spouse, will be the
actuarial equivalent of the Regular Benefit. In addition, the Eligible
Trustee 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.
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee'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 Trustees as a group was less than 1 percent of the Fund's shares of
beneficial interest outstanding.
12
<PAGE>
INVESTMENT PRACTICES AND POLICIES
- --------------------------------------------------------------------------------
FOREIGN SECURITIES. As stated in the Prospectus, the Fund may invest in
securities issued by foreign issuers. 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 currencies trade.
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. 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 exchange scrutiny and regulation then 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.
REPURCHASE AGREEMENTS. When cash may be available for only a few days, it
may be invested by the Fund in repurchase agreements until such time as it may
otherwise be invested or used for payments of obligations of the Fund. These
agreements, which may be viewed as a type of secured lending by the Fund,
typically involve the acquisition by the Fund of debt securities from a selling
financial institution such as a bank, savings and loan association or
broker-dealer. The agreement provides that the Fund will sell back to the
institution, and that the institution will repurchase, the underlying security
("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 value of the collateral, as specified in the agreement, does
not decrease below the purchase price plus accrued interest. If such decrease
occurs, additional collateral will be requested and, when received, added to the
account to maintain full collateralization. The Fund will accrue interest from
the institution until the time when the repurchase is to occur. Although 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.
While repurchase agreements involve certain risks not associated with direct
investments in debt securities, the Fund follows procedures designed to minimize
such risks. These procedures include effecting repurchase transactions only with
large, well-capitalized and well-established financial institutions whose
financial condition will be continually monitored by the Investment Manager
subject to procedures established by the Board of Trustees of the Fund. In
addition, as described above, the value of the collateral underlying the
repurchase agreement will be at least equal to the repurchase price,
13
<PAGE>
including any accrued interest earned on the repurchase agreement. In the event
of a default or bankruptcy by a selling financial institution, the Fund will
seek to liquidate such collateral. However, the exercising of the Fund's right
to liquidate such collateral could involve certain costs or delays and, to the
extent that proceeds from any sale upon a default of the obligation to
repurchase were less than the repurchase price, the Fund could suffer a loss. It
is the current policy of the Fund not to invest in repurchase agreements that do
not mature within seven days if any such investment, together with any other
illiquid assets held by the Fund, amounts to more than 10% of its net assets.
The Fund's investments in repurchase agreements may at times be substantial
when, in the view of the Investment Manager, liquidity, tax or other
considerations warrant.
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 cash equivalents, which are maintained in a segregated
account pursuant to applicable regulations and that are equal to at least 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 day's notice, or by the Fund on four business days'
notice. If the borrower fails to deliver the loaned securities within four 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 Investment Manager pursuant to procedures adopted and reviewed, on an
ongoing basis, by the Board of Trustees 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. During the
fiscal year ended November 30, 1997, the Fund did not loan any of its portfolio
securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From
time to time the Fund may purchase securities on a when-issued or delayed
delivery basis or may purchase or sell securities on a forward commitment basis.
When 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 commitment. While the Fund will only purchase securities on a
when-issued, delayed delivery or forward commitment basis with the intention of
acquiring the securities, the Fund may sell the securities before the settlement
date, if it is deemed advisable. The securities so purchased or sold are subject
to market fluctuation and no interest or dividends accrue to the purchaser prior
to the settlement date. At the time the Fund makes the commitment to purchase or
sell securities on a when-issued, delayed delivery or forward commitment basis,
it will record the transaction and thereafter reflect the value, each day, of
such security purchased, or if a sale, the proceeds to be received, in
determining its net asset value. At the time of delivery of the securities, the
value may be more or less than the purchase or sale price. The Fund will also
establish a segregated account with its custodian bank in which it will
continually maintain cash or cash equivalents or other liquid portfolio
securities equal in value to commitments to purchase securities on a
when-issued, delayed delivery or forward commitment basis. Subject to the
foregoing
14
<PAGE>
restrictions, the Fund may purchase securities on such basis without limit. The
Investment Manager and the Board of Trustees do not believe that the Fund's net
asset value will be adversely affected by the purchase of securities on such
basis.
WHEN, AS AND IF ISSUED SECURITIES. The Fund may purchase securities on a
"when, as and if issued" basis under which the issuance of the security depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization, 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 maintain cash or cash equivalents or other
liquid portfolio securities equal in value to recognized commitments for such
securities. Once a segregated account has been established, if the anticipated
event does not occur and the securities are not issued, the Fund will have lost
an investment opportunity. 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 Investment Manager and the Trustees 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.
RIGHTS AND WARRANTS. The Fund may invest up to 5% of the value of its net
assets in warrants, including not more than 2% in warrants not listed on either
the New York or American Stock Exchange. 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. The Fund may acquire warrants and
stock rights attached to other securities without reference to the foregoing
limitations.
PRIVATE PLACEMENTS. The Fund may invest up to 5% of its total assets in
securities which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933, 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.) 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 ("SEC") 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 Trustees of the Fund, will make a
determination as to the liquidity of each restricted security purchased by the
Fund. The procedures require that the following factors be taken into account in
making a liquidity determination: (1) the frequency of trades and price quotes
for the security; (2) the number of dealers and other potential purchasers who
have issued quotes on the security; (3) any dealer undertakings to make a market
in the security; and (4) the nature of the security and the nature of the
marketplace trades (the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). If a restricted security is
determined to be "liquid," such security will not be included within the
category "illiquid securities," which under the SEC's current policies may not
exceed 10% of the Fund's net assets, and will not be subject to the 5%
limitation set out in the preceding paragraph.
15
<PAGE>
OPTIONS AND FUTURES TRANSACTIONS
The Fund may write covered call options against securities held in its
portfolio and covered put options on eligible portfolio securities and stock
indexes and purchase options of the same series to effect closing transactions,
and may hedge against potential changes in the market value of investments (or
anticipated investments) and facilitate the reallocation of the Fund's assets
into and out of equities and fixed-income securities by purchasing put and call
options on portfolio (or eligible portfolio) securities and engaging in
transactions involving futures contracts and options on such contracts. The Fund
may also hedge against potential changes in the market value of the currencies
in which its investments (or anticipated investments) are denominated by
purchasing put and call options on currencies and engage in transactions
involving currency futures contracts and options on such contracts.
Call and put options on U.S. Treasury notes, bonds and bills and equity
securities are listed on Exchanges and are written in over-the-counter
transactions ("OTC options"). Listed options are issued by the Options Clearing
Corporation ("OCC") and other clearing entities including foreign exchanges.
Ownership of a listed call option gives the Fund the right to buy from the OCC
the underlying security covered by the option at the stated exercise price (the
price per unit of the underlying security) by filing an exercise notice prior to
the expiration date of the option. The writer (seller) of the option would then
have the obligation to sell to the OCC the underlying security at that exercise
price prior to the expiration date of the option, regardless of its then current
market price. Ownership of a listed put option would give the Fund the right to
sell the underlying security to the OCC at the stated exercise price. Upon
notice of exercise of the put option, the writer of the put would have the
obligation to purchase the underlying security from the OCC at the exercise
price.
OPTIONS ON TREASURY BONDS AND NOTES. Because trading in options written on
Treasury bonds and notes tends to center on the most recently auctioned issues,
the exchanges on which such securities trade will not continue indefinitely to
introduce options with new expirations to replace expiring options on particular
issues. Instead, the expirations introduced at the commencement of options
trading on a particular issue will be allowed to run their course, with the
possible addition of a limited number of new expirations as the original ones
expire. Options trading on each issue of bonds or notes will thus be phased out
as new options are listed on more recent issues, and options representing a full
range of expirations will not ordinarily be available for every issue on which
options are traded.
OPTIONS ON TREASURY BILLS. Because a deliverable Treasury bill changes from
week to week, writers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of the
option, the position may be hedged from a risk standpoint by the writing of a
call option. For so long as the call option is outstanding, the Fund will hold
the Treasury bills in a segregated account with its Custodian, so that they will
be treated as being covered.
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 a
16
<PAGE>
security 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 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.
OTC OPTIONS. Exchange-listed options are issued by the OCC 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 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 primary U.S. Government securities dealers recognized by
the Federal Reserve Bank of New York.
COVERED CALL WRITING. The Fund is permitted to write covered call options
on portfolio securities and the U.S. dollar and foreign currencies, without
limit, in order to aid in achieving its investment objective. 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 securities (currency) deliverable under the call option. A call option is
also covered if the Fund holds a call on the same security (currency) 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
17
<PAGE>
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 achieve a greater total return than would be
realized from holding the underlying securities (currency) alone. Moreover, the
income received from the premium will offset a portion of the potential loss
incurred by the Fund if the securities (currency) 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 less 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 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. Also, effecting a closing purchase transaction will
permit the cash or proceeds from the concurrent sale of any securities subject
to the option to be used for other investments by the Fund. The Fund may realize
a net gain or loss from a closing purchase transaction depending upon whether
the 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 on the option less the commission paid.
Options written by a Fund normally have expiration dates of from up to nine
months (equity securities) to eighteen months (fixed-income securities) 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 (currency) at the time
the option is written. See "Risks of Options Transactions," below.
COVERED PUT WRITING. As a writer of a covered put option, the Fund incurs
an obligation to buy the security underlying the option from the purchaser of
the put, at the option's exercise price at any time during the option period, at
the purchaser's election (certain listed and OTC put options written by the Fund
will be exercisable by the purchaser only on a specific date). A put is
"covered" if, at all times, the Fund maintains, in a segregated account
maintained on its behalf at the Fund's Custodian, cash, U.S. Government
securities or other liquid portfolio securities in an amount equal to at least
the exercise price of the option, at all times during the option period.
Similarly, a short put position could be covered by the Fund by its purchase of
a put option on the same security as the underlying security of the written
option, where the exercise price of the purchased option is equal to or more
than the exercise price of the put written or less than the exercise price of
the put written if the mark-to-market difference is maintained by
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the Fund in cash, U.S. Government securities or other liquid portfolio
securities which the Fund holds in a segregated account maintained at its
Custodian. In writing puts, the Fund assumes the risk of loss should the market
value of the underlying security decline below the exercise price of the option
(any loss being decreased by the receipt of the premium on the option written).
In the case of listed options, during the option period, the Fund may be
required, at any time, to make payment of the exercise price against delivery of
the underlying security. The operation of, and limitations on, covered put
options in other respects are substantially identical to those of call options.
The Fund will write put options for two purposes: (1) to receive the income
derived from the premiums paid by purchasers; and (2) when the Investment
Manager wishes to purchase the security underlying the option at a price lower
than its current market price, in which case it will write the covered put at an
exercise price reflecting the lower purchase price sought. The potential gain on
a covered put option is limited to the premium received on the option (less the
commissions paid on the transaction) while the potential loss equals the
difference between the exercise price of the option and the current market price
of the underlying securities when the put is exercised, offset by the premium
received (less the commissions paid on the transaction).
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 in order to close out a covered call position (see
"Covered Call Writing" above) or purchase call options on securities they intend
to purchase. The Fund may also purchase 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 or 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 (currency) which it holds
(or has the right to acquire) in its portfolio only to protect itself against a
decline in the value of the security (currency). 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. The Fund may also purchase put options to close out written
put positions in a manner similar to call options closing purchase transactions.
In addition, the Fund may sell a put option which it has previously purchased
prior to the sale of the securities (currency) 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. Any 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. 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 currency in which it is denominated) increase, but
has retained the risk of loss should the price of the underlying security
(currency) decline. The covered put writer also retains the risk of loss should
the market value of the underlying security (currency) decline below the
exercise price of the option less the premium received on the sale of the
option. In both cases, the writer has no control over the time when it may be
required to fulfill its obligation as a writer of the option. 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 (currency) 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 transaction or to purchase
an offsetting over-the-counter 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
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able to sell (exchange) an underlying security (currency) at a time when it
might otherwise be advantageous to do so. A covered put option writer who is
unable to effect a closing purchase transaction or to purchase an offsetting
over-the-counter option would continue to bear the risk of decline in the market
price of the underlying security (currency) until the option expires or is
exercised. In addition, a covered put writer would be unable to utilize the
amount held in cash or U.S. Government securities or other liquid portfolio
securities as security for the put option for other investment purposes until
the exercise or expiration of the option.
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
exercisable in accordance with their terms.
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.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in options, 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.
Each of the Exchanges has established limitations governing the maximum
number of call or put 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 Exchanges or are held or written on
one or more accounts or through one or more brokers). An Exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. These position limits may restrict the
number of listed options which the Fund may write.
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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 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. 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 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.
STOCK INDEX OPTIONS. Options on stock indexes are similar to options on
stock except that, rather than the right to take or make delivery of stock at a
specified price, an option on a stock index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the stock index upon which the option is based is greater than, in the case of a
call, or less than, in the case of a put, the exercise price of the option. This
amount of cash is equal to such difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple (the "multiplier"). The multiplier for an index option
performs a function similar to the unit of trading for a stock option. It
determines the total dollar value per contract of each point in the difference
between the exercise price of an option and the current level of the underlying
index. A multiplier of 100 means that a one-point difference will yield $100.
Options on different indexes may have different multipliers. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. Unlike stock options, all settlements are in cash and a gain or
loss depends on price movements in the stock market generally (or in a
particular segment of the market) rather than the price movements in individual
stocks. Currently, options are traded on the S&P 100 Index and the S&P 500 Index
on the Chicago Board Options Exchange, the Major Market Index and the Computer
Technology Index, Oil Index and Institutional Index on the American Stock
Exchange and the NYSE Index and NYSE Beta Index on the New York Stock Exchange,
The Financial News Composite Index on the Pacific Stock Exchange and the Value
Line Index, National O-T-C Index and Utilities Index on the Philadelphia Stock
Exchange, each of which and any similar index on which options are traded in the
future which include stocks that are not limited to any particular industry or
segment of the market is referred to as a "broadly based stock market index."
Options on stock indexes provide the Fund with a means of protecting the Fund
against the risk of market wide price movements. If the Investment Manager
anticipates a market decline, the Fund could purchase a stock index put option.
If the expected market decline materialized, the resulting decrease in the value
of the Fund's portfolio would be offset to the extent of the increase in the
value of the put option. If the Investment Manager anticipates a market rise,
the Fund may purchase a stock index call option to enable the Fund to
participate in such rise until completion of anticipated common stock purchases
by the Fund. Purchases and sales of stock index options also enable the
Investment Manager to more speedily achieve changes in the Fund's equity
positions.
The Fund will write put options on stock indexes only if such positions are
covered by cash, U.S. Government securities or other liquid portfolio securities
equal to the aggregate exercise price of the puts, which cover is held for the
Fund in a segregated account maintained for it by the Fund's Custodian. All call
options on stock indexes written by the Fund will be covered either by a
portfolio of stocks substantially replicating the movement of the index
underlying the call option or by holding a separate call option on the same
stock index with a strike price no higher than the strike price of the call
option sold by the Fund.
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RISKS OF OPTIONS ON INDEXES. Because exercises of stock index options are
settled in cash, call writers such as the Fund cannot provide in advance for
their potential settlement obligations by acquiring and holding the underlying
securities. A call writer can offset some of the risk of its writing position by
holding a diversified portfolio of stocks similar to those on which the
underlying index is based. However, most investors cannot, as a practical
matter, acquire and hold a portfolio containing exactly the same stocks as the
underlying index, and, as a result, bear a risk that the value of the securities
held will vary from the value of the index. Even if an index call writer could
assemble a stock portfolio that exactly reproduced the composition of the
underlying index, the writer still would not be fully covered from a risk
standpoint because of the "timing risk" inherent in writing index options. When
an index option is exercised, the amount of cash that the holder is entitled to
receive is determined by the difference between the exercise price and the
closing index level on the date when the option is exercised. As with other
kinds of options, the writer will not learn that it has been assigned until the
next business day, at the earliest. The time lag between exercise and notice of
assignment poses no risk for the writer of a covered call on a specific
underlying security, such as a common stock, because there the writer's
obligation is to deliver the underlying security, not to pay its value as of a
fixed time in the past. So long as the writer already owns the underlying
security, it can satisfy its settlement obligations by simply delivering it, and
the risk that its value may have declined since the exercise date is borne by
the exercising holder. In contrast, even if the writer of an index call holds
stocks that exactly match the composition of the underlying index, it will not
be able to satisfy its assignment obligations by delivering those stocks against
payment of the exercise price. Instead, it will be required to pay cash in an
amount based on the closing index value on the exercise date; and by the time it
learns that it has been assigned, the index may have declined, with a
corresponding decrease in the value of its stock portfolio. This "timing risk"
is an inherent limitation on the ability of index call writers to cover their
risk exposure by holding stock positions.
A holder of an index option who exercises it before the closing index value
for that day is available runs the risk that the level of the underlying index
may subsequently change. If such a change causes the exercised option to fall
out-of-the-money, the exercising holder will be required to pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
If dissemination of the current level of an underlying index is interrupted,
or if trading is interrupted in stocks accounting for a substantial portion of
the value of an index, the trading of options on that index will ordinarily be
halted. If the trading of options on an underlying index is halted, an exchange
may impose restrictions prohibiting the exercise of such options.
FUTURES CONTRACTS. The Fund may purchase and sell interest rate and stock
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 ("interest rate" futures), on the U.S. dollar and foreign
currencies, and such indexes as the S&P 500 Index, the Moody's Investment-Grade
Corporate Bond Index and the New York Stock Exchange Composite 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 and bond
index futures contracts for the purpose of hedging its fixed-income portfolio
(or anticipated portfolio) securities against changes in prevailing interest
rates. If the Investment Manager anticipates that interest rates may rise and,
concomitantly, the price of fixed-income securities fall, the Fund may sell an
interest rate futures contract or a bond index 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 U.S. Government
securities the Fund intends to purchase. Subsequently, appropriate fixed-income
securities may be purchased by the
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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 futures contracts on the U.S. dollar and on
foreign currencies to hedge against an anticipated rise or decline in the value
of the U.S. dollar or foreign currency in which a portfolio security of the Fund
is denominated vis-a-vis another currency.
The Fund will purchase or sell stock index futures contracts for the purpose
of hedging its equity portfolio (or anticipated portfolio) securities against
changes in their prices. If the Investment Manager anticipates that the prices
of stock held by the Fund may fall, the Fund may sell a stock index futures
contract. Conversely, if the Investment Manager wishes to hedge against
anticipated price rises in those stocks which the Fund intends to purchase, the
Fund may purchase stock index futures contracts. In addition, interest rate and
stock index futures contracts will be bought or sold in order to close out a
short or long position in a corresponding futures contract.
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. Index futures
contracts provide for the delivery of an amount of cash equal to a specified
dollar amount times the difference between the stock index value at the open or
close of the last trading day of the contract and the futures contract price. A
futures contract sale is closed out by effecting a futures contract purchase for
the same aggregate amount of the specific type of equity security and the same
delivery date. If the sale price exceeds the offsetting purchase price, the
seller would be paid the difference and would realize a gain. If the offsetting
purchase price exceeds the sale price, the seller would pay the difference and
would realize a loss. Similarly, a futures contract purchase is closed out by
effecting a futures contract sale for the same aggregate amount of the specific
type of equity security 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 2% of the contract amount. Initial margin
requirements are established by the Exchanges on which futures contracts trade
and may, from time to time, change. In addition, brokers may establish margin
deposit requirements in excess of those required by the Exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a 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 called "variation margin," with
the Fund's Custodian, in the account in the name of the broker, which are
reflective of price fluctuations in the futures contract. Currently, interest
rates 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.
INDEX FUTURES CONTRACTS. 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,
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the initial margin requirement is approximately 5% 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 a gain.
Currently, index futures contracts can be purchased or sold with respect to,
among others, the Standard & Poor's 500 Stock Price Index and the Standard &
Poor's 100 Stock Price Index on the Chicago Mercantile Exchange, the New York
Stock Exchange Composite Index on the New York Futures Exchange, the Major
Market Index on the American Stock Exchange, the Moody's Investment-Grade
Corporate Bond Index on the Chicago Board of Trade and the Value Line Stock
Index on the Kansas City Board of Trade.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write call and put
options on futures contracts and enter into closing transactions with respect to
such options to terminate an existing position. An option on a futures contract
gives the purchaser the right (in return for the premium paid), and the writer
the obligation, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option is accompanied by delivery of the accumulated balance in
the writer's futures margin account, which represents the amount by which the
market price of the futures contract at the time of exercise exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.
The 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 or sale of a put 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 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 seeks to hedge. Any premiums received in the writing of
options on futures contracts may, of course, augment the total return of the
Fund and thereby provide a further hedge against losses resulting from price
declines in portions of the Fund's portfolio.
The writer of an option on a futures contract is required to deposit initial
and variation margin pursuant to requirements similar to those applicable to
futures contracts. Premiums received from the writing of an option on a futures
contract are included in initial margin deposits.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Fund may not
enter into futures contracts or purchase related options thereon if, immediately
thereafter, the amount committed to margin plus the amount paid for premiums for
unexpired options on futures contracts exceeds 5% of the value of the Fund's
total assets, after taking into account unrealized gains and unrealized losses
on such contracts it has entered into, provided, however, that in the case of an
option that is in-the-money (the exercise price of the call (put) option is less
(more) than the market price of the underlying security) at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%.
However, there is no overall limitation on the percentage of the Fund's assets
which may be subject to a hedge position. In addition, in accordance with the
regulations of the Commodity Futures Trading Commission ("CFTC") under which the
Fund is exempted from registration as a commodity pool operator, the Fund may
only enter into futures contracts and options on futures contracts transactions
for purposes of hedging a part or all of its portfolio. If the CFTC changes its
regulations so that the Fund would be permitted to write options on futures
contracts for purposes other than hedging the Fund's investments without CFTC
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registration, the Fund may engage in such transactions for those purposes.
Except as described above, there are no other limitations on the use of futures
and options thereon by the Fund.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. The Fund
may sell a futures contract to protect against the decline in the value of
securities held by the Fund. However, it is possible that the futures market may
advance and the value of securities 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, and the value of such securities
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 addition, if the Fund holds a long position in a futures contract or has
sold a put option on a futures contract, it will hold cash, U.S. Government
securities or other liquid portfolio securities equal to the purchase price of
the contract or the exercise price of the put option (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.
If the Fund maintains a short position in a futures contract or 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 underlying
the futures contract or the exercise price of the option. Such a position may
also be covered by owning the securities underlying the futures contract (in the
case of a stock index futures contract a portfolio of securities substantially
replicating the relevant index), 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.
Exchanges may limit the amount by which the price of 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 Internal Revenue Code's requirements
for qualification as a regulated investment company and the Fund's intention to
qualify as such. See "Dividends, Distributions and Taxes" in the Prospectus and
the Statement of Additional Information.
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 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 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 by the Investment Manager may still not result
in a successful hedging transaction.
There is no assurance that a liquid secondary market will exist for futures
contracts and related options in which the Fund may invest. In the event a
liquid market does not exist, it may not be possible
25
<PAGE>
to close out a futures position, and in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In addition, limitations imposed by an exchange or board of trade on
which futures contracts are traded may compel or prevent the Fund from closing
out a contract which may result in reduced gain or increased loss to the Fund.
The absence of a liquid market in futures contracts might cause the Fund to make
or take delivery of the underlying securities 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.
The Investment Manager has 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.
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. Borrow money, except that the Fund, (i) may borrow from a bank for
temporary or emergency purposes and (ii) may engage in reverse repurchase
agreements and dollar rolls, in amounts not exceeding 5% (taken at the lower
of cost or current value) of its total assets (not including the amount
borrowed).
4. Pledge its assets or assign or otherwise encumber them except to
secure borrowings effected within the limitations set forth in restriction
(3). 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.
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.
26
<PAGE>
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 objective and policies; (b) by investment in
repurchase agreements; or (c) by lending its portfolio securities.
7. Make short sales of securities.
8. Purchase securities on margin, except for such short-term loans as
are necessary for the clearance of portfolio securities. The deposit or
payment by the Fund of initial or variation margin in connection with
futures contracts or related options thereon is not considered the purchase
of a security on margin.
9. 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.
10. Invest for the purpose of exercising control or management of any
other issuer.
11. 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.
12. Purchase or sell commodities or commodities contracts except that
the Fund may purchase or sell futures contracts or options on futures.
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 Board of Trustees, the Investment
Manager is responsible for decisions to buy and sell securities for the Fund,
the selection of brokers and dealers to effect the transactions, and the
negotiation of brokerage commissions, if any. Purchases and sales of securities
on a stock exchange are effected through brokers who charge a commission for
their services. In the over-the-counter market, securities are generally traded
on a "net" basis with dealers acting as principal for their own accounts without
a stated commission, although the price of the security usually includes a
profit to the dealer. The Fund expects that securities will be purchased at
times in underwritten offerings where the price includes a fixed amount of
compensation, generally referred to as the underwriter's concession or discount.
Options and futures transactions will usually be effected through a broker and a
commission will be charged. On occasion, the Fund may also purchase certain
money market instruments directly from an issuer, in which case no commissions
or discounts are paid. During the fiscal period October 27, 1995 (commencement
of operations) through November 30, 1995 and the fiscal years ended November 30,
1996 and 1997, the Fund paid $70,648, $520,777 and $1,063,917, respectively, in
brokerage commissions.
The Investment Manager currently serves as investment advisors to a number
of clients, including other investment companies, and may in the future act as
investment adviser to others. It is the practice of the Investment Manager to
cause purchase and sale transactions to be allocated among the Fund and others
whose assets it manages in such manner as it deems equitable. In making such
allocations among the Fund and other client accounts, various factors may be
considered, including the 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
27
<PAGE>
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 from obtaining a high quality of
brokerage and research services. In seeking to determine the reasonableness of
brokerage commissions paid in any transaction, the Investment Manager relies
upon its experience and knowledge regarding commissions generally charged by
various brokers and on its judgment in evaluating the brokerage and research
services received from the broker effecting the transaction. Such determinations
are necessarily subjective and imprecise, and 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 foreign 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 effects
transactions with those brokers and dealers who the Investment Manager believes
provide the most favorable prices and are capable of providing efficient
executions. If the Investment Manager believes such prices and executions are
obtainable from more than one broker or dealer, it may give consideration to
placing portfolio transactions with those brokers and dealers who also furnish
research and other services to the Fund or the Investment Manager. 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. During the
fiscal year ended November 30, 1997, the Fund directed the payment of $891,597
in brokerage commissions in connection with transactions in the aggregate amount
of $351,455,382.
The information and services received by the Investment Manager from brokers
and dealers may be of benefit to them 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 thereby reduce their expenses, it is of
indeterminable value and the fees paid to the Investment Manager 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., Certificates 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 & 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.
28
<PAGE>
Furthermore, the Board of Trustees of the Fund, including a majority of the
Trustees 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
October 27, 1995 through November 30, 1995 and the fiscal years ended November
30, 1996 and 1997, the Fund paid $1,500, $21,460 and $29,900, respectively, in
brokerage commissions to DWR. During the fiscal year ended November 30, 1997,
the brokerage commissions paid to DWR represented approximately 2.81% of the
total brokerage commissions paid by the Fund during the year and were paid on
account of transactions having an aggregate dollar value equal to approximately
4.64% of the aggregate dollar value of all portfolio transactions of the Fund
during the year for which commissions were paid. During the period June 1
through November 30, 1997, the Fund paid a total of $6,250 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 0.59% 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 0.73% of
the aggregate dollar value of all portfolio transactions of the Fund during the
period for which commissions were paid.
During the fiscal year ended November 30, 1997, the Fund did not acquire any
securities of the ten brokers or the ten dealers who executed the largest dollar
amounts of principal transactions with the Fund during the period, or securities
of the parents of those broker-dealers.
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
dealer agreement with DWR, which through its own sales organization sells shares
of the Fund. In addition, the Distributor may enter into similar agreements with
other selected dealers ("Selected Broker-Dealers"). The Distributor, a Delaware
corporation, is a wholly-owned subsidiary of MSDWD. The Trustees of the Fund,
including a majority of the Trustees who are not, and were not at the time they
voted, interested persons of the Fund, as defined in the Act (the "Independent
Trustees"), approved, at their meeting held on June 30, 1997, the current
Distribution Agreement (the "Distribution Agreement") appointing the Distributor
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 has an initial term ending April 30, 1998, and provides that it 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 and state securities laws and pays filing fees in
accordance with state securities laws. The Fund and the Distributor have agreed
to indemnify each other against certain liabilities, including liabilities under
the Securities Act 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.
29
<PAGE>
PLAN OF DISTRIBUTION
To compensate the Distributor for the services it or any selected dealer
provides and for the expenses it bears under the Distribution Agreement, 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 $1,800, $484,000 and $983,855 in contingent deferred
sales charges from Class B for the period October 27, 1995 (commencement of
operations) through November 30, 1995 and for the fiscal years ended November
30, 1996 and 1997, respectively, (b) approximately $0 and $653 in contingent
deferred sales charges from Class A and Class C, respectively, for the fiscal
year ended November 30, 1997, and (c) approximately $11,990 in front-end sales
charges from Class A for the fiscal year ended November 30, 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 each of Class B and Class C each year pursuant
to the Plan of Distribution 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 such is defined by the aforementioned Rules of the
Association.
The Plan was adopted by a vote of the Trustees of the Fund on August 24,
1995, at a meeting of the Trustees called for the purpose of voting on such
Plan. The vote included the vote of a majority of the Trustees 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 Trustees"). In making their decision to adopt the Plan, the
Trustees requested from the Distributor and received such information as they
deemed necessary to make an informed determination as to whether or not adoption
of the Plan was in the best interests of the shareholders of the Fund. After due
consideration of the information received, the Trustees, including the
Independent 12b-1 Trustees, determined that adoption of the Plan would benefit
the shareholders of the Fund. InterCapital, as then sole shareholder of the
Fund, approved the Plan on August 24, 1995, whereupon the Plan went into effect.
Under its terms, the Plan had an initial term ending April 30, 1996 and
provides that it will remain in effect from year to year thereafter, provided
such continuance is approved annually by a vote of the Trustees in the manner
described above. Prior to the Board's approval of Amendments to the Plan to
reflect the multiple-class structure for the Fund, the most recent continuance
of the Plan for one year, until April 30, 1998, was approved by the Trustees,
including a majority of the Independent 12b-1 Trustees, on April 24, 1997 at a
meeting called for the purpose of voting on such Plan. At that meeting the
Trustees and the Independent 12b-1 Trustees, after evaluating all the
information they deemed necessary to make an informed determination of whether
the Plan should be continued. The determination was based upon the conclusion of
the Trustees that the Plan provides an effective means of stimulating sales of
shares of the Fund and of reducing or avoiding net redemptions and the
potentially adverse effects that may occur therefrom. At their meeting held on
June 30, 1997, the Trustee, including a majority of the Independent 12b-1
Trustee, approved Amendments to the Plan to reflect the multiple-class structure
for the Fund, which took effect on July 28, 1997.
30
<PAGE>
Under the Plan and as required by Rule 12b-1, the Trustees will receive and
review promptly after the end of each fiscal 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 November 30, 1997 of $3,434,993. This amount is equal to 1.0% of the
average daily net assets of Class B for the fiscal year and was calculated
pursuant to clause (b) of the compensation formula under the Plan. For the
fiscal period July 28 through November 30, 1997, Class A and Class C shares of
the Fund accrued payments under the Plan amounting to $197 and $2,400,
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 (401k) and other
plans qualified under Section 401(a) of the Internal Revenue Code ("Qualified
Retirement Plans") for which Dean Witter Trust FSB ("DWT") serves as Trustee or
DWR's Retirement Plan 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 for 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 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 Fund associated distribution-related expenses,
including sales compensation and overhead. The distribution fee that the
Distributor receives from the Fund under the Plan, in effect, offsets
distribu-
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<PAGE>
tion 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 the distribution
expenses to the Fund, in the case of Class B shares, such assumed interest
(computed at the "broker's call rate") has been calculated on the gross 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 term
"overhead and other branch office distribution-related expenses" represents (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 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 Trustees, including
a majority of the Independent 12b-1 Trustees. 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 Trustees will
review a quarterly budget of projected distribution expenses to be incurred on
behalf of the Fund, together with a report explaining the purposes and
anticipated benefits of incurring such expenses. The Trustees will determine
which particular expenses, and the portions thereof, that may be borne by the
Fund, and in making such a determination shall consider the scope of the
Distributor's commitment to promoting the distribution of the Fund's Class A and
Class C shares.
Each Class paid 100% of the amounts accrued under the Plan with respect to
that Class for the fiscal year ended November 30, 1997 to the Distributor. The
Distributor and DWR estimate that they have spent, pursuant to the Plan,
$19,341,226 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)
7.42% ($1,435,245) -- advertising and promotional expenses; (ii) 0.54%
($104,306) -- printing of prospectuses for distribution to other than current
shareholders; and (iii) 92.04% ($17,801,675) -- other expenses, including the
gross sales credit and the carrying charge, of which 5.47% ($974,187) represents
carrying charges, 37.92% ($6,751,188) represents commission credits to DWR
branch offices for payments of commissions to account executives and 56.61%
($10,076,300) represents overhead and other branch office distribution-related
expenses. These amounts represent amounts paid by Class B only; there were no
Class A or Class C shares outstanding on such date. The amounts accrued by Class
A and Class C for distribution during the fiscal period July 28 through November
30, 1997 were for expenses which relate to compensation of self-personnel and
associated overhead expenses.
In the case of Class B shares, at any given time, the expenses in
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, the
excess amount, including the carrying charge designed to approximate the
opportunity costs incurred by DWR which arise from it
32
<PAGE>
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 $12,299,293
at November 30, 1997. Because there is no requirement under the Plan that the
Distributor be reimbursed for all 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 distribution expenses in excess of payments made
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. Any cumulative expenses incurred, but not yet recovered through
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 Trustee 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, DWSC and DWR or certain of their employees may be
deemed to have such an interest as a result of benefits derived from the
successful operation of the Plan or as a result of receiving a portion of the
amounts expended thereunder by the Fund.
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 Trustees in the manner described above. The Plan
may be terminated at any time, without payment of any penalty, by vote of a
majority of the Independent 12b-1 Trustees or by a vote of a majority of the
outstanding voting securities of the 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 Trustees shall be
committed to the discretion of the Independent 12b-1 Trustees.
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 p.m., at such earlier times), on each day that
the New York Stock Exchange is open by taking the net assets of the Fund and
dividing by the number of shares outstanding and adjusting to the nearest cent.
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.
As stated in the Prospectus, short-term securities with remaining maturities
of sixty days or less at the time of purchase are valued at amortized cost,
unless the Trustees determine such does not reflect the securities' market
value, in which case these securities will be valued at their fair value as
determined by the Trustees. 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 Trustees determine such does not reflect the securities'
market value, in which case these securities will be valued at their fair value
as determined by the Trustees. Listed options on debt securities are valued at
the latest sale price on the exchange on which they are listed unless no sales
of such options have taken place that day, in which case they will be valued at
the mean between their latest bid and asked prices. Unlisted options on debt
securities and all options on equity securities are valued at the mean between
their latest bid and asked prices. Futures are valued at the latest sale price
on the commodities exchange on which they trade unless the Trustees determine
that such price does not reflect their market value, in which case they will be
valued at their fair value as determined by the Trustees. 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 Trustees.
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 the close of the New York Stock
Exchange. The values of such securities used in computing the net asset
33
<PAGE>
value of the Fund's shares are determined as of such times. Foreign currency
exchange rates are also generally determined prior to the close of the New York
Stock Exchange. Occasionally, events which affect the values of such securities
and such exchange rates may occur between the times at which they are determined
and the close of the New York Stock Exchange and will therefore not be reflected
in the computation of the Fund's net asset value. If events materially affecting
the value of such securities occur during such period, then these securities
will be valued at their fair value as determined in good faith under procedures
established by and under the supervision of the Trustees.
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.
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
34
<PAGE>
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 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
35
<PAGE>
the month. The following table sets forth the rates of the CDSC applicable to
most Class B shares of the Fund:
<TABLE>
<CAPTION>
YEAR SINCE
PURCHASE CDSC AS A 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>
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>
YEAR SINCE
PURCHASE CDSC AS A PERCENTAGE OF
PAYMENT MADE AMOUNT 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 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
36
<PAGE>
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 charge, 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 the Distributor, which 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 Capital Appreciation Fund or in another Class of Dean
Witter Capital Appreciation Fund. Such investment will be made as described
above for automatic investment in shares 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. Shareholders of Dean Witter Capital Appreciation 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.
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 thirty 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 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" in the Prospectus).
Therefore, any shareholder participating in the Withdrawal Plan will have
sufficient
37
<PAGE>
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 an 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 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 shareholder
may, at any time, change the amount and interval of withdrawal payments through
his or her Account Executive or by written nomination to the Transfer Agent. In
addition, the party and/or the address to which the checks are mailed may be
changed by written notification to the Transfer Agent, with signature guarantees
required in the manner described above. 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. The shareholder may also redeem all or part of
the shares held in the Withdrawal Plan account (see "Redemptions and
Repurchases" in the Prospectus) at any time.
DIRECT INVESTMENTS THROUGH TRANSFER AGENT. As discussed in the Prospectus,
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 Capital Appreciation Fund, 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
funds are hereinafter referred to as 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)
38
<PAGE>
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
Global Short-Term. However, in the case of shares exchanged into 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, if any,
incurred on or after that date which are attributable to those shares.
Shareholders acquiring shares of an 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 Exchange Fund, with no CDSC being imposed on such
exchange. The holding period previously frozen when shares were first exchanged
for shares of the Exchange Fund resumes on the last day of the month when 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 or in Global
Short-Term are exchanged for shares of a Dean Witter Multi-Class Fund, share 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. 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
39
<PAGE>
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 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 Tax-Free Daily Income Trust, Dean Witter California
Tax-Free Daily Income Trust and Dean Witter New York Municipal Money Market
Trust, although those funds may, at their discretion, accept initial investments
of as low as $1,000. The minimum 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 as low as
$5,000. The minimum initial 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 those 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' prior written notice 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
40
<PAGE>
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, policies and restrictions.
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. 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.
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
- --------------------------------------------------------------------------------
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 certificates, 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" in the Prospectus) 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 Agent may require
that written evidence of authority acceptance 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. 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 a 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
41
<PAGE>
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 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, 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 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 the proceeds, is
received by the Transfer Agent.
Exercise of the reinstatement privilege will not affect the federal income
tax and state 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 and state personal income tax purposes but will be applied to
adjust the cost basis of the shares acquired upon reinstatement.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
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.
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 received
by the shareholder in the prior calendar year.
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 capital 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 lengthenes the
required holding period to
42
<PAGE>
obtain the lower rate from more than 12 months to more than 18 months. The lower
rates do not apply to collectibles and certain 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 qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986 (the "Code"). If so qualified,
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.
After the end of the calendar year, shareholders will be sent 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.
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 normally 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 long-term capital loss
to the extent of any distributions of net long-term capital gains during the
six-month period.
The Fund may elect to retain net capital gains and pay corporate income tax
thereon. In such event, each shareholder of record on the last day of the Fund's
taxable year would be required to include in income for tax purposes such
shareholder's proportionate share of the Fund's undistributed net capital gain.
In addition, each shareholder would be entitled to credit such shareholder's
proportionate share of the tax paid by the Fund against federal income tax
liabilities, to claim refunds to the extent that the credit exceeds such
liabilities, and to increase the basis of his shares held for federal income tax
purposes by an amount equal to 65% of such shareholder's proportionate share of
the undistributed net capital gain.
Dividends, interest and capital gains received by the Fund may give rise to
withholding 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 or
deductions 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
43
<PAGE>
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. The Fund may request a private letter ruling from the Internal Revenue
Service on some or all of these issues.
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.
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 attorney or tax adviser regarding
specific questions as to federal, state or local taxes.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
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 separately for Class A, Class B, Class C and Class D shares. The Fund's
"average annual total return" represents an annualization of the Fund's total
return over a particular period and is computed by finding the annual percentage
rate which will result in the ending redeemable value of a hypothetical $1,000
investment made at the beginning of a one, five or ten year period, or for the
period from the date of commencement of 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 return of Class B for the fiscal year ended November 30, 1997 and
the period October 27, 1995 (commencement of operations) through November 30,
1997 were 4.47% and 17.11%, 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
44
<PAGE>
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 November 30, 1997 were -5.78%, -1.83% and -0.49% 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 imposition of the maximum front-end sales charge for Class A or
the 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 returns of the Fund may be calculated in the manner described above, but
without deduction for any applicable sales charge. Based on this calculation,
total returns of Class B for the fiscal year ended November 30, 1997 and for the
period October 27, 1995 through November 30, 1997 were 9.47% and 18.30%,
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 fiscal year ended November
30, 1997 and for the period October 27, 1995 through November 30, 1997 were
9.47% and 42.20%, respectively. Based on the foregoing calculations, the total
returns for Class A, Class C and Class D for the period July 28 through November
30, 1997 were -0.56%, -0.84% and -0.49%, 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 total aggregate total return to date (expressed as a decimal and
without taking into account the effect of 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 or $100,000 in the case of each of Class B, Class C and Class D, as the
case may be. Investments of $10,000, $50,000 and $100,000 in each Class at
inception of the Class would have grown (declined) to the following amounts at
November 30, 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 $ 9,422 $ 47,731 $ 96,457
Class B 10/27/95 14,220 71,100 142,200
Class C 7/28/97 9,916 49,580 99,160
Class D 7/28/97 9,951 49,755 99,510
</TABLE>
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent organizations
including the Capital Appreciation Lipper Index.
DESCRIPTION OF SHARES
- --------------------------------------------------------------------------------
The shareholders of the Fund are entitled to a full vote for each full share
held. All of the Trustees have been elected by the shareholders of the Fund,
most recently at a Special Meeting of Shareholders held on May 21, 1997. The
Trustees themselves have the power to alter the number and the terms of office
of the Trustees, and they may at any time lengthen their own terms or make their
terms of unlimited
45
<PAGE>
duration and appoint their own successors, provided that always at least a
majority of the Trustees has been elected by the shareholders of the Fund. Under
certain circumstances the Trustees may be removed by action of the Trustees. The
shareholders also have the right to remove the Trustees following a meeting
called for that purpose requested in writing by the record holders of not less
than ten percent of the Fund's outstanding shares. The voting rights of
shareholders are not cumulative, so that holders of more than 50 percent of the
shares voting can, if they choose, elect all Trustees being selected, while the
holders of the remaining shares would be unable to elect any Trustees.
The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios) and additional classes of shares
within any series. The Trustees have not presently authorized any such
additional series or classes of shares other than as set forth in the
Prospectus.
The Declaration of Trust provides that no Trustee, officer, employee or
agent of the Fund is liable to the Fund or to a shareholder, nor is any Trustee,
officer, employee or agent liable to any third persons in connection with the
affairs of the Fund, except as such liability may arise from his or her own bad
faith, willful misfeasance, gross negligence, or reckless disregard of his or
her duties. It also provides that all third persons shall look solely to the
Fund's property for satisfaction of claims arising in connection with the
affairs of the Fund. With the exceptions stated, the Declaration of Trust
provides that a Trustee, officer, employee or agent is entitled to be
indemnified against all liabilities in connection with the affairs of the Fund.
The Fund is authorized to issue an unlimited number of shares of beneficial
interest. The Fund shall be of unlimited duration subject to the provisions in
the Declaration of Trust concerning termination by action of the shareholders.
CUSTODIAN AND TRANSFER AGENT
- --------------------------------------------------------------------------------
The Bank of New York is the Custodian of the Fund's assets. The Custodian
has contracted with various foreign banks and depositories 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 of 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.
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.
46
<PAGE>
The Fund's fiscal year ends on November 30. 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 Trustees.
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 year ended November 30, 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 CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (100.2%)
ADVERTISING (0.1%)
25,000 TMP Worldwide, Inc.*................................................................... $ 453,125
------------
AEROSPACE & DEFENSE (0.9%)
100,000 Kellstrom Industries, Inc.*............................................................ 2,612,500
30,000 Orbital Sciences Corp.*................................................................ 768,750
------------
3,381,250
------------
AGRICULTURE (0.1%)
20,000 Scheid Vineyards Inc. (Class A)*....................................................... 200,000
------------
AGRICULTURE RELATED (0.3%)
50,000 Agribiotech, Inc.*..................................................................... 493,750
100,000 Cadiz Land Company, Inc.*.............................................................. 718,750
------------
1,212,500
------------
ASSET MANAGEMENT (0.0%)
5,000 MAXIMUS, Inc.*......................................................................... 120,625
------------
AUTOMOTIVE (0.4%)
28,900 Avis Rent-A-Car, Inc.*................................................................. 969,956
31,600 Group 1 Automotive, Inc.*.............................................................. 306,125
------------
1,276,081
------------
BANKING (0.0%)
5,000 Net.B@nk, Inc.*........................................................................ 55,625
------------
BIOTECHNOLOGY (0.9%)
30,000 ESC Medical Systems Ltd. (Israel)*..................................................... 1,072,500
70,000 Osteotech, Inc.*....................................................................... 2,108,750
------------
3,181,250
------------
BUILDING & CONSTRUCTION (0.4%)
40,000 Dycom Industries, Inc.*................................................................ 900,000
20,000 Hospitality Worldwide Services, Inc.*.................................................. 240,000
15,000 Schuff Steel Co.*...................................................................... 165,000
900 UNIFAB International, Inc.*............................................................ 18,000
------------
1,323,000
------------
BUSINESS SERVICES (0.2%)
30,000 Wackenhut Corrections Corp.*........................................................... 840,000
------------
CEMENT (0.5%)
80,000 Giant Cement Holding, Inc.*............................................................ 1,930,000
------------
CHEMICALS - SPECIALTY (0.1%)
60,000 Eco Soil Systems, Inc.*................................................................ 337,500
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMERCIAL SERVICES (5.2%)
80,000 Actrade International, Ltd.*........................................................... $ 2,290,000
30,000 Administaff, Inc.*..................................................................... 667,500
60,000 Billing Information Concepts Corp.*.................................................... 2,670,000
50,000 Caribiner International, Inc.*......................................................... 2,121,875
50,000 Claremont Technology Group, Inc.*...................................................... 900,000
50,000 Complete Management, Inc.*............................................................. 831,250
30,000 Crescent Operating, Inc.*.............................................................. 498,750
50,000 Grow Biz International, Inc.*.......................................................... 600,000
30,000 International Total Services, Inc.*.................................................... 461,250
30,000 Lason Holdings, Inc.*.................................................................. 836,250
10,000 Market Facts Inc.*..................................................................... 176,250
65,000 May & Speh, Inc.*...................................................................... 861,250
5,300 Metro Information Services, Inc.*...................................................... 135,150
30,000 Personnel Group of America, Inc.*...................................................... 1,096,875
50,000 Primark Corp.*......................................................................... 1,693,750
80,000 ProSoft I-Net Solutions Inc.*.......................................................... 890,000
40,000 Quebecor Printing, Inc. (Canada)....................................................... 573,114
50,000 Superior Services, Inc.*............................................................... 1,168,750
30,000 Vestcom International, Inc.*........................................................... 592,500
------------
19,064,514
------------
COMMUNICATIONS - EQUIPMENT & SOFTWARE (0.2%)
30,000 EXCEL Communications, Inc.*............................................................ 705,000
------------
COMMUNICATIONS - EQUIPMENT/MANUFACTURERS (0.3%)
30,000 Bay Networks, Inc.*.................................................................... 901,875
------------
COMPUTER EQUIPMENT (0.8%)
30,000 Kemet Corp.*........................................................................... 708,750
45,000 RADCOM Ltd.*........................................................................... 348,750
60,000 Splash Technology Holdings, Inc.*...................................................... 1,920,000
------------
2,977,500
------------
COMPUTER SERVICES (1.0%)
80,000 CheckFree Corp.*....................................................................... 2,085,000
30,000 Data Systems Network Corp.*............................................................ 345,000
40,000 Procom Technology, Inc.*............................................................... 615,000
40,000 SPR Inc.*.............................................................................. 635,000
------------
3,680,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
48
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMPUTER SOFTWARE (9.5%)
25,000 Advantage Learning Systems, Inc.*...................................................... $ 568,750
60,000 Aladdin Knowledge Systems Ltd. (Israel)*............................................... 900,000
100,000 Borland International, Inc.*........................................................... 1,000,000
24,000 Box Hill Systems Corp.*................................................................ 280,500
50,000 Business Objects S.A. (ADR) (France)*.................................................. 537,500
100,000 Compuware Corp.*....................................................................... 3,493,750
80,000 CyberMedia, Inc.*...................................................................... 1,800,000
100,000 Data Dimensions, Inc.*................................................................. 1,806,250
50,000 DataMirror Corp. (Canada)*............................................................. 458,281
100,000 Digi International Inc.*............................................................... 1,937,500
60,000 Dr. Solomon's Group PLC (ADR) (United Kingdom)*........................................ 2,085,000
3,000 Great Plains Software, Inc.*........................................................... 67,500
50,000 International Microcomputer Software, Inc.*............................................ 787,500
60,000 INTERSOLV, Inc.*....................................................................... 956,250
50,000 InterVU Inc.*.......................................................................... 493,750
5,400 J.D. Edwards & Co.*.................................................................... 184,275
50,000 Kofax Image Products, Inc.*............................................................ 425,000
50,000 Landmark Systems Corp.*................................................................ 350,000
30,000 Learning Company, Inc.*................................................................ 543,750
50,000 LGS Group Inc. (Canada)................................................................ 570,656
40,000 MetaCreations Corp.*................................................................... 475,000
3,600 MMC Networks Inc.*..................................................................... 62,325
14,200 New Era of Networks, Inc.*............................................................. 181,050
40,000 Open Text Corp. (Canada)*.............................................................. 377,500
50,000 Oshap Technologies, Ltd. (Israel)*..................................................... 434,375
30,000 Pairgain Technologies, Inc.*........................................................... 706,875
30,000 Peregrine Systems, Inc.*............................................................... 356,250
20,000 Platinum Technology, Inc.*............................................................. 520,000
12,000 QAD Inc.*.............................................................................. 189,750
30,000 Rainbow Technologies, Inc.*............................................................ 720,000
25,000 RealNetworks, Inc.*.................................................................... 382,812
110,000 Sapiens International Corp. (Israel)*.................................................. 825,000
90,000 Simulation Sciences, Inc.*............................................................. 1,620,000
70,000 Symantec Corp.*........................................................................ 1,750,000
30,000 Symix Systems, Inc.*................................................................... 442,500
130,000 System Software Associates, Inc.*...................................................... 1,755,000
100,000 Systems & Computer Technology Corp.*................................................... 4,650,000
31,000 TSI International Software Ltd.*....................................................... 310,000
------------
35,004,649
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMPUTER SOFTWARE & SERVICES (8.6%)
80,000 Analysts International Corp............................................................ $ 3,780,000
30,000 CCC Information Services Group, Inc.*.................................................. 555,000
30,000 Certicom Corp. (Canada)*............................................................... 821,745
40,000 Check Point Software Technologies Ltd. (Israel)*....................................... 1,805,000
40,000 Cylink Corp.*.......................................................................... 440,000
30,000 Documentum, Inc.*...................................................................... 922,500
50,000 Edify Corp.*........................................................................... 837,500
45,000 Harbinger Corp.*....................................................................... 1,350,000
90,000 Hyperion Software Corp.*............................................................... 3,875,625
50,000 I2 Technologies, Inc.*................................................................. 2,256,250
30,000 IDT Corp.*............................................................................. 645,000
50,000 Infoseek Corp.*........................................................................ 553,125
30,000 JetForm Corp.*......................................................................... 459,375
50,000 Keane, Inc.*........................................................................... 1,584,375
80,000 Legato Systems, Inc.*.................................................................. 3,040,000
70,000 Lycos, Inc.*........................................................................... 2,135,000
50,000 Netopia, Inc.*......................................................................... 325,000
40,000 Olicom A/S (Denmark)*.................................................................. 1,147,500
60,000 PRI Automation, Inc.*.................................................................. 2,040,000
40,000 Secure Computing Corp.*................................................................ 475,000
90,000 Versant Object Technology Corp.*....................................................... 1,333,125
60,000 Xylan Corp.*........................................................................... 1,226,250
------------
31,607,370
------------
COMPUTERS (1.2%)
30,000 Lexmark International Group, Inc. (Class A)*........................................... 956,250
40,000 MICROS Systems, Inc.*.................................................................. 2,075,000
30,000 Network Appliance, Inc.*............................................................... 1,511,250
------------
4,542,500
------------
COMPUTERS - SYSTEMS (0.8%)
76,113 ATL Products, Inc.*.................................................................... 861,028
60,000 Tera Computer Co.*..................................................................... 900,000
60,000 Unisys Corp.*.......................................................................... 858,750
20,000 Video Lottery Technologies, Inc.*...................................................... 227,500
------------
2,847,278
------------
CONSUMER PRODUCTS (0.2%)
30,000 Consolidated Cigar Holdings Inc. (Class A)*............................................ 826,875
------------
CONSUMER SERVICES (1.1%)
60,000 AccuStaff, Inc.*....................................................................... 1,773,750
70,000 AmeriTrade Holding Corp. (Class A)*.................................................... 2,345,000
------------
4,118,750
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
49
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
DATA PROCESSING (0.4%)
20,000 Choicepoint Inc.*...................................................................... $ 701,250
100,000 Object Design, Inc.*................................................................... 937,500
------------
1,638,750
------------
DISTRIBUTION (0.5%)
5,800 JLK Direct Distribution Inc. (Class A)*................................................ 164,937
60,000 VWR Scientific Products Corp.*......................................................... 1,593,749
------------
1,758,686
------------
DRUGS (0.5%)
50,000 IDEC Pharmaceuticals Corp.*............................................................ 1,746,875
------------
EDUCATION (0.5%)
10,100 Bright Horizons, Inc.*................................................................. 156,550
82,700 Cornell Corrections, Inc.*............................................................. 1,447,250
13,000 Education Management Corp.*............................................................ 324,187
------------
1,927,987
------------
ELECTRONIC COMPONENTS (2.1%)
30,000 ATMI Inc.*............................................................................. 963,750
60,000 DII Group, Inc.*....................................................................... 1,342,500
40,000 DSP Communications, Inc.*.............................................................. 640,000
78,100 EFTC Corp.*............................................................................ 1,161,737
30,000 Exar Corp.*............................................................................ 746,250
19,600 FARO Technologies, Inc.*............................................................... 240,100
40,000 GenRad, Inc.*.......................................................................... 1,062,500
30,000 Ramtron International Corp.*........................................................... 193,125
60,000 Windmere-Durable Holdings Inc.......................................................... 1,447,500
------------
7,797,462
------------
ELECTRONICS (3.7%)
40,000 Aeroflex Inc.*......................................................................... 342,500
60,000 Analog Devices, Inc.*.................................................................. 1,882,500
19,000 Anaren Microwave, Inc.*................................................................ 380,000
110,000 Creative Technology Ltd. (Singapore)*.................................................. 2,928,750
30,000 DSP Group, Inc.*....................................................................... 975,000
40,000 Faroudja, Inc.*........................................................................ 275,000
20,000 Flextronics International, Ltd.*....................................................... 800,000
110,000 Kopin Corp.*........................................................................... 2,310,000
100,000 Odetics, Inc. (Class A)*............................................................... 662,500
8,700 OSI Systems, Inc.*..................................................................... 113,100
30,000 Ultratech Stepper, Inc.*............................................................... 731,250
50,000 Vitesse Semiconductor Corp.*........................................................... 2,225,000
------------
13,625,600
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
ELECTRONICS & ELECTRICAL (0.3%)
35,000 Teradyne, Inc.*........................................................................ $ 1,148,437
------------
ELECTRONICS - SEMICONDUCTORS (0.7%)
90,000 MRV Communications, Inc.*.............................................................. 2,520,000
------------
ELECTRONICS - SEMICONDUCTORS/COMPONENTS (1.0%)
60,000 Kulicke & Soffa Industries, Inc.*...................................................... 1,653,750
60,000 Leitch Technology Corp. (Canada)*...................................................... 1,580,278
30,000 Supertex, Inc.*........................................................................ 367,500
------------
3,601,528
------------
ENERGY (0.6%)
30,000 Global Marine, Inc.*................................................................... 789,375
80,000 KTI, Inc.*............................................................................. 1,270,000
------------
2,059,375
------------
ENTERTAINMENT (0.0%)
9,600 N2K Inc.*.............................................................................. 177,600
------------
ENVIRONMENTAL (0.6%)
60,000 Allied Waste Industries, Inc.*......................................................... 1,308,750
90,000 ITEQ, Inc.*............................................................................ 1,057,500
------------
2,366,250
------------
ENVIRONMENTAL CONTROL (0.8%)
90,000 U.S.A Waste Services, Inc.*............................................................ 2,975,625
------------
EQUIPMENT (0.4%)
30,000 EVI, Inc.*............................................................................. 1,543,125
------------
FINANCE (0.5%)
50,000 Franchise Mortgage Acceptance Co.*..................................................... 875,000
76,500 New Century Financial Corp.*........................................................... 1,004,062
------------
1,879,062
------------
FINANCIAL SERVICES (0.2%)
30,000 Doral Financial Corp................................................................... 641,250
------------
FOOD PROCESSING (0.3%)
30,000 Smithfield Foods, Inc.*................................................................ 1,057,500
------------
FOODS (0.2%)
40,000 Foodmaker, Inc.*....................................................................... 620,000
------------
FURNITURE (0.2%)
25,900 Knoll, Inc.*........................................................................... 780,238
------------
HEALTH & PERSONAL CARE (0.5%)
109,000 Assisted Living Concepts, Inc.*........................................................ 1,866,625
------------
HEALTHCARE (0.2%)
60,000 Bone Care International, Inc.*......................................................... 600,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
50
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
HEALTHCARE - DIVERSIFIED (0.5%)
30,000 Healthsouth Corp.*..................................................................... $ 787,500
23,460 Paragon Health Network, Inc.*.......................................................... 1,216,988
------------
2,004,488
------------
HEALTHCARE - HMO (0.2%)
60,000 Specialty Care Network, Inc.*.......................................................... 742,500
------------
HOME BUILDING (0.2%)
40,000 Kaufman & Broad Home Corp.............................................................. 867,500
------------
HOTELS/MOTELS (0.1%)
31,600 Execustay Corp.*....................................................................... 300,200
------------
HOUSEHOLD PRODUCTS (0.1%)
10,000 Dial Corp.............................................................................. 193,750
------------
INTERNET (0.4%)
18,000 Concentric Network Corp.*.............................................................. 180,000
30,000 Excite, Inc.*.......................................................................... 768,750
8,100 Network Solutions, Inc. (Class A)*..................................................... 128,588
35,000 Preview Travel, Inc.*.................................................................. 319,375
------------
1,396,713
------------
INVESTMENT COMPANIES (0.4%)
22,400 Affiliated Managers Group, Inc.*....................................................... 560,000
45,000 Consolidated Capital Corp.*............................................................ 922,500
------------
1,482,500
------------
LEISURE (1.1%)
40,000 American Coin Merchandising, Inc.*..................................................... 675,000
28,900 Brass Eagle Inc.*...................................................................... 334,156
30,000 Signature Resorts, Inc.*............................................................... 806,250
39,000 Silverleaf Resorts, Inc.*.............................................................. 809,250
34,500 Trendwest Resorts, Inc.*............................................................... 845,250
20,000 Vistana, Inc.*......................................................................... 440,000
------------
3,909,906
------------
MACHINERY (2.1%)
110,000 Chart Industries, Inc.................................................................. 2,543,750
40,000 MagneTek, Inc.*........................................................................ 835,000
140,000 National-Oilwell, Inc.*................................................................ 4,436,250
------------
7,815,000
------------
MACHINERY - DIVERSIFIED (0.3%)
50,400 Advanced Energy Industries, Inc.*...................................................... 989,100
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
MANUFACTURING (0.8%)
110,000 General Scanning, Inc.*................................................................ $ 2,860,000
------------
MANUFACTURING - DIVERSIFIED (0.5%)
30,000 Griffon Corp.*......................................................................... 466,875
30,000 Mettler-Toledo International Inc.*..................................................... 536,250
35,000 Middleby Corp.*........................................................................ 354,375
40,000 Safety Components International, Inc.*................................................. 540,000
------------
1,897,500
------------
MEDICAL PRODUCTS & SUPPLIES (1.1%)
30,000 Health Care & Retirement Corp.*........................................................ 1,181,250
100,000 Molecular Dynamics, Inc.*.............................................................. 2,012,500
60,000 Optical Coating Laboratory, Inc........................................................ 900,000
------------
4,093,750
------------
MEDICAL SERVICES (0.1%)
50,000 Medical Resources, Inc.*............................................................... 450,000
------------
METALS & MINING (0.0%)
1,000 BRO-X Minerals Ltd. (Canada)*.......................................................... 492
------------
METALS - MISCELLANEOUS (0.4%)
50,000 Handy & Harman......................................................................... 1,118,750
60,000 Recycling Industries, Inc.*............................................................ 465,000
------------
1,583,750
------------
METALS NON-FERROUS (0.5%)
90,000 Tubos de Acero de Mexico S.A. (ADR) (Mexico)*.......................................... 1,991,250
------------
MISCELLANEOUS (2.5%)
60,000 Brunswick Technologies, Inc.*.......................................................... 1,027,500
90,000 Mail-Well, Inc.*....................................................................... 2,936,250
120,000 Maverick Tube Corp.*................................................................... 3,427,500
70,000 Royal Group Technologies Ltd. (Canada)*................................................ 1,684,375
------------
9,075,625
------------
NATURAL GAS - EXPLORATION & PRODUCTION (0.7%)
120,000 Gulf Island Fabrication, Inc.*......................................................... 2,640,000
------------
OFFICE EQUIPMENT & SUPPLIES (0.1%)
30,000 Corporate Express, Inc.*............................................................... 468,750
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
51
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
OIL & GAS (4.8%)
17,700 Bayard Drilling Technologies, Inc.*.................................................... $ 325,238
90,000 Clayton Williams Energy, Inc.*......................................................... 1,417,500
60,000 Comstock Resources, Inc.*.............................................................. 787,500
30,000 Cross Timbers Oil Co................................................................... 695,625
30,000 Dailey International Inc.*............................................................. 333,750
15,000 Dawson Geophysical Co.*................................................................ 285,000
39,700 Gulf Indonesia Resources Ltd.*......................................................... 895,731
50,000 KCS Energy, Inc........................................................................ 1,187,500
45,000 Lomak Petroleum, Inc................................................................... 781,875
60,000 Mallon Resources Corp.*................................................................ 592,500
120,000 Noble Drilling Corp.*.................................................................. 3,607,500
100,000 Patterson Energy, Inc.*................................................................ 3,637,500
50,000 St. Mary Land & Exploration Co......................................................... 2,043,750
100,000 Unit Corp.*............................................................................ 1,093,750
------------
17,684,719
------------
OIL - DOMESTIC (0.2%)
30,000 Snyder Oil Corp........................................................................ 596,250
------------
OIL - EXPLORATION & PRODUCTION (0.1%)
15,000 Brown (TOM), Inc.*..................................................................... 328,125
------------
OIL EQUIPMENT & SERVICES (1.7%)
3,000 Dril-Quip, Inc.*....................................................................... 89,813
100,000 ENSCO International, Inc............................................................... 3,575,000
120,000 Global Industries Ltd.*................................................................ 1,920,000
22,100 IRI International Corp.*............................................................... 356,363
10,000 Wiser Oil Co........................................................................... 152,500
------------
6,093,676
------------
OIL REFINERIES (0.5%)
60,000 Valero Energy Corp..................................................................... 1,882,500
------------
OIL RELATED (0.4%)
35,000 Veritas DGC Inc.*...................................................................... 1,400,000
------------
OIL SERVICES (1.5%)
97,500 Core Laboratories N.V.*................................................................ 3,510,000
40,000 Friede Goldman International Inc.*..................................................... 1,187,500
25,000 Superior Energy Services, Inc.*........................................................ 262,500
20,000 UTI Energy Corp.*...................................................................... 560,000
------------
5,520,000
------------
OIL WELL EQUIPMENT & SERVICE (0.2%)
30,000 Key Energy Group, Inc.*................................................................ 729,375
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
PHARMACEUTICALS (2.3%)
100,000 Advance Paradigm, Inc.*................................................................ $ 2,962,500
5,000 Algos Pharmaceutical Corp.*............................................................ 127,500
30,000 Emisphere Technologies, Inc.*.......................................................... 603,750
40,000 MedImmune, Inc.*....................................................................... 1,517,500
30,000 PathoGenesis Corp.*.................................................................... 1,065,000
60,000 SangStat Medical Corp.*................................................................ 2,055,000
------------
8,331,250
------------
POLLUTION CONTROL (0.8%)
80,000 American Disposal Services, Inc.*...................................................... 2,820,000
------------
PROPERTY - CASUALTY INSURANCE (0.4%)
5,000 Penn-America Group, Inc................................................................ 91,250
30,000 Stewart Information Services Corp...................................................... 811,875
30,000 Symons International Group, Inc.*...................................................... 558,750
------------
1,461,875
------------
PUBLISHING (1.0%)
9,200 CMP Media Inc. (Class A)*.............................................................. 169,050
5,000 Petersen Companies, Inc. (Class A)*.................................................... 90,000
30,000 Thomson Corp. (Canada)................................................................. 759,587
90,000 Valassis Communications, Inc.*......................................................... 2,705,625
------------
3,724,262
------------
REAL ESTATE (0.3%)
50,000 Catellus Development Corp.*............................................................ 925,000
2,000 LaSalle Partners, Inc.*................................................................ 69,375
------------
994,375
------------
REAL ESTATE INVESTMENT TRUST (0.2%)
40,000 Laser Mortgage Management, Inc......................................................... 590,000
------------
RESTAURANTS (0.1%)
28,000 Star Buffet, Inc.*..................................................................... 364,000
------------
RETAIL (2.7%)
19,900 A. C. Moore Arts & Crafts, Inc.*....................................................... 296,013
30,000 Abercrombie & Fitch Co. (Class A)*..................................................... 898,125
60,000 Claire's Stores, Inc................................................................... 1,357,500
60,000 Fred's, Inc............................................................................ 1,462,500
80,000 Michaels Stores, Inc.*................................................................. 2,565,000
60,000 ONSALE, Inc.*.......................................................................... 1,053,750
60,000 Ross Stores, Inc....................................................................... 2,340,000
------------
9,972,888
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
52
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
RETAIL - DEPARTMENT STORES (1.8%)
75,000 Dollar General Corp.................................................................... $ 2,821,875
60,000 Payless ShoeSource, Inc.*.............................................................. 3,810,000
------------
6,631,875
------------
RETAIL - SPECIALTY (0.8%)
100,000 Braun's Fashions Corp.*................................................................ 950,000
60,000 TJX Companies, Inc..................................................................... 2,070,000
------------
3,020,000
------------
RETAIL - SPECIALTY APPAREL (0.6%)
60,000 Dress Barn, Inc.*...................................................................... 1,545,000
30,000 Vans, Inc.*............................................................................ 481,875
------------
2,026,875
------------
SEMICONDUCTORS (1.1%)
50,000 Integrated Circuit Systems, Inc.*...................................................... 1,400,000
60,000 KLA-Tencor Corp.*...................................................................... 2,317,500
55,000 Plasma-Therm, Inc.*.................................................................... 460,625
------------
4,178,125
------------
SPECIALIZED SERVICES (1.4%)
10,800 Pegasus Systems, Inc.*................................................................. 190,350
30,000 RCM Technologies, Inc.*................................................................ 468,750
3,900 Securacom, Inc.*....................................................................... 40,463
30,000 Select Appointments Holdings Public Limited Co. (ADR) (United Kingdom)................. 577,500
50,000 SOS Staffing Services, Inc.*........................................................... 1,025,000
45,000 Source Services Corp.*................................................................. 922,500
30,000 Todd-AO Corp. (Class A)................................................................ 292,500
8,200 TransCoastal Marine Services, Inc.*.................................................... 159,900
70,000 Transcrypt International, Inc.*........................................................ 1,636,250
------------
5,313,213
------------
STEEL (0.8%)
30,000 Lone Star Technologies, Inc.*.......................................................... 870,000
60,000 Northwest Pipe Co.*.................................................................... 1,357,500
30,000 NS Group, Inc.*........................................................................ 562,500
------------
2,790,000
------------
TECHNOLOGY (1.7%)
40,000 Aerial Communications, Inc.*........................................................... 355,000
60,000 Brilliant Digital Entertainment, Inc.*................................................. 360,000
60,000 CIENA Corp.*........................................................................... 3,251,250
60,000 Kuhlman Corp........................................................................... 2,118,750
3,600 LHS Group, Inc.*....................................................................... 151,200
------------
6,236,200
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
TECHNOLOGY RELATED (0.5%)
130,000 Graham-Field Health Products, Inc.*.................................................... $ 1,941,875
------------
TELECOMMUNICATIONS (4.4%)
50,000 ARC International Corp.*............................................................... 290,625
70,000 CGI Group, Inc. (Canada)*.............................................................. 1,976,401
30,000 CTC Communications Corp.*.............................................................. 442,500
30,000 Globalstar Telecommunications Ltd.*.................................................... 1,486,875
110,000 Inter-Tel Corp......................................................................... 2,310,000
30,000 Norstan, Inc.*......................................................................... 712,500
60,000 Orckit Communications Ltd. (Israel)*................................................... 1,230,000
20,000 PageMart Wireless, Inc.*............................................................... 197,500
19,100 Qwest Communications International Inc.*............................................... 1,040,950
30,000 STAR Telecommunications, Inc.*......................................................... 858,750
40,000 Tel-Save Holdings, Inc.*............................................................... 862,500
90,000 Winstar Communications, Inc.*.......................................................... 2,379,375
100,000 World Access, Inc.*.................................................................... 2,425,000
------------
16,212,976
------------
TELECOMMUNICATIONS EQUIPMENT (4.5%)
30,000 ACE COMM Corp.*........................................................................ 495,000
90,000 Applied Signal Technology, Inc.*....................................................... 1,350,000
40,000 Associated Group, Inc. - Class B*...................................................... 1,250,000
50,000 Boston Communications Group, Inc.*..................................................... 462,500
30,000 Communications Systems, Inc............................................................ 540,000
100,000 Davox Corp.*........................................................................... 3,225,000
180,000 Digital Microwave Corp.*............................................................... 2,835,000
2,000 Excel Switching Corp.*................................................................. 48,250
60,000 Mitec Telecom Inc. (Canada)*........................................................... 326,591
70,000 NICE-Systems Ltd. (ADR) (Israel)*...................................................... 3,062,500
30,000 Ortel Corp.*........................................................................... 528,750
110,000 RIT Technologies Ltd.*................................................................. 1,086,250
30,000 ViaSat, Inc.*.......................................................................... 457,500
30,000 Yurie Systems, Inc.*................................................................... 742,500
------------
16,409,841
------------
TEMPORARY SERVICES (0.5%)
80,000 Labor Ready Inc.*...................................................................... 1,780,000
------------
TRANSPORTATION (3.7%)
75,000 Air Express International Corp......................................................... 2,151,563
60,000 Alaska Air Group, Inc.*................................................................ 2,242,500
50,000 American Classic Voyages Co.*.......................................................... 850,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
53
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
44,700 Budget Group, Inc. (Class A)*.......................................................... $ 1,586,850
30,000 Coach USA, Inc.*....................................................................... 836,250
70,000 Consolidated Freightways Corp.*........................................................ 1,093,750
11,600 Jevic Transportation, Inc.*............................................................ 189,950
70,000 Offshore Logistics, Inc.*.............................................................. 1,601,250
120,000 Transat A.T., Inc. (Canada)*........................................................... 1,011,378
45,000 Trico Marine Service, Inc.*............................................................ 1,254,375
10,000 Virgin Express Holdings PLC - SP (ADR) (United Kingdom)*............................... 165,000
30,000 Werner Enterprises, Inc................................................................ 641,250
------------
13,624,116
------------
TRANSPORTATION - SHIPPING (0.4%)
30,000 Gulfmark Offshore Inc.*................................................................ 1,005,000
50,000 OMI Corp.*............................................................................. 512,500
------------
1,517,500
------------
TRUCKERS (0.5%)
40,000 CNF Transportation Inc................................................................. 1,740,000
------------
WASTE DISPOSAL (0.5%)
80,000 Eastern Environmental Services, Inc.*.................................................. 1,880,000
------------
WHOLESALE DISTRIBUTOR (0.6%)
60,000 Brightpoint, Inc.*..................................................................... 963,750
50,000 CellStar Corp.*........................................................................ 1,293,750
------------
2,257,500
------------
WIRELESS COMMUNICATION (0.1%)
30,000 Metro One Telecommunications*.......................................................... 247,500
------------
TOTAL COMMON STOCKS
(IDENTIFIED COST $320,804,094)......................................................... 367,982,907
------------
PREFERRED STOCK (0.0%)
MEDICAL PRODUCTS & SUPPLIES
30,000 Fresenius National Medical Care (Class D) (Germany) (Identified Cost $6,069)*.......... 1,950
------------
</TABLE>
<TABLE>
<C> <S> <C>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (a) (0.7%)
REPURCHASE AGREEMENT
$ 2,447 The Bank of New York 5.375% due 12/01/97 (dated 11/28/97; proceeds $2,447,971)
(Identified Cost $2,446,890)......................................................... $ 2,446,890
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $323,257,053) (B)........................................................ 100.9 % 370,431,747
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS............................................ (0.9) (3,179,883)
------ -------------
NET ASSETS................................................................................ 100.0 % $ 367,251,864
------ -------------
------ -------------
</TABLE>
- ---------------------
ADR American Depository Receipt.
* Non-income producing security.
(a) Collateralized by $842,747 Government National Mortgage Association 7.00%
due 09/20/24 valued at $519,347 and $1,843,626 Government National Mortgage
Association 9.00% due 11/15/27 valued at $1,976,481.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $62,429,313 and the
aggregate gross unrealized depreciation is $15,254,619, resulting in net
unrealized appreciation of $47,174,694.
SEE NOTES TO FINANCIAL STATEMENTS
54
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1997
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $323,257,053).............................................................. $370,431,747
Cash.......................................................................................... 3,740
Receivable for:
Investments sold.......................................................................... 3,064,024
Shares of beneficial interest sold........................................................ 370,989
Dividends................................................................................. 28,770
Deferred organizational expenses.............................................................. 103,962
Prepaid expenses.............................................................................. 86,388
------------
TOTAL ASSETS............................................................................. 374,089,620
------------
LIABILITIES:
Payable for:
Investments purchased..................................................................... 6,181,443
Plan of distribution fee.................................................................. 312,445
Investment management fee................................................................. 234,571
Shares of beneficial interest repurchased................................................. 31,535
Accrued expenses.............................................................................. 77,762
------------
TOTAL LIABILITIES........................................................................ 6,837,756
------------
NET ASSETS............................................................................... $367,251,864
------------
------------
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $298,208,563
Net unrealized appreciation................................................................... 47,174,694
Accumulated undistributed net realized gain................................................... 21,868,607
------------
NET ASSETS............................................................................... $367,251,864
------------
------------
CLASS A SHARES:
Net Assets.................................................................................... $344,785
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 24,184
NET ASSET VALUE PER SHARE................................................................ $14.26
------------
------------
MAXIMUM OFFERING PRICE PER SHARE
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE)........................................ $15.05
------------
------------
CLASS B SHARES:
Net Assets.................................................................................... $365,483,520
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 25,703,352
NET ASSET VALUE PER SHARE................................................................ $14.22
------------
------------
CLASS C SHARES:
Net Assets.................................................................................... $1,287,861
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 90,559
NET ASSET VALUE PER SHARE................................................................ $14.22
------------
------------
CLASS D SHARES:
Net Assets.................................................................................... $135,698
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 9,511
NET ASSET VALUE PER SHARE................................................................ $14.27
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
55
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1997*
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INCOME
Dividends (net of $3,705 foreign withholding tax).............................................. $ 505,611
Interest....................................................................................... 215,588
-----------
TOTAL INCOME.............................................................................. 721,199
-----------
EXPENSES
Plan of distribution fee (Class A shares)...................................................... 197
Plan of distribution fee (Class B shares)...................................................... 3,434,993
Plan of distribution fee (Class C shares)...................................................... 2,400
Investment management fee...................................................................... 2,578,896
Transfer agent fees and expenses............................................................... 559,409
Registration fees.............................................................................. 70,436
Shareholder reports and notices................................................................ 67,583
Custodian fees................................................................................. 56,761
Professional fees.............................................................................. 51,873
Organizational expenses........................................................................ 35,763
Trustees' fees and expenses.................................................................... 9,206
Other.......................................................................................... 6,743
-----------
TOTAL EXPENSES............................................................................ 6,874,260
-----------
NET INVESTMENT LOSS....................................................................... (6,153,061)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain.............................................................................. 38,570,804
Net change in unrealized appreciation.......................................................... (6,517,638)
-----------
NET GAIN.................................................................................. 32,053,166
-----------
NET INCREASE................................................................................... $25,900,105
-----------
-----------
</TABLE>
- ---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
56
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
NOVEMBER 30, NOVEMBER 30,
1997* 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss..................................... $ (6,153,061) $ (3,677,495)
Net realized gain (loss)................................ 38,570,804 (16,624,523)
Net change in unrealized appreciation................... (6,517,638) 48,698,318
-------------- --------------
NET INCREASE....................................... 25,900,105 28,396,300
Net increase from transactions in shares of beneficial
interest.............................................. 30,542,778 180,404,150
-------------- --------------
NET INCREASE....................................... 56,442,883 208,800,450
NET ASSETS:
Beginning of period..................................... 310,808,981 102,008,531
-------------- --------------
END OF PERIOD...................................... $ 367,251,864 $ 310,808,981
-------------- --------------
-------------- --------------
</TABLE>
- ---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
57
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1997
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter Capital Appreciation Fund (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
long-term capital appreciation. The Fund was organized as a Massachusetts
business trust on July 31, 1995 and commenced operations on October 27, 1995. On
July 28, 1997, the Fund commenced offering three additional 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 Trustees); (2) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest available bid price prior to the time of valuation; (3) when market
quotations are not readily available, including circumstances under which it is
determined by Dean Witter InterCapital Inc. (the "Investment Manager") that sale
or bid prices are not reflective of a security's market value, portfolio
securities are valued at their fair value as determined in good faith under
procedures established by and under the general supervision of the Trustees
(valuation of debt securities for which market quotations are not readily
available may be based upon current market prices of securities which are
comparable in coupon, rating and maturity or an appropriate matrix utilizing
similar factors); and (4) short-term debt securities having a maturity date of
more than sixty
58
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1997, CONTINUED
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. 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.
E. 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.
F. ORGANIZATIONAL EXPENSES -- The Investment Manager paid the organizational
expenses of the Fund in the amount of approximately $179,000 and was reimbursed
for the full amount thereof. Such expenses have been deferred and are being
amortized on the straight-line method over a period not to exceed five years
from the commencement of operations.
59
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1997, CONTINUED
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.75% to the net assets of the Fund determined as of the close of
each business day. Effective May 1, 1997, the Agreement was amended to reduce
the annual fee to 0.725% to the portion of daily net assets exceeding $500
million.
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.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the 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 dividend 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 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
60
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1997, CONTINUED
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 $12,299,293 at November 30, 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 November 30, 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 period ended November 30,
1997, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $983,855 and $653, respectively
and received $11,990 in front-end sales charges from sales of the Fund's Class A
shares. The respective shareholders pay such charges which are not an expense of
the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended November 30, 1997 aggregated
$648,955,963 and $623,441,813, respectively.
For the year ended November 30, 1997, the Fund incurred brokerage commissions of
$29,900 with DWR for portfolio transactions executed on behalf of the fund.
For the period May 31, 1997 through November 30, 1997, the Fund incurred
brokerage commissions of $6,250 with Morgan Stanley & Co., Inc., an affiliate of
the Investment Manager since May 31, 1997, for portfolio transactions executed
on behalf of the Fund.
61
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1997, CONTINUED
Dean Witter Trust FSB, an affiliate of the Investment Manager and Distributor,
is the Fund's transfer agent. At November 30, 1997, the Fund had transfer agent
fees and expenses payable of approximately $4,600.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
NOVEMBER 30, 1997 NOVEMBER 30, 1996
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
CLASS A SHARES*
Sold............................................................. 24,829 $ 380,181 -- --
Repurchased...................................................... (645) (9,645) -- --
----------- -------------- ----------- ------------
Net increase -- Class A.......................................... 24,184 370,536 -- --
----------- -------------- ----------- ------------
CLASS B SHARES
Sold............................................................. 15,086,938 211,255,509 20,783,480 $262,842,130
Repurchased...................................................... (13,313,433) (182,682,535) (6,542,161) (82,437,980)
----------- -------------- ----------- ------------
Net increase -- Class B.......................................... 1,773,505 28,572,974 14,241,319 180,404,150
----------- -------------- ----------- ------------
CLASS C SHARES*
Sold............................................................. 101,030 1,609,066 -- --
Repurchased...................................................... (10,471) (153,924) -- --
----------- -------------- ----------- ------------
Net increase -- Class C.......................................... 90,559 1,455,142 -- --
----------- -------------- ----------- ------------
CLASS D SHARES*
Sold............................................................. 9,511 144,126 -- --
----------- -------------- ----------- ------------
Net increase in Fund............................................. 1,897,759 $ 30,542,778 14,241,319 $180,404,150
----------- -------------- ----------- ------------
----------- -------------- ----------- ------------
</TABLE>
- ---------------------
* For the period July 28, 1997 (issue date) through November 30, 1997.
6. FEDERAL INCOME TAX STATUS
During the year ended November 30, 1997, the Fund utilized its net capital loss
carryover of approximately $15,684,000.
As of November 30, 1997, the Fund had temporary book/tax differences
attributable to capital loss deferrals on wash sales and permanent book/tax
differences primarily attributable to a net operating loss. To reflect
reclassifications arising from the permanent differences, paid-in-capital was
charged $6,136,407, accumulated undistributed net realized gain was charged
$16,654 and net investment loss was credited $6,153,061.
62
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE
PERIOD
OCTOBER 27,
FOR THE YEAR FOR THE YEAR 1995*
ENDED ENDED THROUGH
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1997**++ 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS B SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 12.99 $ 10.53 $ 10.00
------ ------ ------
Net investment loss..................... (0.24) (0.15) (0.01)
Net realized and unrealized gain........ 1.47 2.61 0.54
------ ------ ------
Total from investment operations........ 1.23 2.46 0.53
------ ------ ------
Net asset value, end of period.......... $ 14.22 $ 12.99 $ 10.53
------ ------ ------
------ ------ ------
TOTAL INVESTMENT RETURN+................ 9.47% 23.36% 5.30%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ 2.00% 2.00% 2.87%(2)
Net investment loss..................... (1.79)% (1.72)% (0.79)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands.............................. $365,484 $310,809 $102,009
Portfolio turnover rate................. 184% 108% 7%(1)
Average commission rate paid............ $0.0570 $0.0570 --
</TABLE>
- ---------------------
* 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.
SEE NOTES TO FINANCIAL STATEMENTS
63
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997 *
THROUGH
NOVEMBER 30,
1997++
- ----------------------------------------------------------------------------------------
<S> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 14.34
------
Net investment loss................................................... (0.06)
Net realized and unrealized loss...................................... (0.02)
------
Total from investment operations...................................... (0.08)
------
Net asset value, end of period........................................ $ 14.26
------
------
TOTAL INVESTMENT RETURN+.............................................. (0.56)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.27%(2)
Net investment loss................................................... (1.08)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $345
Portfolio turnover rate............................................... 184%(1)
Average commission rate paid.......................................... $0.0570
</TABLE>
<TABLE>
<S> <C>
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 14.34
------
Net investment loss................................................... (0.09)
Net realized and unrealized loss...................................... (0.03)
------
Total from investment operations...................................... (0.12)
------
Net asset value, end of period........................................ $ 14.22
------
------
TOTAL INVESTMENT RETURN+.............................................. (0.84)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 2.03%(2)
Net investment loss................................................... (1.82)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $1,288
Portfolio turnover rate............................................... 184%(1)
Average commission rate paid.......................................... $0.0570
</TABLE>
- ---------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
64
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
NOVEMBER 30,
1997++
- ----------------------------------------------------------------------------------------
<S> <C>
CLASS D SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 14.34
------
Net investment loss................................................... (0.04)
Net realized and unrealized loss...................................... (0.03)
------
Total from investment operations...................................... (0.07)
------
Net asset value, end of period........................................ $ 14.27
------
------
TOTAL INVESTMENT RETURN+.............................................. (0.49)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.01%(2)
Net investment loss................................................... (0.82)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $136
Portfolio turnover rate............................................... 184%(1)
Average commission rate paid.......................................... $0.0570
</TABLE>
- ---------------------
* 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.
SEE NOTES TO FINANCIAL STATEMENTS
65
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER CAPITAL APPRECIATION FUND
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dean Witter Capital Appreciation
Fund (the "Fund") at November 30, 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
November 30, 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
JANUARY 14, 1998
66
