-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SkQve+tiy06dPJpkUaOmE7YkS0vlWBWqgZ5W4FG0wXiQuxssHfgOvQsF/E2ezCNw kwcz+3R1++oYSh5uDbEaaA== 0000912057-97-013565.txt : 19970423 0000912057-97-013565.hdr.sgml : 19970423 ACCESSION NUMBER: 0000912057-97-013565 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19970421 EFFECTIVENESS DATE: 19970421 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DEAN WITTER VARIABLE INVESTMENT SERIES CENTRAL INDEX KEY: 0000716716 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 133178476 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-82510 FILM NUMBER: 97583846 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-03692 FILM NUMBER: 97583847 BUSINESS ADDRESS: STREET 1: TWO WORLD TRADE CTR CITY: NEW YORK STATE: NY ZIP: 10048 BUSINESS PHONE: 2123922550 FORMER COMPANY: FORMER CONFORMED NAME: WITTER DEAN VARIABLE INVESTMENT SERIES DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WITTER DEAN VARIABLE ANNUITY INVESTMENT SERIES DATE OF NAME CHANGE: 19880229 485BPOS 1 485BPOS AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 21, 1997 REGISTRATION NOS.: 2-82510 811-3692 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/ POST-EFFECTIVE AMENDMENT NO. 21 /X/ AND/OR REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/ AMENDMENT NO. 22 /X/ ------------------------ DEAN WITTER VARIABLE INVESTMENT SERIES (A MASSACHUSETTS BUSINESS TRUST) (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) TWO WORLD TRADE CENTER NEW YORK, NEW YORK 10048 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 392-1600 BARRY FINK, ESQ. TWO WORLD TRADE CENTER NEW YORK, NEW YORK 10048 (NAME AND ADDRESS OF AGENT FOR SERVICE) COPY TO: DAVID M. BUTOWSKY, ESQ. GORDON ALTMAN BUTOWSKY WEITZEN SHALOV & WEIN 114 WEST 47TH STREET NEW YORK, NEW YORK 10036 APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after this Post-Effective Amendment becomes effective ------------------------ IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX) ___ immediately upon filing pursuant to paragraph (b) _X_ on May 1, 1997 pursuant to paragraph (b) ___ 60 days after filing pursuant to paragraph (a) ___ on (date) pursuant to paragraph (a) of rule 485 THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES UNDER THE SECURITIES ACT OF 1933 PURSUANT TO SECTION (A)(1) OF RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. THE REGISTRANT FILED THE RULE 24F-2 NOTICE FOR ITS FISCAL YEAR ENDED DECEMBER 31, 1996 WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 28, 1997. AMENDING THE PROSPECTUS AND UPDATING FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DEAN WITTER VARIABLE INVESTMENT SERIES CROSS-REFERENCE SHEET FORM N-1A
ITEM CAPTION - ---------------------------------------------- --------------------------------------------------------------------- PART A PROSPECTUS 1. ......................................... Cover Page 2. ......................................... Prospectus Summary 3. ......................................... Financial Highlights 4. ......................................... Investment Objectives and Policies; The Fund and its Management; Cover Page; Investment Restrictions; Prospectus Summary 5. ......................................... The Fund and Its Management; Investment Objectives and Policies 6. ......................................... Dividends, Distributions and Taxes; Additional Information 7. ......................................... Purchase of Fund Shares; Prospectus Summary 8. ......................................... Redemption of Fund Shares 9. ......................................... Not Applicable PART B STATEMENT OF ADDITIONAL INFORMATION 10. ......................................... Cover Page 11. ......................................... Table of Contents 12. ......................................... The Fund and its Management 13. ......................................... Investment Practices and Policies; Investment Restrictions; Portfolio Transactions and Brokerage 14. ......................................... The Fund and its Management; Trustees and Officers 15. ......................................... The Fund and its Management; Trustees and Officers 16. ......................................... The Fund and its Management; Custodian and Transfer Agent; Independent Accountants 17. ......................................... Portfolio Transactions and Brokerage 18. ......................................... Description of Shares of the Fund 19. ......................................... Purchase and Redemption of Fund Shares; Financial Statements 20. ......................................... Dividends, Distributions and Taxes; Financial Statements 21. ......................................... Purchase and Redemption of Fund Shares 22. ......................................... Performance Information 23. ......................................... Experts; Financial Statements PART C Information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C of this Registration Statement.
PROSPECTUS DATED May 1, 1997 DEAN WITTER VARIABLE INVESTMENT SERIES Two World Trade Center, New York, New York 10048 (212) 392-2550 or (800) 869-NEWS Dean Witter Variable Investment Series (the "Fund") is an open-end diversified management investment company which is intended to provide a broad range of investment alternatives with its thirteen separate Portfolios, each of which has distinct investment objectives and policies. - THE MONEY MARKET PORTFOLIO - THE QUALITY INCOME PLUS PORTFOLIO - THE HIGH YIELD PORTFOLIO - THE UTILITIES PORTFOLIO - THE INCOME BUILDER PORTFOLIO - THE DIVIDEND GROWTH PORTFOLIO - THE CAPITAL GROWTH PORTFOLIO - THE GLOBAL DIVIDEND GROWTH PORTFOLIO - THE EUROPEAN GROWTH PORTFOLIO - THE PACIFIC GROWTH PORTFOLIO - THE CAPITAL APPRECIATION PORTFOLIO - THE EQUITY PORTFOLIO - THE STRATEGIST PORTFOLIO There can be no assurance that the investment objectives of the Portfolios will be achieved. SEE "Prospectus Summary" and "Investment Objectives and Policies." An investment in the Money Market Portfolio is neither insured nor guaranteed by the U.S. Government. There is no assurance that the Portfolio will be able to maintain a stable net asset value of $1.00 per share. Investors in the High Yield Portfolio should carefully consider the relative risks of investing in high yield securities, which are commonly known as junk bonds. Bonds of this type are considered to be speculative with regard to the payment of interest and return of principal. Investors in the High Yield Portfolio should also be cognizant of the fact that such securities are not generally meant for short-term investing and should assess the risks associated with an investment in the High Yield Portfolio. Shares of the Portfolios 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. Currently, the shares of the Fund will be sold only to (1) Northbrook Life Insurance Company ("Northbrook") to fund the benefits under certain flexible premium variable annuity contracts and certain flexible premium variable life insurance contracts it issues, to (2) Allstate Life Insurance Company of New York ("Allstate New York") to fund the benefits under certain flexible premium deferred variable annuity contracts it issues, to (3) Glenbrook Life and Annuity Company ("Glenbrook") to fund the benefits under certain flexible premium deferred variable annuity contracts and certain flexible premium variable life insurance contracts it issues, and to (4) Paragon Life Insurance Company ("Paragon") to fund the benefits under certain flexible premium variable life insurance contracts it issues in connection with an employer-sponsored insurance program offered only to certain employees of Dean Witter, Discover & Co., the parent company of the Fund's Investment Manager. The variable annuity contracts issued by Northbrook, Allstate New York and Glenbrook are sometimes referred to as the "Variable Annuity Contracts," the variable life insurance contracts issued by Northbrook, Glenbrook and Paragon are sometimes referred to as the "Variable Life Contracts," and the Variable Annuity Contracts and the Variable Life Contracts are sometimes referred to as the "Contracts." Northbrook, Allstate New York, Glenbrook and Paragon are sometimes referred to as the "Companies." In the future, shares may be sold to affiliated and/or non-affiliated entities of the Companies. The Companies will invest in shares of the Fund in accordance with allocation instructions received from Contract Owners, which allocation rights are further described in the accompanying Prospectus for either the Variable Annuity Contracts or the Variable Life Contracts. The Companies will redeem shares to the extent necessary to provide benefits under the Contracts. This Prospectus sets forth concisely the information you should know before allocating your investment under your Contract to 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 May 1, 1997, 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 above. The Statement of Additional Information is incorporated herein by reference. 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 INTERCAPITAL INC. -- Investment Manager This Prospectus must be accompanied by a current Prospectus for the Variable Annuity Contracts issued by Northbrook Life Insurance Company, Allstate Life Insurance Company of New York or Glenbrook Life and Annuity Company or by a current Prospectus for the Variable Life Contracts issued by Northbrook Life Insurance Company, Glenbrook Life and Annuity Company or Paragon Life Insurance Company. Both Prospectuses should be read and retained for future reference. (This page has been left intentionally blank) 2 No dealer, salesman, or other person has been authorized to give any information or to make any representations, other than those contained in the Prospectus and in the Statement of Additional Information, in connection with the offer contained in this Prospectus and in the Statement of Additional Information, and, if given or made, such other information or representations must not be relied upon as having been authorized by the Fund. This Prospectus and the Statement of Additional Information do not constitute an offering in any State in which such offering may not be lawfully made. TABLE OF CONTENTS Prospectus Summary.................................................................................. 4 Financial Highlights................................................................................ 8 Financial Highlights -- Income Builder Portfolio and Capital Appreciation Portfolio (unaudited)..... 12 The Fund and its Management......................................................................... 13 Investment Objectives and Policies.................................................................. 14 The Money Market Portfolio........................................................................ 14 The Quality Income Plus Portfolio................................................................. 15 The High Yield Portfolio.......................................................................... 17 The Utilities Portfolio........................................................................... 18 The Income Builder Portfolio...................................................................... 20 The Dividend Growth Portfolio..................................................................... 21 The Capital Growth Portfolio...................................................................... 22 The Global Dividend Growth Portfolio.............................................................. 22 The European Growth Portfolio..................................................................... 23 The Pacific Growth Portfolio...................................................................... 24 The Capital Appreciation Portfolio................................................................ 26 The Equity Portfolio.............................................................................. 27 The Strategist Portfolio.......................................................................... 28 General Portfolio Techniques...................................................................... 29 Investment Restrictions............................................................................. 38 Determination of Net Asset Value.................................................................... 40 Purchase of Fund Shares............................................................................. 40 Redemption of Fund Shares........................................................................... 41 Dividends, Distributions and Taxes.................................................................. 41 Performance Information............................................................................. 42 Additional Information.............................................................................. 43 Appendix -- Ratings of Corporate Debt Instruments Investments.......................................................................... 45
3 PROSPECTUS SUMMARY - ----------------------------------------------------------
THE FUND The Fund is organized as a Trust, commonly known as a Massachusetts business trust, and is an open-end diversified management investment company. The Fund is comprised of thirteen separate Portfolios: the MONEY MARKET PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO, the HIGH YIELD PORTFOLIO, the UTILITIES PORTFOLIO, the INCOME BUILDER PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO, the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO (see pages 14 through 28). The Trustees of the Fund may establish additional Portfolios at any time. To the extent that shares are sold to the Companies in order to fund the benefits under Contracts, the structure of the Fund permits Contract Owners, within the limitations described in the Contracts, to allocate the investments underlying the Contracts in response to or in anticipation of changes in market or economic conditions. See the accompanying Prospectus for either the Variable Annuity Contracts or the Variable Life Contracts for a description of the relationship between increases or decreases in the net asset value of Fund shares and any distributions on such shares, and benefits provided under a Contract. Each Portfolio is managed for investment purposes as if it were a separate fund issuing a separate class of shares of beneficial interest, with $.01 par value. The assets of each Portfolio are segregated, so that an interest in the Fund is limited to the assets of the Portfolio in which shares are held and shareholders, such as the Companies, are each entitled to a pro rata share of all dividends and distributions arising from the net investment income and capital gains, if any, of such Portfolio (see pages 41 and 43). - ---------------------------------------------------------------------------------------------------------- INVESTMENT Each Portfolio has distinct investment objectives and policies, and is subject to OBJECTIVES, various investment restrictions, some of which apply to all the Portfolios. The POLICIES, Money Market Portfolio seeks high current income, preservation of capital and RESTRICTIONS liquidity by investing in short-term money market instruments (see pages 14-15). AND RISKS The Quality Income Plus Portfolio seeks, as its primary objective, to earn a high level of current income and, as a secondary objective, capital appreciation, but only when consistent with its primary objective, by investing primarily in U.S. Government securities and higher-rated fixed-income securities and by writing covered options on such securities (see pages 15-17). The High Yield Portfolio seeks, as a primary objective, to earn a high level of current income and, as a secondary objective, seeks capital appreciation, but only when consistent with its primary objective, by investing primarily in lower-rated fixed-income securities, which are commonly known as junk bonds (see pages 17-18). The Utilities Portfolio seeks to provide current income and long-term growth of income and capital by investing primarily in equity and fixed-income securities of companies engaged in the public utilities industry (see pages 18-20). The Income Builder Portfolio seeks, as its primary objective, reasonable income and, as its secondary objective, growth of capital, by investing primarily in income-producing equity securities (see pages 20-21). The Dividend Growth Portfolio seeks to provide reasonable current income and long-term growth of income and capital by investing primarily in common stock of companies with a record of paying dividends and the potential for increasing dividends (see pages 21-22). The Capital Growth Portfolio seeks long-term capital growth by investing primarily in common stocks (see page 22). The Global Dividend Growth Portfolio seeks to provide reasonable current income and long-term growth of income and capital by investing primarily in common stock of companies,
4 issued by issuers worldwide, with a record of paying dividends and the potential for increasing dividends (see pages 22-23). The European Growth Portfolio seeks to maximize the capital appreciation of its investments by investing primarily in securities issued by issuers located in Europe (see pages 23-24). The Pacific Growth Portfolio seeks to maximize the capital appreciation of its investments by investing primarily in securities issued by issuers located in Asia, Australia and New Zealand (see pages 24-26). The Capital Appreciation Portfolio seeks long-term capital appreciation by investing primarily in the common stocks of U.S. companies that offer the potential for either superior earnings growth and/or appear to be undervalued (see pages 26-27). The Equity Portfolio seeks, as a primary objective, capital growth through investments in common stock and, as a secondary objective, income but only when consistent with its primary objective (see pages 27-28). The Strategist Portfolio seeks a high total investment return through a fully managed investment policy utilizing equity securities, investment grade fixed-income securities and money market securities, and the writing of covered options on such securities and the collateralized sale of stock index options (see page 28). --------- Although the MONEY MARKET PORTFOLIO will attempt to maintain a constant net asset value per share of $1.00, there can be no assurance that the $1.00 net asset value can be maintained. The net asset value of shares of each Portfolio other than the MONEY MARKET PORTFOLIO will fluctuate with changes in the market value of its portfolio holdings. The market value of the Portfolios' securities will increase or decrease due to a variety of economic, market and political factors which cannot be predicted. A decline in prevailing interest rates generally increases the value of fixed-income securities, while an increase in rates generally reduces the value of those securities. Dividends payable by each Portfolio will vary in relation to the amounts of dividends and/or interest paid by its securities holdings. The QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may purchase put and call options and may enter into transactions involving interest rate futures contracts and bond index futures contracts and options thereon as a means of hedging against changes in the market value of the Portfolio's investments. The UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may also hedge against such changes by entering into transactions involving stock index futures contracts and options thereon, and (except for the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO) options on stock indexes. Each Portfolio may invest, to a different extent, in foreign securities. Foreign securities markets pose different and generally greater risks than those customarily associated with domestic securities and markets including fluctuations in foreign currency exchange rates, foreign tax rates and foreign securities exchange controls. Investment in the QUALITY INCOME PLUS PORTFOLIO, the HIGH YIELD PORTFOLIO, the UTILITIES PORTFOLIO, the INCOME BUILDER PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, THE PACIFIC GROWTH PORTFOLIO, THE CAPITAL APPRECIATION PORTFOLIO, the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO involve more risk than investment in the MONEY MARKET PORTFOLIO. The high yield, high risk fixed-income securities in which the HIGH YIELD PORTFOLIO will invest, and the INCOME BUILDER PORTFOLIO may invest, are subject to greater risk of loss of income and principal than higher rated, lower yielding fixed-income securities. The prices of high yield, high risk securities have been found to be less sensitive to changes in prevailing interest rates than higher rated investments, but are likely to be more sensitive to adverse economic changes or individual corporate developments. Investors in these Portfolios should carefully consider the relative risks of investing in high yield securities and should be cognizant of the fact that such
5 securities are not generally meant for short-term investing (see the discussion of lower-rated securities beginning on page 31). Investors in the CAPITAL APPRECIATION PORTFOLIO should be aware that the Portfolio is intended for long-term investors who can accept the risks involved in seeking long-term appreciation through the investment primarily in securities of companies that offer the potential for either superior earnings growth and/or appear to be undervalued (see the discussion of such securities beginning on page 26). In selecting investments for the CAPITAL APPRECIATION PORTFOLIO, the Investment Manager has no general criteria as to a company's asset size, earnings or industry type. Contract Owners are also directed to the discussion of options and futures transactions (page 34), repurchase agreements (page 33), foreign securities (page 29), forward foreign currency exchange contracts (page 30), public utilities securities (page 19), warrants (page 34), zero coupon securities (page 34), when-issued and delayed delivery securities and forward commitments (page 33) and "when, as and if issued" securities (page 33), concerning risks associated with such securities and management techniques. The Fund is a single diversified investment company, consisting of thirteen Portfolios, and each Portfolio itself is diversified. Diversification does not eliminate investment risk. Contract Owners should review the investment objectives and policies of the Portfolios carefully and consider their ability to assume the risks involved in allocating the investments underlying the Contracts (see pages 14-38). - ---------------------------------------------------------------------------------------------------------- INVESTMENT Dean Witter InterCapital Inc. ("InterCapital"), the Investment Manager of the MANAGER Fund, and its wholly-owned subsidiary, Dean Witter Services Company Inc., serve in various investment management, advisory, management and administrative capacities to 102 investment companies and other portfolios with assets of approximately $91.4 billion at March 31, 1997. For its services as Investment Manager, InterCapital receives a monthly advisory fee at an annual rate of 0.50% of the daily net assets of the QUALITY INCOME PLUS PORTFOLIO up to $500 million and 0.45% of the daily net assets of that Portfolio exceeding $500 million; at an annual rate of 0.50% of the daily net assets of the EQUITY PORTFOLIO up to $1 billion and 0.475% of the daily net assets of that Portfolio exceeding $1 billion; at an annual rate of 0.50% of the daily net assets of each of the MONEY MARKET PORTFOLIO, the HIGH YIELD PORTFOLIO and the STRATEGIST PORTFOLIO; at an annual rate of 0.625% of the daily net assets of the DIVIDEND GROWTH PORTFOLIO up to $500 million, 0.50% of the next $500 million, and 0.475% of the daily net assets of that Portfolio exceeding $1 billion; at an annual rate of 0.65% of the daily net assets of the UTILITIES PORTFOLIO up to $500 million and 0.55% of the daily net assets of that Portfolio exceeding $500 million; at an annual rate of 0.65% of the daily net assets of the CAPITAL GROWTH PORTFOLIO; at an annual rate of 0.75% of the daily net assets of each of the INCOME BUILDER PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO; and at an annual rate of 1.0% of the daily net assets of each of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO. Morgan Grenfell Investment Services Limited has been retained by the Investment Manager as Sub-Adviser to the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO to provide investment advice and manage the portfolios, subject to the overall supervision of the Investment Manager. Morgan Grenfell Investment Services Limited currently manages assets in excess of $15.1 billion primarily for U.S. corporate and public employee plans, endowments, investment companies and foundations. The Sub-Adviser receives a monthly fee from the Investment Manager equal to 40% of the Investment Manager's monthly fee in respect of each of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO (see page 13).
6 - ---------------------------------------------------------------------------------------------------------- SHAREHOLDERS Currently, shares of the Fund are sold only to (1) Northbrook Life Insurance Company ("Northbrook") for allocation to certain separate accounts established to fund the benefits under certain flexible premium deferred variable annuity contracts and certain flexible premium variable life insurance contracts issued by Northbrook, to (2) Allstate Life Insurance Company of New York ("Allstate New York") for allocation to certain separate accounts established to fund the benefits under certain flexible premium deferred variable annuity contracts issued by Allstate New York, to (3) Glenbrook Life and Annuity Company ("Glenbrook") for allocation to certain separate accounts established to fund the benefits under certain flexible premium deferred variable annuity contracts and certain flexible premium variable life insurance contracts issued by Glenbrook, and to (4) Paragon Life Insurance Company ("Paragon") for allocation to a separate account established to fund the benefits under certain flexible premium variable life insurance contracts it issues in connection with an employer-sponsored insurance program offered only to certain employees of Dean Witter, Discover & Co., the parent company of the Fund's Investment Manager. The separate accounts are sometimes referred to individually as an "Account" and collectively as the "Accounts." The variable annuity contracts issued by Northbrook, Allstate New York and Glenbrook are sometimes referred to as the "Variable Annuity Contracts," the variable life insurance contracts issued by Northbrook, Glenbrook and Paragon are sometimes referred to as the "Variable Life Contracts," and the Variable Annuity Contracts and the Variable Life Contracts are sometimes referred to as the "Contracts." Northbrook, Allstate New York, Glenbrook and Paragon are sometimes referred to as the "Companies." Accordingly, the interest of the Contract Owner with respect to the Fund is subject to the terms of the Contract and is described in the accompanying Prospectus for the Variable Annuity Contracts or the Variable Life Contracts, which should be reviewed carefully by a person considering the purchase of a Contract. The accompanying Prospectus for the Variable Annuity Contracts or the Variable Life Contracts describes the relationship between increases or decreases in the net asset value of Fund shares and any distributions on such shares, and the benefits provided under a Contract. The rights of the Companies as shareholders of the Fund should be distinguished from the rights of a Contract Owner which are described in the Contract. In the future, shares may be allocated to certain other separate accounts or sold to affiliated and/or non-affiliated entities of the Companies in connection with variable annuity contracts or variable life insurance contracts. As long as shares of the Fund are sold only to the Companies, the terms "shareholder" or "shareholders" in this Prospectus shall refer to the Companies. It is conceivable that in the future it may become disadvantageous for both variable life and variable annuity contract separate accounts to invest in the same underlying fund (see page 40). - ---------------------------------------------------------------------------------------------------------- PURCHASES Dean Witter Distributors Inc. is the distributor of the Fund's shares. Shares of AND the Fund are sold and redeemed at net asset value, I.E., without sales charge (see REDEMPTIONS pages 40 and 41). - ---------------------------------------------------------------------------------------------------------- THE ABOVE IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS, THE STATEMENT OF ADDITIONAL INFORMATION, AND THE ACCOMPANYING PROSPECTUS FOR EITHER THE VARIABLE ANNUITY CONTRACTS OR THE VARIABLE LIFE CONTRACTS.
7 FINANCIAL HIGHLIGHTS - ---------------------------------------------------------- The following ratios and per share data for a share of beneficial interest outstanding throughout each period for each of the MONEY MARKET PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO, the HIGH YIELD PORTFOLIO, the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO 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
NET ASSET VALUE NET NET REALIZED TOTAL FROM TOTAL DIVIDENDS BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO DISTRIBUTIONS TO AND YEAR ENDED DEC. 31 OF PERIOD INCOME GAIN (LOSS) OPERATIONS SHAREHOLDERS SHAREHOLDERS DISTRIBUTIONS ---------- --------- ---------- -------------- ---------- ------------ ---------------- ---------------- MONEY MARKET 1987 $ 1.00 $ 0.061 $-- $ 0.061 $ (0.061) $-- $ (0.061) 1988 1.00 0.070 -- 0.070 (0.070) -- (0.070) 1989 1.00 0.086 -- 0.086 (0.086) -- (0.086) 1990 1.00 0.076 -- 0.076 (0.076) -- (0.076) 1991 1.00 0.056 -- 0.056 (0.056) -- (0.056) 1992 1.00 0.034 -- 0.034 (0.034) -- (0.034) 1993 1.00 0.027 -- 0.027 (0.027) -- (0.027) 1994 1.00 0.037 -- 0.037 (0.037) -- (0.037) 1995 1.00 0.055 -- 0.055 (0.055) -- (0.055) 1996 1.00 0.050 -- 0.050 (0.050) -- (0.050) QUALITY INCOME PLUS 1987(a) 10.00 0.64 (0.39) 0.25 (0.64) -- (0.64) 1988 9.61 0.85 (0.16) 0.69 (0.85) -- (0.85) 1989 9.45 0.88 0.28 1.16 (0.88) -- (0.88) 1990 9.73 0.86 (0.24) 0.62 (0.86) -- (0.86) 1991 9.49 0.85 0.85 1.70 (0.85) -- (0.85) 1992 10.34 0.77 0.05 0.82 (0.77) -- (0.77) 1993 10.39 0.69 0.64 1.33 (0.69) -- (0.69) 1994 11.03 0.69 (1.40) (0.71) (0.69) (0.18) (0.87) 1995 9.45 0.72 1.50 2.22 (0.71) -- (0.71) 1996 10.96 0.71 (0.58) 0.13 (0.72) -- (0.72) HIGH YIELD 1987 12.06 0.91 (1.15) (0.24) (0.91) (0.94) (1.85) 1988 9.97 1.14 (0.05) 1.09 (1.14) -- (1.14) 1989 9.92 1.30 (2.40) (1.10) (1.30) -- (1.30) 1990 7.52 1.13 (2.91) (1.78) (1.13) (0.06)* (1.19) 1991 4.55 0.70 1.81 2.51 (0.70) (0.11)* (0.81) 1992 6.25 0.96 0.18 1.14 (0.96) -- (0.96) 1993 6.43 0.81 0.68 1.49 (0.81) -- (0.81) 1994 7.11 0.79 (0.95) (0.16) (0.79) -- (0.79) 1995 6.16 0.80 0.08 0.88 (0.78) -- (0.78) 1996 6.26 0.77 (0.06) 0.71 (0.79) -- (0.79) UTILITIES 1990(b) 10.00 0.47 (0.04) 0.43 (0.41) -- (0.41) 1991 10.02 0.54 1.45 1.99 (0.54) -- (0.54) 1992 11.47 0.51 0.88 1.39 (0.52) -- (0.52) 1993 12.34 0.49 1.43 1.92 (0.50) (0.02) (0.52) 1994 13.74 0.53 (1.75) (1.22) (0.52) (0.08) (0.60) 1995 11.92 0.53 2.81 3.34 (0.58) -- (0.58) 1996 14.68 0.55 0.70 1.25 (0.55) (0.04) (0.59)
- ---------------------------------- Commencement of operations: (a) March 1, 1987. (b) March 1, 1990. + Calculated based on the net asset value as of the last business day of the period. * Distribution from capital. (1) Not annualized. (2) Annualized. (3) If the Investment Manager had not assumed all expenses and waived the management fee for the period March 1, 1987 through August 26, 1987, the ratio of expenses to average net assets would have been 0.74%. (4) If the Investment Manager had not assumed all expenses and waived the management fee for the period March 1, 1990 through August 31, 1990, the ratio of expenses to average net assets would have been 0.75%. 8 - ---------------------------------------------------------- contained in the Statement of Additional Information. Further information about the performance of the Portfolios of the Fund is contained in the Fund's Annual Report to Shareholders, which may be obtained without charge upon request to the Fund. See the discussion under the caption "Charges and Other Deductions" in the accompanying prospectus for either the Variable Annuity Contracts or the Variable Life Contracts for a description of charges which may be imposed on the Contracts by the applicable Account. Any such charges are not reflected in the financial highlights below. Inclusion of any such charges would reduce the total return figures for all periods shown.
RATIOS TO AVERAGE NET ASSETS --------------------- NET ASSET TOTAL NET ASSETS AT NET PORTFOLIO AVERAGE VALUE END INVESTMENT END OF PERIOD INVESTMENT TURNOVER COMMISSION OF PERIOD RETURN+ (000'S) EXPENSES INCOME RATE RATE PAID ----------- -------------- -------------- ---------- -------- --------- ------------ $ 1.00 6.26% $ 69,467 0.65% 6.26% N/A N/A 1.00 7.23 77,304 0.62 7.04 N/A N/A 1.00 9.05 76,701 0.58 8.67 N/A N/A 1.00 7.89 118,058 0.57 7.60 N/A N/A 1.00 5.75 104,277 0.57 5.62 N/A N/A 1.00 3.43 96,151 0.59 3.38 N/A N/A 1.00 2.75 129,925 0.57 2.71 N/A N/A 1.00 3.81 268,624 0.55 3.93 N/A N/A 1.00 5.66 249,787 0.53 5.52 N/A N/A 1.00 5.11 340,238 0.52 4.97 N/A N/A 9.61 2.62(1) 24,094 0.35(2)(3) 8.33(2) 265%(1) N/A 9.45 7.32 28,037 0.73 8.87 277 N/A 9.73 12.78 48,784 0.70 9.09 242 N/A 9.49 6.84 57,407 0.66 9.09 166 N/A 10.34 18.75 81,918 0.60 8.39 105 N/A 10.39 8.26 163,368 0.58 7.41 148 N/A 11.03 12.99 487,647 0.56 6.17 219 N/A 9.45 (6.63) 414,905 0.54 6.88 254 N/A 10.96 24.30 520,579 0.54 7.07 162 N/A 10.37 1.56 474,660 0.53 6.84 182 N/A 9.97 (3.02) 191,631 0.53 7.66 287 N/A 9.92 10.83 192,290 0.56 11.06 140 N/A 7.52 (12.44) 96,359 0.55 13.94 54 N/A 4.55 (25.54) 27,078 0.69 17.98 42 N/A 6.25 58.14 34,603 1.01 12.29 300 N/A 6.43 18.35 40,042 0.74 14.05 204 N/A 7.11 24.08 90,200 0.60 11.80 177 N/A 6.16 (2.47) 111,934 0.59 11.71 105 N/A 6.26 14.93 154,310 0.54 12.67 58 N/A 6.18 11.98 259,549 0.51 12.59 57 N/A 10.02 4.52(1) 37,597 0.40(2)(4) 6.38(2) 46(1) -- 11.47 20.56 68,449 0.80 5.23 25 -- 12.34 12.64 153,748 0.73 4.63 26 -- 13.74 15.69 490,934 0.71 3.75 11 -- 11.92 (9.02) 382,412 0.68 4.21 15 -- 14.68 28.65 479,070 0.68 4.00 13 -- 15.34 8.68 440,662 0.67 3.61 9 $ 0.0543
9 FINANCIAL HIGHLIGHTS (CONTINUED) - --------------------------------------------------------------------------------
NET ASSET VALUE NET NET REALIZED TOTAL FROM TOTAL BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO DISTRIBUTIONS TO DIVIDENDS AND YEAR ENDED DEC. 31 OF PERIOD INCOME GAIN (LOSS) OPERATIONS SHAREHOLDERS SHAREHOLDERS DISTRIBUTIONS ---------- --------- ---------- -------------- ---------- ------------ ---------------- -------------- DIVIDEND GROWTH 1990(b) $10.00 $ 0.33 $(1.10) $ (0.77) $ (0.30) $ -- $ (0.30) 1991 8.93 0.36 2.08 2.44 (0.37) -- (0.37) 1992 11.00 0.37 0.51 0.88 (0.37) -- (0.37) 1993 11.51 0.36 1.27 1.63 (0.36) -- (0.36) 1994 12.78 0.38 (0.80) (0.42) (0.37) -- (0.37) 1995 11.99 0.38 3.89 4.27 (0.41) (0.26) (0.67) 1996 15.59 0.41 3.22 3.63 (0.41) (0.41) (0.82) CAPITAL GROWTH 1991(b) 10.00 0.15 2.67 2.82 (0.13) -- (0.13) 1992 12.69 0.07 0.13 0.20 (0.08) (0.02) (0.10) 1993 12.79 0.08 (0.98) (0.90) (0.08) -- (0.08) 1994 11.81 0.10 (0.26) (0.16) (0.10) (0.03) (0.13) 1995 11.52 0.10 3.68 3.78 (0.08) -- (0.08) 1996 15.22 0.08 1.65 1.73 (0.03) (0.27) (0.30) GLOBAL DIVIDEND GROWTH 1994(c) 10.00 0.23 (0.20) 0.03 (0.21) -- (0.21) 1995 9.82 0.24 1.90 2.14 (0.26) (0.01) (0.27) 1996 11.69 0.24 1.75 1.99 (0.24) (0.31) (0.55) EUROPEAN GROWTH 1991(b) 10.00 0.25 (0.13) 0.12 (0.23) -- (0.23) 1992 9.89 0.08 0.32 0.40 (0.10) (0.01) (0.11) 1993 10.18 0.12 3.98 4.10 (0.12) (0.13) (0.25) 1994 14.03 0.17 0.96 1.13 (0.16) (0.44) (0.60) 1995 14.56 0.20 3.50 3.70 (0.19)** (0.54) (0.73) 1996 17.53 0.17 4.91 5.08 (0.04) (1.01) (1.05) PACIFIC GROWTH 1994(c) 10.00 0.07 (0.74) (0.67) -- (0.07) (0.07) 1995 9.26 0.12 0.41 0.53 (0.09) -- (0.09) 1996 9.70 0.05 0.32 0.37 (0.11) -- (0.11) EQUITY 1987 14.41 0.30 (0.94) (0.64) (0.33) (0.95) (1.28) 1988 12.49 0.39 0.83 1.22 (0.35) -- (0.35) 1989 13.36 0.71 1.77 2.48 (0.70) -- (0.70) 1990 15.14 0.48 (1.03) (0.55) (0.49) -- (0.49) 1991 14.10 0.20 8.05 8.25 (0.21) -- (0.21) 1992 22.14 0.23 (0.47) (0.24) (0.24) (1.86) (2.10) 1993 19.80 0.15 3.63 3.78 (0.15) (1.28) (1.43) 1994 22.15 0.23 (1.31) (1.08) (0.22) (1.60) (1.82) 1995 19.25 0.22 7.92 8.14 (0.25) -- (0.25) 1996 27.14 0.16 2.70 2.86 (0.16) (3.45) (3.61) STRATEGIST 1987(a) 10.00 0.48 (0.35) 0.13 (0.48) -- (0.48) 1988 9.65 0.70 0.51 1.21 (0.64) -- (0.64) 1989 10.22 0.84 0.20 1.04 (0.79) (0.06) (0.85) 1990 10.41 0.61 (0.46) 0.15 (0.67) (0.08) (0.75) 1991 9.81 0.47 2.24 2.71 (0.50) -- (0.50) 1992 12.02 0.44 0.41 0.85 (0.45) (0.13) (0.58) 1993 12.29 0.38 0.86 1.24 (0.38) (0.47) (0.85) 1994 12.68 0.48 0.01 0.49 (0.46) (0.26) (0.72) 1995 12.45 0.62 0.49 1.11 (0.67) (0.44) (1.11) 1996 12.45 0.43 1.39 1.82 (0.43) (0.12) (0.55)
- ---------------------------------- Commencement of operations: (a) March 1, 1987. (b) March 1, 1991. (c) February 23, 1994. + Calculated based on the net asset value as of the last business day of the period. ** Includes distributions in excess of net investment income of $0.02. 10 - ----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS --------------------------- NET ASSET TOTAL NET ASSETS AT NET PORTFOLIO AVERAGE VALUE END INVESTMENT END OF PERIOD INVESTMENT TURNOVER COMMISSION OF PERIOD RETURN+ (000'S) EXPENSES INCOME RATE RATE PAID ----------- -------------- -------------- ------- --------- --------- ------------ $ 8.93 (7.81)%(1) $ 57,282 0.54%(2)(4) 4.50%(2) 19%(1) $ -- 11.00 27.76 98,023 0.73 3.61 6 -- 11.51 8.16 192,551 0.69 3.42 4 -- 12.78 14.34 483,145 0.68 3.01 6 -- 11.99 (3.27) 572,952 0.64 3.13 20 -- 15.59 36.38 865,417 0.61 2.75 24 -- 18.40 23.96 1,288,404 0.57 2.46 23 0.0553 12.69 28.41(1) 18,400 -- (2)(4) 1.82(2) 32(1) -- 12.79 1.64 45,105 0.86 0.62 22 -- 11.81 (6.99) 50,309 0.74 0.78 36 -- 11.52 (1.28) 45,715 0.77 0.90 37 -- 15.22 32.92 66,995 0.74 0.70 34 -- 16.65 11.55 86,862 0.73 0.52 98 0.0570 9.82 0.27(1) 138,486 0.87(2)(5) 2.62(2) 20(1) -- 11.69 22.14 205,739 0.88 2.23 55 -- 13.13 17.49 334,821 0.85 1.94 39 0.0360 9.89 1.34(1) 3,653 -- (2)(4) 3.18(2) 77(1) -- 10.18 3.99 10,686 1.73 0.74 97 -- 14.03 40.88 79,052 1.28 0.97 77 -- 14.56 8.36 152,021 1.16 1.49 58 -- 17.53 25.89 188,119 1.17 1.25 69 -- 21.56 29.99 302,422 1.11 0.97 43 0.0453 9.26 (6.73)(1) 75,425 1.00(2)(5) 0.56(2) 22(1) -- 9.70 5.74 98,330 1.44 1.23 53 -- 9.96 3.89 144,536 1.37 1.01 50 0.0108 12.49 (6.23) 52,502 0.59 2.02 63 -- 13.36 9.84 39,857 0.65 2.77 162 -- 15.14 18.83 58,316 0.60 4.85 81 -- 14.10 (3.62) 41,234 0.62 3.38 130 -- 22.14 59.05 63,524 0.64 1.09 214 -- 19.80 0.05 77,527 0.62 1.22 286 -- 22.15 19.72 182,828 0.58 0.69 265 -- 19.25 (4.91) 225,289 0.57 1.19 299 -- 27.14 42.53 359,779 0.54 0.97 269 -- 26.39 12.36 521,908 0.54 0.58 279 0.0587 9.65 1.23(1) 27,016 0.38(2)(3) 6.73(2) 172(1) -- 10.22 12.79 61,947 0.66 7.29 310 -- 10.41 10.67 88,712 0.57 8.38 282 -- 9.81 1.56 68,447 0.58 6.10 163 -- 12.02 28.26 87,779 0.60 4.34 86 -- 12.29 7.24 136,741 0.58 3.74 87 -- 12.68 10.38 287,502 0.57 3.11 57 -- 12.45 3.94 392,760 0.54 3.93 125 -- 12.45 9.48 388,579 0.52 5.03 329 -- 13.72 15.02 423,768 0.52 3.30 153 0.0591
- ---------------------------------- (1) Not annualized. (2) Annualized. (3) If the Investment Manager had not assumed all expenses and waived the management fee for the period March 1, 1987 through August 26, 1987, the ratio of expenses to average net assets would have been 0.74%. (4) If the Investment Manager had not assumed all expenses and waived the management fee for the period March 1, 1991 through December 31, 1991, the ratio of expenses to average net assets would have been 1.60% for Capital Growth and 4.12% for European Growth. (5) If the Investment Manager had not assumed all expenses and waived the management fee for the period February 23, 1994 through May 12, 1994 for Global Dividend Growth and February 23, 1994 through August 2, 1994 for Pacific Growth, the ratio of expenses to average net assets would have been 0.97% for Global Dividend Growth and 1.40% for Pacific Growth. 11 FINANCIAL HIGHLIGHTS -- CAPITAL APPRECIATION PORTFOLIO AND INCOME BUILDER PORTFOLIO (UNAUDITED) - ---------------------------------------------------------- The following ratios and per share data for a share of beneficial interest outstanding throughout the period for each of the Capital Appreciation Portfolio and the Income Builder Portfolio have been taken from the records of the Fund without examination by the independent accountants. The financial highlights should be read in conjunction with the unaudited financial statements and notes thereto which are contained in the Statement of Additional Information. See the discussion under the caption "Charges and Other Deductions" in the accompanying prospectus for either the Variable Annuity Contracts or the Variable Life Contracts for a description of charges which may be imposed on the Contracts by the applicable Account. Any such charges are not reflected in the financial highlights below. Inclusion of any such charges would reduce the total return figures.
FOR THE PERIOD JANUARY 21, 1997* THROUGH MARCH 31, 1997 CAPITAL INCOME APPRECIATION BUILDER -------------- ------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.............. $ 10.00 $ 10.00 ------ ------- Net investment income............................. 0.05 0.06 Net realized and unrealized loss.................. (1.09) (0.23) ------ ------- Total from investment operations.................. (1.04) (0.17) ------ ------- Less dividends from net investment income......... -- (0.06) ------ ------- Net asset value, end of period.................... $ 8.96 $ 9.77 ------ ------- ------ ------- TOTAL INVESTMENT RETURN+.......................... (10.40)%(1) (1.70)%(1) RATIOS TO AVERAGE NET ASSETS: Expenses.......................................... --%(2)(3) --%(2)(4) Net investment income............................. 3.82%(2)(3) 5.87%(2)(4) SUPPLEMENTAL DATA: Net assets, end of period, in thousands........... $ 8,617 $10,133 Portfolio turnover rate........................... 1%(1) 4%(1) Average commission rate paid...................... $0.0486 $0.0531
- ------------------------ * Commencement of operations. + Calculated based on the net asset value as of the last business day of the period. (1) Not annualized. (2) Annualized. (3) If the Investment Manager had not assumed all expenses and waived its management fee, the annualized expense and net investment income ratios would have been 1.60% and 2.22%, respectively. (4) If the Investment Manager had not assumed all expenses and waived its management fee, the annualized expense and net investment income ratios would have been 1.64% and 4.23%, respectively. 12 THE FUND AND ITS MANAGEMENT - ---------------------------------------------------------- Dean Witter Variable Investment Series (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 February 25, 1983. 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 Dean Witter, Discover & Co. ("DWDC"), a balanced financial services organization providing a broad range of nationally marketed credit and investment products. InterCapital and its wholly-owned subsidiary, Dean Witter Services Company Inc., serve in various investment management, advisory, management and administrative capacities to 102 investment companies, thirty of which are listed on the New York Stock Exchange, with combined total assets of approximately $88.3 billion at March 31, 1997. The Investment Manager also manages portfolios of pension plans, other institutions and individuals which aggregated approximately $3.1 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. With regard to the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, under Sub-Advisory Agreements between Morgan Grenfell Investment Services Limited (the "Sub-Adviser") and the Investment Manager, the Sub-Adviser provides the EUROPEAN GROWTH PORTFOLIO with investment advice and portfolio management relating to that Portfolio's investments in securities issued by issuers located in Europe and in other countries located elsewhere around the world, and provides the PACIFIC GROWTH PORTFOLIO with investment advice and portfolio management relating to that Portfolio's investments in securities issued by issuers located in Asia, Australia and New Zealand and in countries located elsewhere around the world, in each case subject to the overall supervision of the Investment Manager. The Sub-Adviser, whose address is 20 Finsbury Circus, London, England, currently manages assets in excess of $15.1 billion primarily for U.S. corporate and public employee benefit plans, endowments, investment companies and foundations. The Sub-Adviser is an indirect subsidiary of Deutsche Bank AG, the largest commercial bank in Germany. The Fund's Trustees review the various services provided by or under the direction of the Investment Manager (and, for the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, by the Sub-Adviser) to ensure that the Fund's general investment policies and programs are being properly carried out and that administrative services are being provided to the Fund in a satisfactory manner. On February 5, 1997, DWDC and Morgan Stanley Group Inc. announced that they had entered into an Agreement and Plan of Merger, with the combined company to be named Morgan Stanley, Dean Witter, Discover & Co. The business of Morgan Stanley Group Inc. and its affiliated companies is providing a wide range of financial services for sovereign governments, corporations, institutions and individuals throughout the world. DWDC is the direct parent of InterCapital and Dean Witter Distributors Inc., the Fund's distributor. It is currently anticipated that the transaction will close in mid-1997. Thereafter, InterCapital and Dean Witter Distributors Inc. will be direct subsidiaries of Morgan Stanley, Dean Witter, Discover & Co. As full compensation for the services and facilities furnished to the Fund and expenses of the Fund assumed by the Investment Manager, the Fund currently pays the Investment Manager monthly compensation calculated daily by applying the annual rate of 0.50% to the net assets of the QUALITY INCOME PLUS PORTFOLIO up to $500 million and the annual rate of 0.45% to the daily net assets of that Portfolio exceeding $500 million, by applying the annual rate of 0.50% to the daily net assets of the EQUITY PORTFOLIO up to $1 billion and 0.475% to the daily net assets of that Portfolio exceeding $1 billion, by applying the annual rate of 0.50% to the net assets of each of the MONEY MARKET PORTFOLIO, the HIGH YIELD PORTFOLIO and the STRATEGIST PORTFOLIO, by applying the annual rate of 0.625% to the net assets of the DIVIDEND GROWTH PORTFOLIO up to $500 million, the annual rate of 0.50% to the next $500 million, and the annual rate of 0.475% to the daily net assets of that Portfolio exceeding $1 billion, by applying the annual rate of 0.65% to the net assets of the UTILITIES PORTFOLIO up to $500 million and the annual rate of 0.55% to the daily net assets of that Portfolio exceeding $500 million, by applying the annual rate of 0.65% to the net assets of the CAPITAL GROWTH PORTFOLIO, by applying the annual rate of 0.75% to the net assets of each of the INCOME BUILDER PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO, and by applying the annual rate of 1.0% to the net assets of each of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, in each case determined as of the close of each business day. As compensation for its services provided to the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO pursuant to the Sub-Advisory Agreements in respect of those Portfolios, the Investment Manager pays the Sub-Adviser monthly compensation equal to 40% of its monthly compensation in respect of each of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO. For the year ended December 31, 1996, the Fund accrued total compensation to the Investment Manager amounting to 0.50% of the average daily net assets of each of the MONEY MARKET 13 PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO, the HIGH YIELD PORTFOLIO, the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO, 0.56% of the average daily net assets of the DIVIDEND GROWTH PORTFOLIO, 0.65% of the average daily net assets of each of the UTILITIES PORTFOLIO and the CAPITAL GROWTH PORTFOLIO, 0.75% of the average daily net assets of the GLOBAL DIVIDEND GROWTH PORTFOLIO, and 1.0% of the average daily net assets of each of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO. The total expenses of the MONEY MARKET PORTFOLIO amounted to 0.52% of its average daily net assets, the total expenses of the QUALITY INCOME PLUS PORTFOLIO amounted to 0.53% of the average daily net assets, the total expenses of the HIGH YIELD PORTFOLIO amounted to 0.51% of its average daily net assets, the total expenses of the EQUITY PORTFOLIO amounted to 0.54% of its average daily net assets, the total expenses of the STRATEGIST PORTFOLIO amounted to 0.52% of its average daily net assets, the total expenses of the DIVIDEND GROWTH PORTFOLIO amounted to 0.57% of its average daily net assets, the total expenses of the UTILITIES PORTFOLIO amounted to 0.67% of its average daily net assets, the total expenses of the CAPITAL GROWTH PORTFOLIO amounted to 0.73% of its average daily net assets, the total expenses of the GLOBAL DIVIDEND GROWTH PORTFOLIO amounted to 0.85% of its average daily net assets, the total expenses of the EUROPEAN GROWTH PORTFOLIO amounted to 1.11% of its average daily net assets, and the total expenses of the PACIFIC GROWTH PORTFOLIO amounted to 1.37% of its average daily net assets. The INCOME BUILDER PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO commenced operations on January 21, 1997. The Investment Manager has undertaken to assume all expenses of each of these Portfolios (except for any brokerage fees) and to waive the compensation provided for each of these Portfolios in its Management Agreement with the Fund until such time as the pertinent Portfolio has $50 million of net assets or until six months from the date of the Portfolio's commencement of operations, whichever occurs first. INVESTMENT OBJECTIVES AND POLICIES - ---------------------------------------------------------- THE MONEY MARKET PORTFOLIO The investment objectives of the MONEY MARKET PORTFOLIO are high current income, preservation of capital and liquidity. The MONEY MARKET PORTFOLIO seeks to achieve those objectives by investing in the following money market instruments: U.S. Government Securities. Obligations issued or guaranteed as to principal and interest by the United States or its agencies (such as the Export-Import Bank of the United States, Federal Housing Administration, and Government National Mortgage Association) or its instrumentalities (such as the Federal Home Loan Bank, Federal Intermediate Credit Banks and Federal Land Bank), including Treasury bills, notes and bonds; Bank Obligations. Obligations (including certificates of deposit and bankers' acceptances) of banks subject to regulation by the U.S. Government and having total assets of $1 billion or more, and instruments secured by such obligations, not including obligations of foreign branches of domestic banks except to the extent below; Eurodollar Certificates of Deposit. Eurodollar certificates of deposit issued by foreign branches of domestic banks having total assets of $1 billion or more (see the discussion of foreign securities under "General Portfolio Techniques" below); Obligations of Savings Institutions. Certificates of deposit of savings banks and savings and loan associations, having total assets of $1 billion or more; Fully Insured Certificates of Deposit. Certificates of deposit of banks and savings institutions, having total assets of less than $1 billion, if the principal amount of the obligation is insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation, limited to $100,000 principal amount per certificate and to 10% or less of the Portfolio's total assets in all such obligations and in all illiquid assets, in the aggregate; Commercial Paper. Commercial paper rated within the two highest grades by Standard & Poor's Corporation ("S&P") or the highest grade by Moody's Investors Service, Inc. ("Moody's"), or, if not rated, issued by a company having an outstanding debt issue rated at least AA by S&P or Aa by Moody's; Corporate Obligations. Corporate obligations, rated at least A by S&P or Moody's, maturing in one year or less. See the Appendix for an explanation of S&P and Moody's ratings. Variable Rate Obligations. The interest rates payable on certain securities in which the MONEY MARKET PORTFOLIO may invest are not fixed and may fluctuate based upon changes in market rates. Obligations of this type are called "variable rate" obligations. The interest rate payable on a variable rate obligation is adjusted either at predesignated periodic intervals or whenever there is a change in the market rate of interest on which the interest rate payable is based. The MONEY MARKET PORTFOLIO may enter into repurchase agreements, may lend its portfolio securities and purchase securities on a when-issued or delayed delivery basis, in each case in accordance with the description of those techniques (and 14 subject to the risks) set forth under "General Portfolio Techniques" below and in the Statement of Additional Information. The investment objectives and policies stated above may not be changed without the approval of the shareholders of the MONEY MARKET PORTFOLIO. The MONEY MARKET PORTFOLIO may not invest in securities other than the types of securities listed above and is subject to other specific investment restrictions as detailed under "Investment Restrictions" below and in the Statement of Additional Information. Although the MONEY MARKET PORTFOLIO will not generally be managed with a policy of active short-term trading, it may dispose of any portfolio security prior to its maturity if, on the basis of a revised credit evaluation of the issuer or other circumstances or considerations, the Investment Manager believes such disposition advisable. The MONEY MARKET PORTFOLIO is expected to have a high portfolio turnover due to the short maturities of securities purchased, but this should not affect income or net asset value as brokerage commissions are not normally charged on the purchase or sale of money market instruments. The MONEY MARKET PORTFOLIO will attempt to balance its objectives of high income, capital preservation and liquidity by investing in securities of varying maturities and risks. The MONEY MARKET PORTFOLIO will not, however, invest in securities that mature in more than one year from the date of purchase (see "Determination of Net Asset Value"). The amounts invested in obligations of various maturities of one year or less will depend on management's evaluation of the risks involved. Longer-term issues, while generally paying higher interest rates, are subject to greater fluctuations in value resulting from general changes in interest rates than shorter-term issues. Thus, when rates on new debt securities increase, the value of outstanding securities may decline, and vice versa. Such changes may also occur, but to a lesser degree, with short-term issues. These changes, if realized, may cause fluctuations in the amount of daily dividends and, in extreme cases, could cause the net asset value per share to decline (see "Determination of Net Asset Value"). Longer-term issues also increase the risk that the issuer may be unable to pay an installment of interest or principal at maturity. Also, in the event of unusually large redemption demands, such securities may have to be sold at a loss prior to maturity, or the MONEY MARKET PORTFOLIO might have to borrow money and incur interest expenses. Either occurrence would adversely impact the amount of daily dividend and could result in a decline in net asset value per share or the redemption by the MONEY MARKET PORTFOLIO of shares held in a shareholder's account. The MONEY MARKET PORTFOLIO will attempt to minimize these risks by investing in longer-term securities when it appears to management that interest rates on such securities are not likely to increase substantially during the period of expected holding, and then only in securities of high quality which are readily marketable. However, there can be no assurance that the MONEY MARKET PORTFOLIO will be successful in achieving this or its other objectives. THE QUALITY INCOME PLUS PORTFOLIO The primary investment objective of the QUALITY INCOME PLUS PORTFOLIO is to earn a high level of current income, by investing primarily in U.S. Government securities and other fixed-income securities. As a secondary objective, the QUALITY INCOME PLUS PORTFOLIO will seek capital appreciation but only when consistent with its primary objective. There is no assurance that the objectives will be achieved. The objectives of the QUALITY INCOME PLUS PORTFOLIO are fundamental policies of the Portfolio and, as such, may not be changed without the approval of the shareholders of the QUALITY INCOME PLUS PORTFOLIO. The QUALITY INCOME PLUS PORTFOLIO has also adopted the following investment policies which are not fundamental policies and may be changed by the Trustees of the Fund without shareholder approval. In seeking to achieve its objectives, the QUALITY INCOME PLUS PORTFOLIO will normally invest at least 65% of its net assets in a combination of U.S. Government securities and debt securities (including straight debt securities and debt securities convertible into common stock) and "Yankee government bonds," which are U.S. dollar denominated debt securities issued by foreign governments or their respective instrumentalities or agencies which securities are either registered under the Securities Act of 1933 or eligible for resale pursuant to Rule 144A under that Act and pay both principal and interest in U.S. dollars, which have a rating at the time of purchase within the three highest grades as determined by Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa or A) or Standard & Poor's Corporation ("S&P") (AAA, AA or A) or which, if not rated, are deemed to be of comparable quality by the Fund's Trustees, with a maximum of 20% of the Portfolio's net assets in "Yankee government bonds." However, any security which subsequently receives a rating as low as Baa(3) by Moody's or BBB- by S&P (the lowest investment grade ratings) will be eliminated from the portfolio at such time as the Investment Manager determines that it is practicable to sell the security without undue market or tax consequences to the QUALITY INCOME PLUS PORTFOLIO. A description of corporate bond ratings is contained in the Appendix. See "General Portfolio Techniques" below for a discussion of convertible securities and foreign securities. Securities which may be purchased include zero coupon securities (see "General Portfolio Techniques" below). Generally, as prevailing interest rates rise, the value of the U.S. Government and other debt securities held by the QUALITY INCOME PLUS PORTFOLIO, and concomitantly, the net asset value of the Portfolio's shares, will fall. Such securities with longer maturities generally tend to produce higher yields and are subject to greater market fluctuation as a result of changes in interest rates than 15 debt securities with shorter maturities. The Portfolio is not limited as to the maturities of the U.S. Government and other debt securities in which it may invest. U.S. Government securities include: (1) U.S. Treasury bills (maturities of one year or less), U.S. Treasury notes (maturities of one to ten years) and U.S. Treasury bonds (generally maturities of greater than ten years), all of which are direct obligations of the U.S. Government and, as such, are backed by the "full faith and credit" of the United States. (2) Securities issued by agencies and instrumentalities of the U.S. Government which are backed by the full faith and credit of the United States. Among the agencies and instrumentalities issuing such obligations are the Federal Housing Administration, the Government National Mortgage Association ("GNMA"), the Department of Housing and Urban Development, the Export-Import Bank, the Farmers Home Administration, the General Services Administration, the Maritime Administration and the Small Business Administration. The maturities of such obligations range from three months to thirty years. (3) Securities issued by agencies and instrumentalities which are not backed by the full faith and credit of the United States, but whose issuing agency or instrumentality has the right to borrow, to meet its obligations, from an existing line of credit with the U.S. Treasury. Among the agencies and instrumentalities issuing such obligations are the Tennessee Valley Authority, the Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and the U.S. Postal Service. (4) Securities issued by agencies and instrumentalities which are not backed by the full faith and credit of the United States, but which are backed by the credit of the issuing agency or instrumentality. Among the agencies and instrumentalities issuing such obligations are the Federal Farm Credit System and the Federal Home Loan Banks. Certain of the U.S. Government securities in which the QUALITY INCOME PLUS PORTFOLIO may invest; E.G., certificates issued by GNMA, FNMA and FHLMC, are "mortgage-backed securities," which evidence an interest in a specific pool of mortgages. These certificates are, in most cases, "pass-through" instruments, wherein the issuing agency guarantees the timely payment of principal and interest on mortgages underlying the certificates, whether or not such amounts are collected by the issuer on the underlying mortgages. The average life of such certificates varies with the maturities of the underlying mortgage instruments, which may be up to thirty years. This average life is likely to be substantially shorter than the original maturity of the mortgage pools underlying the certificates, as a pool's duration may be shortened by unscheduled or early payments of principal on the underlying mortgages. The occurrence of mortgage prepayments is affected by factors including the prevailing level of interest rates, general economic conditions, the location and age of the mortgage and other social and demographic conditions. For example, during periods of declining interest rates, mortgage prepayments can be expected to accelerate. As prepayment rates vary widely, it is not possible to accurately predict the average life of a particular pool. The net asset value of shares of the QUALITY INCOME PLUS PORTFOLIO and the Portfolio's ability to achieve its investment objectives may be adversely affected by mortgage prepayments. While the QUALITY INCOME PLUS PORTFOLIO will invest primarily in U.S. Government and other debt securities, it may invest up to 35% of its portfolio (including options on debt instruments, options on futures contracts and futures contracts) in money market instruments, including commercial paper, certificates of deposit, bankers' acceptances and other obligations of domestic banks or domestic branches of foreign banks, or foreign branches of domestic banks, in each case having total assets of at least $500 million, and obligations issued or guaranteed by the United States Government, and, within this portion of the portfolio, up to 15% of its net assets in "Yankee corporate bonds," which are U.S. dollar denominated debt securities issued by foreign corporations which securities are either registered under the Securities Act of 1933 or eligible for resale pursuant to Rule 144A under that Act and pay both principal and interest in U.S. dollars, and which have a rating at the time of purchase within the three highest grades as determined by Moody's or S&P or which, if not rated, are deemed to be of comparable quality by the Fund's Trustees (any security which subsequently receives a rating as low as Baa(3) by Moody's or BBB- by S&P will be eliminated from the portfolio at such time as the Investment Manager determines that it is practicable to sell the security without undue market or tax consequences to the QUALITY INCOME PLUS PORTFOLIO) (see "General Portfolio Techniques" below and in the Statement of Additional Information). Moreover, and notwithstanding any of the above, the QUALITY INCOME PLUS PORTFOLIO may invest in money market instruments without limitation when market conditions dictate a "defensive" investment strategy. The QUALITY INCOME PLUS PORTFOLIO may enter into repurchase agreements, lend its portfolio securities, purchase securities on a when-issued or delayed delivery basis or a "when, as and if issued" basis, and purchase or sell securities on a forward commitment basis, in each case in accordance with the description of those techniques (and subject to the risks) set forth under "General Portfolio Techniques" below and in the Statement of Additional Information. BORROWING. The QUALITY INCOME PLUS PORTFOLIO may borrow money, but only from a bank and in an amount up to 25% of the Portfolio's gross assets taken at the lower of market value or cost, not including the amount borrowed. When the Portfolio borrows it will be because it seeks additional income by leveraging its investments through purchasing securities with the borrowed funds. The QUALITY INCOME PLUS PORTFOLIO will be required to 16 maintain an asset coverage (including the proceeds of borrowings) of at least 300% of such borrowings in accordance with the provisions of the Investment Company Act of 1940, as amended (the "Act"). THE HIGH YIELD PORTFOLIO The primary investment objective of the HIGH YIELD PORTFOLIO is to earn a high level of current income by investing in a professionally managed diversified portfolio consisting principally of fixed-income securities, which may include both non-convertible and convertible debt securities and preferred stocks. As a secondary objective, the HIGH YIELD PORTFOLIO will seek capital appreciation, but only when consistent with its primary objective. Capital appreciation may result, for example, from an improvement in the credit standing of an issuer whose securities are held in the portfolio of the HIGH YIELD PORTFOLIO or from a general decline in interest rates, or a combination of both. Conversely, capital depreciation may result, for example, from a lowered credit standing or a general rise in interest rates, or a combination of both. There is no assurance that the objectives will be achieved. The objectives of the HIGH YIELD PORTFOLIO may not be changed without the approval of the shareholders of the HIGH YIELD PORTFOLIO. The following policies may be changed by the Trustees of the Fund without shareholder approval: The higher yields sought by the HIGH YIELD PORTFOLIO are generally obtainable from securities rated in the lower categories by recognized rating services. The HIGH YIELD PORTFOLIO seeks high current income by investing principally in fixed-income securities, as described above, which are rated Baa or lower by Moody's Investors Service, Inc. ("Moody's"), or BBB or lower by Standard & Poor's Corporation ("S&P"). Fixed-income securities rated Baa by Moody's or BBB by S&P have speculative characteristics greater than those of more highly-rated bonds, while fixed-income securities rated Ba or BB or lower by Moody's and S&P, respectively, are considered to be speculative investments. Furthermore, the HIGH YIELD PORTFOLIO does not have any minimum quality rating standard for its investments. As such, the High Yield Portfolio may invest in securities rated as low as Caa, Ca or C by Moody's or CCC, CC, C or CI by S&P. Fixed-income securities rated Caa or Ca by Moody's may already be in default on payment of interest or principal, while bonds rated C by Moody's, their lowest bond rating, can be regarded as having extremely poor prospects of ever attaining any real investment standing. Bonds rated CI by S&P, their lowest bond rating, are no longer making interest payments. For a further discussion of the characteristics and risks associated with high yield securities, and for a discussion of convertible securities, see "General Portfolio Techniques" below. A description of corporate bond ratings is contained in the Appendix. Non-rated securities will also be considered for investment by the HIGH YIELD PORTFOLIO when the Investment Manager believes that the financial condition of the issuers of such securities, or the protection afforded by the terms of the securities themselves, makes them appropriate investments for the HIGH YIELD PORTFOLIO. All fixed-income securities are subject to two types of risks: the credit risk and the interest rate risk. The credit risk relates to the ability of the issuer to meet interest or principal payments or both as they come due. The interest rate risk refers to the fact that there are fluctuations in net asset value of any portfolio of fixed-income securities resulting from the inverse relationship between price and yield of fixed-income securities; that is, when the general level of interest rates rises, the prices of outstanding fixed-income securities generally decline, and when interest rates fall, prices generally rise. The ratings of fixed-income securities by Moody's and S&P are a generally accepted barometer of credit risk. However, as the creditworthiness of issuers of lower-rated fixed-income securities is more problematical than that of the issuers of higher-rated fixed-income securities, the achievements of the HIGH YIELD PORTFOLIO's investment objectives will be more dependent upon the Investment Manager's own credit analysis than would be the case with a mutual fund investing primarily in higher quality bonds. The Investment Manager will utilize a security's credit rating as simply one indication of an issuer's creditworthiness and will principally rely upon its own analysis of any security currently held by the HIGH YIELD PORTFOLIO or potentially purchasable by the Portfolio. In determining which securities to purchase or hold for the portfolio of the HIGH YIELD PORTFOLIO and in seeking to reduce the credit and interest rate risks, the Investment Manager will rely on information from various sources, including: the rating of the security; research, analysis and appraisals of brokers and dealers, including Dean Witter Reynolds Inc.; the views of the Trustees of the Fund and others regarding economic developments and interest rate trends; and the Investment Manager's own analysis of factors it deems relevant. The extent to which the Investment Manager is successful in reducing depreciation or losses arising from either interest rate or credit risks depends in part on the Investment Manager's portfolio management skills and judgment in evaluating the factors affecting the value of securities. No assurance can be given regarding the degree of success that will be achieved. Consistent with its primary investment objective, the HIGH YIELD PORTFOLIO anticipates that, under normal conditions, at least 65% of the value of its total assets will be invested in the lower-rated and non-rated fixed-income securities (including zero coupon securities) previously described. However, when the yields derived from such securities and those derived from higher-rated issues are relatively narrow, the HIGH YIELD PORTFOLIO may invest in the higher-rated issues since they may provide similar yields with somewhat less risk. Pending investment of proceeds of sale of shares of the HIGH YIELD PORTFOLIO or of its portfolio securities or at other times when market conditions dictate a more "defensive" investment strategy, the HIGH YIELD PORTFOLIO may invest without limit in money 17 market instruments, including commercial paper of corporations organized under the laws of any state or political subdivision of the United States, certificates of deposit, bankers' acceptances and other obligations of domestic banks or domestic branches of foreign banks, or foreign branches of domestic banks, in each case having total assets of at least $500 million, and obligations issued or guaranteed by the United States Government, or foreign governments or their respective instrumentalities or agencies. The yield on these securities will generally tend to be lower than the yield on other securities that can be purchased by the HIGH YIELD PORTFOLIO. The HIGH YIELD PORTFOLIO may enter into repurchase agreements, invest in foreign securities (including American Depository Receipts, European Depository Receipts or other similar securities convertible into securities of foreign issuers), lend its portfolio securities, purchase securities on a when-issued or delayed delivery basis, or a "when, as and if issued" basis, and purchase or sell securities on a forward commitment basis, in each case in accordance with the description of those investments and techniques (and subject to the risks) set forth under "General Portfolio Techniques" below and in the Statement of Additional Information. The HIGH YIELD PORTFOLIO may purchase unit offerings (where corporate debt securities are offered as a unit with convertible securities, preferred or common stocks, warrants, or any combination thereof) (see the discussion of warrants under "General Portfolio Techniques" below). Public Utilities. The HIGH YIELD PORTFOLIO's investments in public utilities, if any, may be subject to certain risks (see the description of the risks associated with investment in public utilities set forth below under "The Utilities Portfolio"). Special Investment Considerations. Because of the special nature of the HIGH YIELD PORTFOLIO's investment in high yield securities, commonly known as "junk bonds," the Investment Manager must take account of certain special considerations in assessing the risks associated with such investments. Investors should carefully consider the risks of investing in high yield securities (see "General Portfolio Techniques" below and in the Statement of Additional Information for a discussion of the risks of investments in high yield securities). During the fiscal year ended December 31, 1996, the monthly dollar weighted average ratings of the debt obligations held by the HIGH YIELD PORTFOLIO, expressed as a percentage of the Portfolio's total investments, were as follows:
Percentage of Ratings Total Investments - --------------------------------------------- ----------------- AAA/Aaa...................................... 1.0 AA/Aa........................................ -- A/A.......................................... 7.0 BBB/Baa...................................... -- BB/Ba........................................ 5.3 B/B.......................................... 73.1 CCC/Caa...................................... 2.3 CC/Ca........................................ -- C/C.......................................... -- D............................................ -- Unrated...................................... 11.3 ----- 100.0 %
THE UTILITIES PORTFOLIO The investment objective of the UTILITIES PORTFOLIO is to provide current income and long-term growth of income and capital, by investing primarily in equity and fixed-income securities of companies engaged in the public utilities industry. The objective of the UTILITIES PORTFOLIO may not be changed without the approval of the shareholders of the UTILITIES PORTFOLIO. The term "public utilities industry" consists of companies engaged in the manufacture, production, generation, transmission, sale and distribution of gas and electric energy, as well as companies engaged in the communications field, including telephone, telegraph, satellite, microwave and other companies providing communication facilities for the public, but excluding public broadcasting companies. For purposes of the UTILITIES PORTFOLIO, a company will be considered to be in the public utilities industry if, during the most recent twelve month period, at least 50% of the company's gross revenues, on a consolidated basis, is derived from the public utilities industry. The following investment policies may be changed by the Trustees of the Fund without shareholder approval: In seeking to achieve its objective, the UTILITIES PORTFOLIO will normally invest at least 65% of its total assets in securities of companies in the public utilities industry. The Investment Manager believes the UTILITIES PORTFOLIO's investment policies are suited to benefit from certain characteristics and historical performance of the securities of public utility companies. Many of these companies have historically set a pattern of paying regular dividends and increasing their common stock dividends over time, and the average common stock dividend yield of utilities historically has substantially exceeded that of industrial stocks. The Investment Manager believes that these factors may not only provide current income but also generally tend to moderate risk and thus may enhance the opportunity for appreciation of securities owned by the UTILITIES PORTFOLIO, although the potential for capital appreciation has historically been lower for many utility stocks compared with most industrial stocks. There can be no assurance that the historical investment performance of the public utilities industry will be indicative of future events and performance. There can be no assurance that the investment objective of the UTILITIES PORTFOLIO will be achieved. 18 The UTILITIES PORTFOLIO will invest in both equity securities (common stocks and securities convertible into common stock) and fixed income securities (bonds and preferred stock) in the public utilities industry. The UTILITIES PORTFOLIO does not have any set policies to concentrate within any particular segment of the utilities industry. The UTILITIES PORTFOLIO will shift its asset allocation without restriction between types of utilities and between equity and fixed-income securities based upon the Investment Manager's determination of how to achieve the UTILITIES PORTFOLIO's investment objective in light of prevailing market, economic and financial conditions. For example, at a particular time the Investment Manager may choose to allocate up to 100% of the UTILITIES PORTFOLIO's assets in a particular type of security (for example, equity securities) or in a specific utility industry segment (for example, electric utilities). See "General Portfolio Techniques" below for a discussion of convertible securities. Criteria to be utilized by the Investment Manager in the selection of equity securities include the following screens: earnings and dividend growth; book value; dividend discount; and price/ earnings relationships. In addition, the Investment Manager makes continuing assessments of management, the prevailing regulatory framework and industry trends. The Investment Manager may also utilize computer-based equity selection models in connection with stock allocation in the equity portion of the portfolio. In keeping with the UTILITIES PORTFOLIO's objective, if in the opinion of the Investment Manager favorable conditions for capital growth of equity securities are not prevalent at a particular time, the UTILITIES PORTFOLIO may allocate its assets predominantly or exclusively in debt securities with the aim of obtaining current income as well as preserving capital and thus benefiting long term growth of capital. The UTILITIES PORTFOLIO may purchase equity securities sold on the New York, American and other stock exchanges and in the over-the-counter market. Fixed-income securities in which the UTILITIES PORTFOLIO may invest are debt securities and preferred stocks, which are rated at the time of purchase Baa or better by Moody's Investors Service, Inc. or BBB or better by Standard & Poor's Corporation or which, if unrated, are deemed to be of comparable quality by the Fund's Trustees (see "General Portfolio Techniques" below for a discussion of the characteristics and risks of investments in fixed-income securities rated Baa or BBB). Under normal circumstances the average weighted maturity of the debt portion of the portfolio is expected to be in excess of seven years. A description of corporate bond ratings is contained in the Appendix. While the UTILITIES PORTFOLIO will invest primarily in the securities of public utility companies, under ordinary circumstances it may invest up to 35% of its total assets in U.S. Government securities (securities issued or guaranteed as to principal and interest by the United States or its agencies and instrumentalities), money market instruments, repurchase agreements, options and futures (see "General Portfolio Techniques" below and in the Statement of Additional Information). U.S. Government securities are described above and in the Statement of Additional Information under the caption "The Quality Income Plus Portfolio." The UTILITIES PORTFOLIO may acquire warrants attached to other securities purchased by the Portfolio (see "General Portfolio Techniques" below). There may be periods during which, in the opinion of the Investment Manager, market conditions warrant reduction of some or all of the UTILITIES PORTFOLIO's securities holdings. During such periods, the UTILITIES PORTFOLIO may adopt a temporary "defensive" posture in which greater than 35% of its total assets are invested in cash or money market instruments which would be eligible investments for the Fund's MONEY MARKET PORTFOLIO (as set forth above under "The Money Market Portfolio"). The UTILITIES PORTFOLIO may enter into repurchase agreements, invest in foreign securities (including American Depository Receipts, European Depository Receipts or other similar securities convertible into securities of foreign issuers), invest in zero coupon securities, invest in real estate investment trusts, lend its portfolio securities, purchase securities on a when-issued or delayed delivery basis or a "when, as and if issued" basis, and purchase or sell securities on a forward commitment basis, in each case in accordance with the description of those investments and techniques (and subject to the risks) set forth under "General Portfolio Techniques" below and in the Statement of Additional Information. Public Utilities Industry. The public utilities industry as a whole has certain characteristics and risks particular to that industry. Unlike industrial companies, the rates which utility companies may charge their customers generally are subject to review and limitation by governmental regulatory commissions. Although rate changes of a utility usually fluctuate in approximate correlation with financing costs, due to political and regulatory factors rate changes ordinarily occur only following a delay after the changes in financing costs. This factor will tend to favorably affect a utility company's earnings and dividends in times of decreasing costs, but conversely will tend to adversely affect earnings and dividends when costs are rising. In addition, the value of public utility debt securities (and, to a lesser extent, equity securities) tends to have an inverse relationship to the movement of interest rates. Among the risks affecting the utilities industry are the following: risks of increases in fuel and other operating costs; the high cost of borrowing to finance capital construction during inflationary periods; restrictions on operations and increased costs and delays associated with compliance with environmental and nuclear safety regulations; the difficulties involved in obtaining natural gas for resale or fuel for generating electricity at reasonable prices; the risks in connection with the construction and operation of nuclear power plants; the effects of energy conservation and the effects of regulatory changes, such as the possible adverse effects of profits on recent increased competition within the telecommunications, electric and natural gas industries and the uncertainties resulting from companies within these industries diversifying into new domestic and international 19 businesses, as well as from agreements by many such companies linking future rate increases to inflation or other factors not directly related to the actual operating profits of the enterprise. THE INCOME BUILDER PORTFOLIO The primary investment objective of the INCOME BUILDER PORTFOLIO is to seek reasonable income. Growth of capital is a secondary objective. There can be no assurance that the objectives will be achieved. The objectives of the INCOME BUILDER PORTFOLIO may not be changed without the approval of the shareholders of the INCOME BUILDER PORTFOLIO. The following policies may be changed by the Trustees of the Fund without shareholder approval: The INCOME BUILDER PORTFOLIO seeks to achieve its objectives by investing, under normal market conditions, at least 65% of its total assets in income-producing equity securities, including common stock, preferred stock and convertible securities. Up to 35% of the Portfolio's assets may be invested in fixed-income securities or common stocks that do not pay a regular dividend but are expected to contribute to the Portfolio's ability to meet its investment objectives. The INCOME BUILDER PORTFOLIO will invest, under normal market conditions, primarily in common stocks of large-cap companies which have a record of paying dividends and, in the opinion of the Investment Manager, have the potential for maintaining dividends, in preferred stock and in securities convertible into common stocks of small and mid-cap companies. See "General Portfolio Techniques" below for a discussion of convertible securities, including a discussion of "enhanced," "synthetic" and "exchangeable" convertible securities in which the INCOME BUILDER PORTFOLIO may invest. The Investment Manager intends to use a value-oriented investment style in the selection of securities for the portfolio of the INCOME BUILDER PORTFOLIO. The INCOME BUILDER PORTFOLIO also may invest up to 20% of its total assets in fixed-income securities rated below investment grade. Securities below investment grade are the equivalent of high yield, high risk bonds (commonly known as "junk bonds"). Investment grade is generally considered to be debt securities rated BBB or higher by Standard & Poor's Corporation ("S&P") or Baa or higher by Moody's Investors Service, Inc. ("Moody's"). See "General Portfolio Techniques" below for a discussion of investments in securities rated BBB by S&P or Baa by Moody's. Fixed-income securities rated BBB by S&P or Baa by Moody's, which generally are regarded to have an adequate capacity to pay interest and repay principal, have speculative characteristics. However, the INCOME BUILDER PORTFOLIO will not invest in fixed-income securities that are rated lower than B by S&P or Moody's or, if not rated, are determined to be of comparable quality by the Investment Manager. The INCOME BUILDER PORTFOLIO will not invest in fixed-income securities that are in default in payment of principal or interest. The 20% limitation on securities rated below investment grade in which the INCOME BUILDER PORTFOLIO may invest does not include securities convertible into common stock. A description of fixed-income security ratings is contained in the Appendix. See "General Portfolio Techniques" below for a discussion of the risks of investments in lower rated, high yield securities. A portion of the INCOME BUILDER PORTFOLIO's assets may be invested in investment grade fixed income (fixed-rate and adjustable rate) securities such as corporate notes and bonds and obligations issued or guaranteed by the U.S. Government, its agencies and instrumentalities. U.S. Government securities are described above and in the Statement of Additional Information under "The Quality Income Plus Portfolio." The non-governmental debt securities in which the INCOME BUILDER PORTFOLIO will invest will include: (a) corporate debt securities, including bonds, notes and commercial paper, rated in the four highest categories by a nationally recognized statistical rating organization ("NRSRO") including Moody's Investors Service, Inc., Standard & Poor's Corporation, Duff and Phelps, Inc. and Fitch Investors Service, Inc.; and (b) bank obligations, including CDs, banker's acceptances and time deposits, issued by banks with a long-term CD rating in one of the four highest categories by a NRSRO. Investments in securities rated within the four highest rating categories by a NRSRO are considered "investment grade." However, such securities rated within the fourth highest rating category by a NRSRO have speculative characteristics and, therefore, changes in economic conditions or other circumstances are more likely to weaken their capacity to make principal and interest payments than would be the case with investments in securities with higher credit ratings. Where a fixed-income security is not rated by a NRSRO (as may be the case with a foreign security) the Investment Manager will make a determination of its creditworthiness and may deem it to be investment grade. A description of fixed-income security ratings is contained in the Appendix. Payments of interest and principal on U.S. Government securities are guaranteed by the U.S. Government; however, neither the value nor the yield of corporate notes and bonds and U.S. Government securities which may be invested in by the INCOME BUILDER PORTFOLIO are guaranteed by the U.S. Government. Values and yield of corporate and government bonds will fluctuate with changes in prevailing interest rates and other factors. Generally, as prevailing interest rates rise, the value of corporate notes and bonds and government bonds held by the Portfolio will fall. Securities with longer maturities generally tend to produce higher yields and are subject to greater market fluctuation as a result of changes in interest rates than debt securities with shorter maturities. The INCOME BUILDER PORTFOLIO is not limited as to the maturities of the debt securities in which it may invest. The Investment Manager intends to follow a "bottom-up" approach in the selection of convertible securities for the INCOME BUILDER PORTFOLIO. Beginning with a universe of about 500 companies, the Investment Manager will narrow the focus to small and mid-cap companies and review the issues to determine if the convertible is trading with the underlying equity security. The yield of the underlying equity security will be evaluated and company fundamentals will be studied to evaluate cash flow, 20 risk/reward balance, valuation and the prospects for growth. The Investment Manager intends to select convertible securities that, in its judgment, are issued by companies with sound management practices and that represent good value. Money market instruments in which the INCOME BUILDER PORTFOLIO may invest include securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities (Treasury bills, notes and bonds, including zero coupon securities); bank obligations; Eurodollar certificates of deposit; obligations of savings institutions; fully insured certificates of deposit; and commercial paper rated within the four highest grades by Moody's or S&P or, if not rated, issued by a company having an outstanding debt issue rated at least AA by S&P or Aa by Moody's. Such securities may be used to invest uncommitted cash balances. There may be periods during which, in the opinion of the Investment Manager, market conditions warrant reduction of some or all of the Portfolio's securities holdings. During such periods, the INCOME BUILDER PORTFOLIO may adopt a temporary "defensive" posture in which up to 100% of its total assets is invested in money market instruments or cash. The INCOME BUILDER PORTFOLIO may enter into repurchase agreements, invest in foreign securities (including American Depository Receipts, European Depository Receipts or other similar securities convertible into securities of foreign issuers), invest in warrants, zero coupon securities and real estate investment trusts, lend its portfolio securities, purchase securities which are issued in private placements or are otherwise not readily marketable, purchase securities on a when-issued or delayed delivery basis or a "when, as and if issued" basis, and purchase or sell securities on a forward commitment basis, in each case in accordance with the description of these investments and techniques (and subject to the risks) set forth under "General Portfolio Techniques" below and in the Statement of Additional Information. The INCOME BUILDER PORTFOLIO is authorized to engage in transactions involving options and futures contracts that would be eligible for use by the STRATEGIST PORTFOLIO, as described under "Options and Futures Transactions" under "General Portfolio Techniques" below and in the Statement of Additional Information. The INCOME BUILDER PORTFOLIO does not, however, presently intend to engage in such options and futures transactions and will not do so unless and until the Fund's prospectus has been revised to reflect this. Special Investment Considerations. Because of the special nature of the INCOME BUILDER PORTFOLIO's investments in high yield securities, commonly known as "junk bonds," the Investment Manager must take account of certain special considerations in assessing the risks associated with such investments. Investors should carefully consider the risks of investing in high yield securities (see "General Portfolio Techniques" below and in the Statement of Additional Information for a discussion of the risks of investments in high yield securities). THE DIVIDEND GROWTH PORTFOLIO The investment objective of the DIVIDEND GROWTH PORTFOLIO is to provide reasonable current income and long-term growth of income and capital. There is no assurance that the objective will be achieved. The DIVIDEND GROWTH PORTFOLIO seeks to achieve its investment objective primarily through investments in common stock of companies with a record of paying dividends and the potential for increasing dividends. Net asset value of the DIVIDEND GROWTH PORTFOLIO's shares will fluctuate with changes in market values of portfolio securities. The DIVIDEND GROWTH PORTFOLIO will attempt to avoid speculative securities or those with speculative characteristics. The investment objective of the DIVIDEND GROWTH PORTFOLIO may not be changed without the approval of the shareholders of the DIVIDEND GROWTH PORTFOLIO. The following policies may be changed by the Trustees of the Fund without shareholder approval: (1) Up to 30% of the value of the DIVIDEND GROWTH PORTFOLIO's total assets may be invested in: (a) convertible debt securities, convertible preferred securities, warrants (see "General Portfolio Techniques" below), U.S. Government securities (securities issued or guaranteed as to principal and interest by the United States or its agencies and instrumentalities), corporate debt securities which are rated at the time of purchase Baa or better by Moody's Investors Service, Inc. or BBB or better by Standard & Poor's Corporation or which, if unrated, are deemed to be of comparable quality by the Fund's Trustees (see "General Portfolio Techniques" below for a discussion of the characteristics and risks of investments in fixed-income securities rated Baa or BBB) and/or money market instruments which would be eligible investments for the Fund's MONEY MARKET PORTFOLIO (as set forth above under "The Money Market Portfolio") when, in the opinion of the Investment Manager, the projected total return on such securities is equal to or greater than the expected total return on equity securities or when such holdings might be expected to reduce the volatility of the portfolio (for purposes of this provision, the term "total return" means the difference between the cost of a security and the aggregate of its market value and dividends received); or (b) in money market instruments under any one or more of the following circumstances: (i) pending investment of proceeds of sale of the DIVIDEND GROWTH PORTFOLIO's shares or of portfolio securities; (ii) pending settlement of purchases of portfolio securities; or (iii) to maintain liquidity for the purpose of meeting anticipated redemptions. (2) Notwithstanding any of the foregoing limitations, the DIVIDEND GROWTH PORTFOLIO may invest more than 30% of the value of its total assets in money market instruments to maintain, temporarily, a "defensive" posture when, in the opinion of the Investment Manager, it is advisable to do so because of economic or market conditions. The DIVIDEND GROWTH PORTFOLIO may enter into repurchase agreements, invest in American Depository Receipts, invest in zero 21 coupon securities, invest in real estate investment trusts, lend its portfolio securities, purchase securities on a when-issued or delayed delivery basis or a "when, as and if issued" basis, and purchase or sell securities on a forward commitment basis, in each case in accordance with the description of those investments and techniques (and subject to the risks) set forth under "General Portfolio Techniques" below and in the Statement of Additional Information. The DIVIDEND GROWTH PORTFOLIO is authorized to engage in transactions involving options and futures contracts which would be eligible for use by the STRATEGIST PORTFOLIO. These transactions are described under "Options and Futures Transactions" under "General Portfolio Techniques" below and in the Statement of Additional Information. The DIVIDEND GROWTH PORTFOLIO does not, however, presently intend to engage in such options and futures transactions and will not do so unless and until the Fund's prospectus were revised to reflect this. THE CAPITAL GROWTH PORTFOLIO The investment objective of the CAPITAL GROWTH PORTFOLIO is long-term capital growth. There is no assurance that the objective will be achieved. The investment objective of the CAPITAL GROWTH PORTFOLIO may not be changed without the approval of the shareholders of the CAPITAL GROWTH PORTFOLIO. The following policies may be changed by the Board of Trustees without shareholder approval: The CAPITAL GROWTH PORTFOLIO seeks to achieve its investment objective by investing, under normal circumstances, at least 65% of its total assets in common stocks. As part of its management of the Portfolio, the Investment Manager will utilize a screening process designed to find companies which have demonstrated a history of consistent growth in earnings and revenues for the past several years. Additionally, screened companies will have solid future earnings growth characteristics and attractive valuations. Companies meeting these requirements will be potential candidates for investment by the CAPITAL GROWTH PORTFOLIO. Subject to the Portfolio's investment objective, the Investment Manager, without notice, may modify the foregoing screening process and/ or may utilize additional or different screening processes in connection with the investment of the Portfolio's assets. Dividend income will not be a consideration in the selection of stocks for purchase. Although the CAPITAL GROWTH PORTFOLIO will invest primarily in common stocks, the Portfolio may invest up to 35% of its total assets (taken at current value and subject to restrictions appearing elsewhere in this Prospectus), in U.S. Government securities (securities issued or guaranteed as to principal and interest by the United States or its agencies or instrumentalities), and corporate debt securities which are rated at the time of purchase Baa or better by Moody's Investors Service, Inc. or BBB or better by Standard & Poor's Corporation or which, if unrated, are deemed to be of comparable quality by the Fund's Trustees (see "General Portfolio Techniques" below for a discussion of the characteristics and risks of investments in fixed-income securities rated Baa or BBB), convertible securities, money market instruments, repurchase agreements, options and futures (see "General Portfolio Techniques" below and in the Statement of Additional Information). The CAPITAL GROWTH PORTFOLIO may also purchase unit offerings (where corporate debt securities are offered as a unit with convertible securities, preferred or common stocks, warrants, or any combination thereof) (see the discussion of warrants under "General Portfolio Techniques" below). U.S. Government securities are described above and in the Statement of Additional Information under "The Quality Income Plus Portfolio." There may be periods during which, in the opinion of the Investment Manager, market conditions warrant reduction of some or all of the CAPITAL GROWTH PORTFOLIO's securities holdings. During such periods, the CAPITAL GROWTH PORTFOLIO may adopt a temporary "defensive" posture in which greater than 35% of its total assets are invested in cash or money market instruments which would be eligible investments for the Fund's MONEY MARKET PORTFOLIO (as set forth above under "The Money Market Portfolio"). The CAPITAL GROWTH PORTFOLIO may enter into repurchase agreements, invest in foreign securities (including American Depository Receipts, European Depository Receipts or other similar securities convertible into securities of foreign issuers), invest in zero coupon securities, invest in real estate investment trusts, lend its portfolio securities, purchase securities on a when-issued or delayed delivery basis or a "when, as and if issued" basis, and purchase or sell securities on a forward commitment basis, in each case in accordance with the description of those investments and techniques (and subject to the risks) set forth under "General Portfolio Techniques" below and in the Statement of Additional Information. THE GLOBAL DIVIDEND GROWTH PORTFOLIO The investment objective of the GLOBAL DIVIDEND GROWTH PORTFOLIO is to provide reasonable current income and long-term growth of income and capital. This objective is fundamental and may not be changed without shareholder approval. There is no assurance that the objective will be achieved. The GLOBAL DIVIDEND GROWTH PORTFOLIO seeks to achieve its investment objective primarily through investments in common stock of companies, issued by issuers worldwide, with a record of paying dividends and the potential for increasing dividends. The following policies may be changed by the Trustees of the Fund without shareholder approval: The GLOBAL DIVIDEND GROWTH PORTFOLIO will invest at least 65% of its total assets in dividend-paying equity securities issued by issuers located in various countries around the world. The Portfolio's investment portfolio will also be invested in at least three separate countries. 22 The GLOBAL DIVIDEND GROWTH PORTFOLIO will maintain a flexible investment policy and, based on a worldwide investment strategy, will invest in a diversified portfolio of securities of companies located throughout the world. The Investment Manager will seek those companies with what, in its opinion, is a strong record of earnings. The percentage of the GLOBAL DIVIDEND GROWTH PORTFOLIO's assets invested in particular geographic sectors will shift from time to time in accordance with the judgement of the Investment Manager. Up to 35% of the value of the GLOBAL DIVIDEND GROWTH PORTFOLIO's total assets may be invested in: (a) convertible debt securities, convertible preferred securities, warrants (see "General Portfolio Techniques" below), U.S. Government securities (securities issued or guaranteed as to principal and interest by the United States or its agencies and instrumentalities), fixed-income securities issued by foreign governments and international organizations, investment grade corporate debt securities and/or money market instruments when, in the opinion of the Investment Manager, the projected total return on such securities is equal to or greater than the expected total return on equity securities or when such holdings might be expected to reduce the volatility of the portfolio (for purposes of this provision, the term "total return" means the difference between the cost of a security and the aggregate of its market value and dividends received) and forward foreign currency exchange contracts, futures contracts and options (see "General Portfolio Techniques" below and in the Statement of Additional Information); or (b) money market instruments under any one or more of the following circumstances: (i) pending investment of proceeds of sale of the Portfolio's shares or of portfolio securities; (ii) pending settlement of purchases of portfolio securities; or (iii) to maintain liquidity for the purpose of meeting anticipated redemptions. The term investment grade consists of debt instruments rated Baa or higher by Moody's Investors Service, Inc. or BBB or higher by Standard & Poor's Corporation or, if not rated, determined to be of comparable quality by the Investment Manager (see "General Portfolio Techniques" below for a discussion of the characteristics and risks of investments in fixed-income securities rated Baa or BBB). U.S. Government securities are described above and in the Statement of Additional Information under "The Quality Income Plus Portfolio." The GLOBAL DIVIDEND GROWTH PORTFOLIO may also invest in securities of foreign issuers in the form of American Depository Receipts, European Depository Receipts or other similar securities convertible into securities of foreign issuers, invest in zero coupon securities, purchase equity and fixed-income securities which are issued in private placements and invest up to 10% of its total assets in securities issued by other investment companies (see the discussion of these securities under "General Portfolio Techniques" below). Notwithstanding the GLOBAL DIVIDEND GROWTH PORTFOLIO's investment objective of seeking total return, the Portfolio may, for "defensive" purposes, without limitation, invest in: obligations of the United States Government, its agencies or instrumentalities; cash and cash equivalents in major currencies; repurchase agreements; and money market instruments which would be eligible investments for the Fund's MONEY MARKET PORTFOLIO (as set forth above under "The Money Market Portfolio"). Investors should carefully consider the risks of investing in securities of foreign issuers and securities denominated in non-U.S. currencies (see "General Portfolio Techniques" below for a discussion of the characteristics and risks of investments in foreign securities). The GLOBAL DIVIDEND GROWTH PORTFOLIO may enter into repurchase agreements, invest in real estate investment trusts, lend its portfolio securities, purchase securities on a when-issued or delayed delivery basis or a "when, as and if issued" basis, and purchase or sell securities on a forward commitment basis, in each case in accordance with the description of those investments and techniques (and subject to the risks) set forth under "General Portfolio Techniques" below and in the Statement of Additional Information. THE EUROPEAN GROWTH PORTFOLIO The investment objective of the EUROPEAN GROWTH PORTFOLIO is to maximize the capital appreciation of its investments. There is no assurance that the objective will be achieved. The investment objective of the EUROPEAN GROWTH PORTFOLIO may not be changed without the approval of the shareholders of the EUROPEAN GROWTH PORTFOLIO. The following policies may be changed by the Board of Trustees without shareholder approval: The EUROPEAN GROWTH PORTFOLIO seeks to achieve its investment objective by investing at least 65% of its total assets in securities issued by issuers located in countries located in Europe. Such issuers will include companies (i) which are organized under the laws of a European country and have a principal office in a European country, or (ii) which derive 50% or more of their total revenues from business in Europe, or (iii) the equity securities of which are traded principally on a stock exchange in Europe. The principal countries in which such issuers will be located are France, the United Kingdom, Germany, the Netherlands, Spain, Sweden, Switzerland and Italy. The Portfolio's investment portfolio will be invested in at least three separate countries. The securities invested in will primarily consist of equity securities issued by companies based in European countries, but may also include fixed-income securities issued or guaranteed by European governments, when it is deemed that such investments are consistent with the EUROPEAN GROWTH PORTFOLIO's investment objective. For example, there may be times when the Investment Manager or the Sub-Adviser determines that the prices of government securities are more likely to appreciate than those of equity securities. Such an occasion might arise when inflation concerns have led to general increases in interest rates. Such fixed-income securities which will be purchased by the Portfolio are likely to be obligations of the treasuries of one of the major European nations. In addition, the EUROPEAN GROWTH PORTFOLIO 23 may invest in fixed-income securities which are, either alone or in combination with a warrant, option or other right, convertible into the common stock of a European issuer, when the Investment Manager or the Sub-Adviser determines that such securities are more likely to appreciate in value than the common stock of such issuers or when the Investment Manager or the Sub-Adviser wishes to hedge the risk inherent in the direct purchase of the equity of a given issuer. The EUROPEAN GROWTH PORTFOLIO will select convertible securities of issuers whose common stock has, in the opinion of the Investment Manager or the Sub-Adviser, a superior investment potential (see "General Portfolio Techniques" below). The EUROPEAN GROWTH PORTFOLIO may also purchase equity and fixed-income securities which are issued in private placements and warrants or other securities conveying the right to purchase common stock, and may invest up to 10% of its total assets in securities issued by other investment companies (see the discussion of these securities under "General Portfolio Techniques" below). The remainder of the assets of the EUROPEAN GROWTH PORTFOLIO, equalling, at times, up to 35% of the Portfolio's total assets, may be invested in equity and/or governmental and convertible securities issued by issuers located anywhere in the world, including the United States, subject to the Portfolio's investment objective. In addition, this portion of the portfolio will consist of various other financial instruments such as forward foreign currency exchange contracts, futures contracts and options (see "General Portfolio Techniques" below and in the Statement of Additional Information). U.S. Government securities are described above and in the Statement of Additional Information under "The Quality Income Plus Portfolio." It is anticipated that the securities held by the EUROPEAN GROWTH PORTFOLIO in its portfolio will be denominated, principally, in liquid European currencies. Such currencies include the German mark, French franc, British pound, Dutch guilder, Swiss franc, Swedish krona, Italian lira, and Spanish peseta. In addition, the Portfolio may hold securities denominated in the European Currency Unit (a weighted composite of the currencies of member states of the European Monetary System). Securities of issuers within a given country may be denominated in the currency of a different country. The EUROPEAN GROWTH PORTFOLIO may also invest in securities of foreign issuers in the form of American Depository Receipts, European Depository Receipts or other similar securities convertible into securities of foreign issuers (see the discussion of these securities under "General Portfolio Techniques" below). There may be periods during which market conditions warrant reduction of some or all of the EUROPEAN GROWTH PORTFOLIO's securities holdings. During such periods, the Portfolio may adopt a temporary "defensive" posture in which greater than 35% of its total assets are invested in cash or money market instruments which would be eligible investments for the Fund's MONEY MARKET PORTFOLIO (as set forth above under "The Money Market Portfolio"). Investors should carefully consider the risks of investing in securities of foreign issuers and securities denominated in non-U.S. currencies (see "General Portfolio Techniques" below for a discussion of the characteristics and risks of investments in foreign securities). The EUROPEAN GROWTH PORTFOLIO may enter into repurchase agreements, invest in zero coupon securities, lend its portfolio securities, purchase securities on a when-issued or delayed delivery basis or a "when, as and if issued" basis, and purchase or sell securities on a forward commitment basis, in each case in accordance with the description of those investments and techniques (and subject to the risks) set forth under "General Portfolio Techniques" below and in the Statement of Additional Information. THE PACIFIC GROWTH PORTFOLIO The investment objective of the PACIFIC GROWTH PORTFOLIO is to maximize the capital appreciation of its investments. There is no assurance that the objective will be achieved. The investment objective of the PACIFIC GROWTH PORTFOLIO may not be changed without the approval of the shareholders of the PACIFIC GROWTH PORTFOLIO. The following policies may be changed by the Board of Trustees without shareholder approval: The PACIFIC GROWTH PORTFOLIO seeks to achieve its investment objective by investing at least 65% of its total assets in securities issued by issuers located in Asia, Australia and New Zealand. Such issuers will include companies which are organized under the laws of an Asian country, Australia or New Zealand and have a principal office in an Asian country, Australia or New Zealand, or which derive 50% or more of their total revenues from business in an Asian country, Australia or New Zealand. The principal countries in which such issuers will be located are Japan, Australia, Malaysia, Singapore, Hong Kong, Thailand, the Philippines, Indonesia, Taiwan and South Korea. The Portfolio's investment portfolio will be invested in at least three separate countries. The PACIFIC GROWTH PORTFOLIO may invest more than 25% of its total assets in Japan, reflecting the dominance of the Japanese stock market in the Pacific basin. The concentration of the Portfolio's assets in Japanese issuers will subject the PACIFIC GROWTH PORTFOLIO to the risks of adverse social, political or economic events which occur in Japan. Specifically, investments in the Japanese stock market may entail a higher degree of risk than investments in other markets as, by fundamental measures of corporate valuation, such as its high price-earnings ratios and low dividend yields, the Japanese market as a whole may appear expensive relative to other world stock markets (I.E., the prices of Japanese stocks may be relatively high). In addition, the prices of securities traded on the Japanese markets may be more volatile than many other markets. The PACIFIC GROWTH PORTFOLIO also may invest over 25% of its total assets in securities issued by issuers located in Hong Kong. In 24 common with the other stock markets of the Pacific Basin, the Hong Kong stock market is more volatile, as measured by standard deviation, than the major equity markets of North America and Europe. At midnight on June 30, 1997, Hong Kong will become part of the People's Republic of China, and will form a Special Administrative Region within that country. The Government of China has indicated that it will not seek to alter the free market-oriented economic system of Hong Kong for at least fifty years following 1997. The PACIFIC GROWTH PORTFOLIO may also invest over 25% of its total assets in securities issued by issuers located in Malaysia. The Malaysian stock market may also be more volatile than many other markets and, as in the case of other international equity markets, the value of equities can be impacted by unforeseen, adverse developments in the macro-economy or currency, political and/or social instability, government regulatory changes or individual corporate developments. The securities invested in will primarily consist of equity securities issued by companies based in Asian countries, Australia and New Zealand which the Investment Manager and/or Sub-Adviser believe are most likely to help the PACIFIC GROWTH PORTFOLIO meet its investment objective, but may also include fixed-income securities issued or guaranteed by (I.E., are the direct obligations of) the governments of such countries, when it is deemed by the Investment Manager or Sub-Adviser that such investments are consistent with the Portfolio's investment objective. For example, there may be times when the Investment Manager or Sub-Adviser determines that the prices of government securities are more likely to appreciate than those of equity securities. Such an occasion might arise when inflation concerns have led to general increases in interest rates. Such fixed-income securities which will be purchased by the Portfolio are likely to be obligations of the treasuries of Australia or Japan. In addition, the PACIFIC GROWTH PORTFOLIO may invest in fixed-income securities which are, either alone or in combination with a warrant, option or other right, convertible into the common stock of an issuer, when the Investment Manager or the Sub-Adviser determines that such securities are more likely to appreciate in value than the common stock of such issuers or when the Investment Manager or Sub-Adviser wishes to hedge the risk inherent in the direct purchase of the equity of a given issuer, by receiving a steady stream of interest payments. The PACIFIC GROWTH PORTFOLIO will select convertible securities of issuers whose common stock has, in the opinion of the Investment Manager or Sub-Adviser, a potential to appreciate in price (see "General Portfolio Techniques" below). The PACIFIC GROWTH PORTFOLIO may also purchase equity and fixed-income securities which are issued in private placements and warrants or other securities conveying the right to purchase common stock, and may invest up to 10% of its total assets in securities issued by other investment companies (see the discussion of these securities under "General Portfolio Techniques" below). The decisions of the Investment Manager and Sub-Adviser to invest in securities for the PACIFIC GROWTH PORTFOLIO will be based on a general strategy of selecting those issuers which they believe have shown a high rate of growth in earnings. Moreover, securities will primarily be selected which possess, on both an absolute basis and as compared with other securities in their region and around the world, attractive price/earnings, price/cash flow and price/revenue ratios. The remainder of the assets of the PACIFIC GROWTH PORTFOLIO, equalling, at times, up to 35% of the Portfolio's total assets, may be invested in equity and/or fixed-income and convertible securities issued by issuers located anywhere in the world, including the United States, subject to the Fund's investment objective. In addition, this portion of the portfolio will consist of various other financial instruments such as forward foreign currency exchange contracts, futures contracts and options (see "General Portfolio Techniques" below and in the Statement of Additional Information). U.S. government securities are described above and in the Statement of Additional Information under "The Quality Income Plus Portfolio." It is anticipated that the securities held by the PACIFIC GROWTH PORTFOLIO in its portfolio will be denominated, principally, in the liquid Asian currencies and the Australian dollar. Such currencies include the Japanese yen, Malaysian ringgit, Singapore dollar, Hong Kong dollar, Thai baht, Philippine peso, Indonesia rupiah, Taiwan dollar and South Korean won. Securities of issuers within a given country may be denominated in the currency of a different country. The PACIFIC GROWTH PORTFOLIO may also invest in securities of foreign issuers in the form of American Depository Receipts, European Depository Receipts or other similar securities convertible into securities of foreign issuers (see the discussion of these securities under "General Portfolio Techniques" below). There may be periods during which market conditions warrant reduction of some or all of the PACIFIC GROWTH PORTFOLIO's securities holdings. During such periods, the Portfolio may adopt a temporary "defensive" posture in which greater than 35% of its net assets are invested in cash or money market instruments that would be eligible investments for the Fund's MONEY MARKET PORTFOLIO (as set forth above under "The Money Market Portfolio"). Investors should carefully consider the risks of investing in securities of foreign issuers and securities denominated in non-U.S. currencies (see "General Portfolio Techniques" below for a discussion of the characteristics and risks of investments in foreign securities). In particular, the foreign securities in which the PACIFIC GROWTH PORTFOLIO will be investing may be issued by issuers located in developing countries. Compared to the United States and other developed countries, developing countries may have relatively unstable governments, economies based on only a few industries, and securities markets which trade a small number of securities. Prices on these securities tend to be especially volatile and, in the past, securities in these countries have offered greater potential for gain (as well as loss) than securities of companies located in developed countries. The PACIFIC GROWTH PORTFOLIO may enter into repurchase agreements, invest in zero coupon securities, lend its portfolio securities, purchase securities on a when-issued or delayed delivery 25 basis or a "when, as and if issued" basis, and purchase or sell securities on a forward commitment basis, in each case in accordance with the description of those investments and techniques (and subject to the risks) set forth under "General Portfolio Techniques" below and in the Statement of Additional Information. THE CAPITAL APPRECIATION PORTFOLIO The investment objective of the CAPITAL APPRECIATION PORTFOLIO is long-term capital appreciation. There is no assurance that the objective will be achieved. The investment objective of the CAPITAL APPRECIATION PORTFOLIO may not be changed without the approval of the shareholders of the CAPITAL APPRECIATION PORTFOLIO. The following policies may be changed by the Board of Trustees without shareholder approval: The CAPITAL APPRECIATION PORTFOLIO 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 superior earnings growth and/or appear to be undervalued. The Investment Manager will base the selection of stocks for the portfolio of the CAPITAL APPRECIATION 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 CAPITAL APPRECIATION PORTFOLIO. 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 CAPITAL APPRECIATION PORTFOLIO will invest in companies of all sizes. For a discussion of the risks of investing in the securities of such companies, see below. Consequently, the CAPITAL APPRECIATION PORTFOLIO 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 Portfolio apart from pure "growth" or pure "value" funds. The CAPITAL APPRECIATION PORTFOLIO'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 Portfolio's net assets. In addition to U.S. common stock, up to 35% of the CAPITAL APPRECIATION PORTFOLIO'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 Portfolio's investment objective. (For a discussion of each of these types of securities, see "General Portfolio Techniques" below.) The CAPITAL APPRECIATION PORTFOLIO 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 CAPITAL APPRECIATION PORTFOLIO. However, the CAPITAL APPRECIATION PORTFOLIO will not purchase a non-investment grade debt security (or junk bond) if, immediately after such purchase, the Portfolio would have more than 5% of its total assets invested in such securities. See "General Portfolio Techniques" below for a discussion of investment in securities rated Baa by Moody's Investors Service, Inc. or BBB by Standard & Poor's Corporation (the lowest credit ratings designated "investment grade") and a discussion of investments in securities rated lower than investment grade. The securities in which the CAPITAL APPRECIATION PORTFOLIO 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. Given the investment risks described below, an investment in shares of the CAPITAL APPRECIATION PORTFOLIO 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 CAPITAL APPRECIATION PORTFOLIO. 26 The net asset value of the shares of the CAPITAL APPRECIATION PORTFOLIO will fluctuate with changes in the market value of its portfolio securities. The market value of the portfolio securities of the CAPITAL APPRECIATION PORTFOLIO will increase or decrease due to a variety of economic, market or political factors which cannot be predicted. The CAPITAL APPRECIATION PORTFOLIO 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 CAPITAL APPRECIATION PORTFOLIO, 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 CAPITAL APPRECIATION PORTFOLIO 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 CAPITAL APPRECIATION PORTFOLIO 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. There may be periods during which, in the opinion of the Investment Manager, market conditions warrant a reduction of some or all of the CAPITAL APPRECIATION PORTFOLIO's securities holdings. During such periods, the Portfolio may adopt a temporary "defensive" posture in which greater than 35% of its total assets is invested in cash or money market instruments, 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 CAPITAL APPRECIATION PORTFOLIO may enter into repurchase agreements, invest in foreign securities (including American Depository Receipts), zero coupon securities and real estate investment trusts, invest up to 10% of its total assets in securities issued by other investment companies, engage in futures contracts and options transactions, lend its portfolio securities, purchase securities which are issued in private placements or are otherwise not readily marketable, purchase securities on a when-issued or delayed delivery basis or a "when, as and if issued" basis, and purchase or sell securities on a forward commitment basis, in each case in accordance with the description of these investments and techniques (and subject to the risks) set forth under "General Portfolio Techniques" below and in the Statement of Additional Information. THE EQUITY PORTFOLIO The portfolio of the EQUITY PORTFOLIO will be actively managed by the Investment Manager with a view to achieving the EQUITY PORTFOLIO's primary investment objective of growth of capital through investments in common stock of companies believed by the Investment Manager to have potential for superior growth. As a secondary objective, the EQUITY PORTFOLIO will seek income, but only when consistent with its primary objective. There can be no assurance that the objectives will be achieved. The investment objectives of the EQUITY PORTFOLIO may not be changed without the approval of the shareholders of the EQUITY PORTFOLIO. The following policies may be changed by the Trustees of the Fund without shareholder approval: Consistent with its primary investment objective, the EQUITY PORTFOLIO will invest principally in common stocks, under most conditions, but may also invest in corporate debt securities which are rated at the time of purchase Aa or better by Moody's Investors Service, Inc. or AA or better by Standard & Poor's Corporation (the Portfolio may continue to hold a security even if its quality rating is reduced by a rating service below those specified; see "General Portfolio Techniques" below for a discussion of the risks of holding lower-rated securities), U.S. Government securities (securities issued or guaranteed as to principal and interest by the United States, its agencies or instrumentalities), preferred stocks, securities convertible into common stock, including convertible debt obligations and convertible preferred stocks, and warrants (see the discussion of convertible securities and warrants under "General Portfolio Techniques" below). The EQUITY PORTFOLIO will invest at least 65% of its net assets at all times, except for temporary and defensive purposes, in equity securities and securities convertible into equity securities. In determining the percentage of the EQUITY PORTFOLIO's assets to be invested in equity securities, the Investment Manager may employ valuation models based on various economic and market indicators. Equity assets will be distributed among high-quality, large-capitalization, dividend-oriented stocks, stocks of small-and medium-sized growth-oriented companies, and stocks which it believes to be undervalued regardless of capitalization size. Funds will be allocated among these different approaches based on the Investment Manager's evaluation of economic and market trends and on valuation parameters such as price/earnings ("P/E") ratios, price/book ratios, dividend yields, P/E to growth rate ratios, and/or dividend discount models. While the EQUITY PORTFOLIO may not invest in securities of foreign issuers, it may invest in (a) securities of Canadian issuers registered under 27 the Securities Exchange Act of 1934 and (b) American Depository Receipts ("ADRs") (see the discussion of ADRs under "General Portfolio Techniques" below). In order to maintain a liquid position or in periods in which general market conditions warrant, in the opinion of the Investment Manager, the adoption of a temporary "defensive" posture, part of the assets of the EQUITY PORTFOLIO may be invested in money market instruments, including obligations issued or guaranteed as to principal or interest by the United States, 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 EQUITY PORTFOLIO may enter into repurchase agreements, invest in zero coupon securities, invest in real estate investment trusts, lend its portfolio securities, purchase securities on a when-issued or delayed delivery basis or a "when, as and if issued" basis, and purchase or sell securities on a forward commitment basis, in each case in accordance with the description of those techniques (and subject to the same risks) set forth under "General Portfolio Techniques" below and in the Statement of Additional Information. THE STRATEGIST PORTFOLIO The investment objective of the STRATEGIST PORTFOLIO is to seek a high total investment return through a fully managed investment policy utilizing equity, fixed-income and money market securities, and the writing of covered call and put options. This is a fundamental policy and cannot be changed without the approval of the shareholders of the STRATEGIST PORTFOLIO. In seeking to achieve its objective, the STRATEGIST PORTFOLIO actively allocates assets among the major asset categories of equity securities, fixed-income securities and money market instruments. Total investment return consists of current income (including dividends, interest and, in the case of discounted instruments, discount accretion) and capital appreciation. There can be no assurance that the investment objective of the STRATEGIST PORTFOLIO will be achieved. The following policies may be changed by the Trustees of the Fund without shareholder approval: The achievement of the STRATEGIST PORTFOLIO's investment objective depends on the ability of the Investment Manager to assess the effect of economic and market trends on different sectors of the market. The Investment Manager believes that superior investment returns at a lower risk are achievable by actively allocating resources to the equity, debt and money market sectors of the market as opposed to relying solely on just one market. At times, the equity market may hold a higher potential return than the debt market and would warrant a higher asset allocation. The reverse would be true when the bond market potential return is higher. Short duration bonds and money market instruments can be used to soften market declines when both bonds and equities are fully priced. Conserving capital during declining markets can contribute to maximizing total return over a longer period of time. In addition, the securities of companies within various economic sectors may at times offer higher returns than other sectors and can thus contribute to superior returns. Finally, the Investment Manager believes that superior stock selection can also contribute to superior total return. Within the equity sector, the Investment Manager actively allocates funds to those economic sectors expected to benefit from major trends and to individual stocks which are deemed to have superior investment potential. The STRATEGIST PORTFOLIO may purchase equity securities (including warrants, convertible debt obligations and convertible preferred stock) sold on the New York, American and other stock exchanges and in the over-the-counter market. See the discussion of convertible securities and warrants under "General Portfolio Techniques" below. Within the fixed-income sector of the market, the Investment Manager seeks to maximize the return on its investments by adjusting maturities and coupon rates as well as by exploiting yield differentials among different types of investment grade bonds. Fixed-income securities in which the STRATEGIST PORTFOLIO may invest are short-term to intermediate (one to five year maturities) and intermediate to long-term (greater than five year maturities) debt securities and preferred stocks, including U.S. Government securities (securities issued or guaranteed as to principal and interest by the United States or its agencies and instrumentalities) and corporate securities which are rated at the time of purchase Baa or better by Moody's Investor Service, Inc. or BBB or better by Standard & Poor's Corporation, or which, if unrated, are deemed to be of comparable quality by the Fund's Trustees (a description of corporate bond ratings is contained in the Appendix). Fixed-income securities which may be purchased include zero coupon securities. See the discussion of the characteristics and risks of investments in fixed-income securities rated Baa or BBB and zero coupon securities under "General Portfolio Techniques" below. Within the money market sector of the market, the Investment Manager seeks to maximize returns by exploiting spreads among short-term instruments. The STRATEGIST PORTFOLIO may invest in money market securities which would be eligible investments for the Fund's MONEY MARKET PORTFOLIO (as set forth above under "The Money Market Portfolio"). The STRATEGIST PORTFOLIO may enter into repurchase agreements, invest in foreign securities (including American Depository Receipts, European Depository Receipts or other similar securities convertible into securities of foreign issuers), invest in real estate investment trusts, lend its portfolio securities, invest in futures contracts and options, purchase securities on a when-issued or delayed delivery basis or a "when, as and if issued" basis, and purchase or sell securities on a forward commitment basis, in each case in accordance with the description of those investments and techniques (and subject to the risks) set forth under " General Portfolio Techniques" below and in the Statement of Additional Information. 28 GENERAL PORTFOLIO TECHNIQUES Foreign Securities. The EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO will invest primarily in foreign securities. The GLOBAL DIVIDEND GROWTH PORTFOLIO will invest a substantial portion of its assets in foreign securities. Each of the INCOME BUILDER PORTFOLIO and the CAPITAL GROWTH PORTFOLIO may invest up to 25% of the value of its total assets, at the time of purchase, in foreign securities (other than securities of Canadian issuers registered under the Securities Exchange Act of 1934 or American Depository Receipts ("ADRs") (described below), on which there is no such limit; investments in certain Canadian issuers may be speculative due to certain political risks and may be subject to substantial price fluctuations). The CAPITAL GROWTH PORTFOLIO's investments in unlisted foreign securities are subject to the overall restrictions applicable to investments in illiquid securities (see "Investment Restrictions"). Each of the HIGH YIELD PORTFOLIO and the STRATEGIST PORTFOLIO may invest up to 20% of its total assets in securities issued by foreign governments and other foreign issuers and in foreign currency issues of domestic issuers, but not more than 10% of its total assets in such securities, whether issued by a foreign or a domestic issuer, which are denominated in foreign currency. The QUALITY INCOME PLUS PORTFOLIO may invest up to 20% of its net assets in "Yankee government bonds," and up to 15% of its net assets in "Yankee corporate bonds," which are U.S. dollar denominated debt securities issued, respectively, by foreign governments or their respective instrumentalities or agencies or by foreign corporations, which securities in each case are either registered under the Securities Act of 1933, or eligible for resale pursuant to Rule 144A under that Act and pay both principal and interest in U.S. dollars. The UTILITIES PORTFOLIO may invest up to 20% of the value of its total assets, at the time of purchase, in securities issued by foreign issuers, with a maximum of 10% of the value of its total assets, at the time of purchase, invested in such securities that are not ADRs. The CAPITAL APPRECIATION PORTFOLIO may invest up to 10% of the value of its total assets in foreign securities. The QUALITY INCOME PLUS PORTFOLIO and the HIGH YIELD PORTFOLIO may invest in money market obligations of domestic branches of foreign banks, or foreign branches of domestic banks, including Eurodollar Certificates of Deposit, as set forth above under the description of these Portfolios. The MONEY MARKET PORTFOLIO, the UTILITIES PORTFOLIO, the INCOME BUILDER PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may invest in Eurodollar certificates of deposit issued by foreign branches of domestic banks having total assets of $1 billion or more. 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 a Portfolio'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 a Portfolio's assets denominated in that currency and thereby impact upon the Portfolio'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 a Portfolio will be conducted on a spot basis or, in the case of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, through forward foreign currency exchange contracts (described below) or, in the case of those three Portfolios and the CAPITAL APPRECIATION PORTFOLIO, futures contracts (described below under "Options and Futures Transactions"). A Portfolio 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 Portfolio assets and any effects of foreign social, economic or political instability. Political and economic developments in Europe, especially as they relate to changes in the structure of the European Economic Community and the anticipated development of a unified common market, may have profound effects upon the value of a large segment of the GLOBAL DIVIDEND GROWTH PORTFOLIO and the EUROPEAN GROWTH PORTFOLIO, in particular. Continued progress in the evolution of, for example, a united European common market may be slowed by unanticipated political or social events and may, therefore, adversely affect the value of certain of the securities held by a Portfolio. Foreign companies are not subject to the regulatory requirements of U.S. companies and, as such, there may be less publicly available information about such companies. Moreover, foreign companies are not subject to uniform accounting, auditing and financial reporting standards and requirements comparable to those applicable to U.S. companies. Securities of foreign issuers may be less liquid than comparable securities of U.S. issuers and, as such, their price changes may be more volatile. Furthermore, foreign exchanges and broker-dealers are generally subject to less government and 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 Portfolio trades effected in such markets. Inability to dispose of portfolio securities due to settlement delays could result in losses to a Portfolio due to subsequent declines in value of such securities and the inability of the Portfolio to make intended security purchases due to settlement problems could result in a failure of the Portfolio to 29 make potentially advantageous investments. To the extent a Portfolio purchases Eurodollar certificates of deposit issued by foreign branches of domestic United States banks, consideration will be given to their domestic marketability, the lower reserve requirements normally mandated for overseas banking operations, the possible impact of interruptions in the flow of international currency transactions, and future international political and economic developments which might adversely affect the payment of principal or interest. Forward Foreign Currency Exchange Contracts. The GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO may engage in transactions involving forward foreign currency exchange contracts ("forward contracts"). A forward contract involves an obligation to purchase or sell a currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. The GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO may enter into forward contracts as a hedge against fluctuations in future foreign exchange rates. The Portfolios will enter into forward contracts under various circumstances. When a Portfolio enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may, for example, desire to "lock in" the price of the security in U.S. dollars or some other foreign currency which the Portfolio is temporarily holding in its portfolio. By entering into a forward contract for the purchase or sale, for a fixed amount of dollars or other currency, of the amount of foreign currency involved in the underlying security transactions, the Portfolio will be able to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar or other currency which is being used for the security purchase and the foreign currency in which the security is denominated during the period between the date on which the security is purchased or sold and the date on which payment is made or received. At other times, when, for example, it is believed that the currency of a particular foreign country may suffer a substantial decline against the U.S. dollar or some other foreign currency, a Portfolio may enter into a forward contract to sell, for a fixed amount of dollars or other currency, the amount of foreign currency approximating the value of some or all of the Portfolio's securities (or securities which the Portfolio has purchased for its portfolio) denominated in such foreign currency. Under identical circumstances, the Portfolio may enter into a forward contract to sell, for a fixed amount of U.S. dollars or other currency, an amount of foreign currency other than the currency in which the securities to be hedged are denominated approximating the value of some or all of the portfolio securities to be hedged. This method of hedging, called "cross-hedging," will be selected when it is determined that the foreign currency in which the portfolio securities are denominated has insufficient liquidity or is trading at a discount as compared with some other foreign currency with which it tends to move in tandem. In addition, when a Portfolio anticipates purchasing securities at some time in the future, and wishes to lock in the current exchange rate of the currency in which those securities are denominated against the U.S. dollar or some other foreign currency, it may enter into a forward contract to purchase an amount of currency equal to some or all of the value of the anticipated purchase, for a fixed amount of U.S. dollars or other currency. Lastly, the Portfolios are permitted to enter into forward contracts with respect to currencies in which certain of their portfolio securities are denominated and on which options have been written (see "Options and Futures Transactions" below and in the Statement of Additional Information). In all of the above circumstances, if the currency in which portfolio securities (or anticipated portfolio securities) are denominated rises in value with respect to the currency which is being purchased (or sold), then the Portfolio will have realized fewer gains than had the Portfolio not entered into the forward contracts. Moreover, the precise matching of the forward contract amounts and the value of the securities involved will not generally be possible, since the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. The GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO are not required to enter into such transactions with regard to their foreign currency-denominated securities and will not do so unless deemed appropriate by the Investment Manager or, in the case of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, the Sub-Adviser. The Portfolios generally will not enter into a forward contract with a term of greater than one year, although they may enter into forward contracts for periods of up to five years. The Portfolios may be limited in their ability to enter into hedging transactions involving forward contracts by the Internal Revenue Code requirements relating to qualifications as a regulated investment company (see "Dividends, Distributions and Taxes"). American Depository Receipts and European Depository Receipts. The HIGH YIELD PORTFOLIO, the UTILITIES PORTFOLIO, the INCOME BUILDER PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the STRATEGIST PORTFOLIO may also invest in securities of foreign issuers in the form of American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") or other similar securities convertible into securities of foreign issuers. In addition, the DIVIDEND GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORFOLIO and the EQUITY PORTFOLIO may invest in ADRs. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by a United States bank or trust company evidencing ownership of the underlying securities. EDRs are European receipts evidencing a similar 30 arrangement. Generally, ADRs, in registered form, are designed for use in the United States securities markets and EDRs, in bearer form, are designed for use in European securities markets. Securities of Other Investment Companies. Each of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO may invest up to 10% of its total assets in the aggregate in shares of other investment companies and up to 5% of its total assets in shares of any one investment company. A Portfolio may not own more than 3% of the outstanding voting stock of any investment company. Such investments may be the sole or most practical means by which the Portfolio may participate in certain foreign securities markets. The Portfolio will incur any indirect expenses incurred through investment in an investment company, such as the payment of a management fee (which may result in the payment of an additional advisory fee). Furthermore, it should be noted that foreign investment companies are not subject to the U.S. securities laws and may be subject to fewer or less stringent regulations than U.S. investment companies. Investments in Securities Rated Baa by Moody's or BBB by S&P. The UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may invest a portion of their assets in fixed-income securities rated at the time of purchase Baa or better by Moody's Investors Service, Inc. ("Moody's") or BBB or better by Standard & Poor's Corporation ("S&P"). Investments in fixed-income securities rated either Baa by Moody's or BBB by S&P (the lowest credit ratings designated "investment grade") may have speculative characteristics and, therefore, changes in economic conditions or other circumstances are more likely to weaken their capacity to make principal and interest payments than would be the case with investments in securities with higher credit ratings. If a bond held by a Portfolio other than the CAPITAL APPRECIATION PORTFOLIO is downgraded by a rating agency to a rating of below Baa or BBB, the Portfolio will retain such security in its portfolio until the Investment Manager determines that it is practicable to sell the security without undue market or tax consequences to the Portfolio. In the case of the CAPITAL APPRECIATION PORTFOLIO, the Portfolio may continue to hold downgraded securities but will not purchase a non-investment grade debt security if, immediately after such purchase, the Portfolio would have more than 5% of its total assets invested in such securities. The risks of holding lower-rated securities are described below. Special Considerations for Investments in High Yield Securities. Because of the special nature of the HIGH YIELD PORTFOLIO's, the INCOME BUILDER PORTFOLIO's and the CAPITAL APPRECIATION PORTFOLIO's investments in lower rated, high yield securities, commonly known as "junk bonds," the Investment Manager must take account of certain special considerations in assessing the risks associated with such investments. Although the growth of the high yield securities market in the 1980s had paralleled a long economic expansion, recently many issuers have been affected by adverse economic and market conditions. It should be recognized that an economic downturn or increase in interest rates is likely to have a negative effect on the high yield bond market and on the value of the high yield securities held by the Portfolios, as well as on the ability of the securities' issuers to repay principal and interest on their borrowings. The prices of high yield securities have been found to be less sensitive to changes in prevailing interest rates than higher-rated investments, but are likely to be more sensitive to adverse economic changes or individual corporate developments. During an economic downturn or substantial period of rising interest rates, highly leveraged issuers may experience financial stress which would adversely affect their ability to service their principal and interest payment obligations, to meet their projected business goals or to obtain additional financing. If the issuer of a fixed-income security owned by a Portfolio defaults, the Portfolio may incur additional expenses to seek recovery. In addition, periods of economic uncertainty and change can be expected to result in an increased volatility of market prices of high yield securities and a concomitant volatility in the net asset value of a share of the Portfolio. Moreover, the market prices of certain of the securities which are structured as zero coupon and payment-in-kind securities are affected to a greater extent by interest rate changes and thereby tend to be more volatile than securities which pay interest periodically and in cash (see "Dividends, Distributions and Taxes" for a discussion of the tax ramifications of investments in such securities). The secondary market for high yield securities may be less liquid than the markets for higher quality securities and, as such, may have an adverse effect on the market prices of certain securities. The illiquidity of the market may also adversely affect the ability of the Fund's Trustees to arrive at a fair value for certain high yield securities at certain times and could make it difficult for the Portfolios to sell certain securities. New laws and proposed new laws may have a potentially negative impact on the market for high yield bonds. For example, present legislation requires federally-insured savings and loan associations to divest their investments in high yield bonds. This legislation and other proposed legislation may have an adverse effect upon the value of high yield securities and a concomitant negative impact upon the net asset value of a share of the HIGH YIELD PORTFOLIO, the INCOME BUILDER PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO. Convertible Securities. Each Portfolio (other than the MONEY MARKET PORTFOLIO) 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 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 31 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 each of these Portfolios may invest are not rated. With the exception of securities purchased by the QUALITY INCOME PLUS PORTFOLIO (which may not invest in securities rated lower than A by Moody's or S&P at the time of purchase), when such securities are rated, such ratings will generally be below investment grade. Securities below investment grade are the equivalent of high yield, high risk bonds, commonly known as "junk bonds." However, with the exception of the HIGH YIELD PORTFOLIO (which invests primarily in lower-rated securities), no Portfolio will invest in convertible securities that are in default in payment of principal or interest and each Portfolio other than the HIGH YIELD PORTFOLIO and the INCOME BUILDER PORTFOLIO has no current intention of investing in excess of 10% of its net assets in unrated or lower-rated convertible securities. The risks of holding lower-rated securities are described above. The INCOME BUILDER PORTFOLIO may invest up to 25% of its total assets in "enhanced" convertible securities. Enhanced convertible securities offer holders the opportunity to obtain higher current income than would be available from a traditional equity security issued by the same company, in return for reduced participation or a cap on appreciation in the underlying common stock of the issuer which the holder can realize. In addition, in many cases, enhanced convertible securities are convertible into the underlying common stock of the issuer automatically at maturity, unlike traditional convertible securities which are convertible only at the option of the security holder. Enhanced convertible securities may be more volatile than traditional convertible securities due to the mandatory conversion feature. The INCOME BUILDER PORTFOLIO also may invest up to 10% of its total assets in "synthetic" convertible securities. Unlike traditional convertible securities whose conversion values are based on the common stock of the issuer of the convertible security, "synthetic" convertible securities are preferred stocks or debt obligations of an issuer which are combined with an equity component whose conversion value is based on the value of the common stock of a different issuer or a particular benchmark (which may include a foreign issuer or basket of foreign stocks, or a company whose stock is not yet publicly traded). In many cases, "synthetic" convertible securities are not convertible prior to maturity, at which time the value of the security is paid in cash by the issuer. "Synthetic" convertible securities may be less liquid than traditional convertible securities and their price changes may be more volatile. Reduced liquidity may have an adverse impact on the ability of the INCOME BUILDER PORTFOLIO to sell particular synthetic securities promptly at favorable prices and may also make it more difficult for the Portfolio to obtain market quotations based on actual trades, for purposes of valuing the portfolio securities of the INCOME BUILDER PORTFOLIO. The INCOME BUILDER PORTFOLIO may invest without limitation in "exchangeable" convertible bonds and convertible preferred stock which are issued by one company, but convertible into the common stock of a different publicly traded company. These securities generally have liquidity trading and risk characteristics similar to traditional convertible securities noted above. Real Estate Investment Trusts. Each of the UTILITIES PORTFOLIO, the INCOME BUILDER PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO, the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO may invest in real estate investment trusts, which pool investors' funds for investments primarily in commercial real estate properties. Investment in real estate investment trusts may be the most practical available means for the Portfolios to invest in the real estate industry (the Portfolios are prohibited from investing in real estate directly). As a shareholder in a real estate investment trust, the Portfolio would bear its ratable share of the real estate investment trust's expenses, including its advisory and administration fees. At the same time the Portfolio would continue to pay its own investment management fees and other expenses, as a result of which the Portfolio and its shareholders in effect will be absorbing duplicate levels of fees with respect to investments in real estate investment trusts. Real estate investment trusts are not diversified and are subject to the risk of financing projects. They are also subject to heavy cash flow dependency, defaults by borrowers or tenants, self-liquidation, and the possibility of failing to qualify for tax-free status under the Internal Revenue Code and failing to maintain exemption from the Investment Company Act of 1940, as amended. Lending of Portfolio Securities. Consistent with applicable regulatory requirements, each Portfolio of 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 Portfolio (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 32 will only be made to firms deemed by the Investment Manager or, in the case of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, the Sub-Adviser to be creditworthy and when the income which can be earned from such loans justifies the attendant risks. Repurchase Agreements. Each Portfolio of the Fund may enter into repurchase agreements, which may be viewed as a type of secured lending by the Portfolio, and which typically involve the acquisition by the Portfolio of debt securities from a selling financial institution such as a bank, savings and loan association or broker-dealer. The agreement provides that the Portfolio will sell back to the institution, and that the institution will repurchase, the underlying security ("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 Portfolio will receive interest from the institution until the time when the repurchase is to occur. Although such date is deemed by the Portfolio to be the maturity date of a repurchase agreement, the maturities of securities subject to repurchase agreements are not subject to any limits and may exceed one year. While repurchase agreements involve certain risks not associated with direct investments in debt securities, the Fund follows procedures designed to minimize such risks. These procedures include effecting repurchase transactions only with large, well-capitalized and well-established financial institutions and specifying the required value of the collateral underlying the agreement. When-Issued and Delayed Delivery Securities and Forward Commitments. From time to time, in the ordinary course of business, each Portfolio of 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. While a Portfolio will only purchase securities on a when-issued, delayed delivery or forward commitment basis with the intention of acquiring the securities, a Portfolio may sell the securities before the settlement date, if it is deemed advisable. The securities so purchased or sold are subject to market fluctuation and no interest accrues to the purchaser during this period. At the time a Portfolio makes the commitment to purchase or sell securities on a when-issued, delayed delivery or forward commitment basis, it will record the transaction and thereafter reflect the value, each day, of such security purchased or, if a sale, the proceeds to be received, in determining its net asset value. At the time of delivery of the securities, their value may be more or less than the purchase or sale price. A Portfolio will also establish a segregated account with its custodian bank in which it will continually maintain cash or cash equivalents or other high grade debt portfolio securities equal in value to commitments to purchase securities on a when-issued, delayed delivery or forward commitment basis. An increase in the percentage of a Portfolio's assets committed to the purchase of securities on a when-issued, delayed delivery or forward commitment basis may increase the volatility of the Portfolio's net asset value. When, As and If Issued Securities. Each Portfolio (other than the MONEY MARKET PORTFOLIO) may purchase securities on a "when, as and if issued" basis under which the issuance of the security depends upon the occurrence of a subsequent event, such as approval of a merger, corporate reorganization or debt restructuring. The commitment for the purchase of any such security will not be recognized in the portfolio until the Investment Manager determines that the issuance of the security is probable, whereupon the accounting treatment for such commitment will be the same as for a commitment to purchase a security on a when-issued, delayed delivery or forward commitment basis, described above and in the Statement of Additional Information. An increase in the percentage of a Portfolio'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. Private Placements. As a fundamental policy, which may be changed only by the shareholders of the affected Portfolios, each of the QUALITY INCOME PLUS PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO may invest up to 5% of its total assets in securities which are subject to restrictions on resale because they have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or which are otherwise not readily marketable. 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 Portfolio from disposing of them promptly at reasonable prices. The Portfolio may have to bear the expense of registering such securities for resale and the risk of substantial delays in effecting such registration. As a non-fundamental policy, which may be changed by the Trustees of the Fund, each of the UTILITIES PORTFOLIO, the INCOME BUILDER PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO may invest up to 5%, the EUROPEAN GROWTH PORTFOLIO may invest up to 10%, and each of the HIGH YIELD PORTFOLIO and the PACIFIC GROWTH PORTFOLIO may invest up to 15%, of its total assets in private placements or restricted securities. (With regard to these eight Portfolios, securities eligible for resale pursuant to Rule 144A under the Securities Act, and determined to be liquid pursuant to the procedures discussed in the following paragraph, are not subject to the foregoing restriction.) The Securities and Exchange Commission has adopted Rule 144A under the Securities Act, which permits the twelve Portfolios named above 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 any of these Portfolios. If a restricted security is determined to be "liquid," such security will not be included within the category "illiquid securities," which is limited by the Fund's investment restrictions to 10% of the total assets of each of these Portfolios other than the HIGH YIELD PORTFOLIO, the INCOME BUILDER PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the PACIFIC 33 GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO, and which under current policy is limited to 15% of the net assets of each of the five Portfolios named above. Zero Coupon Securities. A portion of the fixed-income purchased by each Portfolio may be zero coupon securities. Such securities are purchased at a discount from their face amount, giving the purchaser the right to receive their full value at maturity. The interest earned on such securities is, implicitly, automatically compounded and paid out at maturity. While such compounding at a constant rate eliminates the risk of receiving lower yields upon reinvestment of interest if prevailing interest rates decline, the owner of a zero coupon security will be unable to participate in higher yields upon reinvestment of interest received on interest-paying securities if prevailing interest rates rise. A zero coupon security pays no interest to its holder during its life. Therefore, to the extent a Portfolio 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 a Portfolio) of a zero coupon security accrue a portion of the discount at which the security was purchased as income each year even though the Portfolio receives no interest payments in cash on the security during the year. Warrants. Each Portfolio (other than the MONEY MARKET PORTFOLIO and the QUALITY INCOME PLUS PORTFOLIO) may acquire warrants attached to other securities and, in addition, each of the INCOME BUILDER PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO, the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO may invest up to 5% of the value of its total assets in warrants not attached to other securities, including up to 2% of such assets in warrants not listed on either the New York or American Stock Exchange or, in the case of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, on either a recognized domestic or foreign 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 corporation issuing them. If warrants remain unexercised at the end of the exercise period, they will lapse and the Portfolio's investment in them will be lost. The prices of warrants do not necessarily move parallel to the prices of the underlying securities. Options and Futures Transactions As noted above, each of the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may write covered call options against securities held in its portfolio and covered put options on eligible portfolio securities (the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may also write covered put and call options on stock indexes) and purchase options of the same or similar series to effect closing transactions, and may hedge against potential changes in the market value of its investments (or anticipated investments) by purchasing put and call options on securities which it holds (or has the right to acquire) in its portfolio and engaging in transactions involving interest rate futures contracts and bond index futures contracts and options on such contracts. The UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may also hedge against such changes by entering into transactions involving stock index futures contracts and options thereon, and (except for the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO) options on stock indexes. The GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO may also hedge against potential changes in the market value of the currencies in which their investments (or anticipated investments) are denominated by writing and/or purchasing put and call options on currencies and engaging in transactions involving currencies futures contracts and options on such contracts. Call and put options on U.S. Treasury notes, bonds and bills, on various foreign currencies and on equity securities are listed on Exchanges and are written in over-the-counter transactions ("OTC options"). Listed options are issued or guaranteed by the exchange on which they trade or by a clearing corporation such as the Options Clearing Corporation ("OCC"). Ownership of a listed call option gives the Portfolio the right to buy from the OCC (in the U.S.) or other clearing corporation or exchange 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 of the option. The writer (seller) of the option would then have the obligation to sell to the OCC (in the U.S.) or other clearing corporation or exchange the underlying security at that exercise price prior to the expiration date of the option, regardless of its then current market price. Ownership of a listed put option would give the Portfolio the right to sell the underlying security to the OCC (in the U.S.) or other clearing corporation or exchange at the stated exercise price. Upon notice of exercise of the put option, the writer of the put would have the obligation to purchase the underlying security from the OCC (in the U.S.) or other clearing corporation or exchange at the exercise price. Exchange-listed options are issued by the OCC (in the U.S.) or other clearing corporation or exchange which assures that all transactions in such options are properly executed. OTC options are purchased from or sold (written) to dealers or financial institutions which have entered into direct agreements with the Portfolio. With OTC options, such variables as expiration date, exercise price and premium will be agreed upon between the 34 Portfolio and the transacting dealer, without the intermediation of a third party such as the OCC. If the transacting dealer fails to make or take delivery of the securities (or, in the case of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO or the CAPITAL APPRECIATION PORTFOLIO, the currency) underlying an option it has written, in accordance with the terms of that option, the Portfolio would lose the premium paid for the option as well as any anticipated benefit of the transaction. The Portfolios will engage in OTC option transactions only with member banks of the Federal Reserve System or primary dealers in U.S. Government securities or with affiliates of such banks or dealers which have capital of at least $50 million or whose obligations are guaranteed by an entity having capital of at least $50 million. Covered Call Writing. The QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO are permitted to write covered call options on portfolio securities, without limit, in order to aid them in achieving their investment objectives. In the case of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO, such options may be denominated in either U.S. dollars or foreign currencies and may be on the U.S. dollar and foreign currencies. As a writer of a call option, the Portfolio has the obligation, upon notice of exercise of the option, to deliver the security (or amount of currency) underlying the option prior to the expiration date of the option (certain listed and OTC put options written by a Portfolio will be exercisable by the purchaser only on a specific date). Covered Put Writing. As a writer of covered put options, the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO or the STRATEGIST PORTFOLIO incurs an obligation to buy the security underlying the option from the purchaser of the put, at the option's exercise price at any time during the option period, at the purchaser's election (certain listed and OTC put options written by a Portfolio will be exercisable by the purchaser only on a specific date). The QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO will write put options for two purposes: (1) to receive the income derived from the premiums paid by purchasers; and (2) when the Portfolio's management wishes to purchase the security underlying the option at a price lower than its current market price, in which case the Portfolio will write the covered put at an exercise price reflecting the lower purchase price sought. The aggregate value of the obligations underlying the puts determined as of the date the options are sold will not exceed 50% of a Portfolio's net assets. Purchasing Call and Put Options. The QUALITY INCOME PLUS PORTFOLIO may purchase listed and OTC call and put options in amounts equalling up to 10% of its total assets. Each of the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO may purchase such call and put options in amounts equalling up to 5% of its total assets. Each of the UTILITIES PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO and the STRATEGIST PORTFOLIO may purchase such call and put options and options on stock indexes in amounts equalling up to 10% of its total assets, with a maximum of 5% of its total assets invested in the purchase of stock index options. These Portfolios may purchase call options either to close out a covered call position or to protect against an increase in the price of a security a Portfolio anticipates purchasing or, in the case of call options on a foreign currency, to hedge against an adverse exchange rate change of the currency in which the security the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO or the CAPITAL APPRECIATION PORTFOLIO anticipates purchasing is denominated vis-a-vis the currency in which the exercise price is denominated. The Portfolio may purchase put options on securities 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. Similarly, each of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO may purchase put options on currencies in which securities it holds are denominated only to protect itself against a decline in value of such currency vis-a-vis the currency in which the exercise price is denominated. The Portfolios may also purchase put options to close out written put positions in a manner similar to call option closing purchase transactions. There are no other limits on the ability of these Portfolios to purchase call and put options. Stock Index Options. The UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may invest in options on stock indexes, which 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 lesser than, in the case of a put, the exercise price of the option. See "Risks of Options on Indexes," in the Statement of Additional Information. Futures Contracts. The QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may purchase and sell interest rate futures contracts that are currently traded, or may in the future be traded, on U.S. commodity exchanges on such underlying securities as U.S. Treasury bonds, notes, and bills and GNMA Certificates and bond index futures contracts that are traded on U.S. commodity exchanges on such indexes as the Moody's Investment-Grade Corporate Bond Index. The UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH 35 PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may also purchase and sell stock index futures contracts that are currently traded, or may in the future be traded, on U.S. commodity exchanges on such indexes as the S&P 500 Index and the New York Stock Exchange Composite Index. The GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO may also purchase and sell futures contracts that are currently traded, or may in the future be traded, on foreign commodity exchanges on such underlying securities as common stocks or any foreign government fixed-income security, on various currencies ("currency futures") and on such indexes of foreign equity and fixed-income securities as may exist or come into being, such as the Financial Times Equity Index. As a futures contract purchaser, a Portfolio 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, a Portfolio incurs an obligation to deliver the specified amount of the underlying obligation at a specified time in return for an agreed upon price. The QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO will purchase or sell interest rate futures contracts and bond index futures contracts for the purpose of hedging their fixed-income portfolio (or anticipated portfolio) securities against changes in prevailing interest rates or, in the case of the UTILITIES PORTFOLIO and the STRATEGIST PORTFOLIO, to facilitate asset reallocations into and out of the fixed-income area. The UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO will purchase or sell stock index futures contracts for the purpose of hedging their equity portfolio (or anticipated portfolio) securities against changes in their prices or, in the case of the UTILITIES PORTFOLIO and the STRATEGIST PORTFOLIO, to facilitate asset reallocations into and out of the equity area. The GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO will purchase or sell currency futures on currencies in which their portfolio securities (or anticipated portfolio securities) are denominated for the purposes of hedging against anticipated changes in currency exchange rates. Options on Futures Contracts. The QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may purchase and write call and put options on futures contracts which are traded on an exchange and enter into closing transactions with respect to such options to terminate an existing position. An option on a futures contract gives the purchaser the right, in return for the premium paid, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the term of the option. The QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO will only 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. Risks of Options and Futures Transactions. A Portfolio may close out its position as writer of an option, or as a buyer or seller of a futures contract, only if a liquid secondary market exists for options or futures contracts of that series. There is no assurance that such a market will exist, particularly in the case of OTC options, as such options will generally only be closed out by entering into a closing purchase transaction with the purchasing dealer. Also, 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. The extent to which a Portfolio may enter into transactions involving options and futures contracts may be limited by the Internal Revenue Code's requirements for qualification of each Portfolio as a regulated investment company and the Fund's intention to qualify each Portfolio as such. See "Dividends, Distributions and Taxes." While the futures contracts and options transactions to be engaged in by the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO for the purpose of hedging their portfolio securities are not speculative in nature, there are risks inherent in the use of such instruments. One such risk is that the Portfolio's management could be incorrect in its expectations as to the direction or extent of various interest rate movements or the time span within which the movements take place. For example, if a Portfolio sold interest rate 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 Portfolio would lose money on the sale. Another risk which may arise in employing futures contracts to protect against the price volatility of portfolio securities is that the prices of securities, currencies and indexes subject to futures contracts (and thereby the futures contract prices) may correlate imperfectly with the behavior of the U.S. dollar cash prices of the portfolio securities (and, in the case of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO, the securities' denominated currencies). Another such risk is that prices of interest rate futures contracts may not move in tandem with the changes in prevailing interest rates against which the Portfolio 36 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 GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO, by entering into transactions in foreign futures and options markets, will incur risks similar to those discussed above under "Foreign Securities." New options and futures contracts and other financial products and various combinations thereof continue to be developed. The QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may invest in any such options, futures and products as may be developed to the extent consistent with their investment objectives and applicable regulatory requirements, and the Fund will make any and all pertinent disclosures relating to such investments in its Prospectus and/or Statement of Additional Information. Except as otherwise noted above, there are no limitations on the ability of any of these Portfolios to invest in options, futures and options on futures. Portfolio Trading Although the Fund does not intend to engage in short-term trading of portfolio securities as a means of achieving the investment objectives of the respective Portfolios, each Portfolio may sell portfolio securities without regard to the length of time they have been held whenever such sale will in the opinion of the Investment Manager (or, in the case of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, the Sub-Adviser) strengthen the Portfolio's position and contribute to its investment objectives. In determining which securities to purchase for the Portfolios or hold in a Portfolio, the Investment Manager and, in the case of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, the Sub-Adviser will rely on information from various sources, including research, analysis and appraisals of brokers and dealers, the views of Trustees of the Fund and others regarding economic developments and interest rate trends, and the Investment Manager's and, in the case of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, the Sub-Adviser's own analysis of factors they deem relevant. Personnel of the Investment Manager and, in the case of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, the Sub-Adviser have substantial experience in the use of the investment techniques described above under the heading "Options and Futures Transactions," which techniques require skills different from those needed to select the portfolio securities underlying various options and futures contracts. Brokerage commissions are not normally charged on the purchase or sale of money market instruments and U.S. Government obligations, or on currency conversions, but such transactions will involve costs in the form of spreads between bid and asked prices. Orders for transactions in portfolio securities and commodities may be placed for the Fund with a number of brokers and dealers, including Dean Witter Reynolds Inc. ("DWR"), the principal underwriter of certain of the Variable Annuity Contracts and the Variable Life Contracts and a broker-dealer affiliate of InterCapital, and certain affiliated broker-dealers of Morgan Grenfell Investment Services Limited, the Sub-Adviser of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO. Pursuant to an order of the Securities and Exchange Commission, the Fund may effect principal transactions in certain money market instruments with DWR. In addition, the Fund may incur brokerage commissions on transactions conducted through DWR and affiliated broker-dealers of the Sub-Adviser of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO. The Money Market Portfolio is expected to have a high portfolio turnover due to the short maturities of securities purchased, but this should not affect income or net asset value as brokerage commissions are not normally charged on the purchase or sale of money market instruments. It is not anticipated that the portfolio turnover rates of the Portfolios will exceed the following percentages in any year: QUALITY INCOME PLUS PORTFOLIO: 300%; HIGH YIELD PORTFOLIO: 300%; UTILITIES PORTFOLIO: 100%; DIVIDEND GROWTH PORTFOLIO: 90%; INCOME BUILDER PORTFOLIO: 90%; CAPITAL GROWTH PORTFOLIO: 200%; GLOBAL DIVIDEND GROWTH PORTFOLIO: 100%; EUROPEAN GROWTH PORTFOLIO: 100%; PACIFIC GROWTH PORTFOLIO: 100%; CAPITAL APPRECIATION PORTFOLIO: 300%; EQUITY PORTFOLIO: 300%; and STRATEGIST PORTFOLIO: 400%. A portfolio turnover rate exceeding 100% in any one year is greater than that of many other investment companies. Each Portfolio of the Fund will incur underwriting discount costs (on underwritten securities) and/or brokerage costs commensurate with its portfolio turnover rate. The expenses of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO relating to their portfolio management are likely to be greater than those incurred by other investment companies investing primarily in securities issued by domestic issuers as custodial costs, brokerage commissions and other transaction charges related to investing in foreign markets are generally higher than in the United States. Short-term gains and losses may result from portfolio transactions. See "Dividends, Distributions and Taxes" for a discussion of the tax implications of the Portfolios' trading policies. A more extensive discussion of the Portfolios' brokerage policies is set forth in the Statement of Additional Information. Portfolio Management The following individuals are primarily responsible for the day-to-day management of certain of the Portfolios of the Fund: Paula LaCosta, Vice President of InterCapital, has been the primary portfolio manager of the QUALITY INCOME PLUS PORTFOLIO 37 for over five years and has been a portfolio manager with InterCapital for over five years. Peter M. Avelar, Senior Vice President of InterCapital, has been the primary portfolio manager of the HIGH YIELD PORTFOLIO for over five years and has been a portfolio manager with InterCapital for over five years. Edward F. Gaylor, Senior Vice President of InterCapital, has been the primary portfolio manager of the UTILITIES PORTFOLIO since its inception and has been a portfolio manager with InterCapital for over five years. Paul D. Vance, Senior Vice President of InterCapital, and Michael G. Knox, Vice President of InterCapital, have been the primary portfolio co-managers of the INCOME BUILDER PORTFOLIO since its inception. Mr. Vance has been a portfolio manager with InterCapital for over five years. Mr. Knox has been a portfolio manager with InterCapital since August, 1993, prior to which time he was a portfolio manager with Eagle Asset Management, Inc. Mr. Vance has also been the primary portfolio manager of the DIVIDEND GROWTH PORTFOLIO since its inception. Mr. Vance and Matthew Haynes, Assistant Vice President of InterCapital, have been the primary portfolio co-managers of the GLOBAL DIVIDEND GROWTH PORTFOLIO since its inception and since May, 1997, respectively. Mr. Haynes has been a portfolio manager with InterCapital since April, 1993 and prior thereto was a section head in the Fund Accounting Group of InterCapital. Peter Hermann, Vice President of InterCapital, has been the primary portfolio manager of the CAPITAL GROWTH PORTFOLIO since May, 1996. Prior to joining InterCapital in March, 1994, Mr. Hermann was a portfolio manager at The Bank of New York. Jeremy G. Lodwick, a Director of the Sub-Adviser, has been the primary portfolio manager of the EUROPEAN GROWTH PORTFOLIO since April, 1994 and has been a portfolio manager with the Sub-Adviser for over five years. Graham D. Bamping, a Director of the Sub-Adviser, has been the primary portfolio manager of the PACIFIC GROWTH PORTFOLIO since its inception and has been a portfolio manager with the Sub-Adviser for over five years. Ronald J. Worobel, Senior Vice President of InterCapital, has been the primary portfolio manager of the CAPITAL APPRECIATION PORTFOLIO since its inception and has been a portfolio manager with InterCapital since June, 1992, prior to which time he was the Managing Director at MacKay Shields Financial Corp. Michelle Kaufman, Assistant Vice President of InterCapital, has been a primary portfolio manager of the EQUITY PORTFOLIO since May, 1996, and has been the sole primary portfolio manager of that Portfolio since December, 1996. Prior to joining InterCapital in September, 1993, Ms. Kaufman was a securities analyst with Woodward and Associates (March-August, 1993), JRO and Associates (December, 1992) and the First Manhattan Company (January, 1990-November, 1992). Mark Bavoso, Senior Vice President of InterCapital, has been the primary portfolio manager of the STRATEGIST PORTFOLIO since September, 1995, and has been a portfolio manager with InterCapital for over five years. INVESTMENT RESTRICTIONS - ---------------------------------------------------------- The investment restrictions listed below are among the restrictions that have been adopted by the Fund as fundamental policies of each Portfolio. Under the Investment Company Act of 1940, as amended (the "Act"), a fundamental policy may not be changed with respect to a Portfolio without the vote of a majority of the outstanding voting securities of that Portfolio, as defined in the Act. Each Portfolio of 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), or purchase more than 10% of the voting securities, or more than 10% of any class of security, of any issuer (for this purpose all outstanding debt securities of an issuer are considered as one class and all preferred stock of an issuer are considered as one class). With regard to the INCOME BUILDER PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO, these limitations apply only as to 75% of the Portfolio's total assets. 2. Concentrate its investments in any particular industry, but if deemed appropriate for attainment of its investment objective, a Portfolio may invest up to 25% of its total assets (valued at the time of investment) in any one industry classification used by that Portfolio for investment purposes. This restriction does not apply to obligations issued or guaranteed by the United States Government or its agencies or instrumentalities, or, in the case of the MONEY MARKET PORTFOLIO, to domestic bank obligations (not including obligations issued by foreign branches of such banks) or, in the case of the UTILITIES PORTFOLIO, to the utilities industry, in which industry the Portfolio will concentrate. 3. 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. Purchase or sell commodities or commodity futures contracts, or oil, gas or mineral exploration or developmental programs, except that a Portfolio may invest in the securities of companies which operate, invest in, or sponsor such programs, and the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the INCOME BUILDER PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may purchase futures contracts and related options thereon and the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the 38 PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO may purchase currency futures contracts and related options thereon. 5. Borrow money (except insofar as the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO may be deemed to have borrowed by entrance into a reverse repurchase agreement up to an amount not exceeding 10% of the Portfolio's total assets), except from banks for temporary or emergency purposes or to meet redemption requests which might otherwise require the untimely disposition of securities, and, in the case of the Portfolios other than the QUALITY INCOME PLUS PORTFOLIO, not for investment or leveraging, provided that borrowing in the aggregate (other than, in the case of the QUALITY INCOME PLUS PORTFOLIO, for investment or leveraging) may not exceed 5% of the value of the Portfolio's total assets (including the amount borrowed) at the time of such borrowing. 6. Pledge its assets or assign or otherwise encumber them except to secure permitted borrowings. (For the purpose of this restriction, collateral arrangements with respect to the writing of options and collateral arrangements with respect to initial margin for futures are not deemed to be pledges of assets.) 7. Purchase securities on margin (but the Portfolios may obtain short-term loans as are necessary for the clearance of transactions). The deposit or payment by the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the INCOME BUILDER PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO of initial or variation margin in connection with futures contracts or related options thereon is not considered the purchase of a security on margin. 8. Purchase securities of other investment companies, except in connection with a merger, consolidation, reorganization or acquisition of assets or, in the case of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO, in accordance with the provisions of Section 12(d) of the Act and any Rules promulgated thereunder (E.G., each of these Portfolios may not invest in more than 3% of the outstanding voting securities of any investment company). Each of the QUALITY INCOME PLUS PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO may not invest more than 5% of the value of its total assets in securities which are restricted as to disposition under the Federal securities laws or otherwise, provided that this restriction shall not apply to securities received as a result of a corporate reorganization or similar transaction affecting readily marketable securities already held by the Portfolio; however, these Portfolios will attempt to dispose in an orderly fashion of any securities received under these circumstances to the extent that such securities, together with other illiquid securities, exceed 10% of the Portfolio's total assets. Each of the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO and the EUROPEAN GROWTH PORTFOLIO may not invest more than 10% of its total assets in "illiquid securities" (securities for which market quotations are not readily available) and repurchase agreements which have a maturity of longer than seven days. In addition, no more than 15% of the EUROPEAN GROWTH PORTFOLIO's net assets will be invested in such illiquid securities and foreign securities not traded on a recognized domestic or foreign exchange. Generally, OTC options and the assets used as "cover" for written OTC options are illiquid securities. However, these Portfolios are permitted to treat the securities they use as cover for written OTC options as liquid provided they follow a procedure whereby they will sell OTC options only to qualified dealers who agree that the Portfolio may repurchase such options at a maximum price to be calculated pursuant to a predetermined formula set forth in the option agreement. The formula may vary from agreement to agreement, but is generally based on a multiple of the premium received by the Portfolio for writing the option plus the amount, if any, of the option's intrinsic value. An OTC option is considered an illiquid asset only to the extent that the maximum repurchase price under the formula exceeds the intrinsic value of the option. The HIGH YIELD PORTFOLIO may not acquire any common stocks, except (a) when attached to or included in a unit with fixed-income securities; (b) when acquired upon conversion of fixed-income securities; or (c) when acquired upon exercise of warrants attached to fixed-income securities. However, the HIGH YIELD PORTFOLIO may retain common stocks so acquired but not in excess of 10% of its total assets. While the EQUITY PORTFOLIO may not invest in securities of foreign issuers, it may invest in (a) securities of Canadian issuers registered under the Securities Exchange Act of 1934 and (b) American Depository Receipts. All percentage limitations apply immediately after a purchase or initial investment, and any subsequent change in any applicable percentage resulting from market fluctuations or other changes in the amount of total assets does not require elimination of any security from the Portfolio. 39 DETERMINATION OF NET ASSET VALUE - ---------------------------------------------------------- The net asset value per share is calculated separately for each Portfolio. In general, the net asset value per share is computed by taking the value of all the assets of the Portfolio, subtracting all liabilities, dividing by the number of shares outstanding and adjusting the result to the nearest cent. The Fund will compute the net asset value per share of each Portfolio once daily at 4:00 p.m., New York time (or, on days when the New York Stock Exchange closes prior to 4:00 p.m., at such earlier time), on days the New York Stock Exchange is open for trading. 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. The MONEY MARKET PORTFOLIO utilizes the amortized cost method in valuing its portfolio securities, which method involves valuing a security at its cost adjusted by a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. The purpose of this method of calculation is to facilitate the maintenance of a constant net asset value per share of $1.00. However, there can be no assurance that the $1.00 net asset value will be maintained. In the calculation of the net asset value of the Portfolios other than the MONEY MARKET PORTFOLIO: (1) an equity portfolio security listed or traded on the New York or American Stock Exchange or other domestic or foreign stock exchange is valued at its latest sale price on that exchange prior to the time when assets are valued (if there were no sales that day, the security is valued at the latest bid price) (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); and (2) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the latest bid price prior to the time of valuation. When market quotations are not readily available, including circumstances under which it is determined by the Investment Manager (or, in the case of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, by the Sub-Adviser) that sale or bid prices are not reflective of a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Board of Trustees (valuation of securities for which market quotations are not readily available may also be based upon current market prices of securities which are comparable in coupon, rating and maturity or an appropriate matrix utilizing similar factors). For valuation purposes, quotations of foreign portfolio securities, other assets and liabilities and forward contracts stated in foreign currency are translated into U.S. dollar equivalents at the prevailing market rates prior to the close of the New York Stock Exchange. Dividends receivable are accrued as of the ex-dividend date except for certain dividends from foreign securities which are accrued as soon as the Fund is informed of such dividends after the ex-dividend date. 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 portfolio securities of each Portfolio other than the MONEY MARKET PORTFOLIO may be valued by an outside pricing service approved by the Fund's Trustees. The pricing service may utilize a matrix system incorporating security quality, maturity and coupon as the evaluation model parameters, and/or research evaluations by its staff, including review of broker-dealer market price quotations, in determining what it believes is the fair valuation of the portfolio securities valued by such pricing service. PURCHASE OF FUND SHARES - ---------------------------------------------------------- Investments in the Fund may be made only by (1) Northbrook Life Insurance Company ("Northbrook") for allocation to certain separate accounts established and maintained by Northbrook for the purpose of funding variable annuity contracts and variable life insurance contracts it issues, by (2) Allstate Life Insurance Company of New York ("Allstate New York") for allocation to certain separate accounts established and maintained by Allstate New York for the purpose of funding variable annuity contracts it issues, by (3) Glenbrook Life and Annuity Company ("Glenbrook") for allocation to certain separate accounts established and maintained by Glenbrook for the purpose of funding variable annuity contracts and variable life insurance contracts it issues, and by (4) Paragon Life Insurance Company ("Paragon") for allocation to a separate account established and maintained by Paragon for the purpose of funding variable life insurance contracts it issues, in connection with an employer-sponsored insurance program offered only to certain employees of DWDC, the parent company of the Fund's Investment Manager. The separate accounts are sometimes referred to individually as an "Account" and collectively as the "Accounts." Persons desiring to purchase annuity or life insurance contracts funded by any Portfolio of the Fund should read this Prospectus in conjunction with the Prospectus of the flexible premium deferred annuity contracts issued by Northbrook, Allstate New 40 York or Glenbrook (the "Variable Annuity Contracts") or in conjunction with the Prospectus of the flexible premium variable life insurance contracts issued by Northbrook, Glenbrook or Paragon (the "Variable Life Contracts"). In the future, shares of the Portfolios of the Fund may be allocated to certain other separate accounts or sold to affiliated and/ or non-affiliated entities of Northbrook, Allstate New York, Glenbrook and Paragon (the "Companies") in connection with variable annuity contracts or variable life insurance contracts. It is conceivable that in the future it may become disadvantageous for both variable life and variable annuity contract separate accounts to invest in the same underlying fund. Although neither the Companies nor the Fund currently foresee any such disadvantage, the Fund's Board of Trustees intends to monitor events in order to identify any material irreconcilable conflict between the interests of variable annuity contract owners and variable life insurance contract owners and to determine what action, if any, should be taken in response thereto. Shares of each Portfolio of the Fund are offered to the Companies for allocation to the Accounts without sales charge at the respective net asset values of the Portfolios next determined after receipt by the Fund of the purchase payment in the manner set forth above under "Determination of Net Asset Value." In the interest of economy and convenience, certificates representing the Fund's shares will not be physically issued. Dean Witter Distributors Inc. (the "Distributor") acts without remuneration from the Fund as the exclusive Distributor of the Fund's shares. (The Distributor is a wholly-owned subsidiary of DWDC and an affiliate of Dean Witter Reynolds Inc., which is the principal underwriter of certain of the Variable Annuity Contracts and the Variable Life Contracts.) The principal executive office of the Distributor is located at Two World Trade Center, New York, New York 10048. REDEMPTION OF FUND SHARES - ---------------------------------------------------------- Shares of any Portfolio of the Fund can be redeemed by the Companies at any time for cash, without sales charge, at the net asset value next determined after receipt of the redemption request. (For information regarding charges which may be imposed upon the Contracts by the applicable Account, see the accompanying Prospectus for either the Variable Annuity Contracts or the Variable Life Contracts.) The Fund reserves the right to suspend the right of redemption or to postpone the date of payment upon redemption of the shares of any Portfolio for any period during which the New York Stock Exchange is closed (other than weekend and holiday closings) or trading on that Exchange is restricted, or during which an emergency exists (as determined by the Securities and Exchange Commission) as a result of which disposal of the portfolio securities owned by the Portfolio is not reasonably practicable or it is not reasonably practicable for the Portfolio to determine the value of its net assets, or for such other period as the Securities and Exchange Commission may by order permit for the protection of shareholders. DIVIDENDS, DISTRIBUTIONS AND TAXES - ---------------------------------------------------------- Dividends and Distributions. The Fund intends to distribute substantially all of the net investment income and net realized capital gains, if any, of each Portfolio. Dividends from net investment income and any distributions of realized capital gains will be paid in additional shares of the Portfolio paying the dividend or making the distribution and credited to the shareholder's account. Money Market Portfolio. Dividends from net income on the MONEY MARKET PORTFOLIO will be declared, payable on each day the New York Stock Exchange is open for business to shareholders of record as of the close of business the preceding business day. Net income, for dividend purposes, includes accrued interest and accretion of original issue and market discount, less the amortization of market premium and the estimated expenses of the MONEY MARKET PORTFOLIO. The amount of dividend may fluctuate from day to day and may be omitted on some days if realized losses on portfolio securities exceed the MONEY MARKET PORTFOLIO's net investment income. Dividends are automatically reinvested daily in additional shares of the MONEY MARKET PORTFOLIO at the net asset value per share at the close of business that day. Any net realized capital gains will be declared and paid at least once per calendar year; net short-term gains may be paid more frequently, with the distribution of dividends from net investment income. Quality Income Plus Portfolio and High Yield Portfolio. Dividends from net investment income on the QUALITY 41 INCOME PLUS PORTFOLIO and the HIGH YIELD PORTFOLIO will be declared and paid monthly, and any net realized capital gains will be declared and paid at least once per calendar year. Utilities Portfolio, Income Builder Portfolio, Dividend Growth Portfolio, Global Dividend Growth Portfolio, Equity Portfolio and Strategist Portfolio. Dividends from net investment income, if any, on the UTILITIES PORTFOLIO, the INCOME BUILDER PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO will be declared and paid quarterly, and any net realized capital gains will be declared and paid at least once per calendar year. Capital Growth Portfolio, European Growth Portfolio, Pacific Growth Portfolio and Capital Appreciation Portfolio. Dividends from net investment income and net realized capital gains, if any, on the CAPITAL GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO will be declared and paid at least once per calendar year. Taxes. Because the Fund intends to distribute substantially all of the net investment income and capital gains of each Portfolio and otherwise continue to qualify each Portfolio as a regulated investment company under Subchapter M of the Internal Revenue Code (the "Code"), it is not expected that any Portfolio of the Fund will be required to pay any Federal income tax on such income and capital gains. Gains or losses on a Portfolio's transactions in certain listed options and on futures and options on futures generally are treated as 60% long-term and 40% short-term. When a Portfolio engages in options and futures transactions, various tax regulations applicable to the Portfolio may have the effect of causing the Portfolio to recognize a gain or loss for tax purposes before that gain or loss is realized, or to defer recognition of a realized loss for tax purposes. Recognition, for tax purposes, of an unrealized loss may result in a lesser amount of the realized net short-term gains of the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO or the STRATEGIST PORTFOLIO being available for distribution. These Portfolios intend to make certain elections which may minimize the impact of these rules but which could also result in a higher portion of the Portfolio's gains being treated as short-term capital gains. As a regulated investment company, the Fund is subject to the requirement that less than 30% of a Portfolio's gross income be derived from the sale or other disposition of securities held for less than three months. This requirement may limit the ability of the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO to engage in options and futures transactions. With respect to investments by a Portfolio in zero coupon bonds and investment by the HIGH YIELD PORTFOLIO in payment-in-kind bonds, the Portfolios accrue income prior to any actual cash payments by their issuers. In order to continue to comply with Subchapter M of the Code and remain able to forego payment of Federal income tax on their income and capital gains, each Portfolio must distribute all of its net investment income, including income accrued from zero coupon and payment-in-kind bonds. As such, a Portfolio may be required to dispose of some of its portfolio securities under disadvantageous circumstances to generate the cash required for distribution. Dividends, interest and capital gains received by a Portfolio on investments in foreign issuers or which are denominated in foreign currency may give rise to withholding and other taxes imposed by foreign countries, which may or may not be refunded to the Portfolio. Since the Companies are the only shareholders of the Fund, no discussion is stated herein as to the Federal income tax consequences at the shareholder level. For information concerning the Federal income tax consequences to holders of variable annuity or variable life insurance contracts, see the accompanying Prospectus for either the Variable Annuity Contracts or the Variable Life Contracts. PERFORMANCE INFORMATION - ---------------------------------------------------------- From time to time the Fund advertises the "yield" and "effective yield" of the MONEY MARKET PORTFOLIO. Both yield figures are based on historical earnings and are not intended to indicate future performance. The "yield" of the MONEY MARKET PORTFOLIO refers to the income generated by an investment in the Portfolio over a given period (which period will be stated in the advertisement). This income is then annualized. The "effective yield" for a seven-day period is calculated similarly but, when annualized, the income earned by an investment in the MONEY MARKET PORTFOLIO is assumed to be reinvested each week within a 365-day period. The "effective yield" will be slightly higher than the "yield" because of the compounding effect of this assumed reinvestment. The MONEY MARKET PORTFOLIO's "yield" and "effective yield" do not reflect the deduction of any charges which may be imposed on the Contracts by the applicable Account and are therefore not equivalent to total return under a Contract (for a description of such charges, see the Prospectus for the Contracts). From time to time the Fund advertises the "yield" of each of the QUALITY INCOME PLUS PORTFOLIO, the HIGH YIELD PORTFOLIO and the UTILITIES PORTFOLIO. The yield of a Portfolio is based on historical earnings and is not intended to indicate future performance. The 42 yield of a Portfolio is computed by dividing the Portfolio's net investment income over a 30-day period by an average value (using the average number of shares entitled to receive dividends and the net asset value per share at the end of the period), all in accordance with applicable regulatory requirements. Such amount is compounded for six months and then annualized for a twelve-month period to derive the Portfolio's yield. The "yield" of a Portfolio does not reflect the deduction of any charges which may be imposed on the Contracts by the applicable Account and is therefore not equivalent to total return under a Contract (for a description of such charges, see the Prospectus for the Contracts). From time to time the Fund may quote the "total return" of each Portfolio in advertisements and sales literature. The total return of a Portfolio is based on historical earnings and is not intended to indicate future performance. The "average annual total return" of a Portfolio refers to a figure reflecting the average annualized percentage increase (or decrease) in the value of an initial investment in the Portfolio of $1,000 over periods of one, five and ten years, as well as over the life of the Portfolio, if shorter than any of these periods. Average annual total return reflects all income earned by the Portfolio, any appreciation or depreciation of the Portfolio's assets and all expenses incurred by the Portfolio for the stated periods. It also assumes reinvestment of all dividends and distributions paid by the Portfolio. However, average annual total return does not reflect the deduction of any charges which may be imposed on the Contracts by the applicable Account which, if reflected, would reduce the performance quoted. In addition to the foregoing, the Fund may advertise the total return of the Portfolios over different periods of time by means of aggregate, average, year-by-year or other types of total return figures. Such calculations similarly do not reflect the deduction of any charges which may be imposed on the Contracts by the applicable Account. The Fund may also advertise the growth of hypothetical investments of $10,000, $50,000 and $100,000 in shares of a Portfolio. The Fund from time to time may also advertise the performance of the Portfolios relative to certain performance rankings and indexes compiled by independent organizations, such as Lipper Analytical Services, Inc. ADDITIONAL INFORMATION - ---------------------------------------------------------- The shares of beneficial interest of the Fund, with $0.01 par value, are divided into thirteen separate Portfolios, and the shares of each Portfolio are equal as to earnings, assets and voting privileges with all other shares of that Portfolio. There are no conversion, pre-emptive or other subscription rights. Upon liquidation of the Fund or any Portfolio, shareholders of a Portfolio are entitled to share pro rata in the net assets of that Portfolio available for distribution to shareholders after all debts and expenses have been paid. The shares do not have cumulative voting rights. The assets received by the Fund on the sale of shares of each Portfolio and all income, earnings, profits and proceeds thereof, subject only to the rights of creditors, are allocated to each Portfolio, and constitute the assets of such Portfolio. The assets of each Portfolio are required to be segregated on the Fund's books of account. Additional Portfolios (the proceeds of which would be invested in separate, independently managed portfolios with distinct investment objectives, policies and restrictions) may be offered in the future, but such additional offerings would not affect the interests of the current shareholders in the existing Portfolios. On any matters affecting only one Portfolio, only the shareholders of that Portfolio are entitled to vote. On matters relating to all the Portfolios but affecting the Portfolios differently, separate votes by Portfolio are required. Approval of an Investment Management Agreement and a change in fundamental policies would be regarded as matters requiring separate voting by each Portfolio. To the extent required by law, Northbrook Life Insurance Company, Allstate Life Insurance Company of New York, Glenbrook Life and Annuity Company and Paragon Life Insurance Company, which are the only shareholders of the Fund, will vote the shares of the Fund held in each Account in accordance with instructions from Contract Owners, as more fully described under the caption "Voting Rights" in the accompanying Prospectus for either the Variable Annuity Contracts or the Variable Life Contracts. Six of the nine Trustees of the Fund have been elected by Northbrook Life Insurance Company and Allstate Life Insurance Company of New York, pursuant to the instructions of Contract Owners. The other three Trustees of the Fund were elected by the other Trustees of the Fund. 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 Massachusetts law, shareholders of a business trust may, under certain circumstances, be held personally liable as partners for the obligations of the Fund. However, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Fund, requires that 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, 43 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. Transfer Agent and Dividend Disbursing Agent. Dean Witter Trust Company, an affiliate of InterCapital, whose address is Harborside Financial Center, Plaza Two, Jersey City, NJ 07311, is the Transfer Agent of the Fund's shares and Dividend Disbursing Agent for payments of dividends and distributions on Fund shares. 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 investment company managed or advised by InterCapital ("Dean Witter Fund") is engaged at the same time in a purchase or sale of the same security. The Code of Ethics bans the purchase of securities in an initial public offering, and also prohibits engaging in futures and options transactions and profiting on short-term trading (that is, a purchase within sixty days of a sale or a sale within sixty days of a purchase) of a security. In addition, investment personnel may not purchase or sell a security for their personal account within thirty days before or after any transaction in any Dean Witter Fund managed by them. Any violations of the Code of Ethics are subject to sanctions, including reprimand, demotion or suspension or termination of employment. The Code of Ethics comports with regulatory requirements and the recommendations in the 1994 report by the Investment Company Institute Advisory Group on Personal Investing. The Sub-Adviser of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO also has a Code of Ethics which complies with regulatory requirements and, insofar as it relates to persons associated with the Fund, the 1994 report by the Investment Company Institute Advisory Group on Personal Investing. 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. 44 APPENDIX -- RATINGS OF CORPORATE DEBT INSTRUMENTS INVESTMENTS - ---------------------------------------------------------- Moody's Investors Service Inc. ("Moody's") Fixed-Income Security Ratings Aaa Fixed-income securities which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa Fixed-income securities which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade fixed-income securities. They are rated lower than the best fixed-income securities because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A Fixed-income securities which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa Fixed-income securities which are rated Baa are considered as medium grade obligations; I.E., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such fixed-income securities lack outstanding investment characteristics and in fact have speculative characteristics as well. Fixed-income securities rated Aaa, Aa, A and Baa are considered investment grade. Ba Fixed-income securities which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate, and therefore not well safeguarded during both good and bad times in the future. Uncertainty of position characterizes bonds in this class. B Fixed-income securities which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa Fixed-income securities which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca Fixed-income securities which are rated Ca present obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C Fixed-income securities which are rated C are the lowest rated class of fixed-income securities, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2, and 3 in each generic rating classification from Aa through B in its municipal fixed-income security rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and a modifier 3 indicates that the issue ranks in the lower end of its generic rating category. 45 Commercial Paper Ratings Moody's Commercial Paper ratings are opinions of the ability to repay punctually promissory obligations not having an original maturity in excess of nine months. The ratings apply to Municipal Commercial Paper as well as taxable Commercial Paper. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: Prime-1, Prime-2, Prime-3. Issuers rated Prime-1 have a superior capacity for repayment of short-term promissory obligations. Issuers rated Prime-2 have a strong capacity for repayment of short-term promissory obligations; and Issuers rated Prime-3 have an acceptable capacity for repayment of short-term promissory obligations. Issuers rated Not Prime do not fall within any of the Prime rating categories. Standard & Poor's Corporation ("Standard & Poor's") Fixed-Income Security Ratings A Standard & Poor's fixed-income security rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers, or lessees. The ratings are based on current information furnished by the issuer or obtained by Standard & Poor's from other sources it considers reliable. The ratings are based, in varying degrees, on the following considerations: (1) likelihood of default-capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation; (2) nature of and provisions of the obligation; and (3) protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. Standard & Poor's does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended or withdrawn as a result of changes in, or unavailability of, such information, or for other reasons. AAA Fixed-income securities rated "AAA" have the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA Fixed-income securities rated "AA" have a very strong capacity to pay interest and repay principal and differs from the highest-rate issues only in small degree. A Fixed-income securities rated "A" have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than fixed-income securities in higher-rated categories. BBB Fixed-income securities rated "BBB" are regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for fixed-income securities in this category than for fixed- income securities in higher-rated categories. Fixed-income securities rated AAA, AA, A and BBB are considered investment grade. BB Fixed-income securities rated "BB" have less near-term vulnerability to default than other speculative grade fixed-income securities. However, it faces major ongoing uncertainties or exposures to adverse business, financial or economic conditions which could lead to inadequate capacity or willingness to pay interest and repay principal. B Fixed-income securities rated "B" have a greater vulnerability to default but presently have the capacity to meet interest payments and principal repayments. Adverse business, financial or economic conditions would likely impair capacity or willingness to pay interest and repay principal. CCC Fixed-income securities rated "CCC" have a current identifiable vulnerability to default, and are dependent upon favorable business, financial and economic conditions to meet timely payments of interest and repayments of principal. In the event of adverse business, financial or economic conditions, they are not likely to have the capacity to pay interest and repay principal. CC The rating "CC" is typically applied to fixed-income securities subordinated to senior debt which is assigned an actual or implied "CCC" rating. C The rating "C" is typically applied to fixed-income securities subordinated to senior debt which is assigned an actual or implied "CCC-" rating.
46 CI The rating "CI" is reserved for fixed-income securities on which no interest is being paid. NR Indicates that no rating has been requested, that there is insufficient information on which to base a rating or that Standard & Poor's does not rate a particular type of obligation as a matter of policy. Fixed-income securities rated "BB," "B," "CCC," "CC" and "C" are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. "BB" indicates the least degree of speculation and "C" the highest degree of speculation. While such fixed-income securities will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Plus (+) or minus (-): The rating from "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major ratings categories.
Commercial Paper Ratings Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. The commercial paper rating is not a recommendation to purchase or sell a security. The ratings are based upon current information furnished by the issuer or obtained by Standard & Poor's from other sources it considers reliable. The ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability of such information. Ratings are graded into group categories, ranging from "A" for the highest quality obligations to "D" for the lowest. Ratings are applicable to both taxable and tax-exempt commercial paper. The categories are as follows: Issues assigned A ratings are regarded as having the greatest capacity for timely payment. Issues in this category are further refined with the designation 1, 2, and 3 to indicate the relative degree of safety. A-1 indicates that the degree of safety regarding timely payment is very strong. A-2 indicates capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as overwhelming as for issues designated "A-1." A-3 indicates a satisfactory capacity for timely payment. Obligations carrying this designation are, however, somewhat more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations.
Fitch Investors Service, Inc. ("Fitch") Bond Ratings The Fitch Bond Ratings provides a guide to investors in determining the investment risk associated with a particular security. The rating represents its assessment of the issuer's ability to meet the obligations of a specific debt issue or class of debt in a timely manner. Fitch bond ratings are not recommendations to buy, sell or hold securities since they incorporate no information on market price or yield relative to other debt instruments. The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the record of the issuer and of any guarantor, as well as the political and economic environment that might affect the future financial strength and credit quality of the issuer. Bonds which have the same rating are of similar but not necessarily identical investment quality since the limited number of rating categories cannot fully reflect small differences in the degree of risk. Moreover, the character of the risk factor varies from industry to industry and between corporate, health care and municipal . In assessing credit risk, Fitch Investors Service relies on current information furnished by the issuer and/or guarantor and other sources which it considers reliable. Fitch does not perform an audit of the financial statements used in assigning a rating. Ratings may be changed, withdrawn or suspended at any time to reflect changes in the financial condition of the issuer, the status of the issue relative to other debt of the issuer, or any other circumstances that Fitch considers to have a material effect on the credit of the obligor. AAA rated bonds are considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events.
47 AA rated bonds are considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal, while very strong, is somewhat less than for AAA rated securities or more subject to possible change over the term of the issue. A rated bonds are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB rated bonds are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to weaken this ability than bonds with higher ratings. BB rated bonds are considered speculative and of low investment grade. The obligor's ability to pay interest and repay principal is not strong and is considered likely to be affected over time by adverse economic changes. B rated bonds are considered highly speculative. Bonds in this class are lightly protected as to the obligor's ability to pay interest over the life of the issue and repay principal when due. CCC rated bonds may have certain identifiable characteristics which, if not remedied, could lead to the possibility of default in either principal or interest payments. CC rated bonds are minimally protected. Default in payment of interest and/or principal seems probable. C rated bonds are in imminent default in payment of interest and/or principal.
Short-Term Ratings Fitch's short-term ratings apply to debt obligations that are payable on demand or have original maturities of generally up to three years, including commercial paper, certificates of deposit, medium-term notes, and municipal and investment notes. Although the credit analysis is similar to Fitch's bond rating analysis, the short-term rating places greater emphasis on the existence of liquidity necessary to meet the issuer's obligations in a timely manner. Fitch's short-term ratings are as follows: Fitch-1+ (Exceptionally Strong Credit Quality) Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. Fitch-1 (Very Strong Credit Quality) Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated Fitch-1+. Fitch-2 (Good Credit Quality) Issues assigned this rating have a satisfactory degree of assurance for timely payment but the margin of safety is not as great as the two higher categories. Fitch-3 (Fair Credit Quality) Issues assigned this rating have characteristics suggesting that the degree of assurance for timely payment is adequate, however, near-term adverse change is likely to cause these securities to be rated below investment grade. Fitch-S (Weak Credit Quality) Issues assigned this rating have characteristics suggesting a minimal degree of assurance for timely payment and are vulnerable to near term adverse changes in financial and economic conditions. D (Default) Issues assigned this rating are in actual or imminent payment default. LOC This symbol LOC indicates that the rating is based on a letter of credit issued by a commercial bank.
Duff & Phelps, Inc. Long-Term Ratings These ratings represent a summary opinion of the issuer's long-term fundamental quality. Rating determination is based on qualitative and quantitative factors which may vary according to the basic economic and financial characteristics of each industry and each issuer. Important considerations are vulnerability to economic cycles as well as risks related to such factors as competition, government action, regulation, technological obsolescence, demand shifts, cost structure, and management depth and expertise. The projected viability of the obligor at the trough of the cycle is a critical determination. 48 Each rating also takes into account the legal form of the security, (E.G., first mortgage bonds, subordinated debt, preferred stock, etc.). The extent of rating dispersion among the various classes of securities is determined by several factors including relative weightings of the different security classes in the capital structure, the overall credit strength of the issuer, and the nature of covenant protection. Review of indenture restrictions is important to the analysis of a company's operating and financial constraints. The Credit Rating Committee formally reviews all ratings once per quarter (more frequently, if necessary).
Rating Scale Definition - --------- ------------------------------------------------------------------------------------------------------------------------- AAA Highest credit quality. The risk factors are negligible, being only slightly more than risk-free U.S. Treasury debt. AA+ High credit quality. Protection factors are strong. Risk is modest, but may vary slightly from time to time because of AA economic conditions. AA- A+ Protection factors are average but adequate. However, risk factors are more variable and greater in periods of economic A stress. A- BBB+ Below average protection factors but still considered sufficient for prudent investment. Considerable variability in risk BBB during economic cycles. BBB- BB+ Below investment grade but deemed likely to meet obligations when due. Present or prospective financial protection BB factors fluctuate according to industry conditions or company fortunes. Overall quality may move up or down frequently BB- within this category. B+ Below investment grade and possessing risk that obligations will not be met when due. Financial protection factors will B fluctuate widely according to economic cycles, industry conditions and/or company fortunes. Potential exists for frequent B- changes in the quality rating within this category or into a higher or lower quality rating grade. CCC Well below investment grade securities. May be in default or considerable uncertainty exists as to timely payment of principal, interest or preferred dividends. Protection factors are narrow and risk can be substantial with unfavorable economic/industry conditions, and/or with unfavorable company developments. DD Defaulted debt obligations. Issuer failed to meet scheduled principal and/or interest payments. DP Preferred stock with dividend arrearages.
Short-Term Ratings Duff & Phelps' short-term ratings are consistent with the rating criteria utilized by money market participants. The ratings apply to all obligations with maturities of under one year, including commercial paper, the uninsured portion of certificates of deposit, unsecured bank loans, master notes, bankers acceptances, irrevocable letters of credit, and current maturities of long-term debt. Asset-backed commercial paper is also rated according to this scale. Emphasis is placed on liquidity which is defined as not only cash from operations, but also access to alternative sources of funds, including trade credit, bank lines, and the capital markets. An important consideration is the level of an obligor's reliance on short-term funds on an ongoing basis. A. Category High Grade 1: Duff 1+ Highest certainty of timely payment. Short-term liquidity, including internal operating factors and/or access to alternative sources of funds, is outstanding, and safety is just below risk-free U.S. Treasury short-term obligations. Duff 1 Very high certainty of timely payment. Liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor. Duff- High certainty of timely payment. Liquidity factors are strong and supported by good fundamental protection factors. Risk factors are very small.
49 B. Category Good Grade 2: Duff 2 Good certainty of timely payment. Liquidity factors and company fundamentals are sound. Although ongoing funding needs may enlarge total financing requirements, access to capital markets is good. Risk factors are small. C. Category Satisfactory Grade 3: Duff 3 Satisfactory liquidity and other protection factors qualify issue as to investment grade. Risk factors are larger and subject to more variation. Nevertheless, timely payment is expected. D. Category Non-investment Grade 4: Duff 4 Speculative investment characteristics. Liquidity is not sufficient to insure against disruption in debt service. Operating factors and market access may be subject to a high degree of variation. E. Category Default 5: Duff 5 Issuer failed to meet scheduled principal and/or interest payments.
50 DEAN WITTER VARIABLE INVESTMENT SERIES TWO WORLD TRADE CENTER NEW YORK, NEW YORK 10048 BOARD OF TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn John R. Haire Dr. Manuel H. Johnson Michael E. Nugent Philip J. Purcell John L. Schroeder OFFICERS Charles A. Fiumefreddo Chairman and Chief Executive Officer Barry Fink Vice President, Secretary and General Counsel Thomas F. Caloia Treasurer CUSTODIANS The Bank of New York 90 Washington Street New York, New York 10286 The Chase Manhattan Bank One Chase Plaza New York, New York 10081 TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Dean Witter Trust Company Harborside Financial Center Plaza Two Jersey City, New Jersey 07311 INDEPENDENT ACCOUNTANTS Price Waterhouse LLP 1177 Avenue of the Americas New York, New York 10036 INVESTMENT MANAGER Dean Witter InterCapital Inc. SUB-ADVISER (European Growth and Pacific Growth Portfolios) Morgan Grenfell Investment Services Limited DEAN WITTER VARIABLE STATEMENT OF ADDITIONAL INFORMATION INVESTMENT MAY 1, 1997 SERIES - ---------------------------------------------------------------------------- THE DEAN WITTER VARIABLE INVESTMENT SERIES (the "Fund") is an open-end diversified management investment company which is intended to provide a broad range of investment alternatives with its thirteen separate Portfolios, each of which has distinct investment objectives and policies: -THE MONEY MARKET PORTFOLIO -THE QUALITY INCOME PLUS PORTFOLIO -THE HIGH YIELD PORTFOLIO -THE UTILITIES PORTFOLIO -THE INCOME BUILDER PORTFOLIO -THE DIVIDEND GROWTH PORTFOLIO -THE CAPITAL GROWTH PORTFOLIO -THE GLOBAL DIVIDEND GROWTH PORTFOLIO -THE EUROPEAN GROWTH PORTFOLIO -THE PACIFIC GROWTH PORTFOLIO -THE CAPITAL APPRECIATION PORTFOLIO -THE EQUITY PORTFOLIO -THE STRATEGIST PORTFOLIO There can be no assurance that the investment objectives of the Portfolios will be achieved. See "Investment Practices and Policies." A Prospectus for the Fund dated May 1, 1997, which provides the basic information you should know before allocating your investment under your Variable Annuity Contract or your Variable Life Contract to 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 for the Fund. It is intended to provide you additional information regarding the activities and operations of the Fund, and should be read in conjunction with the Prospectuses for the Fund and for the Variable Annuity Contracts or the Variable Life Contracts. Dean Witter Variable Investment Series Two World Trade Center New York, New York 10048 (212) 392-2550 or (800) 869-NEWS TABLE OF CONTENTS - -------------------------------------------------------------------------------- The Fund and its Management........................................................... 3 Trustees and Officers................................................................. 9 Investment Practices and Policies..................................................... 15 Investment Restrictions............................................................... 36 Portfolio Transactions and Brokerage.................................................. 38 Purchase and Redemption of Fund Shares................................................ 41 Dividends, Distributions and Taxes.................................................... 45 Performance Information............................................................... 47 Description of Shares of the Fund..................................................... 50 Custodians and Transfer Agent......................................................... 51 Independent Accountants............................................................... 52 Reports to Shareholders............................................................... 52 Legal Counsel......................................................................... 52 Experts............................................................................... 52 Registration Statement................................................................ 52 Financial Statements -- December 31, 1996............................................. 53 Report of Independent Accountants..................................................... 118 Financial Statements -- Income Builder Portfolio and Capital Appreciation Portfolio -- March 31, 1997 (Unaudited).......................................................... 119
------------------------ Currently, the shares of the Fund will be sold only to (1) Northbrook Life Insurance Company ("Northbrook") for allocation to certain separate accounts established to fund the benefits under certain flexible premium deferred variable annuity contracts and certain flexible premium variable life insurance contracts issued by Northbrook, to (2) Allstate Life Insurance Company of New York ("Allstate New York") for allocation to certain separate accounts established to fund the benefits under certain flexible premium deferred variable annuity contracts issued by Allstate New York, to (3) Glenbrook Life and Annuity Company ("Glenbrook") for allocation to certain separate accounts established to fund the benefits under certain flexible premium deferred variable annuity contracts and certain flexible premium variable life insurance contracts issued by Glenbrook, and to (4) Paragon Life Insurance Company ("Paragon") for allocation to a separate account established to fund the benefits under certain flexible premium variable life insurance contracts it issues in connection with an employer-sponsored insurance program offered only to certain employees of Dean Witter, Discover & Co., the parent company of the Fund's Investment Manager. The separate accounts are sometimes referred to individually as an "Account" and collectively as the "Accounts." The variable annuity contracts issued by Northbrook, Allstate New York and Glenbrook are sometimes referred to as the "Variable Annuity Contracts." The variable life insurance contracts issued by Northbrook, Glenbrook and Paragon are sometimes referred to as the "Variable Life Contracts." The Variable Annuity Contracts and the Variable Life Contracts are sometimes referred to as the "Contracts." Northbrook, Allstate New York, Glenbrook and Paragon are sometimes referred to as the "Companies." In the future, shares may be allocated to certain other separate accounts or sold to affiliated and/or non-affiliated entities of the Companies in connection with variable annuity contracts or variable life insurance contracts. The Companies will invest in shares of the Fund in accordance with allocation instructions received from Contract Owners, which allocation rights are further described in the Prospectus for either the Variable Annuity Contracts or the Variable Life Contracts, which accompanies the Prospectus for the Fund. The Companies will redeem shares to the extent necessary to provide benefits under the Contracts. It is conceivable that in the future it may become disadvantageous for both variable life insurance and variable annuity contract separate accounts to invest in the same underlying fund. Although neither the Companies nor the Fund currently foresee any such disadvantage, the Fund's Board of Trustees intends to monitor events in order to identify any material irreconcilable conflict between the interests of variable annuity contract owners and variable life insurance contract owners and to determine what action, if any, should be taken in response thereto. 2 THE FUND AND ITS MANAGEMENT - -------------------------------------------------------------------------------- THE FUND The Fund was organized under the laws of the Commonwealth of Massachusetts on February 25, 1983 under the name Dean Witter Variable Annuity Investment Series and is a trust of the type commonly knows as a "Massachusetts Business Trust." On February 23, 1988, the Trustees of the Fund adopted an Amendment to the Declaration of Trust of the Fund changing the name of the Fund to Dean Witter Variable Investment Series. On August 24, 1995, the Trustees of the Fund adopted an amendment to the Declaration of Trust of the Fund changing the name of the MANAGED ASSETS PORTFOLIO of the Fund to the STRATEGIST PORTFOLIO, effective September 1, 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 Dean Witter, Discover & Co. ("DWDC"), a Delaware corporation. In an internal reorganization which took place in January, 1993, InterCapital assumed the investment advisory, administrative and management activities previously performed by the InterCapital Division of Dean Witter Reynolds Inc. ("DWR"), a broker-dealer affiliate of InterCapital. (As hereinafter used in this Statement of Additional Information, the terms "InterCapital" and "Investment Manager" refer to DWR's InterCapital Division prior to the internal reorganization and Dean Witter InterCapital Inc. thereafter.) The daily management of the Fund and research relating to the Fund's portfolios are conducted by or under the direction of officers of the Fund and of the Investment Manager, subject to periodic review by the Fund's Board of Trustees. Information as to these Trustees and officers is contained under the caption, "Trustees and Officers." Northbrook Life Insurance Company, an Illinois corporation, Allstate Life Insurance Company of New York, a New York corporation, and Glenbrook Life and Annuity Company, an Illinois corporation, which, with Paragon Life Insurance Company, are the only shareholders of the Fund, are wholly-owned subsidiaries of Allstate Life Insurance Company, an Illinois corporation, which in turn is a wholly-owned subsidiary of Allstate Insurance Company, an Illinois corporation. With the exception of directors' qualifying shares, all of the outstanding capital stock of Allstate Insurance Company is owned by The Allstate Corporation, which is a majority-owned subsidiary of Allstate Holdings Inc., which is a wholly-owned subsidiary of Sears, Roebuck and Co. Paragon Life Insurance Company, a Missouri corporation, is a wholly-owned subsidiary of General American Life Insurance Company, a Missouri corporation. The Investment Manager is also the investment manager or investment adviser of the following investment companies: Dean Witter Liquid Asset Fund Inc., Dean Witter High Yield Securities Inc., Dean Witter Tax-Free Daily Income Trust, Dean Witter Developing Growth Securities Trust, Dean Witter Tax-Exempt Securities Trust, Dean Witter Natural Resource Development Securities Inc., Dean Witter Dividend Growth Securities Inc., Dean Witter American Value Fund, Dean Witter U.S. Government Money Market Trust, Dean Witter World Wide Investment Trust, Dean Witter Select Municipal Reinvestment Fund, Dean Witter U.S. Government Securities 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 World Wide Income Trust, Dean Witter Intermediate Income Securities, Dean Witter Capital Growth Securities, Dean Witter New York Municipal Money Market Trust, Dean Witter European Growth Fund Inc., Dean Witter Precious Metals and Minerals Trust, Dean Witter Global Short-Term Income Fund Inc., Dean Witter Pacific Growth Fund Inc., Dean Witter Multi-State Municipal Series Trust, Dean Witter Premier Income Trust, Dean Witter Short-Term U.S. Treasury 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 High Income Securities, Dean Witter National Municipal Trust, Dean Witter Balanced Growth Fund, Dean Witter Balanced Income Fund, Dean Witter Select Dimen- 3 sions Investment Series, Dean Witter Global Asset Allocation Fund, Dean Witter Hawaii Municipal Trust, Dean Witter Capital Appreciation Fund, Dean Witter Information Fund, Dean Witter Intermediate Term U.S. Treasury Trust, Dean Witter Japan Fund, Dean Witter Income Builder Fund, Dean Witter Special Value Fund, Dean Witter Financial Services Trust, Dean Witter Market Leader Trust, InterCapital Income Securities Inc., High Income Advantage Trust, High Income Advantage Trust II, High Income Advantage Trust III, Dean Witter Government Income Trust, InterCapital Insured Municipal Bond Trust, InterCapital Insured Municipal Trust, InterCapital Insured Municipal Income Trust, InterCapital California Insured Municipal Income Trust, InterCapital Insured Municipal Securities, 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, Active Assets Money Trust, Active Assets Tax-Free Trust, Active Assets California Tax-Free Trust, Active Assets Government Securities Trust, Municipal Income Trust, Municipal Income Trust II, Municipal Income Trust III, Municipal Income Opportunities Trust, Municipal Income Opportunities Trust II, Municipal Income Opportunities Trust III, Municipal Premium Income Trust and Prime Income Trust. The foregoing investment companies, together with the Fund, are collectively referred to as the Dean Witter Funds. In addition, Dean Witter Services Company Inc. ("DWSC"), a wholly-owned subsidiary of InterCapital, serves as manager for the following investment companies for which TCW Funds Management, Inc. is the investment adviser: TCW/DW Core Equity Trust, TCW/DW North American Government Income Trust, TCW/DW Latin American Growth Fund, TCW/DW Income and Growth Fund, TCW/DW Small Cap Growth Fund, TCW/DW Balanced Fund, TCW/DW Mid-Cap Equity 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) sub-adviser to Templeton Global Opportunities Trust, an open-end investment company; (ii) administrator of The BlackRock Strategic Term Trust Inc., a closed-end investment company; and (iii) sub-administrator of MassMutual Participation Investors and Templeton Global Governments Income Trust, closed-end investment companies. 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 assets of each Portfolio (other than the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, discussed below), 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 these Portfolios of the Fund in a manner consistent with their investment objectives and policies. Pursuant to the Management Agreement with the Investment Manager, the Fund has retained the Investment Manager to supervise the investment of the assets of each of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO. The Investment Manager, through consultation with Morgan Grenfell Investment Services Limited (the "Sub-Adviser") and through its own portfolio management staff, obtains and evaluates such information and advice relating to the economy, securities markets and specific securities as it considers necessary or useful to continuously oversee the management of the assets of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO in a manner consistent with their investment objectives. Under the terms of the Management Agreement, the Investment Manager also maintains certain of the Fund's books and records and furnishes, at its own expense, such office space, facilities, equipment, clerical help, 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 4 Investment Manager also bears the cost of telephone service, heat, light, power and other utilities provided to the Fund. Effective December 31, 1993, pursuant to a Services Agreement between InterCapital and DWSC, DWSC began to provide the administrative services to the Fund which were previously performed directly by InterCapital. On April 17, 1995, DWSC was reorganized in the State of Delaware, necessitating the entry into a new Services Agreement by InterCapital and DWSC on that date. The foregoing internal reorganizations did not result in any change in the nature or scope of the administrative services being provided to the Fund or any of the fees being paid by the Fund for the overall services being performed under the terms of the existing Management Agreement. Expenses not expressly assumed by the Investment Manager under the Management Agreement, by the Sub-Adviser of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO pursuant to the Sub-Advisory Agreements (see below), or by the Distributor of the Fund's shares, Dean Witter Distributors Inc. ("Distributors" or the "Distributor"), (see "Purchase and Redemption of Fund Shares -- The Distributor") will be paid by the Fund. Each Portfolio pays all other expenses incurred in its operation and a portion of the Fund's general administration expenses allocated on the basis of the asset size of the respective Portfolios. Expenses that are borne directly by a Portfolio include, but are not limited to: charges and expenses of any registrar, custodian, share transfer and dividend disbursing agent; brokerage commissions; certain taxes; registration costs of the Portfolio and its shares under federal and state securities laws; shareholder servicing costs; charges and expenses of any outside service used for pricing of the shares of the Portfolio; interest on borrowings by the Portfolio; fees and expenses of legal counsel, including counsel to the Trustees who are not interested persons of the Fund or of the Investment Manager (or the Sub-Adviser) (not including compensation or expenses of attorneys who are employees of the Investment Manager (or the Sub-Adviser)) and independent accountants; and all other expenses attributable to a particular Portfolio. Expenses which are allocated on the basis of size of the respective Portfolios include the costs and expenses of printing, including typesetting, and distributing prospectuses and statements of additional information of the Fund and supplements thereto to the Fund's shareholders; all expenses of shareholders' and Trustees' meetings and of preparing, printing and mailing proxy statements and reports to shareholders; fees and travel expenses of Trustees or members of any advisory board or committee who are not employees of the Investment Manager (or the Sub-Adviser) or any corporate affiliate of the Investment Manager (or the Sub-Adviser); state franchise taxes; Securities and Exchange Commission fees; membership dues of industry associations; postage; insurance premiums on property or personnel (including officers and Trustees) of the Fund which inure to its benefit; and all other costs of the Fund's operations properly payable by the Fund and allocable on the basis of size of the respective Portfolios. Depending on the nature of a legal claim, liability or lawsuit, litigation costs, payment of legal claims or liabilities and any indemnification relating thereto may be directly applicable to the Portfolio or allocated on the basis of the size of the respective Portfolios. The Trustees have determined that this is an appropriate method of allocation of expenses. As full compensation for the services and facilities furnished to the Fund and expenses of the Fund assumed by the Investment Manager, the Fund pays the Investment Manager monthly compensation calculated daily by applying the annual rate of (a) 0.50% to the net assets of the QUALITY INCOME PLUS PORTFOLIO up to $500 million and 0.45% to the net assets of that Portfolio exceeding $500 million; (b) 0.50% to the net assets of the EQUITY PORTFOLIO up to $1 billion and 0.475% to the net assets of that Portfolio exceeding $1 billion; (c) 0.50% to the net assets of each of the MONEY MARKET PORTFOLIO, the HIGH YIELD PORTFOLIO and the STRATEGIST PORTFOLIO; (d) 0.625% to the net assets of the DIVIDEND GROWTH PORTFOLIO up to $500 million, 0.50% to the net assets of that Portfolio exceeding $500 million but not exceeding $1 billion, and 0.475% to the net assets of that Portfolio exceeding $1 billion; (e) 0.65% to the net assets of the UTILITIES PORTFOLIO up to $500 million and 0.55% to the net assets of that Portfolio exceeding $500 million; (f) 0.65% to the net assets of the CAPITAL GROWTH PORTFOLIO; (g) 0.75% to the net assets of each of the INCOME BUILDER PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO; and (h) 1.0% to the net assets of each of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, in each case determined as of the close of each business day. The Management Agreement also provides that if the total operating expenses of a Portfolio, exclusive of taxes, interest, brokerage fees 5 and certain legal claims and liabilities and litigation and indemnification expenses, as described in the Management Agreement, for the fiscal year exceed either 1.5% of the first $30,000,000 of average daily net assets of the Portfolio and 1% of any excess over $30,000,000 (in the case of the MONEY MARKET PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO, the HIGH YIELD PORTFOLIO, the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO) or 2.5% of the first $30,000,000 of average daily net assets of the Portfolio, 2% of the next $70,000,000 and 1.5% of any excess over $100,000,000 (in the case of the INCOME BUILDER PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO), the Investment Manager will reimburse the Portfolio for the amount of such excess, up to the amount of the management fee for such Portfolio for that year. Such amount, if any, will be calculated daily and credited on a monthly basis. For the fiscal years ended December 31, 1994, 1995 and 1996, the amount of compensation accrued to the Investment Manager under the Management Agreements in effect for the then-existing Portfolios was $15,287,129 ($1,006,787 for the MONEY MARKET PORTFOLIO, $2,326,911 for the QUALITY INCOME PLUS PORTFOLIO, $567,629 for the HIGH YIELD PORTFOLIO, $2,809,836 for the UTILITIES PORTFOLIO, $3,388,371 for the DIVIDEND GROWTH PORTFOLIO, $308,143 for the CAPITAL GROWTH PORTFOLIO, $479,977 for the GLOBAL DIVIDEND GROWTH PORTFOLIO, $1,299,782 for the EUROPEAN GROWTH PORTFOLIO, $282,241 for the PACIFIC GROWTH PORTFOLIO, $1,077,511 for the EQUITY PORTFOLIO and $1,739,941 for the STRATEGIST PORTFOLIO), $18,648,593 ($1,243,727 for the MONEY MARKET PORTFOLIO, $2,323,329 for the QUALITY INCOME PLUS PORTFOLIO, $673,472 for the HIGH YIELD PORTFOLIO, $2,749,873 for the UTILITIES PORTFOLIO, $4,179,067 for the DIVIDEND GROWTH PORTFOLIO, $362,068 for the CAPITAL GROWTH PORTFOLIO, $1,254,908 for the GLOBAL DIVIDEND GROWTH PORTFOLIO, $1,686,856 for the EUROPEAN GROWTH PORTFOLIO, $828,671 for the PACIFIC GROWTH PORTFOLIO, $1,393,980 for the EQUITY PORTFOLIO and $1,952,642 for the STRATEGIST PORTFOLIO), and $24,198,493 ($1,454,423 for the MONEY MARKET PORTFOLIO, $2,407,993 for the QUALITY INCOME PLUS PORTFOLIO, $1,009,452 for the HIGH YIELD PORTFOLIO, $2,972,835 for the UTILITIES PORTFOLIO, $5,902,896 for the DIVIDEND GROWTH PORTFOLIO, $509,004 for the CAPITAL GROWTH PORTFOLIO, $2,005,162 for the GLOBAL DIVIDEND GROWTH PORTFOLIO, $2,332,742 for the EUROPEAN GROWTH PORTFOLIO, $1,397,813 for the PACIFIC GROWTH PORTFOLIO, $2,211,777 for the EQUITY PORTFOLIO and $1,994,396 for the STRATEGIST PORTFOLIO, respectively. No Portfolio exceeded the applicable expense limitation during the fiscal years ended December 31, 1994, 1995 and 1996. The Investment Manager assumed all expenses of the GLOBAL DIVIDEND GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO and waived the compensation provided for in the Management Agreement in respect of these Portfolios for the period from their commencement of operations on February 23, 1994 through May 12, 1994, in the case of the GLOBAL DIVIDEND GROWTH PORTFOLIO, and August 2, 1994, in the case of the PACIFIC GROWTH PORTFOLIO. The Management Agreement provides that in the absence of willful misfeasance, bad faith, negligence or reckless disregard of its obligations thereunder, the Investment Manager is not liable to the Fund or any of its investors for any act or omission by the Investment Manager or for any losses sustained by the Fund or its investors. The Management Agreement in no way restricts the Investment Manager from acting as investment manager or adviser to others. Pursuant to Sub-Advisory Agreements between the Investment Manager and Morgan Grenfell Investment Services Limited (the "Sub-Adviser"), the Sub-Adviser has been retained, subject to the overall supervision of the Investment Manager and the Trustees of the Fund, (a) to continuously furnish investment advice concerning individual security selections, asset allocations and overall economic trends with respect to Europe and to manage the portion of the assets of the EUROPEAN GROWTH PORTFOLIO invested in securities issued by issuers located in Europe, subject to the supervision of the Investment Manager, and (b) to continuously furnish investment advice concerning individual security selections, asset allocations and overall economic trends with respect to Pacific basin issuers and to manage the portion of the assets of the PACIFIC GROWTH PORTFOLIO invested in securities issued by issuers located in Asia, Australia and New Zealand, subject to the supervision of the Investment Manager. On occasion, the Sub-Adviser will also provide the Investment Manager with investment advice concerning potential investment opportunities for the Fund which are available outside of Europe, Asia, Australia and New Zealand. 6 Morgan Grenfell Investment Services Limited ("MGIS") was organized as a British corporation in 1972 and currently manages assets of approximately $15.1 billion primarily for U.S. corporate and public employee benefit plans, endowments, investment companies and foundations. MGIS' principal office is located at 20 Finsbury Circus, London, England. MGIS is a subsidiary of London-based Morgan Grenfell Asset Management Limited which is itself a subsidiary of London-based Morgan Grenfell Group plc (which is owned by Deutsche Bank AG, an international commercial and investment banking group) and is registered as an investment adviser under the Investment Advisers Act of 1940. In 1838 Morgan Grenfell was founded to provide merchant banking services, primarily trade financing between Great Britain and the United States. In 1958, its investment management arm began operations. In recent years Morgan Grenfell Group plc has achieved a prominent position in the securities industry by providing investment and commercial banking services, financial services, and discretionary management and advisory services covering all of the world's leading securities markets. Morgan Grenfell Asset Management Limited, through its various investment management subsidiaries, which have extensive experience in global investment management, is currently managing in excess of $118 billion worldwide. Both the Investment Manager and the Sub-Adviser have authorized any of their directors, officers and employees who have been elected as Trustees or officers of the Fund to serve in the capacities in which they have been elected. Services furnished to the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO by the Investment Manager and the Sub-Adviser may be furnished by directors, officers and employees of the Investment Manager and the Sub-Adviser. In connection with the services rendered by the Sub-Adviser, the Sub-Adviser bears the following expenses: (a) the salaries and expenses of its personnel; and (b) all expenses incurred by it in connection with performing the services provided by it as Sub-Adviser, as described above. As full compensation for the services and facilities furnished to the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the Investment Manager and expenses of these Portfolios and the Investment Manager assumed by the Sub-Adviser, the Investment Manager pays the Sub-Adviser monthly compensation equal to 40% of the Investment Manager's monthly compensation payable under the Management Agreement in respect of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO. Pursuant to the Sub-Advisory Agreements, if any reimbursement is made by the Investment Manager to the EUROPEAN GROWTH PORTFOLIO or the PACIFIC GROWTH PORTFOLIO as a result of the Portfolio exceeding the expense limitation, the Investment Manager will be reimbursed for 40% of such payment by the Sub-Adviser. The present Management Agreement and the present Sub-Advisory Agreement in respect of the EUROPEAN GROWTH PORTFOLIO were initially approved by the Board of Trustees on October 30, 1992 and by Northbrook and Allstate New York, pursuant to the instructions of Contract Owners, at a Special Meeting of Shareholders held on January 13, 1993. The present Management Agreement and the present Sub- Advisory Agreement in respect of the EUROPEAN GROWTH PORTFOLIO took effect on June 30, 1993 upon the spin-off by Sears, Roebuck and Co. of its remaining shares of DWDC. The Management and Sub-Advisory Agreements may be terminated at any time, without penalty, on thirty days' notice by the Trustees of the Fund, by the holders of a majority, as defined in the Investment Company Act of 1940, as amended (the "Act"), of the outstanding shares of the Fund, or by the Investment Manager. Each Agreement will automatically terminate in the event of its assignment (as defined in the Act). Under their terms, each Agreement had an initial term ending April 30, 1994, and will continue 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, as defined in the Act, of the outstanding shares of each Portfolio (or, in the case of the Sub-Advisory Agreement in respect of the EUROPEAN GROWTH PORTFOLIO, the outstanding shares of the EUROPEAN GROWTH PORTFOLIO), 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. If the question of continuance of the Management Agreement (or adoption of any new Management Agreement) is presented to shareholders, continuance (or adoption) with respect to a Portfolio shall be effective only if approved by a majority vote of the outstanding voting securities of that Portfolio. If the 7 shareholders of any one or more of the Portfolios should fail to approve the Management Agreement, the Investment Manager may nonetheless serve as Investment Manager with respect to any Portfolio whose shareholders approved the Management Agreement. The Management Agreement was approved with respect to the GLOBAL DIVIDEND GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO by the Board of Trustees on January 28, 1994. The Sub-Advisory Agreement in respect of the PACIFIC GROWTH PORTFOLIO was approved by the Board of Trustees on January 28, 1994 and by Northbrook as the then sole shareholder of the Portfolio on February 8, 1994. The Sub-Advisory Agreement in respect of the PACIFIC GROWTH PORTFOLIO is subject to the same renewal and termination provisions as those of the Management Agreement and the Sub-Advisory Agreement in respect of the EUROPEAN GROWTH PORTFOLIO and will automatically terminate in the event of its assignment (as defined in the Act). At their meeting held on April 8, 1994, the Fund's Board of Trustees, including all of the Independent Trustees, amended the terms of the Management Agreement to lower management fees charged on average daily net assets of the DIVIDEND GROWTH PORTFOLIO and the UTILITIES PORTFOLIO in excess of $500 million to 0.50% and 0.55%, respectively. At their meeting held on April 20, 1995, the Fund's Board of Trustees, including all of the Independent Trustees, amended the terms of the Management Agreement to lower management fees charged on average daily net assets of the QUALITY INCOME PLUS PORTFOLIO in excess of $500 million to 0.45%. At their meeting held on April 17, 1996, the Fund's Board of Trustees, including all of the Independent Trustees, amended the terms of the Management Agreement to lower management fees charged an average daily net assets of each of the EQUITY PORTFOLIO and the DIVIDEND GROWTH PORTFOLIO in excess of $1 billion to 0.475%, and approved continuation of the Management Agreement, as so amended, and the Sub-Advisory Agreements until April 30, 1997. The Management Agreement was approved with respect to the INCOME BUILDER PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO by the Board of Trustees on October 25, 1996 and by Northbrook as the sole shareholder of each Portfolio on October 29, 1996. At their meeting held on February 21, 1997, the Board of Trustees approved new Investment Management and Sub-Advisory Agreements, to take effect upon the proposed merger of DWDC with Morgan Stanley Group Inc. (see "The Fund and its Management" in the Prospectus), subject to approval of the Agreements by the shareholders of the Fund, and called a Special Meeting of Shareholders to be held on May 21, 1997 at which the shareholders will vote on approval or disapproval of such Agreements. The new Agreements are substantially identical to the present Agreements except for their dates of effectiveness and termination. At their meeting held on April 24, 1997, the Board of Trustees, including all of the Independent Trustees, approved continuation of the present Management and Sub-Advisory Agreements until the earlier of April 30, 1998 or consummation of the proposed merger. To the extent required by law, Northbrook, Allstate New York, Glenbrook and Paragon, which are the only shareholders of the Fund, will vote the shares of the Fund held by them in the Accounts in accordance with instructions from Contract Owners, as more fully described under the caption "Voting Rights" in the Prospectuses for the Contracts. 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 Management 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. 8 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.
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS - ----------------------------------------- ----------------------------------------------------------------------- Michael Bozic (56) Chairman and Chief Executive Officer of Levitz Furniture Corporation Trustee (since November, 1995); Director or Trustee of the Dean Witter Funds; c/o Levitz Furniture Corporation formerly President and Chief Executive Officer of Hills Department 6111 Broken Sound Parkway, N.W. Stores (May, 1991-July, 1995); formerly variously Chairman, Chief Boca Raton, Florida 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* (63) Chairman, Chief Executive Officer and Director of InterCapital, Chairman of the Board, Distributors and DWSC; Executive Vice President and Director of DWR; President, Chief Executive Officer Chairman, Director or Trustee, President and Chief Executive Officer of and Trustee the Dean Witter Funds; Chairman, Chief Executive Officer and Trustee of Two World Trade Center the TCW/DW Funds; Chairman and Director of Dean Witter Trust Company; New York, New York Director and/or officer of various DWDC subsidiaries; formerly Executive Vice President and Director of DWDC (until February, 1993). Edwin J. Garn (64) Director or Trustee of the Dean Witter Funds; formerly United States Trustee Senator (R-Utah) (1974-1992) and Chairman, Senate Banking Committee c/o Huntsman Corporation (1980-1986); formerly Mayor of Salt Lake City, Utah (1971-1974); 500 Huntsman Way formerly Astronaut, Space Shuttle Discovery (April 12-19, 1985); Vice Salt Lake City, Utah Chairman, Huntsman Corporation (since January, 1993); Director of Franklin Quest (time management systems) and John Alden Financial Corp. (health insurance); member of the board of various civic and charitable organizations. John R. Haire (72) Chairman of the Audit Committee and Chairman of the Committee of the Trustee Independent Directors or Trustees and Director or Trustee of the Dean Two World Trade Center Witter Funds; Chairman of the Audit Committee and Chairman of the New York, New York 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); Director of Washington National Corporation (insurance). Dr. Manuel H. Johnson (48) Senior Partner, Johnson Smick International, Inc., a consulting firm; Trustee Co-Chairman and a founder of the Group of Seven Council (G7C), an c/o Johnson Smick International, international economic commission; Director or Trustee of the Dean Inc. Witter Funds; Trustee of the TCW/DW Funds; Director of NASDAQ (since 1133 Connecticut Avenue, N.W. June, 1995); Director of Greenwich Capital Markets Inc. Washington, DC (broker-dealer); Trustee of the Financial Accounting Foundation (oversight organization for the FASB); formerly Vice Chairman of the Board of Governors of the Federal Reserve System (1986-1990) and Assistant Secretary of the U.S. Treasury (1982-1988).
9
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS - ----------------------------------------- ----------------------------------------------------------------------- Michael E. Nugent (60) General Partner, Triumph Capital, L.P., a private investment part- Trustee nership; Director or Trustee of the Dean Witter Funds; Trustee of the c/o Triumph Capital, L.P. TCW/DW Funds; formerly Vice President, Bankers Trust Company and BT 237 Park Avenue Capital Corporation (1984-1988); Director of various business New York, New York organizations. Philip J. Purcell* (53) Chairman of the Board of Directors and Chief Executive Officer of DWDC, Trustee DWR and Novus Credit Services Inc.; Director of InterCapital, DWSC and Two World Trade Center Distributors; Director or Trustee of the Dean Witter Funds; Director New York, New York and/or officer of various DWDC subsidiaries. John L. Schroeder (66) Retired; Director or Trustee of the Dean Witter Funds; Trustee of the Trustee TCW/DW Funds; Director of Citizens Utilities Company; formerly c/o Gordon Altman Butowsky Executive Vice President and Chief Investment Officer of the Home Weitzen Shalov & Wein Insurance Company (August, 1991-September, 1995). Counsel to the Independent Trustees 114 West 47th Street New York, New York Barry Fink (42) Senior Vice President (since March, 1997) and Secretary and General Vice President, Secretary and Counsel (since February, 1997) of InterCapital and DWSC; Senior Vice General Counsel President (since March, 1997) and Assistant Secretary and Assistant Two World Trade Center General Counsel (since February, 1997) of Distributors; Assistant New York, New York 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. Peter M. Avelar (38) Senior Vice President of InterCapital; Vice President of various Dean Vice President Witter Funds. Two World Trade Center New York, New York Mark Bavoso (36) Senior Vice President of InterCapital (since June, 1993); Vice Vice President President of various Dean Witter Funds; previously Vice President of Two World Trade Center InterCapital. New York, New York Patricia A. Cuddy (43) Vice President of InterCapital (since June, 1994); Vice President of Vice President various Dean Witter Funds; formerly Senior Vice President of Dreyfus Two World Trade Center Corporation. New York, New York Edward F. Gaylor (55) Senior Vice President of InterCapital; Vice President of various Dean Vice President Witter Funds. Two World Trade Center New York, New York Peter Hermann (37) Vice President of InterCapital (since May, 1995) and portfolio manager Vice President with InterCapital (since March, 1994); previously portfolio manager Two World Trade Center with The Bank of New York (August, 1987-February, 1994). New York, New York
10
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS - ----------------------------------------- ----------------------------------------------------------------------- Kenton J. Hinchliffe (52) Senior Vice President of InterCapital; Vice President of various Dean Vice President Witter Funds. Two World Trade Center New York, New York Michael G. Knox (30) Senior Portfolio Manager of InterCapital (since August, 1993); formerly Vice President a portfolio manager and analyst with Eagle Asset Management, Inc. Two World Trade Center New York, New York Anita H. Kolleeny (41) Senior Vice President of InterCapital; Vice President of various Dean Vice President Witter Funds. Two World Trade Center New York, New York Paula LaCosta (45) Vice President of InterCapital; Vice President of various Dean Witter Vice President Funds. Two World Trade Center New York, New York Jonathan R. Page (50) Senior Vice President of InterCapital; Vice President of various Dean Vice President Witter Funds. Two World Trade Center New York, New York Rochelle G. Siegel (48) Senior Vice President of InterCapital; Vice President of various Dean Vice President Witter Funds. Two World Trade Center New York, New York Paul D. Vance (61) Senior Vice President of InterCapital; Vice President of various Dean Vice President Witter Funds. Two World Trade Center New York, New York Ronald J. Worobel (54) Senior Vice President of InterCapital (since June, 1993); Vice Vice President President of various Dean Witter Funds; formerly Vice President of Two World Trade Center InterCapital (June, 1992-June, 1993) and prior thereto Managing New York, New York Director at MacKay Shields Financial Corp. Matthew Haynes (31) Assistant Vice President of InterCapital (since May, 1995) and Assistant Vice President portfolio manager with InterCapital (since April, 1993); prior thereto Two World Trade Center a section head in the Fund Accounting Group of InterCapital (November, New York, New York 1989-March, 1993). Michelle Kaufman (32) Assistant Vice President of InterCapital (since May, 1995) and Assistant Vice President portfolio manager with InterCapital (since September, 1993); previously Two World Trade Center security analyst with Woodward and Associates (March-August, 1993), JRO New York, New York and Associates (December, 1992) and the First Manhattan Company (January, 1990-November, 1992). Thomas F. Caloia (51) First Vice President and Assistant Treasurer of InterCapital and DWSC; Treasurer Treasurer of the Dean Witter Funds and the TCW/DW Funds. Two World Trade Center New York, New York
- --------- * Denotes Trustees who are "interested persons" of the Fund, as defined in the Investment Company Act of 1940, as amended. 11 In addition, Robert M. Scanlan, President and Chief Operating Officer of InterCapital and DWSC, Executive Vice President of Distributors and DWTC and Director of DWTC, Robert S. Giambrone, Senior Vice President of InterCapital, DWSC, Distributors and DWTC and Director of DWTC, Joseph J. McAlinden, Executive Vice President and Chief Investment Officer of InterCapital and Director of DWTC, Kevin Hurley, Senior Vice President of InterCapital, and Jayne Stevlingson, Vice President of InterCapital, are Vice Presidents of the Fund, and Marilyn K. Cranney, First Vice President and Assistant General Counsel of InterCapital and DWSC, LouAnne D. McInnis and Ruth Rossi, Vice Presidents and Assistant General Counsels of InterCapital and DWSC, and Frank Bruttomesso and Carsten Otto, Staff Attorneys with InterCapital, are Assistant Secretaries of the Fund. THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES The Board of Trustees consists of eight (8) 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 127 portfolios. As of March 31, 1997, the Dean Witter Funds had total net assets of approximately $82.9 billion and more than six million shareholders. Six Trustees (75% 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, DWDC. These are the "disinterested" or "independent" Trustees. The other two Trustees (the "management Trustees") are affiliated with InterCapital. Four of the six 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, 1996, the three Committees held a combined total of sixteen 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 12 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 Committee of the Independent Trustees and the Audit Committee 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 Committees 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, since July 1, 1996, 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 $1,000 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). The Fund also reimburses such Trustees for travel and other out-of-pocket expenses incurred by them in connection with attending such meetings. Trustees and officers of the Fund who are or have been employed by the Investment Manager or an affiliated company receive no compensation or expense reimbursement from the Fund. 13 The following table illustrates the compensation paid to the Fund's Independent Trustees by the Fund for the fiscal year ended December 31, 1996.
AGGREGATE FUND COMPENSATION COMPENSATION FROM THE FUND --------------- NAME OF INDEPENDENT TRUSTEE - -------------------------------------------------------------- Michael Bozic................................................. $1,800 Edwin J. Garn................................................. 1,850 John R. Haire................................................. 3,950 Dr. Manuel H. Johnson......................................... 1,800 Michael E. Nugent............................................. 1,800 John L. Schroeder............................................. 1,800
The following table illustrates the compensation paid to the Fund's Independent Trustees for the calendar year ended December 31, 1996 for services to the 82 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, 1996. 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. CASH COMPENSATION FROM DEAN WITTER FUNDS AND TCW/DW FUNDS
FOR SERVICE AS FOR SERVICE CHAIRMAN OF AS TOTAL CASH COMMITTEES OF CHAIRMAN OF COMPENSATION FOR SERVICE INDEPENDENT COMMITTEES OF FOR SERVICES AS DIRECTOR OR DIRECTORS/ INDEPENDENT TO TRUSTEE AND FOR SERVICE AS TRUSTEES AND TRUSTEES AND 82 DEAN COMMITTEE MEMBER TRUSTEE AND AUDIT AUDIT WITTER OF 82 DEAN COMMITTEE MEMBER COMMITTEES OF COMMITTEES OF FUNDS AND NAME OF WITTER OF 14 TCW/DW 82 DEAN WITTER 14 TCW/DW 14 TCW/DW INDEPENDENT TRUSTEE FUNDS FUNDS FUNDS FUNDS FUNDS - --------------------------- ---------------- ---------------- -------------- ------------- ------------- Michael Bozic.............. $138,850 -- -- -- $138,850 Edwin J. Garn.............. 140,900 -- -- -- 140,900 John R. Haire.............. 106,400 $64,283 $195,450 $ 12,187 378,320 Dr. Manuel H. Johnson...... 137,100 66,483 -- -- 203,583 Michael E. Nugent.......... 138,850 64,283 -- -- 203,133 John L. Schroeder.......... 137,150 69,083 -- -- 206,233
As of the date of this Statement of Additional Information, 57 of the Dean Witter Funds, including the Fund, have adopted a retirement program under which an Independent 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 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 - --------- (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. 14 for service to the Adopting Fund in the five year period prior to the date of the Eligible Trustee's retirement. Benefits under the retirement program are not secured or funded by the Adopting Funds. The following table illustrates the retirement benefits accrued to the Fund's Independent Trustees by the Fund for the fiscal year ended December 31, 1996 and by the 57 Dean Witter Funds (including the Fund) for the year ended December 31, 1996, and the estimated retirement benefits for the Fund's Independent Trustees, to commence upon their retirement, from the Fund as of December 31, 1996 and from the 57 Dean Witter Funds as of December 31, 1996. RETIREMENT BENEFITS FROM THE FUND AND ALL DEAN WITTER FUNDS
FOR ALL FUNDS RETIREMENT ESTIMATED ANNUAL -------------------------------------- BENEFITS BENEFITS ESTIMATED ACCRUED AS UPON RETIREMENT(2) CREDITED YEARS ESTIMATED EXPENSES --------------------------- OF SERVICE AT PERCENTAGE OF ----------------------------- FROM NAME OF RETIREMENT ELIGIBLE BY THE BY ALL THE FROM ALL INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUND ADOPTING FUNDS FUND ADOPTING FUNDS - --------------------------- ------------------- ----------------- ----------- ---------------- --------- ---------------- Michael Bozic.............. 10 50.0% $ 381 $ 20,147 950 $ 51,325 Edwin J. Garn.............. 10 50.0 553 27,772 950 51,325 John R. Haire.............. 10 50.0 (271)(3) 46,952 2,335 129,550 Dr. Manuel H. Johnson...... 10 50.0 231 10,926 950 51,325 Michael E. Nugent.......... 10 50.0 396 19,217 950 51,325 John L. Schroeder.......... 8 41.7 736 38,700 792 42,771
- --------- (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 Trustee until June 1, 1998. As of the date of this Statement of Additional Information, Northbrook Life Insurance Company, Allstate Life Insurance Company of New York and Paragon Life Insurance Company owned all of the outstanding shares of the Fund for allocation to the Accounts, none of the Fund's Trustees was a Contract Owner under the Accounts, and the aggregate number of shares of each Portfolio of the Fund allocated to Contracts owned by the Fund's officers as a group was less than one percent of each Portfolio's outstanding shares. INVESTMENT PRACTICES AND POLICIES - -------------------------------------------------------------------------------- The Fund is an open-end diversified management investment company which is intended to provide a broad range of investment alternatives with its thirteen separate Portfolios, each of which has distinct investment objectives and policies, as set forth below and in the Prospectus: -THE MONEY MARKET PORTFOLIO seeks high current income, preservation of capital and liquidity by investing in short-term money market instruments. -THE QUALITY INCOME PLUS PORTFOLIO seeks, as its primary objective, to earn a high level of current income and, as a secondary objective, capital appreciation, but only when consistent with its primary objective, by investing primarily in debt securities issued by the U.S. Government, its agencies and instrumentalities and in fixed-income securities rated A or higher by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") or non-rated securities of comparable quality. -THE HIGH YIELD PORTFOLIO seeks, as its primary objective, to earn a high level of current income and, as a secondary objective, capital appreciation, but only when consistent with its primary objective, by investing principally in fixed-income securities which are rated in the lower categories by established rating services [Baa or lower by Moody's or BBB or lower by S&P] or non-rated securities of comparable quality. 15 -THE UTILITIES PORTFOLIO seeks to provide current income and long-term growth of income and capital by investing primarily in equity and fixed-income securities of companies engaged in the public utilities industry. -THE INCOME BUILDER PORTFOLIO seeks, as its primary investment objective, reasonable income and, as its secondary objective, growth of capital, by investing primarily in income producing common stocks and preferred stocks and in securities convertible into common stock. -THE DIVIDEND GROWTH PORTFOLIO seeks to provide reasonable current income and long-term growth of income and capital by investing primarily in common stock of companies with a record of paying dividends and the potential for increasing dividends. -THE CAPITAL GROWTH PORTFOLIO seeks to provide long-term capital growth by investing principally in common stocks. -THE GLOBAL DIVIDEND GROWTH PORTFOLIO seeks to provide reasonable current income and long-term growth of income and capital by investing primarily in common stock of companies, issued by issuers worldwide, with a record of paying dividends and the potential for increasing dividends. -THE EUROPEAN GROWTH PORTFOLIO seeks to maximize the capital appreciation of its investments by investing primarily in securities issued by issuers located in Europe. -THE PACIFIC GROWTH PORTFOLIO seeks to maximize the capital appreciation of its investments by investing primarily in securities issued by issuers located in Asia, Australia and New Zealand. -THE CAPITAL APPRECIATION PORTFOLIO seeks long-term capital appreciation by investing primarily in the common stocks of U.S. companies that offer the potential for either superior earnings growth and/or appear to be undervalued. -THE EQUITY PORTFOLIO seeks, as its primary objective, capital growth through investments in common stock and, as a secondary objective, income but only when consistent with its primary objective. -THE STRATEGIST PORTFOLIO seeks a high total investment return through a fully managed investment policy utilizing equity securities, fixed-income securities rated Baa or higher by Moody's or BBB or higher by S&P (or non-rated securities of comparable quality), and money market securities. There can be no assurance that the Portfolios' investment objectives will be achieved. Each Portfolio of the Fund is subject to the diversification requirements of Section 817(h) of the Internal Revenue Code relating to the favorable tax treatment of variable annuity contracts. Regulations issued under such section require each Portfolio to invest no more than 55% of its assets in any one investment; no more than 70% of its assets in any two investments; no more than 80% of its total assets in any three investments; and no more than 90% of its total assets in any four investments. For purposes of the regulations, all securities of the same issuer are treated as a single investment. In addition, the Portfolios are subject to the diversification requirements of the Act, as described under the heading "Investment Restrictions" below and in the Prospectus. The investment objectives and policies of each Portfolio are set forth in the Prospectus under the caption "Investment Objectives and Policies." There can be no assurance that the Portfolios' investment objectives will be achieved. QUALITY INCOME PLUS PORTFOLIO As discussed in the Prospectus, certain of the U.S. Government securities purchased by the QUALITY INCOME PLUS PORTFOLIO are "mortgaged-backed securities", which evidence an interest in a specific pool of mortgages. Such securities are issued by the Government National Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). 16 GNMA CERTIFICATES. GNMA Certificates evidence an interest in a specific pool of mortgages insured by the Federal Housing Administration ("FHA") or the Farmers Home Administration or guaranteed by the Veterans Administration ("VA"). Scheduled payments of principal and interest are made to the registered holders of GNMA Certificates. The GNMA Certificates that the QUALITY INCOME PLUS PORTFOLIO will invest in are of the modified pass-through type. GNMA guarantees the timely payment of monthly installments of principal and interest on modified pass-through certificates at the time such payments are due, whether or not such amounts are collected by the issuer on the underlying mortgages. The National Housing Act provides that the full faith and credit of the United States is pledged to the timely payment of principal and interest by GNMA of amounts due on these GNMA Certificates. The average life of GNMA Certificates varies with the maturities of the underlying mortgage instruments, with maximum maturities of 30 years. The average life is likely to be substantially less than the original maturity of the mortgage pools underlying the securities as the result of prepayments or refinancing of such mortgages or foreclosure. Such prepayments are passed through to the registered holder with the regular monthly payments of principal and interest, which has the effect of reducing future payments. Due to the GNMA guarantee, foreclosures impose no risk to principal investments. The average life of pass-through pools varies with the maturities of the underlying mortgage instruments. In addition, a pool's term may be shortened by unscheduled or early payments of principal on the underlying mortgages. The occurrence of mortgage prepayments is affected by such factors as the level of interest rates, general economic conditions, the location and age of the mortgage and other social and demographic conditions. As prepayment rates vary widely, it is not possible to accurately predict the average life of a particular pool. However, statistics indicate that the average life of the type of mortgages backing the majority of GNMA Certificates is approximately 12 years. For this reason, it is standard practice to treat GNMA Certificates as 30-year mortgage-backed securities which prepay fully in the twelfth year. Pools of mortgages with other maturities or different characteristics will have varying assumptions for average life. The assumed average life of pools of mortgages having terms of less than 30 years is less than 12 years, but typically not less than 5 years. The coupon rate of interest of GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or FHA-insured mortgages underlying the Certificates, but only by the amount of the fees paid to GNMA and the issuer. Such fees in the aggregate usually amount to approximately .50 of 1%. Yields on pass-through securities are typically quoted by investment dealers and vendors based on the maturity of the underlying instruments and the associated average life assumption. In periods of falling interest rates, the rate of prepayment tends to increase, thereby shortening the actual average life of a pool of mortgage-related securities. Conversely, in periods of rising rates, the rate of prepayment tends to decrease, thereby lengthening the actual average life of the pool. Reinvestment by the Quality Income Plus Portfolio of prepayments may occur at higher or lower interest rates than the original investment. Historically, actual average life has been consistent with the 12-year assumption referred to above. The actual yield of each GNMA Certificate is influenced by the prepayment experience of the mortgage pool underlying the Certificates. Interest on GNMA Certificates is paid monthly, rather than semiannually, as is the case with traditional bonds. FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation was created in 1970 through enactment of Title III of the Emergency Home Finance Act of 1970. Its purpose is to promote development of a nationwide secondary market in conventional residential mortgages. The FHLMC issues two types of mortgage pass-through securities, mortgages participation certificates ("PCs") and guaranteed mortgages certificates ("GMCs"). PCs resemble GNMA Certificates in that each PC represents a pro rata share of all interest and principal payments made and owned on the underlying pool. The FHLMC guarantees timely monthly payment of interest on PC's and the full return of principal when due. PC's have an assumed average life similar to GNMA Certificates. 17 GMCs also represent a pro rata interest in a pool of mortgages. However, these instruments pay interest semi-annually and return principal once a year in guaranteed minimum payments. The expected average life of these securities is approximately ten years. FNMA SECURITIES. The Federal National Mortgage Association was established in 1938 to create a secondary market in mortgages insured by the FHA. FNMA issues guaranteed mortgage pass-through certificates ("FNMA Certificates"). FNMA Certificates resemble GNMA Certificates in that each FNMA Certificate represents a pro rata share of all interest and principal payments made and owed on the underlying pool. FNMA guarantees timely payment of interest on FNMA Certificates and the full return of principal. FNMA Certificates have an assumed average life similar to GNMA Certificates. LEVERAGING. As discussed in the Prospectus, the QUALITY INCOME PLUS PORTFOLIO may borrow money, but only from a bank and in an amount up to 25% of the Portfolio's gross assets taken at the lower of market value or cost, not including the amount borrowed, to seek additional income by leveraging its investments through purchasing securities with the borrowed funds. Such borrowings will be subject to current margin requirements of the Federal Reserve Board and where necessary the Portfolio may use any or all of its securities as collateral for such borrowings. Any investment gains (and/or investment income) made with the additional monies in excess of interest paid will cause the net asset value of the Portfolio's shares (and/or the Portfolio's net income per share) to rise to a greater extent than would otherwise be the case. Conversely, if the investment performance of the additional monies fails to cover their cost to the Portfolio, net asset value (and/or net income per share) will decrease to a greater extent than would otherwise be the case. This is the speculative factor involved in leverage. The QUALITY INCOME PLUS PORTFOLIO will be required to maintain an asset coverage (including the proceeds of borrowings) of at least 300% of such borrowings in accordance with the provisions of the Act. If due to market fluctuations or other reasons, the value of the Portfolio's assets (including the proceeds of borrowings) becomes at any time less than three times the amount of any outstanding bank debt, the Portfolio, within three business days, will reduce its bank debt to the extent necessary to meet the required 300% asset coverage. In restoring the 300% asset coverage, the Portfolio may have to sell a portion of its investments at a time when it may be disadvantageous to do so. The investment policy provides that the Portfolio may not purchase or sell a security on margin. The margin and bank borrowing restrictions will prevent the ordinary purchase of a security which involves a cash borrowing from a broker of any part of the purchase price of a security. In addition to borrowings for leverage, the Portfolio may also borrow from banks an additional amount as a temporary measure for extraordinary or emergency purposes, and for these purposes, in no event an amount greater than 5% of gross assets taken at the lower of market value or cost. GENERAL PORTFOLIO TECHNIQUES FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS As discussed in the Prospectus, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO may enter into forward foreign currency exchange contracts ("forward contracts") as a hedge against fluctuations in future foreign exchange rates. Each of these Portfolios will conduct its foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forward contracts to purchase or sell foreign currencies. A forward contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are traded in the interbank market conducted directly between currency traders (usually large, commercial banks) and their customers. Such forward contracts will only be entered into with United States banks and their foreign branches or foreign banks whose assets total $1 billion or more. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. 18 When management of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO or the Pacific Growth Portfolio believes that the currency of a particular foreign country may suffer a substantial movement against the U.S. dollar, it may enter into a forward contract to purchase or sell, for a fixed amount of dollars or other currency, the amount of foreign currency approximating the value of some or all of the Portfolio's securities denominated in such foreign currency. The Portfolio will also not enter into such forward contracts or maintain a net exposure to such contracts where the consummation of the contracts would obligate the Portfolio to deliver an amount of foreign currency in excess of the value of the Portfolio's securities or other assets denominated in that currency. Under normal circumstances, consideration of the prospect for currency parities will be incorporated into the longer term investment decisions made with regard to overall diversification strategies. However, the management of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO believes that it is important to have the flexibility to enter into such forward contracts when it determines that the best interests of the Portfolio will be served. The Portfolio's custodian bank will place cash, U.S. Government securities or other liquid portfolio securities in a segregated account of the Fund in an amount equal to the value of the Portfolio's total assets committed to the consummation of forward contracts entered into under the circumstances set forth above. If the value of the securities placed in the segregated account declines, additional cash or securities will be placed in the account on a daily basis so that the value of the account will equal the amount of the Portfolio's commitments with respect to such contracts. Where, for example, the Portfolio is hedging a portfolio position consisting of foreign fixed-income securities denominated in a foreign currency against adverse exchange rate moves vis-a-vis the U.S. dollar, at the maturity of the forward contract for delivery by the Portfolio of a foreign currency, the Portfolio may either sell the portfolio security and make delivery of the foreign currency, or it may retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an "offsetting" contract with the same currency trader obligating it to purchase, on the same maturity date, the same amount of the foreign currency. It is impossible to forecast the market value of portfolio securities at the expiration of the contract. Accordingly, it may be necessary for the Portfolio to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency the Portfolio is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio securities if its market value exceeds the amount of foreign currency the Portfolio is obligated to deliver. If the Portfolio retains the portfolio securities and engages in an offsetting transaction, the Portfolio will incur a gain or loss to the extent that there has been movement in spot or forward contract prices. If the Portfolio engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline during the period between the Portfolio's entering into a forward contract for the sale of a foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, the Portfolio will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, the Portfolio will suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. If the Portfolio purchases a fixed-income security which is denominated in U.S. dollars but which will pay out its principal based upon a formula tied to the exchange rate between the U.S. dollar and a foreign currency, it may hedge against a decline in the principal value of the security by entering into a forward contract to sell an amount of the relevant foreign currency equal to some or all of the principal value of the security. At times when the Portfolio has written a call option on a fixed-income security or the currency in which it is denominated, it may wish to enter into a forward contract to purchase or sell the foreign currency in which the security is denominated. A forward contract would, for example, hedge the risk of the security on which a call currency option has been written declining in value to a greater extent than the value of the premium received for the options. The Portfolio will maintain with its Custodian, at all times, cash, U.S. Government securities, or other high grade debt obligations in a segregated account 19 equal in value to all forward contract obligations and option contract obligations entered into in hedge situations such as this. Although each Portfolio values its assets daily in terms of U.S. dollars, the Portfolios do not intend to convert their holdings of foreign currencies into U.S. dollars on a daily basis. Each Portfolio will, however, do so from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the spread between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Portfolio at one rate, while offering a lesser rate of exchange should the Portfolio desire to resell that currency to the dealer. HIGH YIELD SECURITIES As discussed in the Prospectus, the HIGH YIELD PORTFOLIO will invest principally in fixed-income securities rated Baa or lower by Moody's Investor's Service Inc. ("Moody's"), or BBB or lower by Standard & Poor's Corporation ("S&P"), and the INCOME BUILDER PORTFOLIO may invest up to 20% of its total assets in fixed-income securities rated below investment grade. Investment grade is generally considered to be debt securities rated Baa or higher by Moody's or BBB or higher by S&P. Lower-rated securities involve a higher degree of risk than those securities with higher ratings. The ratings of fixed-income securities by Moody's and S&P are a generally accepted barometer of credit risk. They are, however, subject to certain limitations from an investor's standpoint. Such limitations include the following: the rating of an issuer is heavily weighted by past developments and does not necessarily reflect probable future conditions; there is frequently a lag between the time a rating is assigned and the time it is updated; and there may be varying degrees of difference in credit risk of securities in each rating category. The Investment Manager will attempt to reduce the overall portfolio credit risk through diversification and selection of portfolio securities based on considerations mentioned below. While the ratings provide a generally useful guide to credit risks, they do not, nor do they purport to, offer any criteria for evaluating the interest rate risk. Changes in the general level of interest rates cause fluctuations in the prices of fixed-income securities already outstanding and will therefore result in fluctuation in net asset value of the shares of the Portfolios. The extent of the fluctuation is determined by a complex interaction of a number of factors. The Investment Manager will evaluate those factors it considers relevant and will make portfolio changes when it deems it appropriate in seeking to reduce the risk of depreciation in the value Portfolios. However, in seeking to achieve the Portfolio's primary objective, there will be times, such as during periods of rising interest rates, when depreciation and realization of capital losses on securities in the portfolio will be unavoidable. Moreover, medium and lower-rated securities and non-rated securities of comparable quality tend to be subject to wider fluctuations in yield and market values than higher-rated securities. Such fluctuations after a security is acquired do not affect the cash income received from that security but are reflected in the net asset value of the portfolio of the HIGH YIELD PORTFOLIO and the INCOME BUILDER PORTFOLIO. REPURCHASE AGREEMENTS As discussed in the Prospectus, when cash may be available to a Portfolio for only a few days, it may be invested by the Portfolio in repurchase agreements until such time as it may otherwise be invested or used for payments of obligations of the Portfolio. These agreements, which may be viewed as a type of secured lending by the Portfolio, typically involve the acquisition by the Portfolio of debt securities from a selling financial institution such as a bank, savings and loan association or broker-dealer. The agreement provides that the Portfolio will sell back to the institution, and that the institution will repurchase, the underlying security ("collateral"), which is held by the Portfolio's custodian bank, at a specified price and at a fixed time in the future, usually not more than seven days from the date of purchase. The Portfolio will receive interest from the institution until the time when the repurchase is to occur. Although such date is deemed by the Portfolio to be the maturity date of a repurchase agreement, the maturities of securities subject to repurchase agreements are not subject to any limits and may exceed one year. While repurchase agreements involve certain risks not associated with direct investments in debt securities, 20 the Portfolios follow procedures designed to minimize such risks. These procedures include effecting repurchase transactions only with large, well-capitalized and well-established financial institutions, whose financial conditions will be continually monitored. In addition, the value of the collateral underlying the repurchase agreement will always be at least equal to the resale price, which consists of the purchase price paid to the seller of the securities plus the accrued resale premium which is defined as the amount specified in the repurchase agreement or the daily amortization of the difference between the purchase price and the resale price specified in the repurchase agreement. In the case of the MONEY MARKET PORTFOLIO, such collateral will consist entirely of securities that are direct obligations of, or that are fully guaranteed as to principal and interest by, the United States or any agency thereof, and/or certificates of deposit, bankers' acceptances which are eligible for acceptance by a Federal Reserve Bank, and, if the seller is a bank, mortgage related securities (as such term is defined in section 3(a)(41) of the Securities Exchange Act of 1934) that at the time the repurchase agreement is entered into are rated in the highest rating category by the "Requisite NRSROs" (see "Purchase and Redemption of Fund Shares--Determination of Net Asset Value"). Additionally, in the case of the MONEY MARKET PORTFOLIO, the collateral must qualify the repurchase agreement for preferential treatment under the Federal Deposit Insurance Act of the Federal Bankruptcy Code. In the event of a default or bankruptcy by a selling financial institution, the Portfolio will seek to liquidate such collateral. However, the exercising of the right by a Portfolio to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Portfolio could suffer a loss. It is the current policy of each Portfolio not to invest in repurchase agreements that do not mature within seven days if any such investment, together with any other illiquid assets held by the Portfolio, amounts to more than 10% of its total assets (in the case of the MONEY MARKET PORTFOLIO, the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO), or 15% of its net assets (in the case of the other Portfolios). The investments by a Portfolio in repurchase agreements may at times be substantial when, in the view of the Investment Manager, liquidity, tax or other considerations warrant. REVERSE REPURCHASE AGREEMENTS Each of the QUALITY INCOME PLUS PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO may also use reverse repurchase agreements as part of its investment strategy. Reverse repurchase agreements involve sales by the Portfolio of portfolio assets concurrently with an agreement by the Portfolio to repurchase the same assets at a later date at a fixed price. Generally, the effect of such a transaction is that the Portfolio can recover all or most of the cash invested in the portfolio securities involved during the term of the reverse repurchase agreement, while it will be able to keep the interest income associated with those portfolio securities. Such transactions are only advantageous if the interest cost to the Portfolio of the reverse repurchase transaction is less than the cost of obtaining the cash otherwise. Opportunities to achieve this advantage may not always be available, and the Portfolio intends to use the reverse repurchase technique only when it will be to its advantage to do so. The Portfolio will establish a segregated account with its custodian bank in which it will maintain cash or cash equivalents or other portfolio securities (i.e., U.S. Government securities) equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements are considered borrowings by the Portfolio and for purposes other than meeting redemptions may not exceed 10% of the Portfolio's total assets. LENDING OF PORTFOLIO SECURITIES Consistent with applicable regulatory requirements and subject to Investment Restriction (1) below, each Portfolio of 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 Portfolio (subject to notice provisions described below), 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 100% of the market value, determined daily, of the loaned securities. The advantage of such loans is that the Portfolio continues to receive the income on the loaned securities while at the same time earning 21 interest on the cash amounts deposited as collateral, which will be invested in short-term obligations. A Portfolio will not lend portfolio securities having a value of more than 10% of its total assets. A loan may be terminated by the borrower on one business day's notice, or by the Portfolio on four business days' notice. If the borrower fails to deliver the loaned securities within four days after receipt of notice, the Portfolio 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 of 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 Portfolio. When voting or consent rights which accompany loaned securities pass to the borrower, a Portfolio will follow the policy of calling the loaned securities, in whole or in part as may be appropriate, 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 Portfolio's investment in such loaned securities. The Portfolio will pay reasonable finder's, administrative and custodial fees in connection with a loan of its securities. The creditworthiness of firms to which a Portfolio lends its portfolio securities will be monitored on an ongoing basis. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS As discussed in the Prospectus, from time to time, in the ordinary course of business, each Portfolio of 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 commitment, but delivery and payment can take place a month or more after the date of the 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 Portfolio makes the commitment to purchase or sell securities on a when-issued, delayed delivery or forward commitment basis, the Fund 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 the net asset value of the Portfolio. At the time of delivery of the securities, the value may be more or less than the purchase or sale price. The Portfolio will also establish a segregated account with its custodian bank in which it will continually maintain cash, U.S. Government securities 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 this requirement, a Portfolio may purchase securities on such basis without limit. An increase in the percentage of a Portfolio's assets committed to the purchase of securities on a when-issued or delayed delivery basis may increase the volatility of the Portfolio's net asset value. The Investment Manager and the Board of Trustees do not believe that a Portfolio's net asset value or income will be adversely affected by its purchase of securities on such basis. WHEN, AS AND IF ISSUED SECURITIES As discussed in the Prospectus, each Portfolio other than the MONEY MARKET Portfolio may purchase securities on a "when, as and if issued" basis under which the issuance of the security depends upon the occurrence of a subsequent event, such as approval of a merger, corporate reorganization or debt restructuring. The commitment for the purchase of any such security will not be recognized in the portfolio of the Portfolio until the Investment Manager determines that issuance of the security is probable. At such time, the Fund will record the transaction and, in determining the net asset value of the Portfolio, will reflect the value of the security daily. At such time, the Portfolio will also establish a segregated account with its custodian bank in which it will maintain cash, U.S. Government securities or other liquid portfolio securities equal in value to recognized commitments for such securities. The value of the Portfolio's commitments to purchase the securities of any one issuer, together with the value of all 22 securities of such issuer owned by the Portfolio, may not exceed 5% of the value of the Portfolio's total assets at the time the initial commitment to purchase such securities is made (see "Investment Restrictions" in the Prospectus). Subject to the foregoing restrictions, these Portfolios may purchase securities on such basis without limit. An increase in the percentage of a Portfolio'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 Board of Trustees do not believe that the net asset value of these Portfolios will be adversely affected by their purchase of securities on such basis. These Portfolios may also sell securities on a "when, as and if issued" basis provided that the issuance of the security will result automatically from the exchange or conversion of a security owned by the Portfolio at the time of the sale. OPTIONS AND FUTURES TRANSACTIONS As discussed in the Prospectus, each of the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may write covered call options against securities held in its portfolio and covered put options on eligible portfolio securities (the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may also write covered put and call options on 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) by purchasing put and call options on portfolio (or eligible portfolio) securities and engaging in transactions involving interest rate futures contracts and bond index futures contracts and options on such contracts. In addition, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may also hedge against such changes by entering into transactions involving stock index futures contracts and options thereon, and (except for the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO) options on stock indexes. The GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO may also hedge against potential changes in the market value of the currencies in which their investments (or anticipated investments) are denominated by writing and/or purchasing put and call options on currencies and engaging in transactions involving currencies futures contracts and options on such contracts. OPTIONS ON TREASURY BONDS AND NOTES. Because trading interest 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 a Portfolio 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 Portfolio will hold the Treasury bills in a segregated account with its Custodian, so that they will be treated as being covered. OPTIONS ON GNMA CERTIFICATES. Currently, options on GNMA Certificates are only traded over-the-counter. Since the remaining principal balance of GNMA Certificates declines each month as a result of mortgage payments, a Portfolio, as a writer of a GNMA call holding GNMA Certificates as "cover" to satisfy its delivery obligation in the event of exercise, may find that the GNMA Certificates it holds no longer have a sufficient remaining principal balance for this purpose. Should this occur, the Portfolio will purchase additional GNMA Certificates from the same pool (if obtainable) or replacement GNMA 23 Certificates in the cash market in order to maintain its cover. A GNMA Certificate held by the Portfolio to cover an option position in any but the nearest expiration month may cease to represent cover for the option in the event of a decline in the GNMA coupon rate at which new pools are originated under the FHA/VA loan ceiling in effect at any given time, as such decline may increase the prepayments made on other mortgage pools. If this should occur, the Portfolio will no longer be covered, and the Portfolio will either enter into a closing purchase transaction or replace such Certificate with a Certificate which represents cover. When the Portfolio closes out its position or replaces such Certificate, it may realize an unanticipated loss and incur transaction costs. OPTIONS ON FOREIGN CURRENCIES. The GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO 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 GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO or the CAPITAL APPRECIATION PORTFOLIO 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 Portfolio 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, these Portfolios may purchase call options on foreign currencies in which securities they anticipate 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. These Portfolios may also purchase call and put options to close out written option positions. The GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO 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 security is denominated and the U.S. dollar, then a loss to the Portfolio occasioned by such value decline would be ameliorated by receipt of the premium on the option sold. At the same time, however, the Portfolio 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 European Growth Portfolio may also write options to close out long call option positions. The markets in foreign currency options are relatively new and the ability of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO to establish and close out positions on such options is subject to the maintenance of a liquid secondary market. Although a Portfolio will not purchase or write such options unless and until, in the opinion of the management of the Portfolio, 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. 24 There is no systematic reporting of last sale information for foreign currencies or any regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis. Quotation information available is generally representative of very large transactions in the interbank market and thus may not reflect relatively smaller transactions (i.e., less than $1 million) where rates may be less favorable. The interbank market in foreign currencies is a global, around-the-clock market. To the extent that the U.S. options markets are closed while the markets for the underlying currencies remain open, significant price and rate movements may take place in the underlying markets that are not reflected in the options market. COVERED CALL WRITING. As stated in the Prospectus, the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the STRATEGIST PORTFOLIO are permitted to write covered call options on portfolio securities, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO are permitted to write covered call options on the U.S. dollar and foreign currencies, in each case without limit, in order to aid in achieving their investment objectives. Generally, a call option is "covered" if the Portfolio owns, or has the right to acquire, without additional cash consideration (or for additional cash consideration held for the Portfolio 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, a Portfolio 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 Portfolio holds a call on the same security (currency) as the underlying security of the written option, where the exercise price of the call used for coverage is equal to or less than the exercise price of the call written or greater than the exercise price of the call written if the mark-to-market difference is maintained by the Portfolio in cash, U.S. Government securities or other liquid portfolio obligations which the Portfolio holds in a segregated account maintained with the Portfolio's Custodian. The Portfolio will receive from the purchaser, in return for a call it has written, a "premium"; i.e., the price of the option. Receipt of these premiums may better enable the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO to achieve a high current income return for their shareholders and the STRATEGIST PORTFOLIO to achieve a more consistent average total return than would be realized from holding the underlying securities (and, in the case of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO, currencies) alone. Moreover, the premium received will offset a portion of the potential loss incurred by the Portfolio if the securities (currencies) underlying the option are ultimately sold (exchanged) by the Portfolio at a loss. The premium received will fluctuate with varying economic market conditions. If the market value of the portfolio securities (or, in the case of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO, the currencies in which they are denominated) upon which call options have been written increases, the Portfolio may receive a lower total return from the portion of its portfolio upon which calls have been written than it would have had such calls not been written. As regards listed options and certain over-the-counter ("OTC") options, during the option period, the Portfolio 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 Portfolio has been assigned an exercise notice, the Portfolio 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 25 security (or the exchange of the underlying currency) or to enable the Portfolio to write another call option on the underlying security (currency) with either a different exercise price or expiration date or both. The Portfolio 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 Portfolio 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 Portfolio 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 when the option was written, less the commission paid. Options written by a Portfolio normally have expiration dates of up to to eighteen months from the date written. The exercise price of a call option may be below, equal to or above the current market value of the underlying security (currency) at the time the option is written. See "Risks of Options and Futures Transactions," below. COVERED PUT WRITING. As stated in the Prospectus, as a writer of a covered put option, the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO or the STRATEGIST PORTFOLIO incurs an obligation to buy the security underlying the option from the purchaser of the put, at the option's exercise price at any time during the option period, at the purchaser's election (certain listed and OTC put options written by the Portfolio will be exercisable by the purchaser only on a specific date). A put is "covered" if the Portfolio maintains, in a segregated account maintained on its behalf at its 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 written put position could be covered by the Portfolio 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 the Portfolio in cash, U.S. Government securities or other liquid portfolio securities which the Portfolio holds in a segregated account maintained at its Custodian. In writing puts, the Portfolio 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 Portfolio 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 QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO 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 (or, for the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, the Sub-Adviser) wishes to purchase the security underlying the option at a price lower than its current market price, in which case the Portfolio 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. As stated in the Prospectus, the QUALITY INCOME PLUS PORTFOLIO may purchase listed and OTC call and put options in amounts equalling up to 10% of its total assets. 26 Each of the CAPITAL GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO may purchase such call and put options in amounts equalling up to 5% of its total assets. Each of the UTILITIES PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO and the STRATEGIST PORTFOLIO may purchase such call and put options and options on stock indexes in amounts equalling 10% of its total assets, with a maximum of 5% of its total assets invested in the purchase of stock index options. These Portfolios 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. Each of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO may 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 on a call written over-the-counter may be a listed or an OTC option. In either case, the call purchased is likely to be on the same securities (currencies) and have the same terms as the written option. If purchased over-the-counter, the option would generally be acquired from the dealer or financial institution which purchased the call written by the Portfolio. Each of the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the STRATEGIST PORTFOLIO may purchase put options on securities (and, in the case of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO, on currencies) 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 Portfolio would incur no additional loss. These Portfolios may also purchase put options to close out written put positions in a manner similar to call options closing purchase transactions. In addition, a Portfolio may sell a put option which it has previously purchased prior to the sale of the securities (currencies) underlying such option. Such a sale would result in a net gain or loss depending on whether the amount received on the sale is more or less than the premium and other transaction costs paid on the put option when it was purchased. 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 a Portfolio expired without being sold or exercised, the Portfolio would realize a loss. 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, in the case of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO, the value of the security's denominated currency) increase, but has retained the risk of loss should the price of the underlying security (or, in the case of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO, the value of the security's denominated currency) decline. The covered put writer also retains the risk of loss should the market value of the underlying security decline below the exercise price of the option less the premium received on the sale of the option. In both cases, the writer has no control over the time when it may be required to fulfill its obligation as a writer of the option. Once an option writer has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option and must deliver or receive the underlying securities at the exercise price. Prior to exercise or expiration, an option position can only be terminated by entering into a closing purchase or sale transaction. If a covered call option writer is unable to effect a closing purchase 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 able to sell an underlying security at a time when it might otherwise be advantageous to do so. A secured 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 until the option expires or is exercised. In addition, a covered writer would be unable to utilize the 27 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. A Portfolio's ability to close out its position as a writer of an option is dependent upon the existence of a liquid secondary market on option exchanges. There is no assurance that such a market will exist, particularly in the case of OTC options, as such options will generally only be closed out by entering into a closing purchase transaction with the purchasing dealer. However, a Portfolio 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 Portfolio 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. In the event of the bankruptcy of a broker through which a Portfolio engages in transactions in options, the Portfolio could experience delays and/or losses in liquidating open positions purchased or sold through the broker and/or incur a loss of all or part of its margin deposits with the broker. Similarly, in the event of the bankruptcy of the writer of an OTC option purchased by a Portfolio, the Portfolio could experience a loss of all or part of the value of the option. Transactions are entered into by a Portfolio only with brokers or financial institutions deemed creditworthy by the Portfolio's management. 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 a Portfolio may write. The hours of trading for options may not conform to the hours during which the underlying securities are traded. To the extent that the option markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that cannot be reflected in the option markets. STOCK INDEX OPTIONS. The UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may invest in options on stock indexes. As stated in the Prospectus, 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 28 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, among other indexes, 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 broad-based stock indexes provide the Portfolio with a means of protecting the Portfolio against the risk of market-wide price movements. If the Investment Manager anticipates a market decline, the Portfolio could purchase a stock index put option. If the expected market decline materialized, the resulting decrease in the value of the Portfolio'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 Portfolio may purchase a stock index call option to enable the Portfolio to participate in such rise until completion of anticipated common stock purchases by the Portfolio. Purchases and sales of stock index options also enable the Investment Manager to more speedily achieve changes in a Portfolio's equity positions. The UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO 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, or by a put option on the same stock index with a strike price no lower than the strike price of the put option sold by the Portfolio, which cover is held for the Portfolio in a segregated account maintained for it by its Custodian. All call options on stock indexes written by a Portfolio 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 Portfolio. RISKS OF OPTIONS ON INDEXES. Because exercises of stock index options are settled in cash, call writers such as the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO 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 decline 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. 29 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. As stated in the Prospectus, the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may purchase and sell interest rate futures contracts that are traded, or may in the future be traded, on U.S. commodity exchanges on such underlying securities as U.S. Treasury bonds, notes, bills and GNMA Certificates and bond index futures contracts that are traded, or may in the future be traded, on U.S. commodity exchanges on such indexes as the Moody's Investment-Grade Corporate Bond Index. These Portfolios may also purchase and sell stock index futures contracts that are traded on U.S. commodity exchanges on such indexes as the S&P 500 Index and the New York Stock Exchange Composite Index. The GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO may also purchase and sell futures contracts that are currently traded, or may in the future be traded, on foreign commodity exchanges on such underlying securities as common stocks or any foreign government fixed-income security, on various currencies ("currency futures") and on such indexes of foreign equity and fixed-income securities as may exist or come into being, such as the Financial Times Equity Index. As a futures contract purchaser, a Portfolio 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, a Portfolio incurs an obligation to deliver the specified amount of the underlying obligation at a specified time in return for an agreed upon price. The QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO will purchase or sell interest rate futures contracts for the purpose of hedging their fixed-income portfolio (or anticipated portfolio) securities against changes in prevailing interest rates or, in the case of the UTILITIES PORTFOLIO and the STRATEGIST PORTFOLIO, to alter the Portfolio's asset allocation in fixed-income securities. If it is anticipated that interest rates may rise and, concomitantly, the price of certain of its portfolio securities fall, a Portfolio may sell an interest rate futures contract or a bond index futures contract. If declining interest rates are anticipated, or if the Investment Manager wishes to increase the UTILITIES PORTFOLIO's, or the STRATEGIST PORTFOLIO's, allocation of fixed-income securities, a Portfolio may purchase an interest rate futures contract or a bond index futures contract to protect against a potential increase in the price of securities the Portfolio intends to purchase. Subsequently, appropriate securities may be purchased by the Portfolio in an orderly fashion; as securities are purchased, corresponding futures positions would be terminated by offsetting sales of contracts. The UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO will purchase or sell stock index futures contracts for the purpose of hedging their equity portfolio (or anticipated portfolio) securities against changes in their prices. If the Investment Manager anticipates that the prices of stock held by a Portfolio may fall or wishes to decrease the UTILITIES PORTFOLIO's, or the STRATEGIST PORTFOLIO's, asset allocation in equity securities, the Portfolio may sell a stock index futures contract. Conversely, if the Investment Manager wishes to increase the assets of the UTILITIES PORTFOLIO or the STRATEGIST PORTFOLIO which are invested in stocks or as a hedge against anticipated prices rises in those stocks which the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND 30 GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO or the STRATEGIST PORTFOLIO intends to purchase, the Portfolio may purchase stock index futures contracts. This allows the Portfolio to purchase equities, in accordance with the asset allocations of the Portfolio's management, in an orderly and efficacious manner. The GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO will purchase or sell currency futures on currencies in which their portfolio securities (or anticipated portfolio securities) are denominated for the purposes of hedging against anticipated changes in currency exchange rates. These Portfolios will enter into currency futures contracts for the same reasons as set forth under the heading "Forward Foreign Currency Exchange Contracts" above for entering into forward foreign currency exchange contracts; namely, to "lock-in" the value of a security purchased or sold in a given currency vis-a-vis a different currency or to hedge against an adverse currency exchange rate movement of a portfolio security's (or anticipated portfolio security's) denominated currency vis-a-vis a different currency. In addition to the above, interest rate and bond index and stock index (and currency) 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 index value at the open or close of the last trading day of the contract and the futures contract price. A futures contract sale is closed out by effecting a futures contract purchase for the same aggregate amount of the specific type of security (or, in the case of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO or the CAPITAL APPRECIATION PORTFOLIO, currency) and the same delivery date. If the sale price exceeds the offsetting purchase price, the seller would be paid the difference and would realize a gain. If the offsetting purchase price exceeds the sale price, the seller would pay the difference and would realize a loss. Similarly, a futures contract purchase is closed out by effecting a futures contract sale for the same aggregate amount of the specific type of security (currency) and the same delivery date. If the offsetting sale price exceeds the purchase price, the purchaser would realize a gain, whereas if the purchase price exceeds the offsetting sale price, the purchaser would realize a loss. There is no assurance that a Portfolio will be able to enter into a closing transaction. INTEREST RATE FUTURES CONTRACTS. When the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO or the STRATEGIST PORTFOLIO enters into a futures contract it is initially required to deposit with its Custodian, in an 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 Portfolio upon the proper termination of the futures contract. The margin deposits made are marked to market daily and the Portfolio may be required to make subsequent deposits of cash or U.S. Government securities, called "variation margin", with the Portfolio's futures contract clearing broker, which are reflective of price fluctuations in the futures contract. Currently, interest rate futures contracts can be purchased on debt securities such as U.S. Treasury Bills and Bonds, U.S. Treasury Notes with Maturities between 6 1/2 and 10 years, GNMA Certificates and Bank Certificates of Deposit. INDEX FUTURES CONTRACTS. As discussed in the Prospectus, the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN 31 GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may invest in bond index futures contracts, and the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may invest in stock index futures contracts. An index futures contract sale creates an obligation by the Portfolio, as seller, to deliver cash at a specified future time. An index futures contract purchase would create an obligation by the Portfolio, 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 Portfolio is required to maintain margin deposits with brokerage firms through which it effects index futures contracts in a manner similar to that described above for interest rate futures contracts. Currently, the initial margin requirements range from 3% to 10% of the contract amount for index futures. In addition, due to current industry practice, daily variations in gains and losses on open contracts are required to be reflected in cash in the form of variation margin payments. The Portfolio 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 Portfolio may elect to close the position by taking an opposite position which will operate to terminate the Portfolio'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 Portfolio and the Portfolio 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 Value Line Stock Index on the Kansas City Board of Trade and the Moody's Investment-Grade Corporate Bond Index on the Chicago Board of Trade. CURRENCY FUTURES. As noted above, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO may invest in foreign currency futures. Generally, foreign currency futures provide for the delivery of a specified amount of a given currency, on the exercise date, for a set exercise price denominated in U.S. dollars or other currency. Foreign currency futures contracts would be entered into for the same reason and under the same circumstances as forward foreign currency exchange contracts. The Portfolio's management will assess such factors as cost spreads, liquidity and transaction costs in determining whether to utilize futures contracts or forward contracts in its foreign currency transactions and hedging strategy. Currently, currency futures exist for, among other foreign currencies, the Japanese yen, German mark, Canadian dollar, British pound, Swiss franc and European currency unit. Purchasers and sellers of foreign currency futures contracts are subject to the same risks that apply to the buying and selling of futures generally. In addition, there are risks associated with foreign currency futures contracts and their use as a hedging device similar to those associated with options on foreign currencies described above. Further, settlement of a foreign currency futures contract must occur within the country issuing the underlying currency. Thus, the Portfolio must accept or make delivery of the underlying foreign currency in accordance with any U.S. or foreign restrictions or regulation regarding the maintenance of foreign banking arrangements by U.S. residents and may be required to pay any fees, taxes or charges associated with such delivery which are assessed in the issuing country. Options on foreign currency futures contracts may involve certain additional risks. Trading options on foreign currency futures contracts is relatively new. The ability to establish and close out positions on such options is subject to the maintenance of a liquid secondary market. To reduce this risk, the Portfolios will not purchase or write options on foreign currency futures contracts unless and until, in the opinion of the Portfolio's management, the market for such options has developed sufficiently that the risks in connection with such options are not greater than the risks in connection with transactions in the underlying foreign currency futures contracts. 32 OPTIONS ON FUTURES CONTRACTS. The QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may purchase and write call and put options on futures contracts which are traded on an exchange and enter into closing transactions with respect to such options to terminate an existing position. An option on a futures contract gives the purchaser the right, in return for the premium paid, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the term of the option. Upon the 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 QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO will only 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 (or, in the case of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, the Sub-Adviser) wished to protect against an increase in interest rates and the resulting negative impact on the value of a portion of a Portfolio's 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 Portfolio's management seeks to hedge. Any premiums received in the writing of options on futures contracts may, of course, augment the income of the Portfolio and thereby provide a further hedge against losses resulting from price declines in portions of its 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 QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may not enter into futures contracts or purchase related options thereon if, immediately thereafter, the amount committed to margin plus the amount paid for premiums for unexpired options on futures contracts exceeds 5% of the value of the Portfolio's total assets, after taking into account unrealized gains and unrealized losses on such contracts 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 a Portfolio'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, these Portfolios may only enter into futures contracts and options on futures contracts transactions for purposes of hedging a part or all of the Portfolio's portfolio. If the CFTC changes its regulations so that a Portfolio would be permitted to write options on futures contracts for income purposes without CFTC registration, these Portfolios 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 these Portfolios. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. As stated in the Prospectus, the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may sell a futures contract to protect against the decline in the value of securities (or, in the case of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the 33 PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO, the currency in which securities are denominated) held by the Portfolio. However, it is possible that the futures market may advance and the value of securities (or, in the case of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO, the currency in which they are denominated) held in the Portfolio may decline. If this occurred, the Portfolio 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 QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO or the STRATEGIST PORTFOLIO purchases a futures contract to hedge against the increase in value of securities it intends to buy (or, in the case of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO, the currency in which they are denominated), and the value of such securities (currency) decreases, then the Portfolio may determine not to invest in the securities as planned and will realize a loss on the futures contract that is not offset by a reduction in the price of the securities. In order to assure that the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO are utilizing futures transactions for hedging purposes as such is defined by the Commodity Futures Trading Commission either: (1) a substantial majority (i.e. approximately 75%) of all anticipatory hedge transactions (transactions in which the Portfolio does not own at the time of the transaction, but expects to acquire, the securities underlying the relevant futures contract) involving the purchase of futures contracts or call options thereon will be completed by the purchase of securities which are the subject of the hedge, or (2) the underlying value of all long positions in futures contracts will not exceed the total value of: (a) all short-term debt obligations held by the Portfolio; (b) cash held by the Portfolio; (c) cash proceeds due to the Portfolio on investments within thirty days; (d) the margin deposited on the contracts; and (e) any unrealized appreciation in the value of the contracts. If a Portfolio 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 high grade debt obligations equal in value (when added to any initial or variation margin on deposit) to the market value of the securities (currencies) underlying the futures contract or the exercise price of the option. Such a position may also be covered by owning the securities (currencies) underlying the futures contract (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 Portfolio to purchase the same contract at a price no higher than the price at which the short position was established. In addition, if a Portfolio 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 Portfolio by its Custodian. Alternatively, the Portfolio 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 Portfolio. 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 Portfolio would continue to be required to make daily cash payments of variation margin on open futures positions. In such situations, if the Portfolio has insufficient cash, it may have to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so. In addition, the Portfolio may be required to take or make delivery of the instruments underlying interest rate futures 34 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 Portfolio's ability to effectively hedge its portfolio. With regard to the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO, futures contracts and options thereon which are purchased or sold on foreign commodities exchanges may have greater price volatility than their U.S. counterparts. Furthermore, foreign commodities exchanges may be less regulated and under less governmental scrutiny than U.S. exchanges. Brokerage commissions, clearing costs and other transaction costs may be higher on foreign exchanges. Greater margin requirements may limit the ability of these Portfolios to enter into certain commodity transactions on foreign exchanges. Moreover, differences in clearance and delivery requirements on foreign exchanges may occasion delays in the settlement of the Portfolio's transactions effected on foreign exchanges. In the event of the bankruptcy of a broker through which the Portfolio engages in transactions in futures or options thereon, the Portfolio could experience delays and/or losses in liquidating open positions purchased or sold through the broker and/or incur a loss of all or part of its margin deposits with the broker. Similarly, in the event of the bankruptcy of the writer of an OTC option purchased by the Portfolio, the Portfolio could experience a loss of all or part of the value of the option. Transactions are entered into by a Portfolio only with brokers or financial institutions deemed creditworthy by the Portfolio's management. While the futures contracts and options transactions to be engaged in by a Portfolio for the purpose of hedging the Portfolio's portfolio securities are not speculative in nature, there are risks inherent in the use of such instruments. One such risk which may arise in employing futures contracts to protect against the price volatility of portfolio securities (and, for the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO, the currencies in which they are denominated) is that the prices of securities and indexes subject to futures contracts (and thereby the futures contract prices) may correlate imperfectly with the behavior of the cash prices of the Portfolio's portfolio securities (and the currencies in which they are denominated). Another such risk is that prices of interest rate futures contracts may not move in tandem with the changes in prevailing interest rates against which the Portfolio seeks a hedge. A correlation may also be distorted by the fact that the futures market is dominated by short-term traders seeking to profit from the difference between a contract or security price objective and their cost of borrowed funds. Such distortions are generally minor and would diminish as the contract approached maturity. As stated in the Prospectus, there may exist an imperfect correlation between the price movements of futures contracts purchased by the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO or the STRATEGIST PORTFOLIO and the movements in the prices of the securities (currencies) which are the subject of the hedge. If participants in the futures market elect to close out their contracts through offsetting transactions rather than meet margin deposit requirements, distortions in the normal relationship between the debt securities and futures markets could result. Price distortions could also result if investors in futures contracts opt to make or take delivery of underlying securities rather than engage in closing transactions due to the resultant reduction in the liquidity of the futures market. In addition, due to the fact that, from the point of view of speculators, the deposit requirements in the futures markets are less onerous than margin requirements in the cash market, increased participation by speculators in the futures market could cause temporary price distortions. Due to the possibility of price distortions in the futures market and because of the imperfect correlation between movements in the prices of securities and movements in the prices of futures contracts, a correct forecast of interest rate trends may still not result in a successful hedging transaction. As stated in the Prospectus, there is no assurance that a liquid secondary market will exist for futures contracts and related options in which the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC 35 GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO and the STRATEGIST PORTFOLIO may invest. In the event a liquid market does not exist, it may not be possible to close out a futures position, and in the event of adverse price movements, a Portfolio would continue to be required to make daily cash payments of variation margin. In addition, limitations imposed by an exchange or board of trade on which futures contracts are traded may compel or prevent a Portfolio from closing out a contract which may result in reduced gain or increased loss to the Portfolio. The absence of a liquid market in futures contracts might cause these Portfolios to make or take delivery of the underlying securities (currencies) at a time when it may be disadvantageous to do so. Compared to the purchase or sale of futures contracts, the purchase of call or put options on futures contracts involves less potential risk to the QUALITY INCOME PLUS PORTFOLIO, the UTILITIES PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO or the STRATEGIST PORTFOLIO 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 Portfolio notwithstanding that the purchase or sale of a futures contract would not result in a loss, as in the instance where there is no movement in the prices of the futures contract or underlying securities (currencies). PORTFOLIO TURNOVER. Although the Fund does not intend to engage in short-term trading of portfolio securities as a means of achieving the investment objectives of the respective Portfolios, each Portfolio may sell portfolio securities without regard to the length of time they have been held whenever such sale will in the Investment Manager's opinion strengthen the Portfolio's position and contribute to its investment objectives. A 100% turnover rate would occur, for example, if all the portfolio securities of a Portfolio (other than short-term money market securities) were replaced once during the fiscal year. Based on this definition, it is anticipated that the Money Market Portfolio's policy of investing in securities with remaining maturities of less than one year will not result in a quantifiable portfolio turnover rate. It is not anticipated that the portfolio turnover rates of the Portfolios will exceed the following percentages in any one year: QUALITY INCOME PLUS PORTFOLIO: 300%; HIGH YIELD PORTFOLIO: 300%; UTILITIES PORTFOLIO: 100%; INCOME BUILDER PORTFOLIO: 90%; DIVIDEND GROWTH PORTFOLIO: 90%; CAPITAL GROWTH PORTFOLIO: 200%; GLOBAL DIVIDEND GROWTH PORTFOLIO: 100%; EUROPEAN GROWTH PORTFOLIO: 100%; PACIFIC GROWTH PORTFOLIO: 100%; CAPITAL APPRECIATION PORTFOLIO: 300%; EQUITY PORTFOLIO: 300%; and STRATEGIST PORTFOLIO: 400%. 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 of the Portfolios, except as otherwise indicated. Under the Act, a fundamental policy may not be changed with respect to a Portfolio without the vote of a majority of the outstanding voting securities of that Portfolio, as defined in the Act. Such a majority is defined as the lesser of (a) 67% or more of the shares of the Portfolio present at a meeting of shareholders of the Fund, if the holders of more than 50% of the outstanding shares of the Portfolio are present or represented by proxy or (b) more than 50% of the outstanding shares of the Portfolio. For purposes of the following restrictions and those contained in the Prospectus: (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 the amount of total or net assets does not require elimination of any security from the portfolio. RESTRICTIONS APPLICABLE TO ALL PORTFOLIOS Each Portfolio of the Fund may not: 1. Make loans of money or securities, except (a) by the purchase of debt obligations in which the Portfolio may invest consistent with its investment objectives and policies; (b) by investing in repurchase agreements; or (c) by lending its portfolio securities, not in excess of 10% of the value of a Portfolio's total assets, made in accordance with guidelines adopted by the Fund's Board of 36 Trustees, including maintaining collateral from the borrower equal at all times to the current market value of the securities loaned. 2. Invest in securities of any issuer if, to the knowledge of the Fund, any officer or Trustee of the Fund or any officer or director of the Investment Manager owns more than 1/2 of 1% of the outstanding securities of such issuer, and such officers, Trustees and directors who own more than 1/2 of 1% own in the aggregate more than 5% of the outstanding securities of such issuer. 3. Purchase or sell real estate; however, the Portfolios may purchase marketable securities of issuers which engage in real estate operations or which invest in real estate or interests therein, including Real Estate Investment Trusts (REIT's), and securities which are secured by real estate or interests therein. 4. Engage in the underwriting of securities except insofar as the Portfolio may be deemed an underwriter under the Securities Act of 1933 in disposing of a portfolio security. 5. Invest for the purposes of exercising control or management of another company. 6. Participate on a joint or a joint and several basis in any securities trading account. The "bunching" of orders of two or more Portfolios (or of one or more Portfolios and of other accounts under the investment management of InterCapital) for the sale or purchase of portfolio securities shall not be considered participating in a joint securities trading account. 7. Issue senior securities as defined in the Act except insofar as the Portfolio may be deemed to have issued a senior security by reason of: (a) entering into any repurchase agreement (or, in the case of the QUALITY INCOME PLUS PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, a reverse repurchase agreement); (b) borrowing money in accordance with restrictions described above; (c) purchasing any security on a when-issued, delayed delivery or forward commitment basis; (d) lending portfolio securities; or (e) purchasing or selling futures contracts, forward foreign exchange contracts or options, if such investments are otherwise permitted for the Portfolio. RESTRICTIONS APPLICABLE TO THE MONEY MARKET PORTFOLIO ONLY The MONEY MARKET PORTFOLIO may not: 1. Invest in securities other than those listed in the description of its investment objectives and policies above and in the Prospectus. 2. Invest in securities maturing more than one year from the date of purchase, except that where securities are held subject to repurchase agreements having a term of one year or less from the date of delivery, the securities subject to the agreement may have maturity dates in excess of one year from the date of delivery. 3. Purchase securities for which there are legal or contractual restrictions on resale [i.e., restricted securities]. 4. Write, purchase or sell puts, calls, straddles, spreads or combinations thereof. RESTRICTION APPLICABLE TO THE QUALITY INCOME PLUS PORTFOLIO ONLY The QUALITY INCOME PLUS PORTFOLIO may not acquire any common stocks except when acquired upon conversion of fixed-income securities. The QUALITY INCOME PLUS PORTFOLIO will attempt to dispose in an orderly fashion of any common stocks acquired under these circumstances. RESTRICTIONS APPLICABLE TO THE HIGH YIELD PORTFOLIO ONLY The HIGH YIELD PORTFOLIO may not: 1. Acquire any common stocks, except (a) when attached to or included in a unit with fixed-income securities; (b) when acquired upon conversion of fixed-income securities; or (c) when 37 acquired upon exercise of warrants attached to fixed-income securities. THE HIGH YIELD PORTFOLIO may retain common stocks so acquired but not in excess of 10% of its total assets. 2. Write, purchase or sell puts, calls, straddles, spreads or combinations thereof. RESTRICTION APPLICABLE TO THE DIVIDEND GROWTH PORTFOLIO ONLY The DIVIDEND GROWTH PORTFOLIO may not invest more than 5% of the value of its total assets in warrants, including not more than 2% of such assets in warrants not listed on either the New York or American Stock Exchange. However, the acquisition of warrants attached to other securities is not subject to this restriction. RESTRICTIONS APPLICABLE TO THE EQUITY PORTFOLIO ONLY The EQUITY PORTFOLIO may not: 1. Invest more than 5% of the value of its total assets in warrants, including not more than 2% of such assets in warrants not listed on either the New York or American Stock Exchange. However, the acquisition of warrants attached to other securities is not subject to this restriction. 2. Purchase non-convertible corporate bonds unless rated at the time of purchase Aa or better by Moody's or AA or better by S&P, or purchase commercial paper unless issued by a U.S. corporation and rated at the time of purchase Prime-1 by Moody's or A-1 by S&P, although it may continue to hold a security if its quality rating is reduced by a rating service below those specified. 3. Write, purchase or sell puts, calls, straddles, spreads or combinations thereof. PORTFOLIO TRANSACTIONS AND BROKERAGE - -------------------------------------------------------------------------------- Subject to the general supervision of the Board of Trustees, the Investment Manager and, for the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, the Sub-Adviser are responsible for decisions to buy and sell securities for each Portfolio of the Fund, the selection of brokers and dealers to effect the transactions, and the negotiation of brokerage commissions, if any. Purchases and sales of securities on a stock exchange are effected through brokers who charge a commission for their services. In the over-the-counter market, securities are generally traded on a "net" basis with 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. In underwritten offerings, securities are purchased at a fixed price which includes an amount of compensation to the underwriter, generally referred to as the underwriter's concession or discount. When securities are purchased or sold directly from or to an issuer, no commissions or discounts are paid. For the fiscal years ended December 31, 1994, 1995 and 1996, the Portfolios of the Fund paid brokerage commissions as follows:
BROKERAGE BROKERAGE BROKERAGE COMMISSIONS COMMISSIONS COMMISSIONS PAID FOR FISCAL PAID FOR FISCAL PAID FOR FISCAL YEAR YEAR YEAR NAME OF PORTFOLIO ENDED 12/31/94 ENDED 12/31/95 ENDED 12/31/96 - -------------------------------------------------- ------------------- ------------------- ------------------- High Yield Portfolio.............................. $ 5,071 $ 98,275 $ 10,013 Utilities Portfolio............................... 117,697 29,800 120,935 Dividend Growth Portfolio......................... 497,931 565,780 796,688 Capital Growth Portfolio.......................... 53,239 53,746 176,767 Global Dividend Growth Portfolio.................. 566,953 604,355 762,353 European Growth Portfolio......................... 466,863 437,643 575,660 Pacific Growth Portfolio.......................... 651,772 581,012 878,874 Equity Portfolio.................................. 1,139,195 1,091,067 1,825,817 Strategist Portfolio.............................. 281,517 435,379 429,659
Purchases of money market instruments are made from dealers, underwriters and issuers; sales, if any, prior to maturity, are made to dealers and issuers. The Fund does not normally incur brokerage commission expense on such transactions. Money market instruments are generally traded on a "net" 38 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 Investment Manager and, for the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO, the Sub-Adviser currently serve as investment advisors to a number of clients, including other investment companies, and may in the future act as investment manager or adviser to others. It is the practice of the Investment Manager or the Sub-Adviser to cause purchase and sale transactions to be allocated among the Portfolios of the Fund and others whose assets it manages in such manner as it deems equitable. In making such allocations among the Portfolios of 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 or the Sub-Adviser may utilize a pro-rata allocation process based on the size of the Dean Witter Funds involved and the number of shares available from the public offering. These procedures may, under certain circumstances, have an adverse effect on the Fund. The policy of the Fund regarding purchases and sales of securities for the various Portfolios is that primary consideration will be given to obtaining the most favorable prices and efficient executions of transactions. Consistent with this policy, when securities transactions are effected on a stock exchange, the Fund's policy is to pay commissions which are considered fair and reasonable without necessarily determining that the lowest possible commissions are paid in all circumstances. The Fund believes that a requirement always to seek the lowest possible commission cost could impede effective portfolio management and preclude the Fund and the Investment Manager (or the Sub-Adviser) from obtaining a high quality of brokerage and research services. In seeking to determine the reasonableness of brokerage commissions paid in any transaction, the Investment Manager (or the Sub-Adviser) 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, as in most cases an exact dollar value for those services is not ascertainable. The Fund anticipates that certain of its transactions involving foreign securities will be effected on securities exchanges. Fixed commissions on such transactions are generally higher than negotiated commissions on domestic transactions. There is also generally less government supervision and regulation of foreign securities exchanges and brokers than in the United States. In seeking to implement the policies of the Portfolios of the Fund, the Investment Manager or the Sub-Adviser effects transactions with those brokers and dealers who the Investment Manager or the Sub-Adviser believes provide the most favorable prices and are capable of providing efficient executions. If the Investment Manager or the Sub-Adviser believes such price and execution 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, the Investment Manager or the Sub-Adviser. Such services may include, but are not limited to, any one or more of the following: information as to the availability of securities for purchase or sale; statistical or factual information or opinions pertaining to investment; wire services; and appraisals or evaluations of portfolio securities. The information and services received by the Investment Manager and the Sub-Adviser are from brokers and dealers may be of benefit to the Investment Manager or the Sub-Adviser in the management of accounts of some of its other clients and may not in all cases benefit a Portfolio of 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 or the Sub-Adviser and thus reduce its expenses, it is of indeterminable value and the fees paid to the Investment Manager and the Sub-Adviser are not reduced by any amount that may be attributable to the value of such services. For its fiscal year ended December 31, 1996, the Fund directed the payment of commis- 39 sions in connection with transactions in the following aggregate amounts to brokers because of research services provided, as follows:
BROKERAGE COMMISSIONS DIRECTED IN CONNECTION AGGREGATE DOLLAR AMOUNT WITH RESEARCH SERVICES OF TRANSACTIONS FOR PROVIDED WHICH SUCH COMMISSIONS FOR FISCAL YEAR WERE PAID FOR FISCAL NAME OF PORTFOLIO ENDED 12/31/96 YEAR ENDED 12/31/96 - ------------------------------------- ----------------------- ----------------------- Utilities Portfolio.................. $ 69,935 $ 29,613,981 Dividend Growth Portfolio............ 613,713 467,229,731 Capital Growth Portfolio............. 131,059 75,641,389 Global Dividend Growth Portfolio..... 726,196 241,965,311 Equity Portfolio..................... 1,530,245 1,247,232,441 Strategist Portfolio................. 380,641 272,126,413
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. During its fiscal years ended December 31, 1994, 1995 and 1996, the Fund did not effect any principal transactions with DWR. Consistent with the policy described above, brokerage transactions in securities listed on exchanges or admitted to unlisted trading privileges may be effected through DWR and/or certain affiliated broker-dealers of Morgan Grenfell Investment Services Limited, the Sub-Adviser of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO. In order for these brokers to effect any portfolio transactions for the Fund, the commissions, fees or other remuneration received by them 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 these brokers to receive no more than the remuneration which would be expected to be received by an unaffiliated broker in a commensurate arm's-length transaction. Furthermore, the Trustees 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 these brokers 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 these brokers. For its fiscal years ended December 31, 1994 and 1995, the Fund paid a total of $546,661 ($27,250 for the UTILITIES PORTFOLIO, $192,545 for the DIVIDEND GROWTH PORTFOLIO, $32,574 for the CAPITAL GROWTH PORTFOLIO, $55,460 for the GLOBAL DIVIDEND GROWTH PORTFOLIO, $200,291 for the EQUITY PORTFOLIO and $38,541 for the STRATEGIST PORTFOLIO), $578,933 ($6,500 for the UTILITIES PORTFOLIO, $216,308 for the DIVIDEND GROWTH PORTFOLIO, $32,841 for the CAPITAL GROWTH PORTFOLIO, $50,294 for the GLOBAL DIVIDEND GROWTH PORTFOLIO, $192,565 for the EQUITY PORTFOLIO, and $80,425 for the STRATEGIST PORTFOLIO respectively, in brokerage commissions to DWR. For its fiscal year ended December 31, 1996 the Fund paid a total of $558,707 in brokerage commissions to DWR for transactions as follows:
PERCENTAGE OF AGGREGATE DOLLAR AMOUNT OF EXECUTED BROKERAGE COMMISSIONS PAID PERCENTAGE OF AGGREGATE TRADES ON WHICH BROKERAGE TO DWR FOR FISCAL YEAR BROKERAGE COMMISSIONS FOR COMMISSIONS WERE PAID FOR NAME OF PORTFOLIO ENDED 12/31/96 FISCAL YEAR ENDED 12/31/96 FISCAL YEAR ENDED 12/31/96 - ------------------------- -------------------------- -------------------------- -------------------------- Utilities Portfolio...... $ 49,500 40.93 % 61.83 % Dividend Growth Portfolio............... 181,121 22.73 31.05 Capital Growth Portfolio............... 38,010 21.50 26.01 Global Dividend Growth Portfolio............... 35,401 4.64 14.47 Equity Portfolio......... 220,150 12.06 14.07 Strategist Portfolio..... 34,525 8.04 12.21
40 For the fiscal year ended December 31, 1994, the GLOBAL DIVIDEND GROWTH PORTFOLIO paid a total of $401 in brokerage commissions to Deutsche Bank Securities Corp., an affiliated broker of the Sub-Adviser of the EUROPEAN GROWTH and PACIFIC GROWTH PORTFOLIOS, and the PACIFIC GROWTH PORTFOLIO paid a total of $38,353 in brokerage commissions to Morgan Grenfell Asia Securities (Hong Kong) Ltd., a total of $3,907 in brokerage commissions to Morgan Grenfell Asia Securities (Indonesia) Pte., and a total of $347 in brokerage commissions to Morgan Grenfell Emerging Markets, affiliated brokers of the Sub-Adviser of the EUROPEAN GROWTH and PACIFIC GROWTH PORTFOLIOS. For the fiscal year ended December 31, 1995, the PACIFIC GROWTH PORTFOLIO paid a total of $19,846 in brokerage commissions to Morgan Grenfell Asia and Partners Securities Pte Ltd. and a total of $19,058 to Morgan Grenfell Asia Securities (Hong Kong) Limited, affiliated brokers of the Sub-Adviser of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO. For the fiscal year ended December 31, 1996, the PACIFIC GROWTH PORTFOLIO paid brokerage commissions to affiliated brokers of the Sub-Adviser of the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO for transactions as follows:
BROKERAGE COMMISSIONS PAID TO AFFILIATED PERCENTAGE OF BROKER OF MORGAN AGGREGATE DOLLAR GRENFELL PERCENTAGE OF AMOUNT OF INVESTMENT AGGREGATE BROKERAGE EXECUTED TRADES SERVICES LTD. FOR COMMISSIONS FOR ON WHICH BROKERAGE FISCAL YEAR FISCAL YEAR COMMISSIONS WERE PAID ENDED ENDED FOR FISCAL YEAR ENDED NAME OF BROKER 12/31/96 12/31/96 12/31/96 - -------------------------------- ------------------ ------------------- --------------------- Morgan Grenfell Asia and $ 2,146 0.24% 0.27 % Partners Securities Pte Ltd. Morgan Grenfell Asia Securities 14,787 1.68 1.22 (Hong Kong) Limited
During the fiscal year ended December 31, 1996, the QUALITY INCOME PLUS PORTFOLIO purchased debt securities issued by Bear Stearns Companies, Inc. and Lehman Brothers Holdings, Inc., the EQUITY PORTFOLIO purchased common stock issued by Morgan Stanley Group, Inc., Merrill Lynch & Co., Inc. and Lehman Brothers Holdings, Inc., and the STRATEGIST PORTFOLIO purchased debt securities issued by Lehman Brothers Holdings, Inc. and Paine Webber Group, Inc. and common stock issued by Morgan Stanley & Co., Inc., Merrill Lynch & Co., Inc. and J.P. Morgan & Co., Inc., which issuers were among the ten brokers or the ten dealers which executed transactions for or with the Fund or the applicable Portfolio in the largest dollar amounts during the year. At December 31, 1996, the QUALITY INCOME PLUS PORTFOLIO held debt securities issued by Bear Stearns Companies, Inc., Lehman Brothers Holdings, Inc. and Donaldson Lufkin & Jenrette, Inc. (which issuer was also among such ten brokers and dealers) with market values of $3,913,640, $8,311,420 and $1,955,260, respectively, the EQUITY PORTFOLIO held comon stock issued by Morgan Stanley & Co., Inc., Merrill Lynch & Co., Inc. and Lehman Brothers Holdings, Inc., with market values of $5,712,500, $8,150,000 and $5,622,400, respectively, and the STRATEGIST PORTFOLIO held debt securities issued by Lehman Brothers Holdings, Inc. and Paine Webber Group, Inc. and common stock issued by Morgan Stanley & Co., Inc., Merrill Lynch & Co., Inc. and J.P. Morgan & Co., Inc. with market values of $2,118,480, $2,107,940, $4,684,250, $5,216,000 and $4,393,125, respectively. PURCHASE AND REDEMPTION OF FUND SHARES - -------------------------------------------------------------------------------- As discussed in the Prospectus, investments in the Fund may be made only by (1) Northbrook Life Insurance Company ("Northbrook"), for allocation to certain separate accounts established and maintained by Northbrook for the purpose of funding variable annuity contracts and variable life insurance contracts it issues, by (2) Allstate Life Insurance Company of New York ("Allstate New York") for allocation to certain separate accounts established and maintained by Allstate New York for the purpose of funding variable annuity contracts it issues, by (3) Glenbrook Life and Annuity Company ("Glenbrook"), for allocation to certain separate accounts established and maintained by Glenbrook for the 41 purpose of funding variable annuity contracts and variable life insurance contracts it issues, and by (4) Paragon Life Insurance Company ("Paragon") for allocation to a separate account established and maintained by Paragon for the purpose of funding variable life insurance contracts it issues, in connection with an employer-sponsored insurance program offered only to certain employees of DWDC, the parent company of the Fund's Investment Manager. (The separate accounts are sometimes referred to individually as an "Account" and collectively as the "Accounts".) Shares of each Portfolio of the Fund are offered to Northbrook, Allstate New York, Glenbrook and Paragon (the "Companies") without sales charge at the respective net asset values of the Portfolios next determined after receipt by the Fund of the purchase payment in the manner set forth under the caption "Determination of Net Asset Value" below and in the Prospectus. Shares of any Portfolio of the Fund can be redeemed by the Companies at any time for cash, without sales charge, at the net asset value next determined after receipt of the redemption request. Such payment may be postponed or the right of redemption suspended at times when normal trading is not taking place on the New York Stock Exchange, as discussed in the Prospectus. (For information regarding charges which may be imposed upon the Contracts by the applicable Account, see the Prospectus for the Variable Annuity Contracts or the Variable Life Contracts which accompanies the Prospectus of the Fund.) THE DISTRIBUTOR As discussed in the Prospectus, Dean Witter Distributors Inc. (the "Distributor"), a Delaware corporation, acts without remuneration from the Fund as the exclusive Distributor of the Fund's shares, pursuant to a Distribution Agreement entered into by the Fund and the Distributor on June 30, 1993. The Distributor, a Delaware corporation, is a wholly-owned subsidiary of DWDC. 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 October 30, 1992, the current Distribution Agreement appointing the Distributor as exclusive distributor of the Fund's shares and providing for the Distributor to bear distribution expenses not borne by the Fund. The Distribution Agreement took effect on June 30, 1993 upon the spin-off by Sears, Roebuck and Co. of its remaining shares of DWDC. By its terms, the Distribution Agreement had an initial term ending April 30, 1994, and will remain in effect from year to year thereafter if approved by the Board. At their meeting held on April 24, 1997, the Fund's Board of Trustees, including all of the Independent Trustees, approved a new Distribution Agreement, to take effect upon the proposed merger of DWDC with Morgan Stanley Group Inc. (see "The Fund and its Management" in the Prospectus), and approved continuation of the present Distribution Agreement until the earlier of April 30, 1998 or consummation of the proposed merger. The new Distribution Agreement is substantially identical to the present Agreement except for its dates of effectiveness and termination. The Distributor 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. 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, 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. DETERMINATION OF NET ASSET VALUE As discussed in the Prospectus, the net asset value of the shares of the each Portfolio is determined once daily at 4:00 p.m., New York time (or, on days when the New York Stock Exchange closes prior to 4:00 p.m., at such earlier time), on each day that the New York Stock Exchange is open for trading. The New York Stock Exchange currently observes the following holidays: New Year's Day; Presidents' Day; Good Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day; and Christmas Day. 42 As discussed in the Prospectus, the MONEY MARKET PORTFOLIO utilizes the amortized cost method in valuing its portfolio securities for purposes of determining the net asset value of its shares. The MONEY MARKET PORTFOLIO utilizes the amortized cost method in valuing its portfolio securities even though the portfolio securities may increase or decrease in market value, generally in connection with changes in interest rates. The amortized cost method of valuation involves valuing a security at its cost at the time of purchase adjusted by a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. While this method provides certainty in valuation, it may result in periods during which value, as determined by amortized cost, is higher or lower than the price the MONEY MARKET PORTFOLIO would receive if it sold the investment. During such periods, the yield to investors in the MONEY MARKET PORTFOLIO may differ somewhat from that obtained in a similar company which uses mark-to-market values for all of its portfolio securities. For example, if the use of amortized cost resulted in a lower (higher) aggregate portfolio value on a particular day, a prospective investor in the MONEY MARKET PORTFOLIO would be able to obtain a somewhat higher (lower) yield than would result from investment in such a similar company and existing investors would receive less (more) investment income. The purpose of this method of calculation is to facilitate the maintenance of a constant net asset value per share of $1.00. The use of the amortized cost method to value the portfolio securities of the MONEY MARKET PORTFOLIO and the maintenance of the per share net asset value of $1.00 is permitted pursuant to Rule 2a-7 of the Act (the "Rule") and is conditioned on its compliance with various conditions contained in the Rule including: (a) the Trustees are obligated, as a particular responsibility within the overall duty of care owed to the Portfolio's shareholders, to establish procedures reasonably designed, taking into account current market conditions and the Portfolio's investment objectives, to stabilize the net asset value per share as computed for the purpose of distribution and redemption at $1.00 per share; (b) the procedures include (i) calculation, at such intervals as the Trustees determine are appropriate and as are reasonable in light of current market conditions, of the deviation, if any, between net asset value per share using amortized cost to value portfolio securities and net asset value per share based upon available market quotations with respect to such portfolio securities; (ii) periodic review by the Trustees of the amount of deviation as well as methods used to calculate it; and (iii) maintenance of written records of the procedures, and the Trustees' considerations made pursuant to them and any actions taken upon such consideration; (c) the Trustees should consider what steps should be taken, if any, in the event of a difference of more than 1/2 of 1% between the two methods of valuation; and (d) the Trustees should take such action as they deem appropriate (such as shortening the average portfolio maturity, realizing gains or losses, withholding dividends or, as provided by the Declaration of Trust, reducing the number of outstanding shares of the MONEY MARKET PORTFOLIO) to eliminate or reduce to the extent reasonably practicable material dilution or other unfair results to investors or existing shareholders which might arise from differences between the two methods of valuation. Any reduction of outstanding shares will be effected by having each shareholder proportionately contribute to the MONEY MARKET PORTFOLIO'S capital the necessary shares that represent the amount of excess upon such determination. Each Contract Owner will be deemed to have agreed to such contribution in these circumstances by allocating investment under his or her Contract to the MONEY MARKET PORTFOLIO. Generally, for purposes of the procedures adopted under the Rule, the maturity of a portfolio instrument is deemed to be the period remaining (calculated from the trade date or such other date on which the MONEY MARKET PORTFOLIO'S interest in the instrument is subject to market action) until the date noted on the face of the instrument as the date on which the principal amount must be paid, or in the case of an instrument called for redemption, the date on which the redemption payment must be made. A variable rate obligation that is subject to a demand feature is deemed to have a maturity equal to the longer of the period remaining until the next readjustment of the interest rate or the period remaining until the principal amount can be recovered through demand. A floating rate instrument that is subject to a demand feature is deemed to have a maturity equal to the period remaining until the principal amount can be recovered through demand. 43 A "NRSRO" is a nationally recognized statistical rating organization. The term "Requisite NRSROs" means (i) any two NRSROs that have issued a rating with respect to a security or class of debt obligations of an issuer, or (ii) if only one NRSRO has issued a rating with respect to such security or issuer at the time a fund purchases or rolls over the security, that NRSRO. An Eligible Security is generally defined in the Rule to mean (i) a security with a remaining maturity of 397 calendar days or less that has received a short-term rating (or that has been issued by an issuer that has received a short-term rating with respect to a class of debt obligations, or any debt obligation within that class, that is comparable in priority and security with the security) by the Requisite NRSROs in one of the two highest short-term rating categories (within which there may be sub-categories or gradations indicating relative standing); or (ii) a security: (A) that at the time of issuance had a remaining maturity of more than 397 calendar days but that has a remaining maturity of 397 calendar days or less; and (B) whose issuer has received from the Requisite NRSROs a rating with respect to a class of debt obligations (or any debt obligation within that class) that is now comparable in priority and security with the security, in one of the two highest short-term rating categories (within which there may be sub-categories or gradations indicating relative standing); or (iii) an unrated security that is of comparable quality to a security meeting the requirements of (i) or (ii) above, as determined by the money market fund's board of directors. The MONEY MARKET PORTFOLIO will limit its investments to securities that meet the requirements for Eligible Securities including the required ratings by S&P or Moody's, as set forth in the prospectus. As permitted by the Rule, the Board has delegated to the Fund's Investment Manager, subject to the Board's oversight pursuant to guidelines and procedures adopted by the Board, the authority to determine which securities present minimal credit risks and which unrated securities are comparable in quality to rated securities. Also, as required by the Rule, the MONEY MARKET PORTFOLIO will limit its investments in securities, other than Government securities, so that, at the time of purchase: (a) except as further limited in (b) below with regard to certain securities, no more than 5% of its total assets will be invested in the securities of any one issuer; and (b) with respect to Eligible Securities that have received a rating in less than the highest category by any one of the NRSROs whose ratings are used to qualify the security as an Eligible Security, or that have been determined to be of comparable quality: (i) no more than 5% in the aggregate of the Portfolio's total assets in all such securities, and (ii) no more than the greater of 1% of total assets, or $1 million, in the securities on any one issuer. The presence of a line of credit or other credit facility offered by a bank or other financial institution which guarantees the payment obligation of the issuer, in the event of a default in the payment of principal or interest of an obligation, may be taken into account in determining whether an investment is an Eligible Security, provided that the guarantee itself is an Eligible Security. The Rule further requires that the MONEY MARKET PORTFOLIO limit its investments to U.S. dollar-denominated instruments which the Trustees determine present minimal credit risks and which are Eligible Securities. The Rule also requires the Portfolio to maintain a dollar-weighted average portfolio maturity (not more than 90 days) appropriate to its objective of maintaining a stable net asset value of $1.00 per share and precludes the purchase of any instrument with a remaining maturity of more than 397 days. (An Investment Restriction of the Fund further precludes the Portfolio from investing in securities maturing more than one year from the date of purchase.) Should the disposition of a portfolio security result in a dollar-weighted average portfolio maturity of more than 90 days, the Portfolio will invest its available cash in such a manner as to reduce such maturity to 90 days or less as soon as is reasonably practicable. If the Board determines that it is no longer in the best interests of the MONEY MARKET PORTFOLIO and its shareholders to maintain a stable price of $1 per share or if the Board believes that maintaining such price no longer reflects a market-based net asset value per share, the Board has the right to change from an amortized cost basis of valuation to valuation based on market quotations. The Fund will notify shareholders of the Portfolio of any such change. 44 As stated in the Prospectus, in the calculation of the net asset value of the Portfolios other than the MONEY MARKET PORTFOLIO, 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. Other short-term debt securities will be valued on a mark-to-market basis until such time as they reach a remaining maturity of sixty 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 general 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 value of a Portfolio'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 a Portfolio'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. DIVIDENDS, DISTRIBUTIONS AND TAXES - -------------------------------------------------------------------------------- MONEY MARKET PORTFOLIO. As discussed in the Prospectus, dividends from net income on the MONEY MARKET PORTFOLIO will be declared payable on each day the New York Stock Exchange is open for business to shareholders of record as of the close of business the preceding business day. Net income, for dividend purposes, includes accrued interest and accretion of original issue and market discount, less the amortization of market premium and the estimated expenses of the MONEY MARKET PORTFOLIO. Net income will be calculated immediately prior to the determination of net asset value per share of the MONEY MARKET PORTFOLIO (see "Determination of Net Asset Value" above and in the Prospectus). The amount of dividend may fluctuate from day to day and may be omitted on some days if realized losses on portfolio securities exceed the MONEY MARKET PORTFOLIO's net investment income. The Trustees may revise the above dividend policy, or postpone the payment of dividends, if the MONEY MARKET PORTFOLIO should have or anticipate any large unexpected expense, loss or fluctuation in net assets which in the opinion of the Trustees might have a significant adverse effect on shareholders. On occasion, in order to maintain a constant $1.00 per share net asset value, the Trustees may direct that the number of outstanding shares of the MONEY MARKET PORTFOLIO be reduced in each shareholder's account. Such reduction may result in taxable income to a shareholder in excess of the net increase (i.e., dividends, less such reductions), if any, in the shareholder's account for a period. Furthermore, such reduction may be realized as a capital loss when the shares are liquidated. Any net realized capital gains will be declared and paid at least once per calendar year, except that net short-term gains may be paid more frequently, with the distribution of dividends from net investment income. OTHER PORTFOLIOS. The dividend policies of the QUALITY INCOME PLUS PORTFOLIO, the HIGH YIELD PORTFOLIO, the UTILITIES PORTFOLIO, the INCOME BUILDER PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CAPITAL GROWTH PORTFOLIO, the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH 45 PORTFOLIO, the CAPITAL APPRECIATION PORTFOLIO, the EQUITY PORTFOLIO and the STRATEGIST PORTFOLIO are discussed in the Prospectus. In computing interest income, these Portfolios will not accrete any discount or amortize any premium resulting from the purchase of debt securities except those original issue discounts for which accretion is required for federal income tax purposes. Additionally, with respect to market discount on bonds, a portion of any capital gain realized upon disposition may be recharacterized as taxable ordinary income in accordance with the provisions of the Internal Revenue Code (the "Code"). Dividends, interest and capital gains received by the Portfolios on investments in foreign issuers or which are denominated in foreign currency may give rise to withholding and other taxes imposed by foreign countries. Realized gains and losses on security transactions are determined on the identified cost method. Gains or losses on sales of securities by the Fund will be long-term 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 short-term gains or losses. OPTIONS AND FUTURES. Exchange-traded futures contracts, listed options on futures contracts and certain listed options are classified as "Section 1256" contracts under the Code. Unless the Portfolio makes an election as discussed below, the character of gain or loss resulting from the sale, disposition, closing out, expiration or other termination of Section 1256 contracts would generally be treated as long-term capital gain or loss to the extent of 60 percent thereof and short-term capital gain or loss to the extent of 40 percent thereof and such Section 1256 contracts would also be required to be marked-to- market at the end of the Fund's fiscal year, for purposes of federal income tax calculations. Over-the-counter options are not classified as Section 1256 contracts and are not subject to the mark-to-market or 60 percent-40 percent taxation rules. When call options written by a Portfolio, or put options purchased by a Portfolio, are exercised, the gain or loss realized on the sales of the underlying securities may be either short-term or long-term, depending upon the holding period of the securities. In determining the amount of gain or loss, the sales proceeds are reduced by the premium paid for over-the-counter puts or increased by the premium received for over-the-counter calls. If a Portfolio holds a security which is offset by a Section 1256 contract, the Portfolio would be deemed to hold a "mixed straddle" position, as such is defined in the Code. A Portfolio may elect to identify its mixed straddle positions pursuant to Section 1256(d) of the Code and thereby avoid application of both the mark-to-market and 60 percent-40 percent taxation rules. The Portfolio may also make certain other elections with respect to mixed straddles which could avoid or limit the application of certain rules which could, in certain circumstances, cause deferral or disallowance of losses, change long-term capital gains into short-term capital gains, or change short-term capital losses into long-term capital losses. Whether the portfolio security constituting part of the identified mixed straddle is deemed to have been held for less than three months for purposes of determining qualification of the Portfolio as a regulated investment company will be determined generally by the actual holding period of the security. In certain circumstances, entering into a mixed straddle could result in the recognition of unrealized gain or loss which would be taken into account in determining the amount of income available for the Portfolio's distributions, and can result in an amount which is greater or less than the Portfolio's net realized gains being available for distribution. If an amount which is less than the Portfolio's net realized gains is available for distribution, the Portfolio may elect to distribute more than such available amount, up to the full amount of such net realized gains. Such a distribution may, in part, constitute a return of capital to the shareholders. If the Portfolio does not elect to identify a mixed straddle, no recognition of gain or loss on the securities in its portfolio will result when the mixed straddle is entered into. However, any losses realized on the straddle will be governed by a number of tax rules which might, under certain circumstances, defer or disallow the losses in whole or in part, change long-term gains into short-term gains, or change short-term losses into long-term losses. A deferral or disallowance of recognition of a realized loss may result in an amount being available for the Portfolio's distributions which is greater than the Portfolio's net realized gains. 46 SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS (GLOBAL DIVIDEND GROWTH PORTFOLIO, EUROPEAN GROWTH PORTFOLIO, PACIFIC GROWTH PORTFOLIO AND CAPITAL APPRECIATION PORTFOLIO). 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 each of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO 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 Portfolio. Until such time as these uncertainties are resolved, the Fund will utilize the more conservative, or limiting, definition or approach with respect to determining permissible investments of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO. 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 Portfolio's investment company taxable income available to be distributed to shareholders as ordinary income, rather than increasing or decreasing the amount of the Portfolio's net capital gain. Additionally, if Code Section 988 losses exceed other investment company taxable income during a taxable year, the affected Portfolio would not be able to make any ordinary dividend distributions. The GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO and the CAPITAL APPRECIATION PORTFOLIO may be subject to taxes in foreign countries in which they invest. In addition, if the EUROPEAN GROWTH PORTFOLIO were deemed to be a resident of the United Kingdom for United Kingdom tax purposes or if the Portfolio were treated as being engaged in a trading activity through an agent in the United Kingdom, there is a risk that the United Kingdom would attempt to tax all or a portion of the Portfolio's gains or income. In light of the terms and conditions of the Investment Management and Sub-Advisory Agreements, it is believed that any such risk is minimal. If any of the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO, the PACIFIC GROWTH PORTFOLIO or the CAPITAL APPRECIATION PORTFOLIO 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 Portfolio level which could not be eliminated by distributions to shareholders. The U.S. Treasury issued proposed regulation section 1.1291-8 which establishes a mark-to-market regime which allows investment companies 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 a Portfolio with respect to investments in PFIC's would be significant. PERFORMANCE INFORMATION - -------------------------------------------------------------------------------- The annualized current yield of the MONEY MARKET PORTFOLIO, as may be quoted from time to time in advertisements and other communications to shareholders and potential investors, is computed by determining, for a stated seven-day period, the net change, exclusive of capital changes and including the value of additional shares purchased with dividends and any dividends declared therefrom, in the value of a hypothetical pre-existing account having a balance of one share at the beginning of the period, subtracting a hypothetical charge which reflects deductions from shareholder accounts (such as management fees), and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and then multiplying the base period return by (365/7). 47 The MONEY MARKET PORTFOLIO's annualized effective yield, as may be quoted from time to time in advertisements and other communications to shareholders and potential investors, is computed by determining (for the same stated seven-day period as for the current yield), the net change, exclusive of capital changes and including the value of additional shares purchased with dividends and any dividends declared therefrom, in the value of a hypothetical pre-existing account having a balance of one share at the beginning of the period, subtracting a hypothetical charge reflecting deductions from shareholder accounts, and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and then compounding the base period return by adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the result. The yields quoted in any advertisement or other communication should not be considered a representation of the yields of the MONEY MARKET PORTFOLIO in the future since the yield is not fixed. Actual yields will depend not only on the type, quality and maturities of the investments held by the MONEY MARKET PORTFOLIO and changes in interest rates on such investments, but also on changes in the Portfolio's expenses during the period. Yield information may be useful in reviewing the performance of the MONEY MARKET PORTFOLIO and for providing a basis for comparison with other investment alternatives. However unlike bank deposits or other investments which typically pay a fixed yield for a stated period of time, the MONEY MARKET PORTFOLIO'S yield fluctuates. Furthermore, the quoted yield does not reflect charges which may be imposed on the Contracts by the applicable Account and therefore is not equivalent to total return under a Contract (for a description of such charges, see the Prospectus for the Contracts which accompanies the Prospectus for the Fund). The current yield of the MONEY MARKET PORTFOLIO for the seven days ending December 31, 1996 was 4.96%. The effective annual yield on 4.96% is 5.09%, assuming daily compounding. As discussed in the Prospectus, from time to time the Fund may quote the "yield" of each of the QUALITY INCOME PLUS PORTFOLIO, the HIGH YIELD PORTFOLIO and the UTILITIES PORTFOLIO in advertising and sales literature. Yield is calculated for any 30-day period as follows: the amount of interest and/or dividend income for each security in the Portfolio is determined in accordance with regulatory requirements; the total for the entire portfolio constitutes the Portfolio's gross income for the period. Expenses accrued during the period are subtracted to arrive at "net investment income." The resulting amount is divided by the product of the net asset value per share on the last day of the period multiplied by the average number of Portfolio shares outstanding during the period that were entitled to dividends. This amount is added to 1 and raised to the sixth power. 1 is then subtracted from the result and the difference is multiplied by 2 to arrive at the annualized yield. The "yield" of a Portfolio does not reflect the deduction of any charges which may be imposed on the Contracts by the applicable Account which, if quoted, would reduce the yield quoted. For the 30-day period ended December 31, 1996, the yield of the QUALITY INCOME PLUS PORTFOLIO, calculated pursuant to this formula, was 6.75%, the yield of the HIGH YIELD PORTFOLIO, calculated pursuant to this formula, was 11.48%, and the yield of the UTILITIES PORTFOLIO, calculated pursuant to this formula, was 3.60%. As discussed in the Prospectus, from time to time the Fund may quote the "total return" of each Portfolio in advertising and sales literature. A Portfolio's "average annual total return" represents an annualization of the Portfolio's total return over a particular period and is computed by finding the annual percentage rate which will result in the ending redeemable value of a hypothetical $1,000 investment made at the beginning of a one, five or ten year period, or for the period from the date of commencement of the Portfolio's operations, if shorter than any of the foregoing. For the purpose of this calculation, it is assumed that all dividends and distributions are reinvested. However, average annual total return does not reflect the deduction of any charges which may be imposed on the Contracts by the applicable Account which, if quoted, would reduce the performance quoted. The formula for computing the average annual total return involves a percentage obtained by dividing the ending redeemable value by the amount of the initial investment, taking a root of the quotient (where the root is equivalent to the number of years in the period) and subtracting 1 from the result. 48 The average annual total returns of the MONEY MARKET PORTFOLIO, the HIGH YIELD PORTFOLIO and the EQUITY PORTFOLIO for the one, five and ten year periods ended December 31, 1996 were 5.11%, 4.14% and 5.68%, respectively, for the MONEY MARKET PORTFOLIO; 11.98%, 13.00% and 7.40%, respectively, for the HIGH YIELD PORTFOLIO; and 12.36%, 12.77% and 13.09%, respectively, for the EQUITY PORTFOLIO. The average annual total returns of the QUALITY INCOME PLUS PORTFOLIO and the STRATEGIST PORTFOLIO for the one and five year periods ended December 31, 1996, and for the period from March 1, 1987 (commencement of these Portfolios' operations) through December 31, 1996, were 1.56%, 7.59% and 8.70%, respectively, for the QUALITY INCOME PLUS PORTFOLIO and 15.02%, 9.13% and 9.98%, respectively, for the STRATEGIST PORTFOLIO. The average annual total returns of the UTILITIES PORTFOLIO and the DIVIDEND GROWTH PORTFOLIO for the one and five year periods ended December 31, 1996 and for the period from March 1, 1990 (commencement of these Portfolios' operations) through December 31, 1996 were 8.68% 10.64% and 11.38%, respectively, for the UTILITIES PORTFOLIO and 23.89%, 15.13% and 13.54%, respectively, for the DIVIDEND GROWTH PORTFOLIO. The average annual total returns of the CAPITAL GROWTH PORTFOLIO and the EUROPEAN GROWTH PORTFOLIO for one and five year periods ended December 31, 1996 and for the period from March 1, 1991 (commencement of these Portfolios' operations) through December 31, 1996 were 11.55%, 6.71% and 10.35%, respectively, for the CAPITAL GROWTH PORTFOLIO and 29.99%, 21.04% and 18.04%, respectively, for the EUROPEAN GROWTH PORTFOLIO. The average annual total returns of the GLOBAL DIVIDEND GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO for the one year period ended December 31, 1996 and for the period from February 23, 1994 (commencement of these Portfolios' operations) through December 31, 1996 were 17.49% and 13.60%, respectively, for the GLOBAL DIVIDEND GROWTH PORTFOLIO and 3.89% and 0.85%, respectively, for the PACIFIC GROWTH PORTFOLIO. In addition to the foregoing, the Fund may advertise the total return of the Portfolios over different periods of time by means of aggregate, average, year-by-year or other types of total return figures. Such calculations similarly do not reflect the deduction of any charges which may be imposed on the Contracts by an Account. The Fund may also compute the aggregate total returns of the Portfolios for specified periods by determining the aggregate percentage rate which will result in the ending value of a hypothetical $1,000 investment made at the beginning of the period. For the purpose of this calculation, it is assumed that all dividends and distributions are reinvested. The formula for computing aggregate total return involves a percentage obtained by dividing the ending value (without the reduction for any charges imposed on the Contracts by the applicable Account) by the initial $1,000 investment and subtracting 1 from the result. Based on the foregoing calculation, the total returns of the MONEY MARKET PORTFOLIO, the HIGH YIELD PORTFOLIO and the EQUITY PORTFOLIO for the one, five and ten year periods ended December 31, 1996 were 5.11%, 22.52% and 73.71%, respectively, for the MONEY MARKET PORTFOLIO, 11.98%, 84.33% and 104.27%, respectively, for the HIGH YIELD PORTFOLIO and 12.36%, 82.41% and 242.24%, respectively, for the EQUITY PORTFOLIO, the total returns of the QUALITY INCOME PLUS PORTFOLIO and the STRATEGIST PORTFOLIO for the one and five year periods ended December 31, 1996 and for the period from March 1, 1987 through December 31, 1996 were 1.56%, 44.17% and 127.19%, respectively, for the QUALITY INCOME PLUS PORTFOLIO and 15.02%, 54.81% and 154.82%, respectively, for the STRATEGIST PORTFOLIO, the total returns of the UTILITIES PORTFOLIO and the DIVIDEND GROWTH PORTFOLIO for the one and five year periods ended December 31, 1996 and for the period from March 1, 1990 through December 31, 1996 were 8.68%, 65.77% and 108.89%, respectively, for the UTILITIES PORTFOLIO and 23.96%, 102.25% and 138.21%, respectively, for the DIVIDEND GROWTH PORTFOLIO, the total returns of the CAPITAL GROWTH PORTFOLIO and the EUROPEAN GROWTH PORTFOLIO for the one and five year periods ended December 31, 1996 and for the period from March 1, 1991 through December 31, 1996 were 11.55%, 38.37% and 77.68%, respectively, for the CAPITAL GROWTH PORTFOLIO and 29.99%, 159.80% and 163.29%, respectively, for the EUROPEAN GROWTH PORTFOLIO, and the total returns of the GLOBAL DIVIDEND GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO for the one year period ended December 31, 1996 and for the period from February 23, 1994 through December 31, 1996 were 17.49% and 43.88%, respectively, for the GLOBAL DIVIDEND GROWTH PORTFOLIO and 3.89% and 2.46%, respectively, for the PACIFIC GROWTH PORTFOLIO. The Fund may also advertise the growth of hypothetical investments of $10,000, $50,000 and $100,000 in shares of a Portfolio by adding 1 to the Portfolio's aggregate total return to date (expressed as a decimal) and multiplying by $10,000, $50,000 or $100,000, as the case may be. Investments of 49 $10,000, $50,000 and $100,000 in each Portfolio of the Fund at inception of the Portfolio would have grown (or declined) to the following amounts at December 31, 1996:
INVESTMENT AT COMMENCEMENT OF OPERATIONS OF ----------------------------------- PORTFOLIO $10,000 $50,000 $100,000 - ---------------------------------------------------------------------------- --------- ----------- ----------- Money Market Portfolio...................................................... $ 21,451 $ 107,255 $ 214,510 Quality Income Plus Portfolio............................................... 22,719 113,596 227,190 High Yield Portfolio........................................................ 34,427 172,135 344,270 Utilities Portfolio......................................................... 20,889 104,445 208,890 Dividend Growth Portfolio................................................... 23,821 119,105 238,210 Capital Growth Portfolio.................................................... 17,768 88,840 177,680 Global Dividend Growth Portfolio............................................ 14,388 71,940 143,880 European Growth Portfolio................................................... 26,329 131,645 263,290 Pacific Growth Portfolio.................................................... 10,246 51,230 102,460 Equity Portfolio............................................................ 55,024 275,120 550,240 Strategist Portfolio........................................................ 25,482 127,410 254,820
The Fund from time to time may also advertise the performance of the Portfolios relative to certain performance rankings and indexes compiled by independent organizations. DESCRIPTION OF SHARES OF THE FUND - -------------------------------------------------------------------------------- The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of separate Portfolios and to divide or combine the shares of any Portfolio into a greater or lesser number of shares of that Portfolio without thereby changing the proportionate beneficial interests in that Portfolio. As discussed in the Prospectus, the shares of beneficial interest of the Fund are divided into thirteen separate Portfolios, and the shares of each Portfolio have equal rights and privileges with all other shares of that Portfolio. Each share of a Portfolio represents an equal proportional interest in that Portfolio with each other share. Upon liquidation of the Fund or any Portfolio, shareholders of a Portfolio are entitled to share pro rata in the net assets of that Portfolio available for distribution to shareholders. Shares have no preemptive or conversion rights. The right of redemption is described above and in the Prospectus. Shares of each Portfolio are fully paid and non-assessable by the Fund. The Trustees are authorized to classify unissued shares of the Fund by assigning them to a Portfolio for issuance. The Declaration of Trust permits the Trustees to authorize the creation of additional series of shares and additional classes of shares within any series, as described in the Prospectus. Such additional offerings would not affect the interests of the current shareholders in the existing Portfolios. All consideration received by the Fund for shares of any additional Portfolios, and all assets in which such consideration is invested, would belong to that Portfolio (subject only to the rights of creditors of the Fund) and would be subject to the liabilities related thereto. Pursuant to the Act, shareholders of any additional Portfolio would normally have to approve the adoption of any management contract relating to such Portfolio and of any changes in the investment policies related thereto. Shares of each Portfolio entitle their holders to one vote per share (with proportionate voting for fractional shares). Shareholders have the right to vote on the election of Trustees of the Fund and on any and all matters on which by law or the provisions of the Fund's By-Laws they may be entitled to vote. To the extent required by law, Northbrook Life Insurance Company, Allstate Life Insurance Company of New York, Glenbrook Life and Annuity Company and Paragon Life Insurance Company, which are the only shareholders of the Fund, will vote the shares of the Fund held in each Account in accordance with instructions from Contract Owners, as more fully described under the caption "Voting Rights" in the Prospectus for the Variable Annuity Contracts or the Variable Life Contracts. Shareholders of all Portfolios vote for a single set of Trustees. All of the Trustees of the Fund, except for Messrs. Bozic, Purcell and Schroeder, have been elected by Northbrook Life Insurance Company and Allstate Life Insurance Company of New York, pursuant to the instructions of Contract Owners, most recently at a Special 50 Meeting of Shareholders held on January 13, 1993. Messrs. Bozic, Purcell and Schroeder were elected by the other Trustees of the Fund on April 8, 1994. 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 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. Under certain circumstances the shareholders may call a meeting to remove Trustees and the Fund is required to provide assistance in communicating with shareholders about such a meeting. On any matters affecting only one Portfolio, only the shareholders of that Portfolio are entitled to vote. On matters relating to all the Portfolios but affecting the Portfolios differently, separate votes by Portfolio are required. Approval of an Investment Management Agreement and a change in fundamental policies would be regarded as matters requiring separate voting by each Portfolio. With respect to the submission to shareholder vote of a matter requiring separate voting by Portfolio, the matter shall have been effectively acted upon with respect to any Portfolio if a majority of the outstanding voting securities of that Portfolio votes for the approval of the matter, notwithstanding that: (1) the matter has not been approved by a majority of the outstanding voting securities of any other Portfolio; or (2) the matter has not been approved by a majority of the outstanding voting securities of the Fund. The voting rights of shareholders are not cumulative, so that holders of more than 50 percent of the shares voting can, if they choose, elect all Trustees being selected, while the holders of the remaining shares would be unable to elect any Trustees. The Declaration of Trust further provides that no Trustee, officer, employee or agent of the Fund is liable to the Fund or to a shareholder, nor is any Trustee, officer, employee or agent liable to any third persons in connection with the affairs of the Fund, except as such liability may arise from his/her or its own bad faith, willful misfeasance, gross negligence, or reckless disregard of his/her or its duties. It also provides that all third persons shall look solely to the Fund'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 liability in connection with the affairs of the Fund. The Trust shall be of unlimited duration subject to the provisions in the Declaration of Trust concerning termination by action of the shareholders. CUSTODIANS AND TRANSFER AGENT - -------------------------------------------------------------------------------- The Bank of New York, 90 Washington Street, New York, New York 10286 is the Custodian of the assets of each Portfolio other than the GLOBAL DIVIDEND GROWTH PORTFOLIO, the EUROPEAN GROWTH PORTFOLIO and the PACIFIC GROWTH PORTFOLIO. The Chase Manhattan Bank, One Chase Plaza, New York, New York 10005 is the Custodian of the assets of the Global Dividend Growth Portfolio, the European Growth Portfolio and the Pacific Growth Portfolio in the United States and around the world. As Custodian, The Chase Manhattan Bank has contracted with various foreign banks and depositories to hold portfolio securities of non-U.S. issuers on behalf of those Portfolios. All of a Portfolio's cash balances with the Custodians in excess of $100,000 are unprotected by Federal deposit insurance. Such balances may, at times, be substantial. Dean Witter Trust Company, 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. Dean Witter Trust Company 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 Company's responsibilities include maintaining shareholder accounts; reinvesting dividends; processing account registration changes; handling purchase and redemption transactions; tabulating proxies; and maintaining shareholder records and lists. For these services Dean Witter Trust Company receives a fee from each Portfolio of the Fund. 51 INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036 serves as the independent accountants of the Fund. The independent accountants are responsible for auditing the annual financial statements of the Fund. REPORTS TO SHAREHOLDERS - -------------------------------------------------------------------------------- Statements showing the portfolio of each Portfolio and other information will be furnished, at least semi-annually, to Contract Owners, and annually such statements will be audited by independent accountants whose selection must be approved annually by the Fund's Trustees. The Fund's fiscal year ends on December 31. 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 annual financial statements of the Fund for the year ended December 31, 1996, which are 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. 52 DEAN WITTER VARIABLE INVESTMENT SERIES--MONEY MARKET PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 - --------------------------------------------------------------------------------
ANNUALIZED PRINCIPAL YIELD AMOUNT (IN ON DATE OF MATURITY THOUSANDS) PURCHASE DATE VALUE - ----------- ------------ ------------------- --------------- COMMERCIAL PAPER (85.4%) AUTOMOTIVE - FINANCE (11.0%) $ 3,000 Chrysler Financial Corp................................. 5.46 % 04/07/97 $ 2,956,960 14,930 Ford Motor Credit Co.................................... 5.38-5.48 02/12/97-04/10/97 14,758,203 14,880 General Motors Acceptance Corp.......................... 5.40-5.63 01/15/97-06/02/97 14,689,058 5,000 Toyota Motor Credit Corp................................ 5.40 02/07/97 4,972,713 --------------- 37,376,934 --------------- BANK HOLDING COMPANIES (9.7%) 8,680 BankAmerica Corp........................................ 5.41-5.45 03/10/97-04/11/97 8,573,661 10,000 NationsBank Corp........................................ 5.37-5.75 02/19/97-02/28/97 9,919,532 14,700 PNC Funding Corp........................................ 5.42-5.52 01/24/97-03/31/97 14,605,202 --------------- 33,098,395 --------------- BANKS - COMMERCIAL (21.5%) 8,000 Abbey National North America Corp....................... 5.38-5.42 03/11/97-03/21/97 7,911,194 8,500 ANZ Delaware Inc........................................ 5.36-5.40 02/25/97-04/14/97 8,396,180 3,850 Barclays U.S. Funding Corp.............................. 5.65 01/10/97 3,844,668 10,055 Commerzbank U.S. Finance Inc............................ 5.35-5.50 01/02/97-01/30/97 10,023,545 11,500 National Australia Funding (DE) Inc..................... 5.53-6.01 01/03/97-02/11/97 11,459,039 4,000 Rabobank USA Financial Corp............................. 5.43 05/09/97 3,924,480 11,960 Societe Generale N.A., Inc.............................. 5.42-5.62 02/20/97-04/09/97 11,826,637 15,815 WestPac Capital Corp.................................... 5.41-5.59 01/13/97-05/20/97 15,649,166 --------------- 73,034,909 --------------- BROKERAGE (5.9%) 14,200 Goldman Sachs Group L.P................................. 5.38-7.35 01/02/97-03/20/97 14,068,776 5,875 Morgan Stanley Group, Inc............................... 5.39-6.79 01/02/97-01/28/97 5,858,686 --------------- 19,927,462 --------------- ENTERTAINMENT (0.7%) 2,350 Walt Disney Co.......................................... 5.49 01/23/97 2,342,245 --------------- FINANCE - COMMERCIAL (4.7%) 16,300 CIT Group Holdings, Inc................................. 5.42-5.47 02/27/97-05/16/97 16,071,433 --------------- FINANCE - CONSUMER (13.3%) 15,330 American Express Credit Corp............................ 5.39-5.42 02/24/97-05/27/97 15,125,188 4,000 American General Finance Corp........................... 5.41 02/06/97 3,978,720 3,500 Avco Financial Services Inc............................. 5.38 03/21/97 3,459,447 9,825 Beneficial Corp......................................... 5.37-5.41 02/05/97-03/17/97 9,742,026 13,150 Household Finance Corp.................................. 5.36-5.66 01/08/97-04/17/97 13,054,868 --------------- 45,360,249 --------------- FINANCE - CORPORATE (0.9%) 3,000 Ciesco, L.P............................................. 5.48 01/07/97 2,997,300 --------------- FINANCE - DIVERSIFIED (5.9%) 4,000 Commercial Credit Co.................................... 5.46 03/05/97 3,962,200 16,155 General Electric Capital Corp........................... 5.40-5.81 01/06/97-04/24/97 15,995,637 --------------- 19,957,837 --------------- HEALTHCARE-DIVERSIFIED (1.1%) 4,000 Becton, Dickinson & Co.................................. 5.49 06/09/97 3,905,483 ---------------
53 DEAN WITTER VARIABLE INVESTMENT SERIES--MONEY MARKET PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
ANNUALIZED PRINCIPAL YIELD AMOUNT (IN ON DATE OF MATURITY THOUSANDS) PURCHASE DATE VALUE - ----------- ------------ ------------------- --------------- INDUSTRIALS (0.6%) $ 2,035 Caterpillar Financial Service Corp...................... 5.63 % 01/13/97 $ 2,031,249 --------------- INSURANCE (2.7%) 4,260 American General Corp................................... 5.40 01/21/97 4,247,409 5,000 MetLife Funding, Inc.................................... 5.36 03/04/97 4,954,533 --------------- 9,201,942 --------------- OFFICE EQUIPMENT (2.0%) 3,000 IBM Credit Corp......................................... 5.35 03/06/97 2,971,893 4,000 International Business Machines Corp.................... 5.36 03/18/97 3,955,498 --------------- 6,927,391 --------------- RETAIL (4.8%) 16,450 Sears Roebuck Acceptance Corp........................... 5.42-5.54 01/27/97-06/10/97 16,194,373 --------------- UTILITIES - FINANCE (0.6%) 2,000 National Rural Utilities Cooperative Finance Corp....... 5.37 03/11/97 1,979,722 --------------- TOTAL COMMERCIAL PAPER (AMORTIZED COST $290,406,924)....................................... 290,406,924 ---------------
CERTIFICATES OF DEPOSIT (6.5%) 11,500 Chase Manhattan Bank (USA).............................. 5.40-5.75 03/11/97-05/05/97 11,500,000 5,000 First Alabama Bank...................................... 5.39 01/15/97 4,999,994 3,500 Mellon Bank, N.A........................................ 5.48 03/03/97 3,500,000 2,000 Union Bank of California, N.A........................... 5.72 01/09/97 2,000,000 --------------- TOTAL CERTIFICATES OF DEPOSIT (AMORTIZED COST $21,999,994)................................. 21,999,994 ---------------
SHORT-TERM BANK NOTES (3.6%) 12,400 La Salle National Bank (Amortized Cost $12,400,000)..... 5.45-5.59 03/26/97-06/11/97 12,400,000 ---------------
BANKERS' ACCEPTANCES (3.2%) 4,400 Chase Manhattan Bank.................................... 5.54 02/04/97 4,377,435 1,000 First National Bank of Boston........................... 5.54 02/10/97 994,000 3,000 First Union National Bank of Florida.................... 5.39 04/04/97 2,959,158 2,700 Republic National Bank of New York...................... 5.46 04/23/97 2,654,892 --------------- TOTAL BANKERS' ACCEPTANCES (AMORTIZED COST $10,985,485).................................... 10,985,485 ---------------
U.S. GOVERNMENT AGENCY (1.3%) 4,500 Federal National Mortgage Assoc. (Amortized Cost $4,440,200)........................... 5.29 04/03/97 4,440,200 --------------- TOTAL INVESTMENTS (AMORTIZED COST $340,232,603) (A).................... 100.0% 340,232,603 CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES......................... 0.0 5,438 ---------- ------------- NET ASSETS............................................................. 100.0% $ 340,238,041 ---------- ------------- ---------- ------------- - ---------------- (A) COST IS THE SAME FOR FEDERAL INCOME TAX PURPOSES.
SEE NOTES TO FINANCIAL STATEMENTS 54 DEAN WITTER VARIABLE INVESTMENT SERIES--QUALITY INCOME PLUS PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT (IN COUPON MATURITY THOUSANDS) RATE DATE VALUE - ----------- ---------- ------------------- --------------- CORPORATE BONDS (63.7%) BANK HOLDING COMPANIES (9.7%) $ 1,000 Banc One Corp.............................................. 8.74% 09/15/03 $ 1,101,710 5,000 Bank One Corp.............................................. 7.625 10/15/26 5,062,100 4,000 Bankers Trust New York Corp................................ 7.375 05/01/08 4,022,160 2,000 Citicorp................................................... 7.25 09/01/08 2,015,320 5,000 First Bank, N.A............................................ 8.35 11/01/04 5,414,550 5,000 First Bank System.......................................... 7.625 05/01/05 5,182,600 2,000 Huntington National Bank................................... 7.625 01/15/03 2,067,760 3,000 Mellon Bank N.A............................................ 7.625 09/15/07 3,113,790 5,000 NBD Bank N.A............................................... 6.25 08/15/03 4,851,700 3,000 Old Kent Financial Corp.................................... 6.625 11/15/05 2,893,740 3,145 PNC Funding Corp........................................... 9.875 03/01/01 3,504,379 5,000 State Street Boston Corp................................... 5.95 09/15/03 4,776,950 2,000 Wachovia Corp.............................................. 6.375 04/15/03 1,962,620 --------------- 45,969,379 --------------- BEVERAGES (0.5%) 2,000 Coca-Cola Enterprises, Inc................................. 8.50 02/01/22 2,246,780 --------------- BROKERAGE (3.0%) 4,000 Bear Stearns Companies, Inc................................ 6.625 01/15/04 3,913,640 2,000 Donaldson, Lufkin & Jenrette, Inc.......................... 6.875 11/01/05 1,955,260 3,000 Lehman Brothers Holdings Inc............................... 7.25 10/15/03 3,011,670 5,000 Lehman Brothers Holdings Inc............................... 8.50 08/01/15 5,299,750 --------------- 14,180,320 --------------- COMPUTERS (1.0%) 5,000 International Business Machines Corp....................... 7.125 12/01/96 4,759,800 --------------- CONSUMER PRODUCTS (5.2%) 4,000 Becton, Dickinson & Co..................................... 8.70 01/15/25 4,352,440 5,000 CPC International, Inc..................................... 7.25 12/15/26 4,970,050 5,000 General Motors Corp........................................ 7.70 04/15/16 5,168,050 5,000 Philip Morris Companies, Inc............................... 7.125 10/01/04 4,994,150 5,000 Philip Morris Companies, Inc............................... 7.50 01/15/02 5,118,050 --------------- 24,602,740 --------------- CONSUMER SERVICES (0.9%) 4,500 Times Mirror Co............................................ 7.25 11/15/96 4,370,445 --------------- ENERGY (1.9%) 2,000 Anadarko Petroleum Corp.................................... 7.73 09/15/96 2,089,080 5,000 Dresser Industries, Inc.................................... 7.60 08/15/96 5,111,000 520 Mobil Corp................................................. 9.17 02/29/00 545,252 1,000 Texaco Capital, Inc........................................ 9.75 03/15/20 1,273,250 --------------- 9,018,582 --------------- FINANCIAL SERVICES (7.8%) 5,000 CNA Financial Corp......................................... 7.25 11/15/23 4,751,450 2,000 Corestates Capital Corp.................................... 6.75 11/15/06 1,954,900 5,000 Countrywide Funding Corp................................... 6.875 09/15/05 4,936,700
55 DEAN WITTER VARIABLE INVESTMENT SERIES--QUALITY INCOME PLUS PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT (IN COUPON MATURITY THOUSANDS) RATE DATE VALUE - ----------- ---------- ------------------- --------------- $ 3,000 Equifax, Inc............................................... 6.50% 06/15/03 $ 2,976,120 3,000 Ford Capital BV............................................ 9.50 06/01/10 3,560,670 5,000 Ford Motor Credit Corp..................................... 7.75 03/15/05 5,228,400 3,000 General Motors Acceptance Corp............................. 9.00 10/15/02 3,301,140 2,000 Household Finance Corp..................................... 8.95 09/15/99 2,127,100 3,500 Household Finance Corp..................................... 8.45 12/10/02 3,765,125 4,000 Norwest Financial Inc...................................... 7.875 02/15/02 4,212,400 --------------- 36,814,005 --------------- FOODS (0.8%) 5,000 Archer-Daniels-Midland Co.................................. 0.00 05/01/02 3,544,150 --------------- HEALTHCARE - DIVERSIFIED (1.9%) 5,000 Columbia/HCA Healthcare Corp............................... 9.00 12/15/14 5,831,750 2,000 Kaiser Foundation Health Plan, Inc......................... 9.00 11/01/01 2,199,340 1,000 Kaiser Foundation Health Plan, Inc......................... 9.55 07/15/05 1,170,720 --------------- 9,201,810 --------------- INDUSTRIALS (7.5%) 5,000 Boeing Co.................................................. 7.95 08/15/24 5,544,100 5,000 Browning Ferris Industries, Inc............................ 9.25 05/01/21 5,952,500 5,019 Burlington Northern Santa Fe Corp.......................... 7.33 06/23/10 5,112,554 4,888 Burlington Northern Santa Fe Corp.......................... 7.97 01/01/15 5,206,865 1,000 Caterpillar, Inc........................................... 9.375 07/15/01 1,107,820 3,000 Caterpillar, Inc........................................... 9.375 08/15/11 3,592,440 1,000 Consolidated Rail Corp..................................... 9.75 06/15/20 1,240,140 7,500 Union Pacific Resources.................................... 7.50 11/01/96 7,514,850 --------------- 35,271,269 --------------- INSURANCE (2.9%) 5,000 Liberty Mutual Insurance Co. - 144A*....................... 7.875 10/15/26 5,037,150 5,000 Lumbermens Mutual Casualty - 144A*......................... 9.15 07/01/26 5,442,400 3,000 Travelers Group, Inc....................................... 7.75 06/15/99 3,095,640 --------------- 13,575,190 --------------- PHARMACEUTICALS (1.7%) 2,000 Bristol-Myers Squibb....................................... 6.80 11/15/26 1,928,420 5,000 Johnson & Johnson.......................................... 8.72 11/01/24 5,525,350 733 Marion Merrell Corp........................................ 9.11 08/01/05 804,946 --------------- 8,258,716 --------------- REAL ESTATE INVESTMENT TRUST (1.0%) 5,000 Kimco Realty Corp.......................................... 6.50 10/01/03 4,882,200 --------------- RESTAURANTS (0.2%) 1,000 McDonald's Corp............................................ 8.875 04/01/11 1,160,140 --------------- RETAIL (3.9%) 5,000 May Department Stores Co................................... 6.875 11/01/05 4,974,850 5,000 May Department Stores Co................................... 7.625 08/15/13 5,159,700 1,000 Maytag Corp................................................ 9.75 05/15/02 1,126,390 1,000 Penney (J.C) Co., Inc...................................... 9.75 06/15/21 1,120,420 3,000 Sears Roebuck Acceptance Corp.............................. 6.90 08/01/03 3,015,360
56 DEAN WITTER VARIABLE INVESTMENT SERIES--QUALITY INCOME PLUS PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT (IN COUPON MATURITY THOUSANDS) RATE DATE VALUE - ----------- ---------- ------------------- --------------- $ 3,000 Wal-Mart Stores, Inc....................................... 7.49% 06/21/07 $ 3,152,880 --------------- 18,549,600 --------------- TECHNOLOGY (2.8%) 5,000 Lockheed Corp.............................................. 7.875 03/15/23 5,052,450 3,000 Lockheed Martin Corp....................................... 7.70 06/15/08 3,165,630 5,000 Lockheed Martin Corp....................................... 7.20 05/01/36 5,127,600 --------------- 13,345,680 --------------- TELECOMMUNICATIONS (4.7%) 9,000 AT&T Corp.................................................. 8.35 01/15/25 9,465,390 5,000 GTE North Inc.............................................. 7.625 05/15/26 5,032,100 5,000 Lucent Technologies Inc.................................... 7.25 07/15/06 5,127,500 3,000 U.S. West Communications, Inc.............................. 7.25 10/15/35 2,862,210 --------------- 22,487,200 --------------- TRANSPORTATION (1.0%) 5,000 America West Airlines...................................... 6.85 07/02/09 4,917,250 --------------- UTILITIES - ELECTRIC (5.3%) 1,000 Chugach Electric Co........................................ 9.14 03/15/22 1,120,410 3,750 Consolidated Edison Co. of New York, Inc................... 8.05 12/15/27 3,775,800 4,000 Duke Power Co.............................................. 8.625 03/01/22 4,171,000 5,000 Florida Power & Light Co................................... 7.05 12/01/26 4,688,250 1,260 Georgia Power Co........................................... 8.625 06/01/22 1,260,000 5,000 Pennsylvania Power & Light Co.............................. 7.70 10/01/09 5,325,700 5,000 South Carolina Electric & Gas Co........................... 7.625 06/01/23 4,991,550 --------------- 25,332,710 --------------- TOTAL CORPORATE BONDS (IDENTIFIED COST $294,793,311)........................................ 302,487,966 --------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS (31.9%) 31 Federal Home Loan Mortgage Corp............................ 11.50 06/01/11-05/01/19 35,147 540 Federal Home Loan Mortgage Corp. PC Gold................... 6.50 01/01/24-09/01/24 516,190 3,377 Federal Home Loan Mortgage Corp. PC Gold................... 8.50 01/01/22-12/01/24 3,499,009 14,027 Federal National Mortgage Assoc............................ 7.50 07/01/26-09/01/26 14,018,263 1,763 Federal National Mortgage Assoc............................ 9.00 06/01/21-02/01/25 1,857,900 25,152 Government National Mortgage Assoc......................... 6.50 08/15/25-05/15/26 23,980,806 25,942 Government National Mortgage Assoc......................... 7.00 10/15/22-08/15/26 25,358,589 18,191 Government National Mortgage Assoc......................... 7.50 02/15/24-08/15/26 18,197,123 20,059 Government National Mortgage Assoc......................... 8.00 10/15/24-09/15/26 20,466,427 5,206 Government National Mortgage Assoc......................... 8.50 01/15/17-07/15/26 5,392,914 3,493 Government National Mortgage Assoc......................... 9.00 07/15/24-12/15/24 3,678,819 212 Government National Mortgage Assoc......................... 10.00 05/15/16-04/15/19 232,567 5,000 Tennessee Valley Authority................................. 7.85 06/15/44 5,121,950 13,000 U.S. Treasury Bond......................................... 6.50 10/15/06 13,073,060 7,000 U.S. Treasury Bond......................................... 6.50 11/15/26 6,870,010 9,000 U.S. Treasury Bond......................................... 6.75 08/15/26 9,069,480 --------------- TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (IDENTIFIED COST $150,414,282)............................................................ 151,368,254 ---------------
57 DEAN WITTER VARIABLE INVESTMENT SERIES--QUALITY INCOME PLUS PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT (IN COUPON MATURITY THOUSANDS) RATE DATE VALUE - ----------- ---------- ------------------- --------------- FOREIGN GOVERNMENT & AGENCY OBLIGATIONS (2.8%) $ 5,000 Hydro-Quebec (Canada)...................................... 9.50% 11/15/30 $ 6,135,350 5,000 Province of New Brunswick (Canada)......................... 7.625 06/29/04 5,270,000 2,000 Quebec Province (Canada)................................... 7.50 07/15/23 1,995,600 --------------- TOTAL FOREIGN GOVERNMENT & AGENCY OBLIGATIONS (IDENTIFIED COST $12,385,590)............................................................. 13,400,950 --------------- SHORT-TERM INVESTMENT (0.2%) REPURCHASE AGREEMENT 914 The Bank of New York (dated 12/31/96; proceeds $914,226; collateralized by $271,000 U.S. Treasury Bond 13.75% due 08/15/04 valued at $404,044, $25,450 U.S. Treasury Bond 8.125% due 05/15/21 valued at $29,845, $90,285 U.S. Treasury Note 5.875% due 03/31/99 valued at $91,541 and $400,000 U.S. Treasury Note 6.375% due 05/15/99 valued at $406,803) (Identified Cost $913,953) 5.375 01/02/97 913,953 --------------- TOTAL INVESTMENTS (IDENTIFIED COST $458,507,136) (A)........................................... 98.6% 468,171,123 OTHER ASSETS IN EXCESS OF LIABILITIES.......................................................... 1.4 6,489,089 ---------- ------------- NET ASSETS..................................................................................... 100.0% $ 474,660,212 ---------- ------------- ---------- ------------- - ---------------- * RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. (A) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $12,469,104, AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $2,805,117, RESULTING IN NET UNREALIZED APPRECIATION OF $9,663,987.
SEE NOTES TO FINANCIAL STATEMENTS 58 DEAN WITTER VARIABLE INVESTMENT SERIES--HIGH YIELD PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT (IN COUPON MATURITY THOUSANDS) RATE DATE VALUE - ----------- --------- --------- --------------- CORPORATE BONDS (87.1%) AEROSPACE (1.4%) $ 3,800 Sabreliner Corp. (Series B)......................................... 12.50 % 04/15/03 $ 3,724,000 --------------- AUTOMOTIVE (4.7%) 1,800 APS, Inc............................................................ 11.875 01/15/06 1,948,500 4,000 Envirotest Systems, Inc............................................. 9.125 03/15/01 3,775,000 6,000 Toyota Motor Credit Corp............................................ 15.00 09/26/97 6,391,680 --------------- 12,115,180 --------------- BROADCAST MEDIA (3.1%) 2,000 Adams Outdoor Advertising L.P....................................... 10.75 03/15/06 2,135,000 2,000 Paxson Communications............................................... 11.625 10/01/02 2,095,000 3,505 Spanish Broadcasting System, Inc.................................... 7.50 06/15/02 3,715,300 --------------- 7,945,300 --------------- BUSINESS SERVICES (4.3%) 5,909 Anacomp, Inc........................................................ 13.00+ 06/04/02 6,086,408 5,000 Xerox Credit Corp................................................... 15.00 06/10/97 5,195,300 --------------- 11,281,708 --------------- CABLE & TELECOMMUNICATIONS (15.9%) 5,759 Adelphia Communications Corp. (Series B)............................ 9.50+ 02/15/04 5,010,523 3,000 American Communications Services, Inc............................... 13.00++ 11/01/05 1,807,500 2,000 American Communications Services, Inc............................... 12.75++ 04/01/06 1,125,000 5,000 AT&T Capital Corp................................................... 15.00 05/05/97 5,151,750 2,350 Cablevision Systems Corp............................................ 10.50 05/15/16 2,423,437 2,000 Charter Communication South East L.P. (Series B).................... 11.25 03/15/06 2,072,500 4,985 Falcon Holdings Group L.P. (Series B)............................... 11.00+ 09/15/03 4,486,303 2,000 Frontiervision L.P.................................................. 11.00 10/15/06 2,000,000 5,000 Hyperion Telecommunication (Series B)............................... 13.00++ 04/15/03 2,850,000 23,835 In-Flight Phone Corp. (Series B).................................... 14.00++ 05/15/02 8,014,519 2,000 IXC Communications Inc. (Series B).................................. 12.50 10/01/05 2,200,000 2,000 Peoples Telephone Co., Inc.......................................... 12.25 07/15/02 2,110,000 2,000 Rifkin Acquisition Partners L.P..................................... 11.125 01/15/06 2,075,000 --------------- 41,326,532 --------------- COMPUTER EQUIPMENT (3.6%) 2,000 Advanced Micro Devices.............................................. 11.00 08/01/03 2,170,000 2,000 Unisys Corp......................................................... 15.00 07/01/97 2,095,000 4,180 Unisys Corp. (Conv.)................................................ 8.25 03/15/06 5,110,510 --------------- 9,375,510 --------------- CONSUMER PRODUCTS (1.2%) 3,000 J.B. Williams Holdings, Inc......................................... 12.00 03/01/04 3,078,750 --------------- CONTAINERS (1.6%) 2,000 Mail-Well Corp...................................................... 10.50 02/15/04 2,030,000 2,000 Packaging Resources, Inc............................................ 11.625 05/01/03 2,110,000 --------------- 4,140,000 ---------------
59 DEAN WITTER VARIABLE INVESTMENT SERIES--HIGH YIELD PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT (IN COUPON MATURITY THOUSANDS) RATE DATE VALUE - ----------- --------- --------- --------------- ELECTRICAL & ALARM SYSTEMS (2.4%) $ 6,500 Mosler, Inc......................................................... 11.00 % 04/15/03 $ 6,142,500 --------------- ENTERTAINMENT/GAMING & LODGING (12.9%) 2,000 AMF Group Inc. (Series B)........................................... 10.875 03/15/06 2,110,000 4,850 Fitzgeralds Gaming Corp. (Units)++.................................. 13.00 12/31/02 4,122,500 3,740 Lady Luck Gaming Finance Corp....................................... 11.875 03/01/01 3,688,575 4,000 MGM Grand Hotels Inc................................................ 12.00 05/01/02 4,310,000 8,000 Motels of America, Inc. (Series B).................................. 12.00 04/15/04 6,760,000 3,000 Players International, Inc.......................................... 10.875 04/15/05 2,985,000 3,400 Plitt Theaters, Inc. (Canada)....................................... 10.875 06/15/04 3,455,250 3,000 Station Casinos, Inc................................................ 9.625 06/01/03 2,977,500 3,000 Stuart Entertainment Inc. - 144A*................................... 12.50 11/15/04 3,052,500 --------------- 33,461,325 --------------- FINANCIAL (2.4%) 6,000 Household Finance Corp.............................................. 15.00 09/25/97 6,391,020 --------------- FOODS & BEVERAGES (7.3%) 8,915 Envirodyne Industries, Inc.......................................... 10.25 12/01/01 8,647,550 2,500 Fleming Companies Inc............................................... 10.625 12/15/01 2,553,125 20,250 Specialty Foods Acquisition Corp. (Series B)........................ 13.00++ 08/15/05 7,897,500 --------------- 19,098,175 --------------- HEALTHCARE (2.7%) 6,060 Unilab Corp......................................................... 11.00 04/01/06 4,120,800 2,750 Unison Healthcare Corp. - 144A*..................................... 12.25 11/01/06 2,815,312 --------------- 6,936,112 --------------- MANUFACTURING (3.5%) 2,000 Berry Plastics Corp................................................. 12.25 04/15/04 2,192,500 2,000 Exide Electronics Group, Inc. (Series B)............................ 11.50 03/15/06 2,132,500 2,000 International Wire Group, Inc....................................... 11.75 06/01/05 2,150,000 2,500 Uniroyal Technology Corp............................................ 11.75 06/01/03 2,493,750 --------------- 8,968,750 --------------- MANUFACTURING - DIVERSIFIED (5.3%) 2,090 Foamex L.P.......................................................... 11.875 10/01/04 2,249,363 3,000 Interlake Corp...................................................... 12.125 03/01/02 3,131,250 3,000 J.B. Poindexter & Co., Inc.......................................... 12.50 05/15/04 2,958,750 2,000 Jordan Industries, Inc.............................................. 10.375 08/01/03 1,980,000 4,500 Jordan Industries, Inc.............................................. 11.75++ 08/01/05 3,577,500 --------------- 13,896,863 --------------- OIL & GAS (0.7%) 2,000 Empire Gas Corp..................................................... 7.00 07/15/04 1,740,000 --------------- PUBLISHING (3.0%) 3,250 Affiliated Newspapers Investments, Inc.............................. 13.25++ 07/01/06 2,665,000 2,000 American Media Operations, Inc...................................... 11.625 11/15/04 2,140,000 2,975 United States Banknote Corp......................................... 10.375 06/01/02 2,937,813 --------------- 7,742,813 ---------------
60 DEAN WITTER VARIABLE INVESTMENT SERIES--HIGH YIELD PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT (IN COUPON MATURITY THOUSANDS) RATE DATE VALUE - ----------- --------- --------- --------------- RESTAURANTS (4.8%) $ 7,750 American Restaurant Group Holdings, Inc............................. 14.00++% 12/15/05 $ 3,177,500 3,000 Carrols Corp........................................................ 11.50 08/15/03 3,180,000 8,350 Flagstar Corp....................................................... 11.25 11/01/04 3,423,500 2,500 FRD Acquisition..................................................... 12.50 07/15/04 2,565,625 --------------- 12,346,625 --------------- RETAIL (1.5%) 10,450 County Seat Stores Co. (b).......................................... 12.00 10/01/02 3,814,250 --------------- RETAIL - FOOD CHAINS (2.5%) 2,000 Jitney-Jungle Stores................................................ 12.00 03/01/06 2,112,500 2,500 Pathmark Stores, Inc................................................ 9.625 05/01/03 2,393,750 2,000 Ralphs Grocery Co................................................... 10.45 06/15/04 2,125,000 --------------- 6,631,250 --------------- TEXTILES (2.3%) 2,500 Reeves Industries Inc............................................... 11.00 07/15/02 2,412,500 4,000 U.S. Leather, Inc................................................... 10.25 07/31/03 3,520,000 --------------- 5,932,500 --------------- TOTAL CORPORATE BONDS (IDENTIFIED COST $235,033,351)...................................... 226,089,163 ---------------
NUMBER OF SHARES - ----------- COMMON STOCKS (C) (1.9%) AUTOMOTIVE (0.0%) 87 Northern Holdings Industrial Corp. (Restricted) (d)..................................... -- --------------- COMPUTER EQUIPMENT (0.0%) 39,813 Memorex Telex NV (ADR) (Netherlands) (d)................................................ 2,389 --------------- ENTERTAINMENT/GAMING & LODGING (0.0%) 2,000 Motels of America, Inc. - 144A*......................................................... 100,000 71,890 Vagabond Inns, Inc. (Class D) (a)....................................................... 72 --------------- 100,072 --------------- FOODS & BEVERAGES (0.8%) 201,075 Seven-Up/RC Bottling Co. Southern California, Inc....................................... 1,985,615 120,000 Specialty Foods Acquisition Corp. - 144A*............................................... 120,000 --------------- 2,105,615 --------------- MANUFACTURING - DIVERSIFIED (0.9%) 84,072 Thermadyne Holdings Corp. (d)........................................................... 2,227,908 --------------- PUBLISHING (0.2%) 5,000 Affiliated Newspapers Investments, Inc. (Class B)....................................... 575,000 --------------- RESTAURANTS (0.0%) 7,750 American Restaurant Group Holdings, Inc. - 144A*........................................ 7,750 --------------- TOTAL COMMON STOCKS (IDENTIFIED COST $11,693,479)....................................... 5,018,734 ---------------
61 DEAN WITTER VARIABLE INVESTMENT SERIES--HIGH YIELD PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- --------------- PREFERRED STOCK (0.7%) ENTERTAINMENT/GAMING & LODGING 80,000 Fitzgeralds Gaming Corp. (Units)++ (Identified Cost $2,000,000)......................... $ 1,840,000 ---------------
NUMBER OF EXPIRATION WARRANTS DATE - ----------- --------- WARRANTS (C) (0.1%) AEROSPACE (0.0%) 1,500 Sabreliner Corp. - 144A*...................................................... 04/15/03 15,000 --------------- CABLE & TELECOMMUNICATIONS (0.1%) 2,000 Hyperion Telecommunication - 144A*............................................ 04/01/01 90,000 9,485 In-Flight Phone Corp. - 144A*................................................. 08/31/02 9,485 --------------- 99,485 --------------- CONTAINERS (0.0%) 2,000 Crown Packaging Holdings, Ltd. (Canada) - 144A*............................... 11/01/03 20 --------------- ENTERTAINMENT/GAMING & LODGING (0.0%) 1,000 Boomtown, Inc. - 144A*........................................................ 11/01/98 10 2,000 Fitzgeralds Gaming Corp....................................................... 12/19/98 2,000 3,500 Fitzgeralds South Inc. - 144A*................................................ 03/15/99 35 --------------- 2,045 --------------- MANUFACTURING (0.0%) 2,000 Exide Electronics Group, Inc. - 144A*......................................... 03/15/06 75,000 15,000 Uniroyal Technology Corp...................................................... 06/01/03 15,000 --------------- 90,000 --------------- OIL & GAS (0.0%) 4,140 Empire Gas Corp............................................................... 07/15/04 20,700 --------------- RETAIL (0.0%) 2,000 County Seat Holdings Co....................................................... 10/15/98 20 --------------- TOTAL WARRANTS (IDENTIFIED COST $834,540)................................................ 227,270 ---------------
62 DEAN WITTER VARIABLE INVESTMENT SERIES--HIGH YIELD PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT (IN COUPON MATURITY THOUSANDS) RATE DATE VALUE - ----------- ---------- ------------------- --------------- SHORT-TERM INVESTMENTS (8.3%) U.S. GOVERNMENT AGENCY (E) (7.7%) $ 20,000 Federal Home Loan Banks (Amortized Cost $19,995,028)........................... 5.70-6.50% 01/02/97-01/03/97 $ 19,995,028 --------------- REPURCHASE AGREEMENT (0.6%) 1,481 The Bank of New York (dated 12/31/96; proceeds $1,481,216; collateralized by $569,000 U.S. Treasury Bill 0.00% due 02/20/97 valued at $565,017, $400,000 U.S. Treasury Bond 12.75% due 11/15/10 valued at $572,731, $16,461 U.S. Treasury Bond 13.375% due 08/15/01 valued at $21,989 and $346,623 U.S. Treasury Note 6.25% due 10/31/01 valued at $350,653) (Identified Cost $1,480,774)....................................... 5.375 01/02/97 1,480,774 --------------- TOTAL SHORT-TERM INVESTMENTS (IDENTIFIED COST $21,475,802)................................ 21,475,802 --------------- TOTAL INVESTMENTS (IDENTIFIED COST $271,037,172) (F)................... 98.1% 254,650,969 OTHER ASSETS IN EXCESS OF LIABILITIES.................................. 1.9 4,897,572 ---------- ------------- NET ASSETS............................................................. 100.0% $ 259,548,541 ---------- ------------- ---------- ------------- - ---------------- ADR AMERICAN DEPOSITORY RECEIPT. * RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. ++ CONSISTS OF ONE OR MORE CLASS OF SECURITIES TRADED TOGETHER AS A UNIT; GENERALLY BONDS OR PREFERRED STOCK WITH ATTACHED WARRANTS. + PAYMENT-IN-KIND SECURITY. ++ CURRENTLY A ZERO COUPON BOND AND WILL PAY INTEREST AT THE RATE SHOWN AT A FUTURE SPECIFIED DATE. (A) NON-INCOME PRODUCING SECURITY; ISSUER IN BANKRUPTCY. (B) NON-INCOME PRODUCING SECURITY; BOND IN DEFAULT. (C) NON-INCOME PRODUCING SECURITIES. (D) ACQUIRED THROUGH EXCHANGE OFFER. (E) SECURITY WAS PURCHASED ON A DISCOUNT BASIS.THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (F) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $10,771,721 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $27,157,924, RESULTING IN NET UNREALIZED DEPRECIATION OF $16,386,203.
SEE NOTES TO FINANCIAL STATEMENTS 63 DEAN WITTER VARIABLE INVESTMENT SERIES--UTILITIES PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- --------------- COMMON STOCKS (87.5%) NATURAL GAS (13.3%) 70,000 Apache Corp......................... $ 2,476,250 115,000 Burlington Resources, Inc........... 5,793,125 150,230 El Paso Natural Gas Co.............. 7,586,615 100,000 Enron Corp.......................... 4,312,500 145,000 ENSERCH Corp........................ 3,335,000 80,000 Louisiana Land & Exploration Co..... 4,290,000 140,000 PanEnergy Corp...................... 6,300,000 130,000 Questar Corp........................ 4,777,500 180,000 Seagull Energy Corp.*............... 3,960,000 85,000 Tenneco, Inc........................ 3,835,625 115,000 Union Texas Petroleum Holdings, Inc............................... 2,573,125 255,000 Williams Companies, Inc............. 9,562,500 --------------- 58,802,240 --------------- TELECOMMUNICATIONS (32.3%) 71,666 360 DEG. Communications Co.*........ 1,657,276 135,000 Airtouch Communications, Inc.*...... 3,408,750 220,000 Alltel Corp......................... 6,902,500 100,000 AT&T Corp........................... 4,350,000 145,000 BCE, Inc. (Canada).................. 6,923,750 275,000 Cable & Wireless PLC (ADR) (United Kingdom).......................... 6,771,875 155,000 Century Telephone Enterprises, Inc............................... 4,785,625 140,000 Comcast Corp. (Class A)............. 2,467,500 150,000 Comsat Corp......................... 3,693,750 240,000 Ericsson (L.M.) Telephone Co. (Class B) (ADR) (Sweden)................. 7,230,000 150,000 Frontier Corp....................... 3,393,750 160,000 GTE Corp............................ 7,280,000 61,250 Liberty Media Group (Class A)*...... 1,745,625 46,992 Lucent Technologies, Inc............ 2,173,380 175,000 MCI Communications Corp............. 5,709,375 145,000 MFS Communications Company, Inc.*... 7,866,250 95,000 Northern Telecom Ltd. (Canada)...... 5,878,125 135,000 NYNEX Corp.......................... 6,496,875 115,000 Pacific Telesis Group............... 4,226,250 130,000 SBC Communications, Inc............. 6,727,500 170,000 Southern New England Telecommunications Corp........... 6,608,750 125,000 Sprint Corp......................... 4,984,375 65,000 Tele Danmark AS (ADR) (Denmark)..... 1,771,250 185,000 Tele-Communications, Inc. (Class A)*............................... 2,405,000 70,000 Telecommunications Corp. New Zealand, Ltd. (ADR) (New Zealand).......................... 5,670,000 65,000 Telefonica de Argentina S.A. (ADR) (Argentina)....................... 1,681,875 90,000 Telefonos de Mexico S.A. de C.V. (Series L) (ADR) (Mexico)......... 2,970,000 130,000 Telephone & Data Systems, Inc....... 4,712,500 45,300 Teleport Communications Group Inc. (Class A)*........................ 1,375,988 110,000 U.S. West Communications Group...... 3,547,500 150,000 U.S. West Media Group*.............. 2,775,000 155,000 WorldCom, Inc.*..................... 4,030,000 --------------- 142,220,394 --------------- NUMBER OF SHARES VALUE - ----------- --------------- UTILITIES - ELECTRIC (41.9%) 220,000 Baltimore Gas & Electric Co......... $ 5,885,000 135,000 Carolina Power & Light Co........... 4,927,500 150,000 Central & South West Corp........... 3,843,750 235,865 CINergy Corp........................ 7,871,994 240,000 CMS Energy Corp..................... 8,070,000 130,000 Consolidated Edison Co. of New York, Inc..................... 3,802,500 215,000 DPL, Inc............................ 5,267,500 202,500 DQE, Inc............................ 5,872,500 165,000 DTE Energy Co....................... 5,341,875 130,000 Edison International................ 2,583,750 140,000 Enova Corp.......................... 3,185,000 220,000 Entergy Corp........................ 6,105,000 140,000 FPL Group, Inc...................... 6,440,000 175,000 General Public Utilities Corp....... 5,884,375 125,000 Hawaiian Electric Industries, Inc... 4,515,625 200,000 Houston Industries, Inc............. 4,525,000 255,000 Illinova Corp....................... 7,012,500 225,000 IPALCO Enterprises, Inc............. 6,131,250 145,000 Kansas City Power & Light Co........ 4,132,500 90,000 Montana Power Co.................... 1,923,750 110,000 New England Electric System......... 3,836,250 110,000 New York State Electric & Gas Corp.............................. 2,378,750 175,000 NIPSCO Industries, Inc.............. 6,934,375 305,000 PacifiCorp.......................... 6,252,500 235,000 Pinnacle West Capital Corp.......... 7,461,250 110,000 Portland General Corp............... 4,620,000 80,000 Potomac Electric Power Co........... 2,060,000 200,000 Public Service Company of Colorado.. 7,775,000 240,000 Public Service Company of New Mexico............................ 4,710,000 130,000 Public Service Enterprise Group, Inc............................... 3,542,500 180,000 SCANA Corp.......................... 4,815,000 275,000 Southern Co......................... 6,221,875 140,000 Texas Utilities Co.................. 5,705,000 110,000 United Illuminating Co.............. 3,451,250 200,000 Western Resources, Inc.............. 6,175,000 205,000 Wisconsin Energy Corp............... 5,509,375 --------------- 184,769,494 --------------- TOTAL COMMON STOCKS (IDENTIFIED COST $308,066,459)..................... 385,792,128 ---------------
PRINCIPAL AMOUNT (IN THOUSANDS) - ----------- CORPORATE BONDS (9.7%) NATURAL GAS (2.6%) $ 3,000 Coastal Corp. 7.75% due 10/15/35.... 3,036,930 1,000 El Paso Natural Gas Co. 7.50% due 11/15/26................ 1,001,150 2,500 Enserch Exploration Inc. 7.54% due 01/02/09 144A**......... 2,464,200 2,000 Panhandle Eastern Corp. 8.625% due 04/15/25............... 2,127,340 3,000 Tenneco, Inc. 7.45% due 12/15/25.... 2,958,120 --------------- 11,587,740 ---------------
64 DEAN WITTER VARIABLE INVESTMENT SERIES--UTILITIES PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT (IN THOUSANDS) VALUE - ----------- --------------- TELECOMMUNICATIONS (2.9%) $ 2,000 BellSouth Telecommunications, Inc. 7.625% due 05/15/35............... $ 1,998,720 5,000 Century Telephone Enterprises, Inc. 8.25% due 05/01/24................ 5,154,550 1,400 Century Telephone Enterprises, Inc. 7.20% due 12/01/25................ 1,360,324 2,000 Southwestern Bell Telephone Co. 7.20% due 10/15/26................ 1,924,240 2,000 Sprint Corp. 9.25% due 04/15/22..... 2,420,160 --------------- 12,857,994 --------------- UTILITIES - ELECTRIC (4.2%) 2,000 Florida Power & Light Co. 7.05% due 12/01/26................ 1,875,300 3,000 Illinois Power Co. 8.75% due 07/01/21.......................... 3,124,560 3,000 Indianapolis Power Co. 7.05% due 02/01/24................ 2,838,000 1,500 Long Island Lighting Co. 9.625% due 07/01/24............... 1,552,500 2,000 South Carolina Electric & Gas Co. 7.625% due 06/01/23............... 1,996,620 2,000 Union Electric Co. 8.00% due 12/15/22................ 2,033,100 5,000 Wisconsin Electric Power Co. 7.125% due 03/15/16...................... 4,825,300 --------------- 18,245,380 --------------- TOTAL CORPORATE BONDS (IDENTIFIED COST $42,107,361)................. 42,691,114 ---------------
NUMBER OF SHARES - ----------- PREFERRED STOCKS (0.5%) UTILITIES - ELECTRIC 40,000 Arizona Public Service Co. (Series A) $2.50.................. 1,100,000 20,000 Atlantic Capital I $2.0625.......... 497,500 1,022 Cleveland Electric Illuminating Co. (Series N) $9.125................. 103,988 14,000 Duquesne Capital LP (Series A) $2.09375.......................... 353,500 --------------- TOTAL PREFERRED STOCKS (IDENTIFIED COST $1,952,494).................. 2,054,988 ---------------
PRINCIPAL AMOUNT (IN THOUSANDS) VALUE - ----------- --------------- U.S. GOVERNMENT AGENCY (0.3%) $ 1,250 Tennessee Valley Authority 8.00% due 03/31/45 (Identified Cost $1,250,000)...... $ 1,300,000 --------------- SHORT-TERM INVESTMENTS (1.6%) U.S. GOVERNMENT AGENCY (A) (1.3%) 6,000 Federal Home Loan Bank 6.50% due 01/02/97 (Amortized Cost $5,998,917)....... 5,998,917 --------------- REPURCHASE AGREEMENT (0.3%) 1,270 The Bank of New York 5.375% due 01/02/97 (dated 12/31/96: proceeds $1,270,209; collateralized by $423,313 U.S. Treasury Note 7.50% due 02/15/05 valued at $464,718, $318,484 U.S. Treasury Note 6.125% due 07/31/00 valued at $326,644, and $502,000 U.S. Treasury Note 5.875% due 11/15/99 valued at $503,865) (Identified Cost $1,269,830)....................... 1,269,830 --------------- TOTAL SHORT-TERM INVESTMENTS (IDENTIFIED COST $7,268,747)...... 7,268,747 --------------- TOTAL INVESTMENTS (IDENTIFIED COST $360,645,061) (B)......... 99.6% 439,106,977 OTHER ASSETS IN EXCESS OF LIABILITIES.................... 0.4 1,554,889 ---------- ------------- NET ASSETS....................... 100.0% $ 440,661,866 ---------- ------------- ---------- ------------- - ------------------
ADR AMERICAN DEPOSITORY RECEIPT. * NON-INCOME PRODUCING SECURITY. ** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. (A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $88,292,975 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $9,831,059, RESULTING IN NET UNREALIZED APPRECIATION OF $78,461,916.
SEE NOTES TO FINANCIAL STATEMENTS 65 DEAN WITTER VARIABLE INVESTMENT SERIES--DIVIDEND GROWTH PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- ----------------- COMMON STOCKS (96.0%) AEROSPACE (3.8%) 503,000 Raytheon Co...................... $ 24,206,875 376,000 United Technologies Corp......... 24,816,000 ----------------- 49,022,875 ----------------- ALUMINUM (2.0%) 396,000 Aluminum Co. of America.......... 25,245,000 ----------------- AUTO PARTS (1.9%) 498,000 TRW, Inc......................... 24,651,000 ----------------- AUTOMOTIVE (3.9%) 770,000 Ford Motor Co.................... 24,543,750 452,000 General Motors Corp.............. 25,199,000 ----------------- 49,742,750 ----------------- BANKS (5.8%) 579,000 Banc One Corp.................... 24,897,000 252,200 BankAmerica Corp................. 25,156,950 487,000 KeyCorp.......................... 24,593,500 ----------------- 74,647,450 ----------------- BEVERAGES - SOFT DRINKS (1.9%) 819,000 PepsiCo Inc...................... 23,955,750 ----------------- CHEMICALS (5.6%) 309,000 Dow Chemical Co.................. 24,217,875 438,000 Eastman Chemical Co.............. 24,199,500 425,200 PPG Industries, Inc.............. 23,864,350 ----------------- 72,281,725 ----------------- COMPUTERS (1.9%) 163,000 International Business Machines Corp........................... 24,613,000 ----------------- CONGLOMERATES (3.7%) 299,000 Minnesota Mining & Manufacturing Co............................. 24,779,625 97,600 Newport News Shipbuilding Inc.... 1,464,000 488,000 Tenneco, Inc..................... 22,021,000 ----------------- 48,264,625 ----------------- COSMETICS (2.1%) 342,000 Gillette Co...................... 26,590,500 ----------------- DRUGS (5.6%) 476,000 Abbott Laboratories.............. 24,157,000 404,000 American Home Products Corp...... 23,684,500 219,200 Bristol-Myers Squibb Co.......... 23,838,000 ----------------- 71,679,500 ----------------- ELECTRIC - MAJOR (3.9%) 247,000 General Electric Co.............. 24,422,125 1,321,000 Westinghouse Electric Corp....... 26,254,875 ----------------- 50,677,000 ----------------- FINANCIAL - MISCELLANEOUS (2.0%) 277,000 Household International, Inc..... 25,553,250 ----------------- FOODS (3.9%) 656,000 Quaker Oats Company (The)........ 25,010,000 666,500 Sara Lee Corp.................... 24,827,125 ----------------- 49,837,125 ----------------- NUMBER OF SHARES VALUE - ----------- ----------------- HOUSEHOLD PRODUCTS (1.9%) 232,000 Procter & Gamble Co.............. $ 24,940,000 ----------------- INSURANCE (2.0%) 325,000 Aetna Inc........................ 26,000,000 ----------------- METALS & MINING (1.8%) 354,000 Phelps Dodge Corp................ 23,895,000 ----------------- NATURAL GAS (5.7%) 469,000 Burlington Resources, Inc........ 23,625,875 489,384 El Paso Natural Gas Co........... 24,713,892 564,000 PanEnergy Corp................... 25,380,000 ----------------- 73,719,767 ----------------- OFFICE EQUIPMENT (1.8%) 435,000 Pitney Bowes, Inc................ 23,707,500 ----------------- OIL - DOMESTIC (3.8%) 558,000 Ashland, Inc..................... 24,482,250 186,000 Atlantic Richfield Co............ 24,645,000 ----------------- 49,127,250 ----------------- OIL INTEGRATED - INTERNATIONAL (5.7%) 251,000 Exxon Corp....................... 24,598,000 200,000 Mobil Corp....................... 24,450,000 146,000 Royal Dutch Petroleum Co. (ADR) (Netherlands).................. 24,929,500 ----------------- 73,977,500 ----------------- PAPER & FOREST PRODUCTS (3.9%) 600,000 International Paper Co........... 24,225,000 536,000 Weyerhaeuser Co.................. 25,393,000 ----------------- 49,618,000 ----------------- PHOTOGRAPHY (1.9%) 302,000 Eastman Kodak Co................. 24,235,500 ----------------- RAILROADS (1.9%) 281,000 Burlington Northern Santa Fe Corp........................... 24,271,375 ----------------- RETAIL - DEPARTMENT STORES (1.9%) 533,000 May Department Stores Co......... 24,917,750 ----------------- RETAIL - FOOD CHAINS (1.9%) 600,000 American Stores Co............... 24,525,000 ----------------- STEEL (2.0%) 552,000 Timken Co........................ 25,323,000 ----------------- TELECOMMUNICATIONS (6.0%) 393,000 Bell Atlantic Corp............... 25,446,750 647,000 Sprint Corp...................... 25,799,125 795,000 U.S. West Communications Group... 25,638,750 ----------------- 76,884,625 ----------------- TOBACCO (1.9%) 222,000 Philip Morris Companies, Inc..... 25,002,750 ----------------- UTILITIES - ELECTRIC (3.9%) 546,000 FPL Group, Inc................... 25,116,000 924,000 Unicom Corp...................... 25,063,500 ----------------- 50,179,500 ----------------- TOTAL COMMON STOCKS (IDENTIFIED COST $938,785,654)............. 1,237,086,067 -----------------
66 DEAN WITTER VARIABLE INVESTMENT SERIES--DIVIDEND GROWTH PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT (IN THOUSANDS) VALUE - ----------- ----------------- U.S. GOVERNMENT OBLIGATIONS (3.2%) $ 2,000 U.S. Treasury Bond 8.125% due 08/15/19............ $ 2,311,260 5,000 U.S. Treasury Bond 8.00% due 11/15/21............. 5,731,850 5,000 U.S. Treasury Bond 7.125% due 02/15/23............ 5,217,500 17,000 U.S. Treasury Bond 6.25% due 08/15/23............. 15,935,120 7,000 U.S. Treasury Bond 6.00% due 02/15/26............. 6,368,740 5,000 U.S. Treasury Note 6.375% due 01/15/99............ 5,048,350 ----------------- TOTAL U.S. GOVERNMENT OBLIGATIONS (IDENTIFIED COST $39,899,914)................... 40,612,820 ----------------- SHORT-TERM INVESTMENTS (0.7%) U.S. GOVERNMENT AGENCY (A) (0.7%) 9,000 Federal Home Loan Banks 6.50% due 01/02/97 (Amortized Cost $8,998,375).... 8,998,375 ----------------- PRINCIPAL AMOUNT (IN THOUSANDS) VALUE - ----------- ----------------- REPURCHASE AGREEMENT (0.0%) $ 291 The Bank of New York 5.375% due 01/02/97 (dated 12/31/96; proceeds $290,747; collateralized by $130,591 U.S. Treasury Bills 0.00% due 01/30/97 and 05/08/97 valued at $128,496 and $162,245 U.S. Treasury Notes 6.00% and 7.875% due 04/15/98 and 10/15/99 valued at $167,978) (Identified Cost $290,660)..... $ 290,660 ----------------- TOTAL SHORT-TERM INVESTMENTS (IDENTIFIED COST $9,289,035)... 9,289,035 ----------------- TOTAL INVESTMENTS (IDENTIFIED COST $987,974,603)(B)......... 99.9% 1,286,987,922 OTHER ASSETS IN EXCESS OF LIABILITIES................... 0.1 1,416,505 ---------- --------------- NET ASSETS...................... 100.0% $ 1,288,404,427 ---------- --------------- ---------- --------------- - ------------------ ADR AMERICAN DEPOSITORY RECEIPT. (A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $299,945,233 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $931,914, RESULTING IN NET UNREALIZED APPRECIATION OF $299,013,319.
SEE NOTES TO FINANCIAL STATEMENTS 67 DEAN WITTER VARIABLE INVESTMENT SERIES--CAPITAL GROWTH PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- ------------- COMMON STOCKS (91.2%) ADVERTISING (1.4%) 25,600 Interpublic Group of Companies, Inc................................. $ 1,216,000 ------------- APPAREL (1.4%) 21,000 Cintas Corp........................... 1,233,750 ------------- AUTO TRUCKS & PARTS (0.6%) 25,050 Miller Industries, Inc.*.............. 501,000 ------------- BANKING (3.4%) 15,850 Fifth Third Bancorp................... 994,588 12,000 State Street Boston Corp.............. 774,000 28,000 Washington Mutual, Inc................ 1,211,000 ------------- 2,979,588 ------------- BEVERAGES - ALCOHOLIC (1.0%) 22,000 Anheuser-Busch Companies, Inc......... 880,000 ------------- BIOTECHNOLOGY (2.0%) 25,500 Medtronic, Inc........................ 1,734,000 ------------- CHEMICALS - SPECIALTY (1.7%) 23,700 Sigma-Aldrich Corp.................... 1,478,287 ------------- COMMERCIAL SERVICES (4.2%) 46,000 Affiliated Computer Services, Inc.*... 1,334,000 60,000 Service Corp. International........... 1,680,000 19,500 Stewart Enterprises, Inc. (Class A)... 658,125 ------------- 3,672,125 ------------- COMMUNICATIONS - EQUIPMENT & SOFTWARE (1.5%) 21,000 Cisco Systems, Inc.*.................. 1,336,125 ------------- COMMUNICATIONS EQUIPMENT (1.4%) 31,500 Tellabs, Inc.*........................ 1,185,187 ------------- COMPUTER EQUIPMENT (1.3%) 32,000 Cabletron Systems, Inc.*.............. 1,064,000 ------------- COMPUTER SERVICES (1.9%) 48,000 Sterling Commerce, Inc.*.............. 1,692,000 ------------- COMPUTER SOFTWARE (7.2%) 24,000 Computer Associates International, Inc................................. 1,194,000 21,600 Microsoft Corp.*...................... 1,784,700 28,500 Oracle Corp.*......................... 1,186,313 41,000 Parametric Technology Corp.*.......... 2,106,375 ------------- 6,271,388 ------------- COMPUTERS - SYSTEMS (5.1%) 38,000 Adaptec, Inc.*........................ 1,520,000 60,000 EMC Corp.*............................ 1,987,500 19,000 Hewlett-Packard Co.................... 954,750 ------------- 4,462,250 ------------- DRUGS (1.6%) 27,300 Abbott Laboratories................... 1,385,475 ------------- ELECTRONICS (3.8%) 28,000 Dionex Corp.*......................... 980,000 29,000 Harman International Industries, Inc................................. 1,613,125 16,500 Jabil Circuit, Inc.*.................. 660,000 ------------- 3,253,125 ------------- NUMBER OF SHARES VALUE - ----------- ------------- ELECTRONICS - SEMICONDUCTORS/ COMPONENTS (3.0%) 32,000 Atmel Corp.*.......................... $ 1,060,000 11,500 Intel Corp............................ 1,505,063 ------------- 2,565,063 ------------- ENTERTAINMENT/GAMING & LODGING (1.4%) 35,000 Circus Circus Enterprises, Inc.*...... 1,203,125 ------------- ENVIRONMENTAL CONTROL (2.0%) 50,000 United Waste Systems, Inc.*........... 1,712,500 ------------- FINANCIAL - MISCELLANEOUS (9.9%) 46,000 Federal National Mortgage Assoc....... 1,713,500 55,000 Green Tree Financial Corp............. 2,124,375 16,000 Household International, Inc.......... 1,476,000 38,000 MBNA Corp............................. 1,577,000 22,000 MGIC Investment Corp.................. 1,672,000 ------------- 8,562,875 ------------- FINANCIAL SERVICES (2.3%) 27,400 Primark Corp.*........................ 678,150 30,000 SunAmerica, Inc....................... 1,331,250 ------------- 2,009,400 ------------- FOOD WHOLESALERS (1.1%) 30,000 Sysco Corp............................ 978,750 ------------- HEALTHCARE - DIVERSIFIED (4.9%) 84,000 General Nutrition Companies, Inc.*.... 1,417,500 34,000 United Healthcare Corp................ 1,530,000 45,000 Universal Health Services, Inc. (Class B)*................................. 1,288,125 ------------- 4,235,625 ------------- HOME ENTERTAINMENT (1.6%) 46,000 Electronic Arts, Inc.*................ 1,374,250 ------------- HOTELS/MOTELS (2.7%) 22,900 HFS Inc.*............................. 1,368,275 51,000 La Quinta Inns, Inc................... 975,375 ------------- 2,343,650 ------------- INSURANCE (1.7%) 14,000 American International Group, Inc..... 1,515,500 ------------- MANUFACTURED HOUSING (0.7%) 43,000 Clayton Homes, Inc.................... 580,500 ------------- MANUFACTURING - DIVERSIFIED (0.9%) 14,600 Sherwin-Williams Co................... 817,600 ------------- MEDIA GROUP (1.6%) 39,600 Clear Channel Communications, Inc.*... 1,430,550 ------------- OFFICE EQUIPMENT & SUPPLIES (1.4%) 67,200 Staples, Inc.*........................ 1,209,600 ------------- OIL DRILLING & SERVICES (6.2%) 30,000 ENSCO International, Inc.*............ 1,455,000 85,000 Pride Petroleum Services, Inc.*....... 1,955,000 43,000 Tidewater, Inc........................ 1,945,750 ------------- 5,355,750 -------------
68 DEAN WITTER VARIABLE INVESTMENT SERIES--CAPITAL GROWTH PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- ------------- PHARMACEUTICALS (1.8%) 31,800 Johnson & Johnson..................... $ 1,582,050 ------------- POLLUTION CONTROL (1.6%) 42,900 U.S. Filter Corp.*.................... 1,362,075 ------------- RETAIL - DEPARTMENT STORES (1.8%) 47,800 Dollar General Corp................... 1,529,600 ------------- RETAIL - DRUG STORES (1.8%) 40,000 Walgreen Co........................... 1,600,000 ------------- RETAIL - FOOD CHAINS (2.2%) 45,000 Safeway, Inc.*........................ 1,923,750 ------------- UTILITIES - ELECTRIC (1.1%) 21,000 AES Corp.*............................ 976,500 ------------- TOTAL COMMON STOCKS (IDENTIFIED COST $69,321,743)........................ 79,213,013 -------------
PRINCIPAL AMOUNT (IN THOUSANDS) - ----------- SHORT-TERM INVESTMENTS (9.2%) U.S. GOVERNMENT AGENCY (A) (8.7%) $ 7,600 Federal Home Loan Banks 6.50% due 01/02/97 (Amortized Cost $7,598,628)........................ 7,598,628 ------------- PRINCIPAL AMOUNT (IN THOUSANDS) VALUE - ----------- ------------- REPURCHASE AGREEMENT (0.5%) $ 424 The Bank of New York 5.375% due 01/02/97 (dated 12/31/96; proceeds $424,474; collateralized by $104,899 U.S. Treasury Bond 7.875% due 02/15/21 valued at $121,847, $180,000 U.S. Treasury Note 7.50% due 10/31/99 valued at $189,025 and $119,260 U.S. Treasury Note 5.875% due 08/15/98 valued at $121,962) (Identified Cost $424,347)......... $ 424,347 ------------- TOTAL SHORT-TERM INVESTMENTS (IDENTIFIED COST $8,022,975)....... 8,022,975 ------------- TOTAL INVESTMENTS (IDENTIFIED COST $77,344,718) (B)................ 100.4% 87,235,988 LIABILITIES IN EXCESS OF OTHER ASSETS.......................... (0.4) (373,838) ---------- ------------ NET ASSETS........................ 100.0% $ 86,862,150 ---------- ------------ ---------- ------------ - ------------------ * NON-INCOME PRODUCING SECURITY. (A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $11,174,054 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $1,282,784, RESULTING IN NET UNREALIZED APPRECIATION OF $9,891,270.
SEE NOTES TO FINANCIAL STATEMENTS 69 DEAN WITTER VARIABLE INVESTMENT SERIES--GLOBAL DIVIDEND GROWTH PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- --------------- COMMON AND PREFERRED STOCKS (98.1%) AUSTRALIA (1.5%) BUILDING & CONSTRUCTION 582,000 Pioneer International Ltd......... $ 1,733,996 --------------- MULTI-INDUSTRY 526,000 Southcorp Holdings Ltd............ 1,671,628 --------------- PAPER & FOREST PRODUCTS 268,000 Amcor Ltd......................... 1,722,572 --------------- TOTAL AUSTRALIA................... 5,128,196 --------------- CANADA (3.0%) BANKS - COMMERCIAL 81,800 Toronto Dominion Bank............. 2,101,263 --------------- NATURAL GAS 115,000 TransCanada Pipelines Ltd......... 2,014,157 69,400 IPL Energy, Inc................... 2,023,301 --------------- 4,037,458 --------------- OIL RELATED 42,600 Imperial Oil Ltd.................. 2,005,181 --------------- TELECOMMUNICATIONS 42,800 BCE, Inc.......................... 2,039,583 --------------- TOTAL CANADA...................... 10,183,485 --------------- FRANCE (7.5%) BANKING 19,550 Societe Generale.................. 2,113,819 --------------- BUILDING & CONSTRUCTION 33,300 Lafarge S.A....................... 1,997,936 --------------- FINANCIAL SERVICES 4,550 Societe Eurafrance S.A............ 1,966,098 --------------- FOODS & BEVERAGES 13,300 Eridania Beghin-Say S.A........... 2,140,407 --------------- MISCELLANEOUS MATERIALS & COMMODITIES 14,100 Compagnie de Saint Gobain......... 1,994,681 --------------- MULTI-INDUSTRY 8,000 Compagnie Generale d'Industrie et de Participations............... 2,206,418 8,700 Saint-Louis....................... 2,166,406 34,061 Worms et Compagnie................ 2,064,601 --------------- 6,437,425 --------------- OIL INTEGRATED - INTERNATIONAL 23,500 Elf Aquitaine S.A................. 2,139,163 25,700 Total S.A. (B Shares)............. 2,090,277 --------------- 4,229,440 --------------- TELECOMMUNICATIONS 25,300 Alcatel Alsthom................... 2,032,387 --------------- TELEVISION 21,303 Societe Television Francaise 1.... 2,036,482 --------------- TOTAL FRANCE...................... 24,948,675 --------------- GERMANY (6.3%) BANKING 66,600 Commerzbank AG.................... 1,689,851 --------------- NUMBER OF SHARES VALUE - ----------- --------------- BUILDING & CONSTRUCTION 45,900 Bilfinger & Berger Bau AG......... $ 1,682,901 --------------- CHEMICALS 43,000 BASF AG........................... 1,654,147 42,000 Bayer AG.......................... 1,711,616 --------------- 3,365,763 --------------- HEALTH & PERSONAL CARE 41,800 Douglas Holding AG................ 1,641,077 --------------- MACHINERY - DIVERSIFIED 6,700 M.A.N. AG......................... 1,621,739 --------------- MULTI-INDUSTRY 7,600 Preussag AG....................... 1,718,754 37,300 RWE AG............................ 1,578,170 4,100 Viag AG........................... 1,607,009 --------------- 4,903,933 --------------- RETAIL - DEPARTMENT STORES 4,700 Karstadt AG....................... 1,585,983 --------------- STEEL & IRON 9,500 Thyssen AG........................ 1,682,998 --------------- TEXTILES - APPAREL 1,150 Hugo Boss AG (Pref.).............. 1,442,537 --------------- UTILITIES - ELECTRIC 27,700 Veba AG........................... 1,599,805 --------------- TOTAL GERMANY..................... 21,216,587 --------------- HONG KONG (3.9%) BANKING 131,100 HSBC Holdings PLC................. 2,805,411 --------------- CONGLOMERATES 273,500 Swire Pacific Ltd. (Class A)...... 2,608,045 --------------- REAL ESTATE 299,000 Cheung Kong (Holdings) Ltd........ 2,657,907 --------------- TELECOMMUNICATIONS 1,566,000 Hong Kong Telecommunications Ltd............................. 2,520,908 --------------- UTILITIES - ELECTRIC 773,000 Hong Kong Electric Holdings Ltd... 2,568,671 --------------- TOTAL HONG KONG................... 13,160,942 --------------- ITALY (4.0%) FINANCIAL SERVICES 268,000 Istituto Mobiliare Italiano SpA... 2,296,638 --------------- NATURAL GAS 538,000 Italgas SpA....................... 2,246,691 --------------- OIL & GAS PRODUCTS 423,000 Ente Nazionale Idrocarburi SpA.... 2,170,768 --------------- TELECOMMUNICATIONS 350,000 Sirti SpA......................... 2,122,611 1,175,000 Telecom Italia SpA................ 2,292,683 --------------- 4,415,294 --------------- TEXTILES - APPAREL 175,000 Benetton Group SpA................ 2,213,744 --------------- TOTAL ITALY....................... 13,343,135 ---------------
70 DEAN WITTER VARIABLE INVESTMENT SERIES--GLOBAL DIVIDEND GROWTH PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- --------------- JAPAN (25.5%) AUTOMOTIVE 137,000 Honda Motor Co.................... $ 3,912,597 140,000 Toyota Motor Corp................. 4,022,433 --------------- 7,935,030 --------------- BREWERS 403,000 Kirin Brewery Co., Ltd............ 3,963,934 --------------- BUILDING & CONSTRUCTION 376,000 Sekisui House Ltd................. 3,828,128 --------------- COMPUTER SERVICES 460,000 NCR Japan Limited................. 3,837,964 --------------- ELECTRONICS & ELECTRICAL 430,000 Hitachi, Ltd...................... 4,006,903 63,000 Kyocera Corp...................... 3,924,590 238,000 Matsushita Electric Industrial Co., Ltd........................ 3,881,104 447,000 Matsushita Electric Works......... 3,845,203 676,000 Mitsubishi Electric Corp.......... 4,024,504 336,000 NEC Corp.......................... 4,058,671 278,000 Sharp Corp........................ 3,957,722 59,600 Sony Corp......................... 3,903,054 60,000 TDK Corp.......................... 3,908,542 --------------- 35,510,293 --------------- ENTERTAINMENT & LEISURE TIME 359,000 Mizuno Corp....................... 2,719,603 53,400 Nintendo Corp., Ltd............... 3,801,122 --------------- 6,520,725 --------------- FOODS & BEVERAGES 235,000 House Food Industry............... 3,791,631 699,000 Snow Brand Milk Products.......... 3,950,345 --------------- 7,741,976 --------------- MACHINERY - DIVERSIFIED 53,000 Furukawa Co., Ltd................. 178,343 496,000 Mitsubishi Heavy Industries, Ltd............................. 3,937,187 --------------- 4,115,530 --------------- PHARMACEUTICALS 172,000 Taisho Pharmaceutical Co., Ltd.... 4,051,424 191,000 Takeda Chemical Industries........ 4,004,573 --------------- 8,055,997 --------------- TRANSPORTATION 376,000 Yamato Transport Co. Ltd.......... 3,893,011 --------------- TOTAL JAPAN....................... 85,402,588 --------------- MALAYSIA (1.4%) BANKING 136,000 AMMB Holdings Berhad.............. 1,141,862 --------------- BUILDING & CONSTRUCTION 98,000 Cement Industries of Malaysia..... 294,970 130,000 United Engineers (Malaysia) Berhad Ltd............................. 1,173,861 --------------- 1,468,831 --------------- CONGLOMERATES 311,000 Sime Darby Berhad................. 1,225,525 --------------- NUMBER OF SHARES VALUE - ----------- --------------- OIL RELATED 275,000 Esso Malaysia Berhad.............. $ 778,713 --------------- TOTAL MALAYSIA.................... 4,614,931 --------------- NETHERLANDS (3.0%) APPLIANCES & HOUSEHOLD DURABLES 28,400 Philips Electronics NV............ 1,150,596 --------------- BANKING 16,700 ABN-AMRO Holding NV............... 1,086,399 --------------- BUILDING & CONSTRUCTION 11,700 Koninklijke Volker Stevin NV...... 1,093,616 --------------- CHEMICALS 11,100 DSM NV............................ 1,094,710 --------------- FINANCIAL SERVICES 30,600 ING Groep NV...................... 1,101,586 --------------- INSURANCE 31,250 Fortis Amev NV.................... 1,094,238 --------------- OIL 6,300 Royal Dutch Petroleum Co.......... 1,104,451 --------------- TELECOMMUNICATIONS 28,000 Koninklijke PTT Nederland NV...... 1,067,948 --------------- TEXTILES 23,600 Gamma Holding NV.................. 1,139,159 --------------- TOTAL NETHERLANDS................. 9,932,703 --------------- SWITZERLAND (2.0%) BANKING 11,600 Swiss Bank Corp................... 2,199,851 --------------- FOODS & BEVERAGES 2,025 Nestle AG......................... 2,168,349 --------------- PHARMACEUTICALS 1,990 Novartis AG-Bearer................ 2,271,856 --------------- TOTAL SWITZERLAND................. 6,640,056 --------------- UNITED KINGDOM (10.7%) BANKING 294,000 Hambros PLC....................... 1,129,377 303,000 Lloyds TSB Group PLC.............. 2,238,364 179,000 National Westminster Bank PLC..... 2,104,689 --------------- 5,472,430 --------------- BREWERS 150,500 Bass PLC.......................... 2,120,407 185,000 Scottish & Newcastle Breweries PLC............................. 2,178,408 --------------- 4,298,815 --------------- FOODS & BEVERAGES 1,173,000 Hazlewood Foods PLC............... 2,141,206 650,000 Hillsdown Holdings PLC............ 2,217,059 --------------- 4,358,265 --------------- MULTI-INDUSTRY 750,000 Hanson PLC........................ 1,054,110 --------------- NATURAL GAS 633,000 British Gas PLC................... 2,430,315 --------------- RETAIL - MERCHANDISING 368,000 Tesco PLC......................... 2,232,862 ---------------
71 DEAN WITTER VARIABLE INVESTMENT SERIES--GLOBAL DIVIDEND GROWTH PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- --------------- STEEL & IRON 762,000 British Steel PLC................. $ 2,089,709 --------------- TELECOMMUNICATIONS 320,000 British Telecommunications PLC.... 2,166,496 --------------- TOBACCO 265,000 B.A.T. Industries PLC............. 2,198,376 --------------- UTILITIES - ELECTRIC 340,000 National Power PLC................ 2,843,869 387,000 Scottish Hydro-Electric PLC....... 2,169,050 --------------- 5,012,919 --------------- UTILITIES - WATER 162,000 Hyder PLC......................... 2,071,403 121,500 Hyder PLC (Pref.)................. 213,457 188,000 Severn Trent PLC.................. 2,155,732 --------------- 4,440,592 --------------- TOTAL UNITED KINGDOM.............. 35,754,889 --------------- UNITED STATES (29.3%) AEROSPACE & DEFENSE 62,400 Northrop Grumman Corp............. 5,163,600 --------------- AUTOMOTIVE 159,000 Ford Motor Co..................... 5,068,125 --------------- BANKS 50,100 BankAmerica Corp.................. 4,997,475 97,000 KeyCorp........................... 4,898,500 --------------- 9,895,975 --------------- CHEMICALS 66,000 Dow Chemical Co................... 5,172,750 --------------- COMPUTERS - SYSTEMS 32,000 International Business Machines Corp............................ 4,832,000 --------------- CONGLOMERATES 60,300 Minnesota Mining & Manufacturing Co.............................. 4,997,362 98,800 Tenneco, Inc...................... 4,458,350 --------------- 9,455,712 --------------- MACHINERY - DIVERSIFIED 119,700 Deere & Co........................ 4,862,813 --------------- METALS & MINING 72,500 Phelps Dodge Corp................. 4,893,750 --------------- NATURAL GAS 9,188 El Paso Natural Gas Co............ 464,014 --------------- NUMBER OF SHARES VALUE - ----------- --------------- OIL - DOMESTIC 114,200 Ashland, Inc...................... $ 5,010,525 --------------- OIL INTEGRATED - INTERNATIONAL 76,800 Chevron Corp...................... 4,992,000 --------------- PAPER & FOREST PRODUCTS 125,000 International Paper Co............ 5,046,875 --------------- PHARMACEUTICALS 45,200 Bristol-Myers Squibb Co........... 4,915,500 --------------- RAILROADS 23,730 Conrail, Inc...................... 2,364,101 --------------- RETAIL 131,400 Dayton-Hudson Corp................ 5,157,450 --------------- SHIPBUILDING 19,760 Newport News Shipbuilding Inc..... 296,400 --------------- TELECOMMUNICATIONS 128,500 A T & T Corp...................... 5,364,875 128,300 Sprint Corp....................... 5,115,963 --------------- 10,480,838 --------------- TIRE & RUBBER GOODS 99,600 Goodyear Tire & Rubber Co......... 5,116,950 --------------- TOBACCO 44,400 Philip Morris Companies, Inc...... 5,000,550 --------------- TOTAL UNITED STATES............... 98,189,928 --------------- TOTAL COMMON AND PREFERRED STOCKS (IDENTIFIED COST $287,001,315)................... 328,516,115 ---------------
PRINCIPAL AMOUNT (IN THOUSANDS) - ----------- SHORT-TERM INVESTMENT (A) (2.7%) U.S. GOVERNMENT AGENCY $ 9,000 Federal Home Loan Banks 6.50% due 01/02/97 (Amortized Cost $8,998,375)..... 8,998,375 --------------- TOTAL INVESTMENTS (IDENTIFIED COST $295,999,690) (B)......... 100.8% 337,514,490 LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS................... (0.8) (2,693,548) ---------- ------------- NET ASSETS....................... 100.0% $ 334,820,942 ---------- ------------- ---------- ------------- - ------------------ (A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $50,240,249 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $8,725,449, RESULTING IN NET UNREALIZED APPRECIATION OF $41,514,800.
72 DEAN WITTER VARIABLE INVESTMENT SERIES--GLOBAL DIVIDEND GROWTH PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - -------------------------------------------------------------------------------- FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT DECEMBER 31, 1996:
UNREALIZED CONTRACTS TO IN EXCHANGE DELIVERY APPRECIATION RECEIVE FOR DATE (DEPRECIATION) - ---------------- ---------------- -------- --------------- $ 82,924 L 49,610 01/02/97 $ (2,109) $ 282,585 L 169,061 01/03/97 (7,185) DEM 665,842 $ 432,927 01/03/97 (843) Y 13,707,675 $ 118,681 01/06/97 (410) CHF 228,739 $ 170,497 01/06/97 (51) $ 84,255 L 49,401 01/07/97 (417) $ 67,648 Y 7,845,831 01/07/97 (47) Y 15,317,075 $ 131,822 01/08/97 336 $ 81,328 FRF 423,526 01/31/97 (299) --------------- Net unrealized depreciation.......$(11,025) --------------- ---------------
SEE NOTES TO FINANCIAL STATEMENTS 73 DEAN WITTER VARIABLE INVESTMENT SERIES--GLOBAL DIVIDEND GROWTH SUMMARY OF INVESTMENTS DECEMBER 31, 1996 - --------------------------------------------------------------------------------
PERCENT OF INDUSTRY VALUE NET ASSETS - -------------------------- -------------- ------------- Aerospace & Defense....... $ 5,163,600 1.5% Appliances & Household Durables................ 1,150,596 0.4 Automotive................ 13,003,155 3.9 Banking................... 16,509,623 4.9 Banks..................... 9,895,975 3.0 Banks - Commercial........ 2,101,263 0.6 Brewers................... 8,262,749 2.5 Building & Construction... 11,805,408 3.5 Chemicals................. 9,633,223 2.9 Computer Services......... 3,837,964 1.1 Computer Systems.......... 4,832,000 1.4 Conglomerates............. 13,289,282 4.0 Electronics & Electrical.. 35,510,293 10.6 Entertainment & Leisure Time.................... 6,520,725 1.9 Financial Services........ 5,364,322 1.6 Foods & Beverages......... 16,408,997 4.9 Health & Personal Care.... 1,641,077 0.5 Insurance................. 1,094,238 0.3 Machinery - Diversified... 10,600,082 3.2 Metals & Mining........... 4,893,750 1.5 Miscellaneous Materials & Commodities............. 1,994,681 0.6 Multi-Industry............ 14,067,096 4.2 Natural Gas............... 9,178,478 2.7 Oil....................... 1,104,451 0.3 PERCENT OF INDUSTRY VALUE NET ASSETS - -------------------------- -------------- ------------- Oil - Domestic............ $ 5,010,525 1.5% Oil & Gas Products........ 2,170,768 0.6 Oil Integrated - International........... 9,221,440 2.8 Oil Related............... 2,783,894 0.8 Paper & Forest Products... 6,769,447 2.0 Pharmaceuticals........... 15,243,353 4.6 Railroads................. 2,364,101 0.7 Real Estate............... 2,657,907 0.8 Retail.................... 5,157,450 1.5 Retail - Department Stores.................. 1,585,983 0.5 Retail - Merchandising.... 2,232,862 0.7 Shipbuilding.............. 296,400 0.1 Steel & Iron.............. 3,772,707 1.1 Telecommunications........ 24,723,454 7.4 Television................ 2,036,482 0.6 Textiles.................. 1,139,159 0.3 Textiles - Apparel........ 3,656,281 1.1 Tire & Rubber Goods....... 5,116,950 1.5 Tobacco................... 7,198,926 2.2 Transportation............ 3,893,011 1.2 U.S. Government Agency.... 8,998,375 2.7 Utilities - Electric...... 9,181,395 2.8 Utilities - Water......... 4,440,592 1.3 -------------- ------ $ 337,514,490 100.8% -------------- ------ -------------- ------
- --------------------------------------------------------------------------------
PERCENT OF TYPE OF INVESTMENT VALUE NET ASSETS - -------------------------------------------------------------------------------------- -------------- ------------- Common Stocks......................................................................... $ 326,860,121 97.6% Preferred Stocks...................................................................... 1,655,994 0.5 Short-Term Investment................................................................. 8,998,375 2.7 -------------- ------ $ 337,514,490 100.8% -------------- ------ -------------- ------
SEE NOTES TO FINANCIAL STATEMENTS 74 DEAN WITTER VARIABLE INVESTMENT SERIES--EUROPEAN GROWTH PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - --------------- --------------- COMMON AND PREFERRED STOCKS AND WARRANTS (95.3%) BELGIUM (1.2%) RETAIL 81,327 G.I.B. Holdings Ltd............. $ 3,644,262 --------------- DENMARK (2.4%) AIR TRANSPORT 28,500 Kobenhavns Lufthavne AS......... 2,901,748 --------------- PHARMACEUTICALS 22,400 Novo-Nordisk AS (Series B)...... 4,219,243 --------------- TOTAL DENMARK................... 7,120,991 --------------- FRANCE (15.1%) BUILDING MATERIALS 19,430 IMETAL.......................... 2,868,532 --------------- ENERGY 45,100 Elf Aquitaine S.A............... 4,105,373 --------------- FINANCIAL SERVICES 33,230 Cetelem Groupe.................. 3,842,729 --------------- FOOD, BEVERAGE, TOBACCO & HOUSEHOLD PRODUCTS 12,185 LVMH Moet-Hennessy Louis Vuitton....................... 3,402,923 92,000 SEITA........................... 3,847,740 17,895 Societe BIC S.A.*............... 2,683,301 --------------- 9,933,964 --------------- INSURANCE 75,500 AXA............................. 4,801,966 34,472 Scor S.A........................ 1,212,516 --------------- 6,014,482 --------------- OIL RELATED 35,000 Total S.A. (B Shares)........... 2,846,680 --------------- PHARMACEUTICALS 28,069 Sanofi S.A...................... 2,791,482 2,187 Sanofi S.A. 4.00% due 01/01/00 (Conv. Pfd.).................. 238,153 --------------- 3,029,635 --------------- RETAIL 7,326 Carrefour Supermarche........... 4,766,807 20,160 Castorama Dubois Investissement................ 3,469,766 495 Castorama Dubois Investissement 3.15% due 01/01/03 (Conv. Pfd.)......................... 116,392 --------------- 8,352,965 --------------- STEEL & IRON 229,790 Usinor Sacilor.................. 3,343,769 --------------- TEXTILES 7,800 Christian Dior S.A.............. 1,258,283 3,500 Christian Dior S.A. (Warrants due 06/30/98)*...... 121,153 --------------- 1,379,436 --------------- TOTAL FRANCE.................... 45,717,565 --------------- GERMANY (7.8%) AUTOMOTIVE 3,900 BMW AG.......................... 2,715,574 11,020 Volkswagen AG................... 4,576,768 --------------- 7,292,342 --------------- NUMBER OF SHARES VALUE - --------------- --------------- CHEMICALS 106,000 BASF AG......................... $ 4,077,664 98,650 Bayer AG........................ 4,020,260 20,000 SGL Carbon AG................... 2,517,846 --------------- 10,615,770 --------------- HEALTH & PERSONAL CARE 5,220 Rhoen-Klinikum AG............... 545,373 5,080 Rhoen-Klinikum AG (Pref.)....... 504,374 --------------- 1,049,747 --------------- MANUFACTURING 24,635 Adidas AG....................... 2,126,187 --------------- PHARMACEUTICALS 38,500 Gehe AG......................... 2,460,902 --------------- TOTAL GERMANY................... 23,544,948 --------------- ITALY (4.0%) FOOD MANUFACTURER 2,109,200 Parmalat Finanzeria SpA......... 3,225,672 --------------- HOUSEHOLD FURNISHINGS & APPLIANCES 116,400 Industrie Natuzzi SpA (ADR)..... 2,677,200 --------------- OIL & GAS PRODUCTS 653,700 Ente Nazionale Idrocarburi SpA.. 3,354,683 --------------- TELECOMMUNICATIONS 1,100,850 Telecom Italia Mobile SpA....... 2,782,966 --------------- TOTAL ITALY..................... 12,040,521 --------------- NETHERLANDS (12.3%) BANKING 44,275 ABN-AMRO Holding NV............. 2,880,258 --------------- CHEMICALS 25,000 Akzo Nobel NV................... 3,414,747 --------------- FOOD DISTRIBUTION 51,705 Koninklijke Ahold NV............ 3,231,937 --------------- FOOD PROCESSING 18,524 Nutricia Vereenigde Bedrijven NV............................ 2,814,301 --------------- INSURANCE 48,462 Aegon NV........................ 3,088,127 123,822 ING Groep NV.................... 4,457,535 --------------- 7,545,662 --------------- MANUFACTURING 37,550 ASM Lithography Holding NV*..... 1,875,544 --------------- MERCHANDISING 37,600 Gucci Group NV.................. 2,524,366 --------------- MULTI-INDUSTRY 23,778 Hunter Douglas NV............... 1,603,274 --------------- PUBLISHING 241,000 Elsevier NV..................... 4,072,925 177,000 Ver Ned Uitgev Ver Bezit NV..... 3,698,171 26,232 Wolters Kluwer NV............... 3,484,341 --------------- 11,255,437 --------------- TOTAL NETHERLANDS............... 37,145,526 --------------- NORWAY (0.7%) INSURANCE 341,000 Storebrand AS (A Shares)*....... 1,978,517 ---------------
75 DEAN WITTER VARIABLE INVESTMENT SERIES--EUROPEAN GROWTH PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - --------------- --------------- SPAIN (6.6%) BANKS 71,686 Banco Bilbao Vizcaya............ $ 3,870,591 17,946 Banco Popular Espanol S.A....... 3,524,786 --------------- 7,395,377 --------------- FINANCIAL SERVICES 28,160 Corporacion Financiera Alba..... 2,845,715 --------------- OIL RELATED 11,826 Gas Natural SDG S.A. (Series E)............................ 2,750,868 --------------- TELECOMMUNICATIONS 181,500 Telefonica de Espana S.A........ 4,214,916 --------------- UTILITIES 203,250 Iberdrola S.A................... 2,880,536 --------------- TOTAL SPAIN..................... 20,087,412 --------------- SWEDEN (7.6%) AUTO TRUCKS & PARTS 57,000 Scania AB (A Shares)............ 1,415,446 80,000 Scania AB (B Shares)............ 1,992,434 --------------- 3,407,880 --------------- BUSINESS SERVICES 100,000 Assa Abloy AB (Series B)........ 1,811,303 119,000 Securitas AB (Series "B" Free)......................... 3,450,459 --------------- 5,261,762 --------------- INSURANCE 99,181 Scandia Forsakrings AB.......... 2,796,116 --------------- PHARMACEUTICALS 76,000 Astra AB (B Shares)............. 3,652,405 --------------- RETAIL 32,810 Hennes & Mauritz AB (B Shares)....................... 4,524,261 --------------- TELECOMMUNICATION EQUIPMENT 108,900 Ericsson (L.M.) Telephone Co. AB (Series "B" Free)............. 3,356,447 --------------- TOTAL SWEDEN.................... 22,998,871 --------------- SWITZERLAND (4.8%) INSURANCE 3,200 Schweizerische Rueckversicherungs- Gesellschaft.................. 3,407,452 --------------- MULTI-INDUSTRY 1,756 ABB AG - Bearer................. 2,178,644 --------------- PHARMACEUTICALS 3,430 Novartis AG*.................... 3,918,174 1,000 Novartis AG-Bearer*............. 1,141,580 506 Roche Holdings AG............... 3,926,967 --------------- 8,986,721 --------------- TOTAL SWITZERLAND............... 14,572,817 --------------- UNITED KINGDOM (32.8%) AEROSPACE & DEFENSE 133,333 British Aerospace PLC........... 2,920,648 --------------- NUMBER OF SHARES VALUE - --------------- --------------- AUTOMOTIVE 405,000 BBA Group PLC................... $ 2,443,478 810,000 Rolls-Royce PLC................. 3,568,034 --------------- 6,011,512 --------------- BANKING 225,000 Abbey National PLC.............. 2,946,366 100,000 National Westminster Bank PLC... 1,175,804 290,000 TSB Group PLC................... 2,142,329 --------------- 6,264,499 --------------- BREWERS 145,000 Scottish & Newcastle Breweries PLC........................... 1,707,401 325,000 Vaux Group PLC.................. 1,384,269 --------------- 3,091,670 --------------- BROADCAST MEDIA 155,000 Flextech PLC*................... 1,806,556 --------------- BUILDING & CONSTRUCTION 313,000 Blue Circle Industries PLC...... 1,915,241 207,400 CRH PLC......................... 2,154,231 217,800 Williams Holdings PLC........... 1,284,184 --------------- 5,353,656 --------------- BUILDING MATERIALS 309,000 Redland PLC..................... 1,954,320 --------------- BUSINESS SERVICES 150,000 Reuters Holdings PLC............ 1,929,535 --------------- CHEMICALS 306,000 Albright & Wilson PLC........... 881,133 215,000 Courtaulds PLC.................. 1,455,614 --------------- 2,336,747 --------------- COMPUTER SOFTWARE & SERVICES 200,000 Sage Group (The) PLC............ 1,833,980 153,454 SEMA Group PLC.................. 2,866,920 --------------- 4,700,900 --------------- COMPUTERS 350,000 Amstrad PLC..................... 883,353 --------------- CONGLOMERATES 435,000 BTR PLC......................... 2,124,931 415,000 Tomkins PLC..................... 1,920,537 --------------- 4,045,468 --------------- ELECTRICAL EQUIPMENT 306,363 The BICC Group PLC.............. 1,444,042 --------------- FOOD PROCESSING 275,000 Associated British Foods PLC.... 2,276,621 --------------- FOOD, BEVERAGE, TOBACCO & HOUSEHOLD PRODUCTS 94,261 B.A.T. Industries PLC........... 781,967 187,000 Grand Metropolitan PLC.......... 1,467,972 180,000 Guinness PLC.................... 1,416,107 177,500 Tate & Lyle PLC................. 1,437,510 --------------- 5,103,556 --------------- FOREST PRODUCTS, PAPER & PACKAGING 191,000 De La Rue PLC................... 1,882,401 ---------------
76 DEAN WITTER VARIABLE INVESTMENT SERIES--EUROPEAN GROWTH PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - --------------- --------------- INSURANCE 55,000 Britannic Assurance PLC......... $ 678,744 123,057 Commercial Union PLC............ 1,444,800 261,200 Prudential Corp. PLC............ 2,202,668 327,271 Royal & Sun Alliance Insurance Group PLC..................... 2,498,999 --------------- 6,825,211 --------------- LEISURE 180,000 Granada Group PLC............... 2,662,528 --------------- METALS & MINING 104,000 Smiths Industries PLC........... 1,429,613 --------------- MISCELLANEOUS 200,000 Vendome Luxury Group PLC (Units)++..................... 1,820,268 --------------- OIL RELATED 591,000 Lasmo PLC....................... 2,380,489 245,000 Shell Transport & Trading Co. PLC........................... 4,249,691 --------------- 6,630,180 --------------- PHARMACEUTICALS 191,810 British Biotech PLC*............ 669,031 279,100 Glaxo Wellcome PLC.............. 4,544,585 554,166 Medeva PLC...................... 2,412,595 --------------- 7,626,211 --------------- REAL ESTATE 203,200 Hammerson PLC................... 1,407,071 --------------- RETAIL 100,000 Great Universal Stores PLC...... 1,050,682 250,000 LucasVarity PLC*................ 955,555 247,000 Morrison (W.M.) Supermarkets PLC........................... 696,424 214,000 Next PLC........................ 2,087,069 290,000 W.H. Smith Group PLC (Class A).. 2,127,417 --------------- 6,917,147 --------------- NUMBER OF SHARES VALUE - --------------- --------------- TELECOMMUNICATIONS 842,700 British Telecommunications PLC.. $ 5,705,332 400,635 Securicor Group PLC (Class A)..................... 1,926,161 180,000 Vodafone Group PLC.............. 762,044 --------------- 8,393,537 --------------- TRANSPORTATION 235,500 British Airways PLC............. 2,448,119 --------------- UTILITIES 198,360 Scottish Power PLC.............. 1,193,362 --------------- TOTAL UNITED KINGDOM............ 99,358,731 --------------- TOTAL COMMON AND PREFERRED STOCKS AND WARRANTS (IDENTIFIED COST $214,435,012)................. 288,210,161 ---------------
PRINCIPAL AMOUNT (IN THOUSANDS) - ----------- SHORT-TERM INVESTMENT (A) (4.0%) U.S. GOVERNMENT AGENCY $ 12,000 Federal Home Loan Banks 6.50% due 01/02/97 (Amortized Cost $11,997,833).................... 11,997,833 --------------- TOTAL INVESTMENTS (IDENTIFIED COST $226,432,845) (B)......... 99.3% 300,207,994 CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES................. 0.7 2,214,060 ---------- ------------- NET ASSETS....................... 100.0% $ 302,422,054 ---------- ------------- ---------- ------------- - ------------------ ADR AMERICAN DEPOSITORY RECEIPT. * NON-INCOME PRODUCING SECURITY. ++ CONSISTS OF MORE THAN ONE CLASS OF SECURITIES TRADED TOGETHER AS A UNIT; COMMON STOCK WITH ATTACHED WARRANTS. (A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $74,537,493 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $762,344, RESULTING IN NET UNREALIZED APPRECIATION OF $73,775,149.
SEE NOTES TO FINANCIAL STATEMENTS 77 DEAN WITTER VARIABLE INVESTMENT SERIES--EUROPEAN GROWTH SUMMARY OF INVESTMENTS DECEMBER 31, 1996 - --------------------------------------------------------------------------------
PERCENT OF INDUSTRY VALUE NET ASSETS - -------------------------- -------------- ------------- Aerospace & Defense....... $ 2,920,648 1.0% Air Transport............. 2,901,748 1.0 Auto Trucks & Parts....... 3,407,879 1.1 Automotive................ 13,303,855 4.4 Banking................... 9,144,757 3.0 Banks..................... 7,395,377 2.4 Brewers................... 3,091,670 1.0 Broadcast Media........... 1,806,556 0.6 Building & Construction... 5,353,655 1.8 Building Materials........ 4,822,852 1.6 Business Services......... 7,191,298 2.4 Chemicals................. 16,367,264 5.4 Computer Software & Services................ 4,700,900 1.6 Computers................. 883,353 0.3 Conglomerates............. 4,045,469 1.3 Electrical Equipment...... 1,444,042 0.5 Energy.................... 4,105,373 1.4 Financial Services........ 6,688,444 2.2 Food Distribution......... 3,231,937 1.1 Food Manufacturer......... 3,225,672 1.1 Food Processing........... 5,090,922 1.7 Food, Beverage, Tobacco & Household Products...... 15,037,521 5.0 Forest Products, Paper & Packaging............... 1,882,401 0.6 Health & Personal Care.... 1,049,747 0.3 PERCENT OF INDUSTRY VALUE NET ASSETS - -------------------------- -------------- ------------- Household Furnishings & Appliances.............. $ 2,677,200 0.9% Insurance................. 28,567,440 9.4 Leisure................... 2,662,528 0.9 Manufacturing............. 4,001,732 1.3 Merchandising............. 2,524,366 0.8 Metals & Mining........... 1,429,613 0.5 Miscellaneous............. 1,820,268 0.6 Multi-Industry............ 3,781,918 1.2 Oil & Gas Products........ 3,354,683 1.1 Oil Related............... 12,227,728 4.0 Pharmaceuticals........... 29,975,116 9.9 Publishing................ 11,255,437 3.7 Real Estate............... 1,407,071 0.5 Retail.................... 23,438,634 7.8 Steel & Iron.............. 3,343,769 1.1 Telecommunication Equipment............... 3,356,447 1.1 Telecommunications........ 15,391,419 5.1 Textiles.................. 1,379,435 0.5 Transportation............ 2,448,119 0.8 U.S. Government Agency.... 11,997,833 4.0 Utilities................. 4,073,898 1.3 -------------- ----- $ 300,207,994 99.3% -------------- ----- -------------- -----
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PERCENT OF TYPE OF INVESTMENT VALUE NET ASSETS - -------------------------------------------------------------------------------------- -------------- ------------- Common Stocks......................................................................... $ 287,230,090 95.0% Convertible Preferred Stocks.......................................................... 354,545 0.1 Preferred Stocks...................................................................... 504,374 0.2 Short-Term Investment................................................................. 11,997,833 4.0 Warrants.............................................................................. 121,152 0.0 -------------- ----- $ 300,207,994 99.3% -------------- ----- -------------- -----
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT DECEMBER 31, 1996:
CONTRACTS TO IN EXCHANGE DELIVERY UNREALIZED RECEIVE FOR DATE DEPRECIATION - ---------------- ---------------- -------- --------------- $ 100,543 DEM 156,636 01/02/97 $ (1,103) $ 84,006 SEK 578,759 01/02/97 (535) $ 401,426 SEK 2,764,820 01/03/97 (2,439) ------- Net unrealized depreciation.............. $ (4,077) ------- -------
SEE NOTES TO FINANCIAL STATEMENTS 78 DEAN WITTER VARIABLE INVESTMENT SERIES--PACIFIC GROWTH PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 - --------------------------------------------------------------------------------
SHARES/PRINCIPAL AMOUNT VALUE - --------------- -------------- COMMON AND PREFERRED STOCKS, WARRANTS, RIGHTS AND BONDS (95.2%) AUSTRALIA (2.6%) BUILDING & CONSTRUCTION 210,000 Boral, Ltd...................... $ 597,305 -------------- FOOD, BEVERAGE, TOBACCO & HOUSEHOLD PRODUCTS 204,000 Fosters Brewing Group Ltd. (New)......................... 413,299 -------------- FOODS & BEVERAGES 440,000 Goodman Fielder Wattie Ltd...... 545,345 -------------- METALS & MINING 18,000 CRA Ltd......................... 282,445 404,000 M.I.M. Holdings, Ltd............ 564,921 195,000 North Ltd....................... 570,133 38,750 Overseas & General, Ltd......... 6,003 -------------- -------------- 1,423,502 -------------- OIL RELATED 100,000 Santos, Ltd..................... 405,195 50,000 Woodside Petroleum Ltd.......... 365,073 -------------- 770,268 -------------- TOTAL AUSTRALIA................. 3,749,719 -------------- CHINA (0.7%) TRANSPORTATION 160,000 Jinhui Shipping and Transportation Ltd............ 163,086 -------------- UTILITIES 16,000 Huaneng Power International, Inc. (Class N) (ADR)*......... 360,000 45,000 Shandong Huaneng Power Co., Ltd. (ADR)......................... 438,750 -------------- 798,750 -------------- TOTAL CHINA..................... 961,836 -------------- HONG KONG (21.4%) BANKING 139,000 Bank of East Asia, Ltd.......... 618,257 102,000 Dao Heng Bank Group Ltd......... 489,294 64,000 Guoco Group Ltd................. 358,314 59,000 Hang Seng Bank Ltd.............. 717,093 300,000 Hang Seng Bank Ltd. (Warrants due 02/12/97)................. 118,309 425,000 International Bank of Asia...... 283,004 -------------- 2,584,271 -------------- BUILDING MATERIALS 17,000 Guangdong Tannery Ltd*.......... 4,286 -------------- BUSINESS SERVICES 204,000 First Pacific Co. Ltd........... 265,089 -------------- CONGLOMERATES 43,000 Citic Pacific, Ltd.............. 249,638 90,136 Henderson China Holding Ltd..... 205,119 428,000 Hutchison Whampoa, Ltd.......... 3,361,908 60,000 Jardine Matheson Holdings Ltd... 396,000 154,000 Swire Pacific Ltd. (Class A).... 1,468,516 530,000 Swire Pacific Ltd. (Warrants due 07/30/97)....... 135,687 -------------- 5,816,868 -------------- SHARES/PRINCIPAL AMOUNT VALUE - --------------- -------------- ELECTRONIC & ELECTRICAL EQUIPMENT 212,000 ASM Pacific Technology Ltd...... $ 164,469 -------------- ENGINEERING & CONSTRUCTION 612,000 Road King Infrastructure Ltd.*.. 542,048 -------------- FINANCIAL SERVICES 850,000 Manhattan Card Co. Ltd.......... 431,374 -------------- FOOD PROCESSING 750,000 Tingyi (Cayman Islands) Holding Co.*.......................... 196,373 -------------- HOTELS/MOTELS 190,000 Shangri-La Asia Ltd............. 281,290 -------------- INSURANCE 331,000 National Mutual Asia Ltd........ 314,566 -------------- INVESTMENT COMPANIES 340,000 Guangdong Investments........... 327,515 252,000 Peregrine- Hong Kong (Warrants due 07/30/97)................. 2,444 560,000 Sun Hung Kai (Warrants due 07/10/97)....... 257,047 -------------- 587,006 -------------- LEISURE 1,509,000 CDL Hotels International, Ltd... 863,373 -------------- MISCELLANEOUS 192,000 BZW (Warrants due 02/27/97)..... 148,953 750,000 Hutchinson Whampoa (Warrants due 02/12/97)..................... 169,705 -------------- 318,658 -------------- PUBLISHING 340,000 South China Morning Post (Holdings) Ltd................ 281,355 -------------- REAL ESTATE 414,000 Amoy Properties, Ltd............ 596,858 308,000 Cheung Kong (Holdings) Ltd...... 2,737,910 800,000 Cheung Kong (Holdings) Ltd. (Warrants due 02/27/97)....... 341,350 190,000 China Resources Enterprise Ltd........................... 427,463 170,000 Great Eagle Holding Co.......... 701,190 $ 425K Henderson Capital International 5.00% due 03/27/98 (Conv.).... 363,375 118,000 Henderson Land Development Co. Ltd........................... 1,190,070 352,000 Hong Kong Land Holdings Ltd..... 978,560 106,000 Hysan Development Co. Ltd....... 422,136 6,250 Hysan Development Co. Ltd. (Warrants due 04/30/98)*...... 5,657 229,000 New World Development........... 1,547,097 $ 120K Paliburg International Finance - 144A** 3.50% due 02/06/01 (Conv.)....................... 132,000 195,000 Sun Hung Kai Properties Ltd..... 2,388,964 215,000 Wharf (Holdings) Ltd............ 1,073,054 1,250,000 Wharf-B.T. (Warrants due 01/10/97)....... 279,609 -------------- 13,185,293 -------------- RETAIL 90,399 Dickson Concepts International Ltd. (New).................... 338,967 --------------
79 DEAN WITTER VARIABLE INVESTMENT SERIES--PACIFIC GROWTH PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
SHARES/PRINCIPAL AMOUNT VALUE - --------------- -------------- RETAIL - SPECIALTY 408,000 Giordano International Ltd...... $ 348,177 -------------- TELECOMMUNICATIONS 1,377,400 Hong Kong Telecommunications Ltd........................... 2,217,304 -------------- TRANSPORTATION 119,000 Cathay Pacific Airways.......... 187,717 794,000 The Guangshen Railway Co., Ltd........................... 343,923 -------------- 531,640 -------------- UTILITIES 59,500 China Light & Power Co. Ltd..... 264,650 372,000 Hong Kong & China Gas Co. Ltd... 719,085 119,500 Hong Kong & China Gas Co. (Warrants due 09/30/97)*...... 66,440 162,000 Hong Kong Electric Holdings Ltd........................... 538,324 500,000 Hong Kong Electric Holdings Ltd. (Warrants due 03/27/97)....... 29,416 -------------- 1,617,915 -------------- TOTAL HONG KONG................. 30,890,322 -------------- INDONESIA (7.9%) AUTOMOTIVE 1,250,000 PT Gadjah Tunggal............... 542,673 -------------- BANKING 400,000 PT Bank Dagang Nasional Indonesia..................... 406,607 763,820 PT Bank International Indonesia..................... 752,173 -------------- 1,158,780 -------------- BUILDING MATERIALS 963,732 PT Mulia Industrindo............ 1,000,061 400,000 PT Semen Gresik................. 1,287,590 -------------- 2,287,651 -------------- COMMERCIAL SERVICES 340,000 PT Steady Safe.................. 435,620 -------------- CONSTRUCTION PLANT & EQUIPMENT 340,000 PT United Tractors.............. 712,834 -------------- FOOD, BEVERAGE, TOBACCO & HOUSEHOLD PRODUCTS 270,000 PT Hanjaya Mandala Sampoerna.... 1,440,915 -------------- FOREST PRODUCTS, PAPER & PACKAGING 1,159,380 PT Indah Kiat Pulp Paper Corp... 847,069 7,433 PT Pabrikkertas Tjiwi Kimia..... 7,398 -------------- 854,467 -------------- INDUSTRIALS 300,000 PT Bukaka Teknik Utama.......... 225,540 -------------- INVESTMENT COMPANIES 1 Peregrine Indonesia (Units)++** *................. 529,750 -------------- METALS 460,000 PT Tambang Timah................ 837,781 -------------- MISCELLANEOUS 120,000 PT Perusahaan Perkebu*.......... 317,662 -------------- SHARES/PRINCIPAL AMOUNT VALUE - --------------- -------------- PLANTATION 30,000 Jababeka - 144A** (GDR)......... $ 322,500 60,000 PT London Sumatra............... 158,831 -------------- 481,331 -------------- RETAIL 250,000 PT Ramayana Lestari Sentosa*.... 540,025 -------------- TELECOMMUNICATIONS 587,000 PT Telekomunikasi Indonesia..... 1,013,141 -------------- TOTAL INDONESIA................. 11,378,170 -------------- JAPAN (13.2%) AEROSPACE & DEFENSE 45,000 Ishikawajima-Harima Heavy Industry...................... 199,957 -------------- AUTOMOTIVE 11,000 Honda Motor Co.................. 314,150 51,000 Isuzu Motors Ltd................ 226,618 12,000 Toyota Motor Corp............... 344,780 -------------- 885,548 -------------- BANKING 25,000 Asahi Bank, Ltd................. 222,174 17,000 Bank of Tokyo - Mitsubishi Ltd........................... 315,358 16,000 Dai-Ichi Kangyo Bank............ 230,544 18,000 Long Term Credit Bank of Japan.. 97,377 29,000 Mitsui Trust & Banking.......... 226,445 15,000 Sanwa Bank, Ltd................. 204,487 14,000 Sumitomo Bank................... 201,726 16,000 Sumitomo Trust & Banking........ 160,138 -------------- 1,658,249 -------------- BUILDING & CONSTRUCTION 3,000 Japan Industrial Land Development................... 56,946 32,000 Kajima Corp..................... 228,611 9,000 Kaneshita Construction.......... 85,418 6,000 Mitsui Home Co., Ltd............ 74,029 -------------- 445,004 -------------- BUILDING MATERIALS 4,000 Oriental Construction Co........ 51,424 28,000 Sanwa Shutter................... 208,973 13,000 Shin Nikkei Co., Ltd............ 60,345 11,000 Toyo Shutter.................... 59,413 -------------- 380,155 -------------- BUSINESS SERVICES 2,000 Nippon Kanzai................... 51,769 1,880 Nissin Co. Ltd.................. 40,714 4,000 Secom Co........................ 241,933 7,000 Tanseisha....................... 60,337 -------------- 394,753 -------------- CHEMICALS 2,000 Maezawa Kasei Industries........ 56,083 58,000 Mitsubishi Chemical Corp........ 187,662 33,000 Nippon Zeon Co. Ltd............. 126,704 15,000 Sakai Chemical Industry Co...... 65,617 9,000 Shin-Etsu Chemical Co........... 163,848 14,000 Sumitomo Bakelite Co. Ltd....... 84,556 -------------- 684,470 --------------
80 DEAN WITTER VARIABLE INVESTMENT SERIES--PACIFIC GROWTH PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
SHARES/PRINCIPAL AMOUNT VALUE - --------------- -------------- COMMERCIAL SERVICES 6,000 Kawasho Gecoss Corp............. $ 55,910 2,000 Nichii Gakkan Co................ 99,741 -------------- 155,651 -------------- COMPUTER SERVICES 3,000 Nintendo Corp., Ltd............. 213,546 -------------- COMPUTER SOFTWARE & SERVICES 2,000 Enix Corp....................... 45,211 8,000 Ines Corp....................... 116,652 5,000 Meitec Corp..................... 95,341 5 NTT Data Communications Systems Corp.......................... 146,247 -------------- 403,451 -------------- COMPUTERS 26,000 Fujitsu, Ltd.................... 242,278 550 TKC Corp........................ 13,050 -------------- 255,328 -------------- COMPUTERS - SYSTEMS 3,000 Daiwabo Information Systems Co............................ 42,709 -------------- DATA PROCESSING 9,000 Ricoh Elemex.................... 125,798 -------------- ELECTRICAL EQUIPMENT 7,000 Maspro Denkoh Corp.............. 107,506 -------------- ELECTRONIC & ELECTRICAL EQUIPMENT 5,000 Aiwa Co......................... 85,850 5,000 Canon, Inc...................... 110,440 Y 9,000K Canon, Inc. 1.00% due 12/20/02 (Conv.)....................... 132,787 27,000 Hitachi, Ltd.................... 251,596 3,000 Kyocera Corp.................... 186,885 4,000 Mitsui High-Tec................. 78,343 5,000 Murata Manufacturing Co., Ltd... 163,934 6,000 Nitto Electric Works............ 101,467 8,000 Omron Corp...................... 148,404 12,000 Sharp Corp...................... 170,837 5,000 Sony Corp....................... 327,437 3,000 TDK Corp........................ 195,427 -------------- 1,953,407 -------------- ELECTRONICS 28,000 Fujikura Ltd.................... 224,193 3,000 Kojima Co. Ltd.................. 72,217 10,000 Nissin Electric................. 47,972 2,000 Rohm Co., Ltd................... 131,148 3,000 Ryoyo Electro Corp.............. 54,357 -------------- 529,887 -------------- ELECTRONICS - SEMICONDUCTORS/COMPONENTS 4,000 Toshiba Ceramics................ 28,818 -------------- ENTERTAINMENT 2,200 H.I.S. Company Ltd.............. 106,299 -------------- FINANCIAL SERVICES 20,000 Daiwa Securities Co., Ltd....... 177,739 1,900 Nichiei Co., Ltd. (Kyoto)....... 139,508 13,000 Nomura Securities Co. Ltd....... 195,168 1,000 Sanyo Shinpan Finance Co., Ltd........................... 62,554 2,000 Shinki Co. Ltd.................. 46,247 -------------- 621,216 -------------- SHARES/PRINCIPAL AMOUNT VALUE - --------------- -------------- FOOD, BEVERAGE, TOBACCO & HOUSEHOLD PRODUCTS 16,000 Nippon Meat Packers, Inc........ $ 207,075 -------------- FOREST PRODUCTS, PAPER & PACKAGING 10,000 Daishowa Paper Manufacturing Co. Ltd........................... 43,400 -------------- HEALTH & PERSONAL CARE 5,000 Kawasumi Laboratories, Inc...... 56,514 -------------- HOUSEHOLD FURNISHINGS & APPLIANCES 6,000 Beltecno Corp................... 56,946 6,000 Juken Sangyo Co................. 40,897 -------------- 97,843 -------------- INDUSTRIALS Y 10,000K Forval Corp 1.35% due 9/30/03 (Conv.)....................... 81,104 12,000 Nippon Thompson Co.............. 85,315 27,000 Tokai Carbon Co., Ltd........... 105,065 -------------- 271,484 -------------- INSURANCE 17,000 Tokio Marine & Fire Insurance Co............................ 159,879 22,000 Yasuda Fire & Marine Insurance.. 114,271 -------------- 274,150 -------------- MACHINE TOOLS 2,000 Nitto Kohki Co. Ltd............. 71,613 12,000 OSG Corp........................ 63,676 -------------- 135,289 -------------- MACHINERY 8,000 Aichi Corp...................... 60,052 24,000 Amada Co., Ltd.................. 186,368 16,000 Daifuku Co. Ltd................. 201,553 3,000 Fuji Machine Manufacturing Co... 79,465 5,000 Fujitec Co. Ltd................. 50,043 2,000 Keyence Corp.................... 246,764 Y 19,000K Minebea Co. Ltd. 0.80% due 03/31/03 (Conv.).... 187,049 29,000 Mitsubishi Heavy Industries, Ltd........................... 230,198 5,000 Sansei Yusoki Co., Ltd.......... 55,220 9,000 Sintokogio...................... 65,695 6,000 Takuma Co., Ltd................. 65,746 15,000 Tsudakoma....................... 63,158 -------------- 1,491,311 -------------- MANUFACTURING 5,000 Arcland Sakamoto................ 64,711 7,000 Bridgestone Metalpha Corp....... 59,793 9,000 Daiwa House Industry............ 115,703 10,000 Itoki Crebio Corp............... 66,609 5,000 Nichiha Corp.................... 88,438 10,000 Nippon Electric Glass Co., Ltd........................... 153,581 4,000 Sony Music Entertainment Inc.... 158,067 17,000 Tokyo Style..................... 237,619 -------------- 944,521 -------------- MEDICAL SUPPLIES 10,000 Shimadzu Corp................... 49,267 13,000 Terumo.......................... 176,100 -------------- 225,367 --------------
81 DEAN WITTER VARIABLE INVESTMENT SERIES--PACIFIC GROWTH PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
SHARES/PRINCIPAL AMOUNT VALUE - --------------- -------------- MERCHANDISING 3,000 Misumi Corp..................... $ 51,769 -------------- METALS 6,000 Takada Kiko..................... 44,573 9,200 Tokyo Steel Manufacturing....... 130,975 -------------- 175,548 -------------- METALS & MINING 31,000 Nippon Light Metal Co........... 127,317 89,000 Nippon Steel Co................. 262,623 -------------- 389,940 -------------- MISCELLANEOUS MATERIALS & COMMODITIES 7,000 Minebea Co., Ltd................ 58,464 -------------- MULTI-INDUSTRY 26,000 Mitsui & Co..................... 210,871 3,300 Trusco Nakayama Corp............ 60,932 6,000 Yamae Hisano.................... 59,016 -------------- 330,819 -------------- NATURAL GAS 76,000 Tokyo Gas Co., Ltd.............. 205,902 -------------- OIL RELATED 16,000 General Sekiyu.................. 113,339 -------------- PHARMACEUTICALS 16,000 Daiichi Pharmaceutical.......... 256,773 11,000 Eisai Co. Ltd................... 216,393 -------------- 473,166 -------------- REAL ESTATE 12,000 Cesar Co........................ 62,640 5,000 Chubu Sekiwa Real Estate, Ltd... 64,280 5,000 Kansai Sekiwa Real Estate....... 63,417 23,000 Mitsui Fudosan Co............... 230,198 5,000 Sekiwa Real Estate.............. 40,984 5,000 Tohoku Misawa Homes Co., Ltd.... 59,103 -------------- 520,622 -------------- RETAIL 3,300 Ministop Co., Ltd............... 80,578 4,000 Seven - Eleven Japan............ 233,995 7,000 Shimachu Co., Ltd............... 179,379 2,000 Sundrug Co., Ltd................ 66,437 2,000 Xebio Co. Ltd................... 59,534 -------------- 619,923 -------------- RETAIL - DEPARTMENT STORES 22,000 Hankyu Department Stores........ 218,292 -------------- RETAIL - GENERAL MERCHANDISE 3,000 Circle K Japan Co. Ltd.......... 129,422 -------------- RETAIL - SPECIALTY 5,000 Aderans Co. Ltd................. 122,088 5,500 Seijo Corp...................... 105,349 -------------- 227,437 -------------- STEEL 94,000 Sumitomo Metal Industries....... 231,148 -------------- SHARES/PRINCIPAL AMOUNT VALUE - --------------- -------------- STEEL & IRON 10,000 Yamato Kogyo Co., Ltd........... $ 92,321 -------------- TELECOMMUNICATIONS 30 DDI Corp........................ 198,274 21,000 Nippon Comsys Corp.............. 239,172 12,000 Nippon Denwa Shisetsu........... 110,785 48 Nippon Telegraph & Telephone Corp. (ADR)................... 363,624 -------------- 911,855 -------------- TEXTILES 5,000 Chuo Warehouse Co............... 48,749 2,200 Maruco Co., Ltd................. 73,840 64,000 Mitsubishi Rayon Co., Ltd....... 236,894 30,000 Nitto Boseki Co*................ 81,536 -------------- 441,019 -------------- TRANSPORTATION 17,000 Fukuyama Transporting Co........ 124,970 21,000 Kamigumi Co. Ltd................ 137,705 4,000 Kanto Seino Transportation...... 113,891 27,000 Tokyu Corp...................... 153,287 -------------- 529,853 -------------- TRUCKERS 1,000 Sakai Moving Service Co., Ltd.*......................... 25,108 -------------- UTILITIES 8,900 Hokkaido Electric Power......... 175,082 -------------- WHOLESALE & INTERNATIONAL TRADE 3,000 Satori Electric Co. Ltd......... 103,279 -------------- WHOLESALE DISTRIBUTOR 5,000 Wakita & Co..................... 60,397 -------------- TOTAL JAPAN..................... 19,023,411 -------------- MALAYSIA (20.4%) AGRICULTURE 245,000 Highlands & Lowlands Berhad..... 409,465 170,000 Lingui Developments Berhad...... 290,852 -------------- 700,317 -------------- AUTOMOTIVE 50,000 Cycle & Carriage Bintang Berhad........................ 328,713 160,000 Diversified Resources Berhad.... 592,475 100,800 Oriental Holdings Berhad........ 686,638 50,000 Perusahaan Otomobil Nasional Berhad........................ 316,832 109,000 Tan Chong Motor Holdings Berhad........................ 184,760 -------------- 2,109,418 -------------- BANKING 95,000 DCB Holdings Berhad............. 325,446 37,500 DCB Holdings Berhad (Warrants due 12/27/99)................. 56,436 152,000 Kwong Yik Bank.................. 535,762 127,600 Malayan Banking Berhad.......... 1,414,970 226,666 Public Bank Berhad (Alien Market)................ 480,263 40,000 Public Bank Berhad (Alien Market)................ 81,773 -------------- 2,894,650 --------------
82 DEAN WITTER VARIABLE INVESTMENT SERIES--PACIFIC GROWTH PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
SHARES/PRINCIPAL AMOUNT VALUE - --------------- -------------- BUILDING & CONSTRUCTION 116,666 Gamuda Berhad................... $ 494,387 8,333 Gamuda Berhad (Rights).......... 17,161 32,000 Hume Industries (Malaysia) Berhad........................ 201,505 120,000 Kedah Cement Berhad............. 237,624 150,000 Lingkaran Trans Kota Holdings*.. 308,911 150,000 Malayan Cement Berhad........... 344,554 340,000 Sungei Way Holdings Berhad...... 1,009,901 34,000 Sungei Way Holdings N/P......... 40,396 150,000 United Engineers (Malaysia) Berhad........................ 1,354,455 -------------- 4,008,894 -------------- CHEMICALS 125,000 Chemical Co. of Malaysia Berhad........................ 361,386 31,250 Chemical Co. of Malaysia Berhad (Warrants due 11/07/00)*...... 28,960 -------------- 390,346 -------------- CONGLOMERATES 400,000 Berjaya Group Berhad............ 340,594 40,000 Gadek Berhad*................... 321,584 280,000 Malaysian Resources Corp. Berhad........................ 1,103,366 210,000 Renong Berhad................... 372,594 105,000 Sime Darby Berhad............... 413,762 -------------- 2,551,900 -------------- CONSTRUCTION PLANT & EQUIPMENT 107,500 YTL Corp. Berhad................ 579,010 -------------- ELECTRONIC & ELECTRICAL EQUIPMENT 39,666 Leader Universal Holdings Berhad........................ 83,259 -------------- ENGINEERING & CONSTRUCTION 184,000 Intria Berhad................... 462,733 -------------- ENTERTAINMENT 290,000 Magnum Corporation Berhad....... 562,772 254,000 Resorts World Berhad............ 1,156,832 -------------- 1,719,604 -------------- FINANCIAL SERVICES 266,000 Affin Holdings Berhad........... 732,158 105,000 Gadek Capital Berhad............ 276,535 80,000 Hong Leong Credit Berhad........ 503,762 297,000 Public Finance Berhad........... 517,545 50,000 Rashid Hussain Berhad........... 330,693 -------------- 2,360,693 -------------- HOUSEHOLD APPLIANCES 200,000 Berjaya Singer Bhd.............. 300,990 -------------- INSURANCE 70,000 Malaysian Assurance Alliance Berhad........................ 340,990 -------------- MANUFACTURING 75,000 Kian Joo Can Factory Berhad..... 415,842 57,000 Malaysian Pacific Industries Berhad........................ 221,228 19,375 O.Y.L. Industries Berhad........ 203,342 -------------- 840,412 -------------- SHARES/PRINCIPAL AMOUNT VALUE - --------------- -------------- MULTI-INDUSTRY 338,000 Multi-Purpose Holdings Berhad... $ 655,921 338,000 Multi-Purpose Holdings Berhad (Rights)...................... 15,233 225,000 Nylex Berhad.................... 507,921 -------------- 1,179,075 -------------- OIL & GAS PRODUCTS 160,000 Petronas Dagangan Berhad........ 411,881 -------------- PLANTATION 210,000 Industrial Oxygen Incorporated Berhad........................ 322,693 97,500 Kuala Lumpur Kepong Berhad...... 247,129 -------------- 569,822 -------------- REAL ESTATE 100,000 IOI Properties Berhad........... 324,753 177,500 Land & General Berhad........... 425,297 268,000 Metroplex Berhad................ 329,030 225,000 Pelangi Berhad.................. 242,376 200,000 Selangor Properties Berhad...... 219,406 -------------- 1,540,862 -------------- TELECOMMUNICATIONS 120,000 Technology Resources Industries Berhad*....................... 236,673 305,000 Telekom Malaysia Berhad......... 2,717,822 -------------- 2,954,495 -------------- TRANSPORTATION 80,000 Konsortium Perkapalan Berhad*... 538,614 140,000 Malaysian Airline System Berhad........................ 363,168 -------------- 901,782 -------------- UTILITIES 60,000 Malakoff Berhad................. 294,654 57,000 Prime Utilities Berhad.......... 564,356 12,000 Prime Utilities Berhad (Warrants due 03/11/01)*................ 27,564 24,000 Prime Utilities Berhad 1.00% due 03/01/01 (Loan Stock)......... 7,889 354,000 Tenaga Nasional Berhad.......... 1,696,396 -------------- 2,590,859 -------------- TOTAL MALAYSIA.................. 29,491,992 -------------- PAKISTAN (0.0%) TELECOMMUNICATIONS 1,100 Pakistan Telecommunications Corp. (GDS)*.................. 69,300 -------------- PHILIPPINES (3.2%) BANKING 70,000 Bank of the Philippine Islands.. 423,838 75,000 Far East Bank & Trust........... 299,886 19,780 Philippine National Bank........ 235,386 107,200 Security Bank Corp.............. 185,743 -------------- 1,144,853 -------------- BUILDING & CONSTRUCTION 68,199 Bacnotan Consolidated Industries.................... 223,348 --------------
83 DEAN WITTER VARIABLE INVESTMENT SERIES--PACIFIC GROWTH PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
SHARES/PRINCIPAL AMOUNT VALUE - --------------- -------------- CONGLOMERATES 340,000 First Philippine Holdings Corp. (B Shares).................... $ 776,847 600,000 JG Summit Holdings, Inc. (B Shares)....................... 169,078 -------------- 945,925 -------------- ENGINEERING & CONSTRUCTION 1,050,000 DMCI Holdings Inc.*............. 689,737 -------------- FOREST PRODUCTS, PAPER & PACKAGING 52,500 PICOP Resources*................ 8,897 -------------- REAL ESTATE 2,000,000 Belle Corp.*.................... 555,979 460,000 Fil-Estate Land, Inc.*.......... 407,273 $ 150K Filinvest Land, Inc. 3.75% due 01/02/02 (Conv.).............. 143,625 -------------- 1,106,877 -------------- UTILITIES 67,500 Manila Electric Co. (B Shares).. 552,647 -------------- TOTAL PHILIPPINES............... 4,672,284 -------------- SINGAPORE (13.6%) APPLIANCES & HOUSEHOLD DURABLES 300,000 Courts (Singapore) Ltd.......... 373,124 -------------- AUTOMOTIVE 15,000 Singapore Technologies Automotive Ltd................ 33,453 -------------- BANKING 116,000 Development Bank of Singapore, Ltd........................... 1,567,119 15,000 Keppel Bank..................... 42,245 159,100 Overseas Chinese Banking Corp., Ltd........................... 1,978,799 41,000 Overseas Union Bank, Ltd........ 316,512 161,000 United Overseas Bank, Ltd....... 1,795,282 -------------- 5,699,957 -------------- CONGLOMERATES 108,000 Keppel Corp., Ltd............... 841,458 -------------- ELECTRONIC & ELECTRICAL EQUIPMENT 90,000 Elec & Eltek International Co. Ltd........................... 342,000 400,000 Venture Manufacturing Ltd....... 994,996 -------------- 1,336,996 -------------- FINANCE 85,000 Hong Leong Finance Ltd.......... 295,282 -------------- FOOD, BEVERAGE, TOBACCO & HOUSEHOLD PRODUCTS 49,600 Fraser & Neave Ltd.............. 510,536 -------------- HOTELS 50,000 Overseas Union Enterprise Ltd... 250,179 210,000 Republic Hotels & Resorts Ltd... 247,677 56,000 Republic Hotels & Resorts Ltd. (Warrants due 07/12/00)*...... 27,620 -------------- 525,476 -------------- SHARES/PRINCIPAL AMOUNT VALUE - --------------- -------------- MACHINERY 65,000 Van Der Horst Ltd............... $ 271,801 -------------- METALS 340,000 Amtek Engineering Ltd........... 675,626 -------------- PUBLISHING 39,200 Singapore Press Holdings........ 773,352 -------------- REAL ESTATE 12,000 Bukit Sembawang Estates Ltd..... 265,904 150,000 City Developments, Ltd.......... 1,350,965 125,000 DBS Land Ltd.................... 460,150 125,000 Parkway Holdings Ltd............ 491,422 38,000 Singapore Land Ltd.............. 210,508 240,000 United Overseas Land, Ltd....... 365,404 37,000 United Overseas Land, Ltd. (Warrants due 05/28/01)*...... 22,348 155,000 Wing Tai Holdings Ltd........... 443,174 -------------- 3,609,875 -------------- SHIPBUILDING 30,000 Far East Levingston Shipbuilding Ltd........................... 156,540 130,000 Sembawang Corp. Ltd............. 687,634 -------------- 844,174 -------------- STEEL & IRON 250,000 Natsteel Ltd.................... 568,263 -------------- TELECOMMUNICATIONS 400,000 Singapore Telecommunications, Ltd........................... 943,531 -------------- TRANSPORTATION 350,000 Comfort Group Ltd............... 310,222 220,000 Singapore Airlines Ltd.......... 1,997,141 -------------- 2,307,363 -------------- TOTAL SINGAPORE................. 19,610,267 -------------- SOUTH KOREA (5.5%) AIR TRANSPORT 1,460 Korean Air...................... 23,504 -------------- AUTOMOTIVE 25,000 Hyundai Motor Co., Ltd. (GDR)... 182,500 -------------- BANKING 6,670 Cho Hung Bank................... 54,342 61,000 Cho Hung Bank Co Ltd Gd......... 445,300 33,000 Kangwon Bank.................... 231,098 4,350 Korea Exchange Bank............. 39,499 45,000 Kyungnam Bank................... 480,712 2,740 Shinhan Bank.................... 43,508 -------------- 1,294,459 -------------- CHEMICALS 2,316 Sunkyong........................ 32,163 16,000 Sunkyong Ltd.................... 233,591 -------------- 265,754 -------------- COMMUNICATIONS - EQUIPMENT/MANUFACTURERS 3,500 LG Information & Communication Ltd........................... 224,332 220 Sungmi Telecom Electronics...... 32,902 -------------- 257,234 --------------
84 DEAN WITTER VARIABLE INVESTMENT SERIES--PACIFIC GROWTH PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
SHARES/PRINCIPAL AMOUNT VALUE - --------------- -------------- ELECTRICAL EQUIPMENT 5,500 Samsung Display Devices Co...... $ 315,312 -------------- ELECTRONIC & ELECTRICAL EQUIPMENT 10,270 Samsung Electronics Co.......... 619,345 -------------- ELECTRONICS 4,388 Samsung Electronics Co. (GDR)*........................ 78,852 135 Samsung Electronics Co. (GDS)*.. 5,450 -------------- 84,302 -------------- ENGINEERING & CONSTRUCTION 2,642 Dong-Ah Constuction Industrial Co............................ 27,741 30,000 Dong-Ah Construction Industrial Co. (EDR)*.................... 315,000 15,000 Hyundai Engineering & Construction Co.*............. 348,961 -------------- 691,702 -------------- FOOD PROCESSING 5,000 Cheil Foods & Chemicals......... 201,780 -------------- INDUSTRIALS $ 200K Kia Precisions Works 0.50% due 12/31/09 (Conv.).............. 221,000 -------------- INSURANCE 10,000 Oriental Fire & Marine Insurance..................... 206,528 130 Samsung Fire & Marine Insurance..................... 53,733 -------------- 260,261 -------------- INVESTMENT COMPANIES 25,000 Atlantis Korean Smaller Co's*... 181,250 5,000 Atlantis Korean Smaller Co's (Warrants due 06/30/97)*...... 1,250 -------------- 182,500 -------------- OIL RELATED 14,358 Yukong, Ltd. (GDS).............. 272,674 -------------- PHARMACEUTICALS $ 400K Dong-A Pharmaceutical Co., Ltd. 3.125% due 12/31/06 (Conv.)... 488,000 -------------- STEEL & IRON 4,410 Pohang Iron & Steel Co.......... 257,288 21,800 Pohang Iron & Steel Co., Ltd. (ADR)......................... 441,450 -------------- 698,738 -------------- UTILITIES 30,750 Korea Electric Power Corp....... 897,863 1,000 Samchully Co.................... 70,030 10,000 Seoul City Gas Go Ltd........... 629,080 -------------- 1,596,973 -------------- WHOLESALE DISTRIBUTOR $ 250K Daewoo Corp. 0.25% due 12/31/08 (Conv.)....................... 269,375 -------------- TOTAL SOUTH KOREA............... 7,925,413 -------------- TAIWAN (1.6%) BUILDING MATERIALS 11,650 Asia Cement Corp. (GDR)......... 214,127 -------------- SHARES/PRINCIPAL AMOUNT VALUE - --------------- -------------- INVESTMENT COMPANIES 90 Taipei Fund*.................... $ 810,000 26,000 Taiwan American Fund (Pref.)*... 357,500 -------------- 1,167,500 -------------- TRANSPORTATION $ 500K U-Ming Marine Transport 1.50% due 02/07/01 (Conv.).......... 435,000 $ 504K Yang Ming Marine Transportation - 144A** 2.00% due 10/06/01 (Conv.)....................... 572,040 -------------- 1,007,040 -------------- TOTAL TAIWAN.................... 2,388,667 -------------- THAILAND (4.4%) BANKING 80,000 Bangkok Bank PCL................ 773,580 50,000 Thai Farmers Bank, Ltd.......... 311,927 -------------- 1,085,507 -------------- BUILDING MATERIALS 140,000 Tipco Asphalt Co., Ltd. (Alien Market)....................... 851,562 -------------- ENTERTAINMENT 20,000 Grammy Entertainment PLC........ 227,707 -------------- FOOD, BEVERAGE, TOBACCO & HOUSEHOLD PRODUCTS 75,000 Charoen Pokphand Feedmill Co. Ltd........................... 271,962 -------------- INVESTMENT COMPANIES 600,000 Ruang Khao 2 Fund (Units)++..... 208,211 -------------- METALS & MINING 23,100 Ban Pu Coal Co., Ltd............ 428,728 76,300 Lanna Lignite Public Co. (Alien Market)....................... 678,301 -------------- 1,107,029 -------------- OIL RELATED 95,000 PTT Exploration & Production PCL........................... 1,370,531 -------------- TELECOMMUNICATIONS 28,500 Advanced Information Service PCL (Alien Market)................ 242,250 -------------- TRANSPORTATION 434,000 Bangkok Expressway Public Co. (Alien Market)*............... 486,509 116,000 Bangkok Expressway Public Co. (Local Market)*............... 130,035 -------------- 616,544 -------------- UTILITIES - ELECTRIC 110,000 Cogeneration Public Co.*........ 409,600 -------------- TOTAL THAILAND.................. 6,390,903 -------------- UNITED KINGDOM (0.7%) FINANCIAL SERVICES 46,000 HSBC Holdings PLC............... 1,028,914 -------------- TOTAL COMMON AND PREFERRED STOCKS, WARRANTS, RIGHTS, AND BONDS (IDENTIFIED COST $130,383,101)................. 137,581,198 --------------
85 DEAN WITTER VARIABLE INVESTMENT SERIES--PACIFIC GROWTH PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT (IN THOUSANDS) VALUE - --------------- -------------- SHORT-TERM INVESTMENTS (4.2%) HONG KONG TIME DEPOSIT (a) BANKING HKD 30,343 Chase Manhattan Bank 5.75% due 01/02/97 (Identified Cost $3,922,891).................... $ 3,922,891 -------------- PRINCIPAL AMOUNT (IN THOUSANDS) VALUE - ------------- -------------- UNITED STATES GOVERNMENT AGENCY (b) $ 2,200 Federal Home Loan Banks 6.50% due 01/02/97 (Amortized Cost $2,199,603)............... $ 2,199,603 -------------- TOTAL SHORT-TERM INVESTMENTS (IDENTIFIED COST $6,122,494)... 6,122,494 -------------- TOTAL INVESTMENTS (IDENTIFIED COST $136,505,595) (C).............. 99.4% 143,703,692 CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES................. 0.6 832,765 ---------- ------------- NET ASSETS....................... 100.0% $ 144,536,457 ---------- ------------- ---------- ------------- - ------------------ ADR AMERICAN DEPOSITORY RECEIPT. EDR EUROPEAN DEPOSITORY RECEIPT. GDR GLOBAL DEPOSITORY RECEIPT. GDS GLOBAL DEPOSITORY SHARES. K IN THOUSANDS. * NON-INCOME PRODUCING SECURITY. ** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. ++ CONSISTS OF MORE THAN ONE CLASS OF SECURITIES TRADED TOGETHER AS A UNIT; GENERALLY STOCKS WITH ATTACHED WARRANTS. (A) SUBJECT TO WITHDRAWAL RESTRICTIONS UNTIL MATURITY. (B) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (C) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $19,319,119 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $12,121,022, RESULTING IN NET UNREALIZED APPRECIATION OF $7,198,097.
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT DECEMBER 31, 1996:
CONTRACTS IN EXCHANGE DELIVERY UNREALIZED TO DELIVER FOR DATE DEPRECIATION - ---------------- ---------------- -------- --------------- HKD 2,100,000 $ 271,395 01/06/97 $ (133) ------ ------
SEE NOTES TO FINANCIAL STATEMENTS 86 DEAN WITTER VARIABLE INVESTMENT SERIES--PACIFIC GROWTH SUMMARY OF INVESTMENTS DECEMBER 31, 1996 - --------------------------------------------------------------------------------
PERCENT OF INDUSTRY VALUE NET ASSETS - --------------------------------------------- ------------ ---------- Aerospace & Defense.......................... $ 199,957 0.1% Agriculture.................................. 700,317 0.5 Air Transport................................ 23,504 0.0 Appliances & Household Durables.............. 373,124 0.3 Automotive................................... 3,753,592 2.6 Banking...................................... 17,520,726 12.1 Banks -- International....................... 3,922,891 2.7 Building & Construction...................... 5,274,551 3.6 Building Materials........................... 3,737,781 2.6 Business Services............................ 659,842 0.5 Chemicals.................................... 1,340,570 0.9 Commercial Services.......................... 591,271 0.4 Communications - Equipment/Manufacturers..... 257,234 0.2 Computer Services............................ 213,546 0.1 Computer Software & Services................. 403,451 0.3 Computers.................................... 255,328 0.2 Computers - Systems.......................... 42,709 0.0 Conglomerates................................ 10,156,151 7.0 Construction Plant & Equipment............... 1,291,844 0.9 Data Processing.............................. 125,798 0.1 Electrical Equipment......................... 422,818 0.3 Electronic & Electrical Equipment............ 4,157,476 2.9 Electronics.................................. 614,189 0.4 Electronics - Semiconductors/ Components.................................. 28,818 0.0 Engineering & Construction................... 2,386,220 1.7 Entertainment................................ 2,053,610 1.4 Finance...................................... 295,282 0.2 Financial Services........................... 4,442,197 3.1 Food Processing.............................. 398,153 0.3 Food, Beverage, Tobacco & Household Products.................................... 2,843,787 2.0 Foods & Beverages............................ 545,345 0.4 Forest Products, Paper & Packaging........... 906,764 0.6 Health & Personal Care....................... 56,514 0.0 Hotels....................................... 525,476 0.4 PERCENT OF INDUSTRY VALUE NET ASSETS - --------------------------------------------- ------------ ---------- Hotels/Motels................................ $ 281,290 0.2% Household Furnishings & Appliances........... 97,843 0.1 Household Appliances......................... 300,990 0.2 Industrials.................................. 718,024 0.5 Insurance.................................... 1,189,967 0.8 Investment Companies......................... 2,674,967 1.9 Leisure...................................... 863,373 0.6 Machine Tools................................ 135,289 0.1 Machinery.................................... 1,763,112 1.2 Manufacturing................................ 1,784,933 1.2 Medical Supplies............................. 225,367 0.2 Merchandising................................ 51,769 0.0 Metals....................................... 1,688,955 1.2 Metals & Mining.............................. 2,920,471 2.0 Miscellaneous................................ 636,320 0.4 Miscellaneous Materials & Commodities........ 58,464 0.0 Multi-Industry............................... 1,509,894 1.0 Natural Gas.................................. 205,902 0.1 Oil & Gas Products........................... 411,881 0.3 Oil Related.................................. 2,526,812 1.7 Pharmaceuticals.............................. 961,166 0.7 Plantation................................... 1,051,153 0.8 Publishing................................... 1,054,707 0.7 Real Estate.................................. 19,963,529 13.8 Retail....................................... 1,498,915 1.0 Retail - Department Stores................... 218,292 0.2 Retail - General Merchandise................. 129,422 0.1 Retail - Specialty........................... 575,614 0.4 Shipbuilding................................. 844,174 0.6 Steel........................................ 231,148 0.2 Steel & Iron................................. 1,359,322 0.9 Telecommunications........................... 8,351,876 5.8 Textiles..................................... 441,019 0.3 Transportation............................... 6,057,308 4.2 Truckers..................................... 25,108 0.0 U.S. Government & Agency Obligations......... 2,199,603 1.5 Utilities.................................... 7,332,226 5.1 Utilities - Electric......................... 409,600 0.3 Wholesale & International Trade.............. 103,279 0.1 Wholesale Distributor........................ 329,772 0.2 ------------ --- $143,703,692 99.4% ------------ --- ------------ ---
- --------------------------------------------------------------------------------
PERCENT OF TYPE OF INVESTMENT VALUE NET ASSETS - --------------------------------------------- ------------ ---------- Common Stocks................................ $133,859,796 92.7% Convertible Bonds............................ 2,537,869 1.8 Preferred Stocks............................. 357,500 0.2 Rights....................................... 32,394 -- Short-Term Investments....................... 6,122,494 4.2 Warrants..................................... 793,639 0.5 ------------ --- $143,703,692 99.4% ------------ --- ------------ ---
SEE NOTES TO FINANCIAL STATEMENTS 87 DEAN WITTER VARIABLE INVESTMENT SERIES--EQUITY PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- --------------- COMMON STOCKS (95.5%) AGRICULTURE RELATED (5.3%) 115,000 Archer-Daniels-Midland Co........... $ 2,530,000 75,000 Dekalb Genetics Corp. (Class B)..... 3,806,250 57,000 Delta & Pine Land Co................ 1,824,000 40,000 IMC Global, Inc..................... 1,565,000 200,000 Monsanto Co......................... 7,775,000 16,000 Mycogen Corp.*...................... 336,000 75,000 Pioneer Hi-Bred International, Inc............................... 5,250,000 25,000 Potash Corp. of Saskatchewan, Inc. (Canada).......................... 2,125,000 60,000 Tyson Foods, Inc. (Class A)......... 2,047,500 --------------- 27,258,750 --------------- APPAREL & FOOTWEAR (0.9%) 57,900 Jones Apparel Group, Inc.*.......... 2,164,012 60,000 Reebok International Ltd. (United Kingdom).......................... 2,520,000 --------------- 4,684,012 --------------- AUTO RELATED (1.0%) 80,000 General Motors Corp................. 4,460,000 35,400 Miller Industries, Inc.*............ 708,000 --------------- 5,168,000 --------------- BANKS (7.3%) 80,000 Bank of Boston Corp................. 5,140,000 55,000 BankAmerica Corp.................... 5,486,250 60,000 Chase Manhattan Corp................ 5,355,000 63,000 Citicorp............................ 6,489,000 80,000 First Chicago NBD Corp.............. 4,300,000 15,000 Firstar Corp........................ 787,500 77,600 Mellon Bank Corp.................... 5,509,600 50,000 NationsBank Corp.................... 4,887,500 --------------- 37,954,850 --------------- BASIC CYCLICALS (3.2%) 40,000 Aluminum Co. of America............. 2,550,000 100,000 Crown Cork & Seal Co., Inc.......... 5,437,500 40,000 Du Pont (E.I.) de Nemours & Co...... 3,775,000 100,000 RMI Titanium Co.*................... 2,812,500 70,000 Titanium Metals Corp.*.............. 2,283,750 --------------- 16,858,750 --------------- BIOTECHNOLOGY (3.8%) 130,000 Biochem Pharma, Inc.*............... 6,483,750 137,000 Biogen, Inc.*....................... 5,274,500 200,000 Centocor, Inc.*..................... 7,150,000 33,000 IDEC Pharmaceuticals Corp.*......... 779,625 --------------- 19,687,875 --------------- CAPITAL GOODS (3.1%) 63,000 Boeing Co........................... 6,701,625 70,000 Honeywell, Inc...................... 4,602,500 70,000 United Technologies Corp............ 4,620,000 --------------- 15,924,125 --------------- COMMUNICATIONS EQUIPMENT (6.4%) 31,400 ADC Telecommunications, Inc.*....... 973,400 48,000 Adtran, Inc.*....................... 1,992,000 6,200 Advanced Fibre Communications, Inc.*............................. 344,875 60,000 Andrew Corp.*....................... 3,180,000 20,000 Ascend Communications, Inc.*........ 1,240,000 98,000 Cisco Systems, Inc.*................ 6,235,250 NUMBER OF SHARES VALUE - ----------- --------------- 80,000 3Com Corp.*......................... $ 5,860,000 55,000 Ericsson (L.M.) Telephone Co. (Class B) (ADR) (Sweden)................. 1,656,875 20,000 Lucent Technologies, Inc............ 925,000 60,000 Newbridge Networks Corp.* (Canada).......................... 1,695,000 120,000 Pairgain Technologies, Inc.*........ 3,645,000 50,000 Tellabs, Inc.*...................... 1,881,250 15,000 Uniphase Corp.*..................... 787,500 40,000 U.S. Robotics Corp.*................ 2,880,000 9,100 XlConnect Solutions, Inc............ 261,625 --------------- 33,557,775 --------------- COMPUTER EQUIPMENT (5.2%) 15,000 COMPAQ Computer Corp.*.............. 1,113,750 152,000 Dell Computer Corp.*................ 8,075,000 200,000 EMC Corp.*.......................... 6,625,000 40,000 Gateway 2000, Inc.*................. 2,140,000 86,000 Quantum Corp.*...................... 2,440,250 170,000 Seagate Technology, Inc.*........... 6,715,000 --------------- 27,109,000 --------------- COMPUTER SERVICES (1.4%) 80,000 Gartner Group, Inc. (Class A)*...... 3,110,000 60,000 Keane, Inc.*........................ 1,905,000 19,000 Reuters Holdings PLC (ADR) (United Kingdom).......................... 1,453,500 25,000 Transaction Systems Architects, Inc. (Class A)*........................ 818,750 --------------- 7,287,250 --------------- COMPUTER SOFTWARE (5.7%) 60,000 BMC Software, Inc.*................. 2,482,500 43,000 Computer Associates International, Inc............................... 2,139,250 150,000 Microsoft Corp.*.................... 12,393,750 70,000 Peoplesoft, Inc.*................... 3,351,250 67,900 Rational Software Corp.*............ 2,665,075 8,400 Rogue Wave Software*................ 132,300 100,000 Veritas Software Co.*............... 4,925,000 40,000 Viasoft, Inc.*...................... 1,890,000 --------------- 29,979,125 --------------- CONSTRUCTION (0.5%) 29,000 American Standard Companies, Inc.*.. 1,109,250 30,000 Miller (Herman), Inc................ 1,687,500 --------------- 2,796,750 --------------- CONSUMER BUSINESS SERVICES (1.3%) 22,600 BA Merchant Services, Inc.*......... 403,975 45,000 Diebold, Inc........................ 2,829,375 78,800 National Education Corp.*........... 1,201,700 82,800 Service Corp. International......... 2,318,400 --------------- 6,753,450 --------------- CONSUMER - NONCYCLICAL (2.2%) 64,600 Avon Products, Inc.................. 3,690,275 30,000 Colgate-Palmolive Co................ 2,767,500 5,300 Nu Skin Asia Pacific Inc. (Class A)*............................... 163,676 40,000 PanAmerican Beverages, Inc. (Class A) (Mexico)....................... 1,875,000 30,000 Procter & Gamble Co................. 3,225,000 --------------- 11,721,451 ---------------
88 DEAN WITTER VARIABLE INVESTMENT SERIES--EQUITY PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- --------------- CONSUMER PRODUCTS (1.6%) 65,900 Callaway Golf Company............... $ 1,894,625 66,000 Kroger Co.*......................... 3,069,000 80,000 Safeway, Inc.*...................... 3,420,000 --------------- 8,383,625 --------------- DRUGS (4.3%) 70,000 Bristol-Myers Squibb Co............. 7,612,500 59,000 Dura Pharmaceuticals, Inc.*......... 2,809,875 90,000 Lilly (Eli) & Co.................... 6,570,000 70,000 Warner-Lambert Co................... 5,250,000 --------------- 22,242,375 --------------- ENERGY (8.2%) 9,000 Apache Corp......................... 318,375 95,000 Baker Hughes, Inc................... 3,277,500 25,600 BJ Services Co.*.................... 1,305,600 38,000 British Petroleum Co. PLC (ADR) (United Kingdom).................. 5,372,250 25,000 Chesapeake Energy Corp.*............ 1,390,625 40,000 Cooper Cameron Corp.*............... 3,060,000 41,000 Diamond Offshore Drilling, Inc.*.... 2,337,000 24,600 Falcon Drilling Company, Inc.*...... 965,550 130,300 Global Marine, Inc.*................ 2,687,437 48,000 Louisiana Land & Exploration Co..... 2,574,000 23,000 Marine Drilling Company, Inc.*...... 451,375 85,000 Reading & Bates Corp.*.............. 2,252,500 80,000 Rowan Companies, Inc.*.............. 1,810,000 70,000 Schlumberger, Ltd................... 6,991,250 41,000 Smith International, Inc.*.......... 1,839,875 40,000 Transocean Offshore, Inc............ 2,505,000 60,000 Unocal Corp......................... 2,437,500 20,000 Western Atlas, Inc.*................ 1,417,500 --------------- 42,993,337 --------------- ENTERTAINMENT, GAMING & LODGING (2.8%) 40,000 HFS Inc.*........................... 2,390,000 190,000 Hilton Hotels Corp.................. 4,963,750 150,000 International Game Technology....... 2,737,500 100,000 Mirage Resorts, Inc.*............... 2,162,500 140,000 Sodak Gaming, Inc.*................. 2,100,000 --------------- 14,353,750 --------------- FINANCIAL - MISCELLANEOUS (7.8%) 30,000 American Express Co................. 1,695,000 24,000 Countrywide Credit Industries, Inc............................... 687,000 57,600 Crescent Real Estate Equities, Inc............................... 3,038,400 24,800 Federal Home Loan Mortgage Corp..... 2,731,100 160,000 Federal National Mortgage Assoc..... 5,960,000 18,300 Infinity Financial Technology, Inc.*............................. 306,525 179,200 Lehman Brothers Holdings, Inc....... 5,622,400 100,000 Merrill Lynch & Co., Inc............ 8,150,000 100,000 Morgan Stanley Group, Inc........... 5,712,500 80,000 Paine Webber Group Inc.............. 2,250,000 85,000 PMI Group, Inc...................... 4,706,875 --------------- 40,859,800 --------------- HEALTHCARE PRODUCTS & SERVICES (0.7%) 145,000 Health Management Associates, Inc. (Class A)*........................ 3,262,500 7,000 PhyCor, Inc.*....................... 196,875 NUMBER OF SHARES VALUE - ----------- --------------- 4,000 Shared Medical Systems Corp......... $ 196,500 --------------- 3,655,875 --------------- INSURANCE (3.7%) 50,000 Ace, Ltd. (Bermuda)................. 3,006,250 64,000 Allstate Corp. (Note 3)............. 3,704,000 91,000 Conseco Inc......................... 5,801,250 50,000 Exel Ltd. (Bermuda)................. 1,893,750 52,000 SunAmerica, Inc..................... 2,307,500 60,000 Travelers Group, Inc................ 2,722,500 --------------- 19,435,250 --------------- INTERNET (1.0%) 140,000 America Online, Inc.*............... 4,655,000 15,000 Security Dynamics Technologies, Inc.*............................. 470,625 --------------- 5,125,625 --------------- MEDIA GROUP (2.5%) 61,600 Clear Channel Communications, Inc.*............................. 2,225,300 67,500 Evergreen Media Corp. (Class A)*.... 1,670,625 71,000 Infinity Broadcasting Corp. (Class A)*............................... 2,387,375 61,000 Lin Television Corp.*............... 2,562,000 63,750 Outdoor Systems, Inc................ 1,785,000 66,600 Univision Communications, Inc. (Class A)*........................ 2,464,200 --------------- 13,094,500 --------------- MEDICAL SUPPLIES (1.7%) 65,000 Boston Scientific Corp.*............ 3,900,000 42,000 Guidant Corp........................ 2,394,000 40,000 Medtronic, Inc...................... 2,720,000 --------------- 9,014,000 --------------- RESTAURANTS (0.9%) 80,000 Boston Chicken, Inc.*............... 2,860,000 70,000 Starbucks Corp.*.................... 1,995,000 --------------- 4,855,000 --------------- RETAIL (3.1%) 80,000 Dayton-Hudson Corp.................. 3,140,000 54,000 Federated Department Stores, Inc.*.. 1,842,750 17,000 Gucci Group NV (Italy).............. 1,085,875 75,000 Home Depot, Inc..................... 3,759,375 32,800 Neiman-Marcus Group, Inc............ 836,400 130,000 Price/Costco, Inc.*................. 3,266,250 56,000 Tiffany & Co........................ 2,051,000 --------------- 15,981,650 --------------- SEMICONDUCTORS (9.3%) 76,000 Altera Corp.*....................... 5,519,500 120,000 Analog Devices, Inc.*............... 4,065,000 130,000 Applied Materials, Inc.*............ 4,663,750 70,000 Atmel Corp.*........................ 2,318,750 48,000 Intel Corp.......................... 6,282,000 150,000 KLA Instruments Corp.*.............. 5,306,250 113,000 Maxim Integrated Products, Inc.*.... 4,887,250 95,000 Microchip Technology, Inc.*......... 4,821,250 140,000 Micron Technology, Inc.............. 4,077,500 30,000 Novellus Systems, Inc.*............. 1,623,750 100,000 Tencor Instruments*................. 2,637,500 50,000 Vitesse Semiconductor Corp.*........ 2,275,000 --------------- 48,477,500 ---------------
89 DEAN WITTER VARIABLE INVESTMENT SERIES--EQUITY PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- --------------- TELECOMMUNICATIONS (0.4%) 50,000 McLeod, Inc. (Class A)*............. $ 1,275,000 30,000 Teleport Communications Group Inc. (Class A)*........................ 911,250 --------------- 2,186,250 --------------- TRANSPORTATION (0.2%) 41,600 OMI Corp.*.......................... 364,000 15,000 Teekay Shipping Corp................ 491,250 --------------- 855,250 --------------- TOTAL COMMON STOCKS (IDENTIFIED COST $455,616,320)................ 498,254,950 --------------- PRINCIPAL AMOUNT (IN THOUSANDS) - ----------- U.S. GOVERNMENT OBLIGATION (1.6%) $ 38,500 U.S. Treasury Note Strips 0.00% due 5/15/19 (Amortized Cost $8,087,951)...... 8,329,090 --------------- SHORT-TERM INVESTMENTS (2.6%) U.S. GOVERNMENT AGENCY (A) (1.7%) 9,000 Federal Home Loan Banks 6.50% due 01/02/97 (Amortized Cost $8,998,375)...... 8,998,375 --------------- PRINCIPAL AMOUNT (IN THOUSANDS) VALUE - ----------- --------------- REPURCHASE AGREEMENT (0.9%) $ 4,889 The Bank of New York 5.375% due 01/02/97 (dated 12/31/96; proceeds $4,890,655; collateralized by $3,790,228 U.S Treasury Bonds 7.50% to 10.625% due 08/15/15 - 11/15/24 valued at $4,986,979) (Identified Cost $4,889,195)................. $ 4,889,195 --------------- TOTAL SHORT-TERM INVESTMENTS (IDENTIFIED COST $13,887,570).... 13,887,570 --------------- TOTAL INVESTMENTS (IDENTIFIED COST $477,591,841) (B)......... 99.7% 520,471,610 OTHER ASSETS IN EXCESS OF LIABILITIES.................... 0.3 1,436,814 ---------- ------------- NET ASSETS....................... 100.0% $ 521,908,424 ---------- ------------- ---------- ------------- - ------------------ ADR AMERICAN DEPOSITORY RECEIPT. * NON-INCOME PRODUCING SECURITY. (A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $54,662,238 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $11,782,469, RESULTING IN NET UNREALIZED APPRECATION OF $42,879,769.
SEE NOTES TO FINANCIAL STATEMENTS 90 DEAN WITTER VARIABLE INVESTMENT SERIES--STRATEGIST PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- --------------- COMMON AND PREFERRED STOCKS (49.8%) AEROSPACE & DEFENSE (3.2%) 44,000 Boeing Co............................................................................... $ 4,680,500 75,000 Honeywell, Inc.......................................................................... 4,931,250 160,000 Watkins-Johnson Co...................................................................... 3,920,000 --------------- 13,531,750 --------------- ALUMINUM (1.0%) 67,000 Aluminum Co. of America................................................................. 4,271,250 --------------- BANKS - MONEY CENTER (2.2%) 47,000 Citicorp................................................................................ 4,841,000 45,000 Morgan (J.P.) & Co., Inc................................................................ 4,393,125 --------------- 9,234,125 --------------- BEVERAGES - SOFT DRINKS (0.8%) 120,000 PepsiCo Inc............................................................................. 3,510,000 --------------- BROKERAGE (2.3%) 64,000 Merrill Lynch & Co., Inc................................................................ 5,216,000 82,000 Morgan Stanley Group, Inc............................................................... 4,684,250 --------------- 9,900,250 --------------- CHEMICALS (1.2%) 130,000 Monsanto Co............................................................................. 5,053,750 --------------- COMPUTER EQUIPMENT (2.4%) 70,000 Cisco Systems, Inc.*.................................................................... 4,453,750 144,000 Seagate Technology, Inc.*............................................................... 5,688,000 --------------- 10,141,750 --------------- COMPUTER SOFTWARE (2.1%) 60,000 Microsoft Corp.*........................................................................ 4,957,500 90,000 Oracle Corp.*........................................................................... 3,746,250 --------------- 8,703,750 --------------- COMPUTERS (1.1%) 90,000 Gateway 2000, Inc.*..................................................................... 4,815,000 --------------- COMPUTERS - SYSTEMS (1.7%) 76,000 Hewlett-Packard Co...................................................................... 3,819,000 134,000 Sun Microsystems, Inc.*................................................................. 3,433,750 --------------- 7,252,750 --------------- ELECTRICAL EQUIPMENT (1.6%) 47,000 General Electric Co..................................................................... 4,647,125 110,000 Westinghouse Electric Corp.............................................................. 2,186,250 --------------- 6,833,375 --------------- ELECTRONICS - SEMICONDUCTORS/COMPONENTS (1.3%) 42,000 Intel Corp.............................................................................. 5,496,750 --------------- ENTERTAINMENT/GAMING & LODGING (0.9%) 110,000 Circus Circus Enterprises, Inc.*........................................................ 3,781,250 ---------------
91 DEAN WITTER VARIABLE INVESTMENT SERIES--STRATEGIST PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- --------------- FINANCIAL - MISCELLANEOUS (1.1%) 120,000 Federal National Mortgage Assoc......................................................... $ 4,470,000 --------------- FOODS (3.2%) 52,000 Campbell Soup Co........................................................................ 4,173,000 70,000 General Mills, Inc...................................................................... 4,436,250 130,000 Quaker Oats Company (The)............................................................... 4,956,250 --------------- 13,565,500 --------------- HEALTHCARE - MISCELLANEOUS (1.9%) 210,000 Humana, Inc.*........................................................................... 4,016,250 47,000 PacifiCare Health Systems, Inc. (Class B)*.............................................. 3,995,000 --------------- 8,011,250 --------------- HOUSEHOLD PRODUCTS (1.0%) 48,000 Colgate-Palmolive Co.................................................................... 4,428,000 --------------- HOUSEWARES (0.8%) 60,500 Tupperware Corp......................................................................... 3,244,312 --------------- INDUSTRIALS (1.0%) 66,000 AlliedSignal, Inc....................................................................... 4,422,000 --------------- MEDICAL PRODUCTS & SUPPLIES (0.8%) 84,000 Baxter International, Inc............................................................... 3,444,000 --------------- MULTI-LINE INSURANCE (0.1%) 7,490 Aetna Inc. (Class C) (Conv. Pref.) $1.48................................................ 594,519 --------------- NATURAL GAS (1.1%) 120,000 Williams Companies, Inc................................................................. 4,500,000 --------------- OFFICE EQUIPMENT & SUPPLIES (1.0%) 80,000 Alco Standard Corp...................................................................... 4,130,000 --------------- OIL - DOMESTIC (1.0%) 31,300 Atlantic Richfield Co................................................................... 4,147,250 --------------- OIL INTEGRATED - INTERNATIONAL (2.1%) 45,000 Exxon Corp.............................................................................. 4,410,000 45,000 Texaco, Inc............................................................................. 4,415,625 --------------- 8,825,625 --------------- PHARMACEUTICALS (3.7%) 56,000 American Home Products Corp............................................................. 3,283,000 60,000 Lilly (Eli) & Co........................................................................ 4,380,000 75,000 Johnson & Johnson....................................................................... 3,731,250 50,000 Pfizer, Inc............................................................................. 4,143,750 --------------- 15,538,000 --------------- RETAIL (0.9%) 100,000 Dayton-Hudson Corp...................................................................... 3,925,000 --------------- RETAIL - SPECIALTY (2.0%) 75,000 Home Depot, Inc......................................................................... 3,759,375 126,000 Payless ShoeSource, Inc.*............................................................... 4,725,000 --------------- 8,484,375 ---------------
92 DEAN WITTER VARIABLE INVESTMENT SERIES--STRATEGIST PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- --------------- RETAIL - SPECIALTY APPAREL (0.7%) 100,000 Gap, Inc................................................................................ $ 3,012,500 --------------- SAVINGS & LOAN ASSOCIATIONS (2.3%) 70,000 Golden West Financial Corp.............................................................. 4,418,750 250,000 Roosevelt Financial Group, Inc.......................................................... 5,187,500 --------------- 9,606,250 --------------- SHIPPING (0.4%) 80,000 APL Ltd................................................................................. 1,890,000 --------------- SHOES (0.9%) 64,000 Nike, Inc. (Class B).................................................................... 3,824,000 --------------- STEEL & IRON (1.0%) 133,000 Inland Steel Industries, Inc............................................................ 2,660,000 30,000 Nucor Corp.............................................................................. 1,530,000 --------------- 4,190,000 --------------- TELECOMMUNICATIONS (0.6%) 92,000 Newbridge Networks Corp.* (Canada)...................................................... 2,599,000 --------------- UTILITIES - ELECTRIC (0.4%) 60,000 Kansas City Power & Light Co............................................................ 1,710,000 --------------- TOTAL COMMON AND PREFERRED STOCKS (IDENTIFIED COST $168,327,131)........................ 211,087,331 ---------------
PRINCIPAL AMOUNT (IN COUPON MATURITY THOUSANDS) RATE DATE - ----------- ---------- --------- CORPORATE BONDS (27.0%) AIRLINES (2.0%) $ 3,000 America West Airlines................................................ 6.86% 07/02/04 2,992,500 1,612 United Air Lines, Inc................................................ 10.125 03/22/15 1,932,708 3,100 United Air Lines, Inc................................................ 9.35 04/07/16 3,491,375 --------------- 8,416,583 --------------- BANKS (5.1%) 2,000 Banque Paribas of New York........................................... 6.875 03/01/09 1,895,060 3,000 Capital One Bank Corp................................................ 6.74 05/31/99 3,009,540 2,160 First Nationwide Bank................................................ 10.00 10/01/06 2,500,308 3,000 MBNA Capital Inc..................................................... 8.278 12/01/26 3,011,250 3,000 People's Bank-Bridgeport............................................. 7.20 12/01/06 2,933,370 3,000 Provident Bank - 144A **............................................. 8.60 12/01/26 3,030,000 3,000 Skandinaviska Enskilda Banken (Hong Kong) - 144A **.................. 8.125 09/06/49 3,135,000 2,000 Standard Federal Bancorp............................................. 7.75 07/17/06 2,088,820 --------------- 21,603,348 --------------- BEVERAGES - SOFT DRINKS (0.5%) 2,000 Coca-Cola Enterprises, Inc........................................... 8.50 02/01/22 2,246,780 ---------------
93 DEAN WITTER VARIABLE INVESTMENT SERIES--STRATEGIST PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT (IN COUPON MATURITY THOUSANDS) RATE DATE VALUE - ----------- ---------- --------- --------------- BROKERAGE (1.0%) $ 2,000 Lehman Brothers Holdings Inc......................................... 8.05% 01/15/19 $ 2,118,480 2,000 Paine Webber Group, Inc.............................................. 8.25 05/01/02 2,107,940 --------------- 4,226,420 --------------- CABLE/CELLULAR (0.5%) 2,000 Tele-Communications, Inc............................................. 9.25 04/15/02 2,111,540 --------------- COMPUTERS (0.6%) 3,000 International Business Machines...................................... 7.125 12/01/96 2,865,000 --------------- ENERGY (0.7%) 3,000 Freeport-McMoran C & G Co............................................ 7.50 11/15/06 2,944,500 --------------- ENTERTAINMENT (0.5%) 2,000 Time Warner Inc...................................................... 9.125 01/15/13 2,212,880 --------------- FINANCE (0.5%) 2,000 Terra Nova Holdings (United Kingdom)................................. 10.75 07/01/05 2,252,860 --------------- FINANCIAL (7.6%) 4,000 Arkwright CSN Trust - 144A**......................................... 9.625 08/15/26 4,380,000 2,000 Associates Corp. N.A................................................. 6.25 03/15/99 1,999,460 2,000 Associates Corp. N.A................................................. 6.375 08/15/99 2,002,220 2,000 BankBoston Capital Trust II - 144A**................................. 7.75 12/15/26 1,922,500 2,000 Farmers Insurance Exchange - 144A**.................................. 8.50 08/01/04 2,127,500 2,000 Firstar Capital Trust I - 144A**..................................... 8.32 12/15/26 2,037,500 3,000 GMAC Asset Trust - 144A**............................................ 6.375 09/30/98 3,007,500 3,000 Guangdong International Trust & Investment - 144A** (South Korea).... 8.75 10/24/16 3,090,000 2,000 Lehman Brothers Holdings............................................. 6.625 11/15/00 1,987,560 1,650 Price Reit Inc....................................................... 7.25 11/01/00 1,664,850 2,000 RHG Finance Corp..................................................... 8.875 10/01/05 2,124,820 2,000 State Street Institute Capital - A................................... 7.94 12/30/26 2,010,000 4,000 W.R. Berkley Capital Trust - 144A**.................................. 8.197 12/15/45 3,940,000 --------------- 32,293,910 --------------- FINANCIAL SERVICES (1.1%) 2,000 Conseco, Inc......................................................... 10.50 12/15/04 2,364,760 2,000 Lumbermens Mutual Casualty - 144A**.................................. 9.15 07/01/26 2,182,500 --------------- 4,547,260 --------------- FOREIGN GOVERNMENT AGENCY (0.8%) 1,000 Quebec Province (Canada)............................................. 6.89 04/15/26 1,010,000 2,000 Quebec Province (Canada)............................................. 8.625 12/01/26 2,243,340 --------------- 3,253,340 --------------- INDUSTRIALS (2.0%) 2,000 Anixter International Inc............................................ 8.00 09/15/03 2,039,100 2,000 Legrand S.A. (France)................................................ 8.50 02/15/25 2,240,660 4,000 Reliance Industries. Inc - 144A**.................................... 10.50 08/06/46 4,269,520 --------------- 8,549,280 ---------------
94 DEAN WITTER VARIABLE INVESTMENT SERIES--STRATEGIST PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT (IN COUPON MATURITY THOUSANDS) RATE DATE VALUE - ----------- ---------- --------- --------------- TELECOMMUNICATIONS (1.2%) $ 2,000 360 Communications Co................................................ 7.125% 03/01/03 $ 1,974,380 3,000 Total Access Communication - 144A**.................................. 8.375 11/04/06 3,026,250 --------------- 5,000,630 --------------- TELEPHONES (0.5%) 2,000 British Telecom Finance (United Kingdom)............................. 9.625 02/15/19 2,181,100 --------------- TOBACCO (1.0%) 2,000 Philip Morris Companies, Inc......................................... 7.50 01/15/02 2,047,220 2,000 Philip Morris Companies, Inc......................................... 7.65 07/01/08 2,050,620 --------------- 4,097,840 --------------- TRANSPORTATION EQUIPMENT (0.9%) 3,100 Jet Equipment Trust - 144A**......................................... 10.91 08/15/14 3,642,500 --------------- UTILITIES - ELECTRIC (0.5%) 2,000 Niagara Mohawk Power Corp............................................ 9.25 10/01/01 2,019,580 --------------- TOTAL CORPORATE BONDS (IDENTIFIED COST $112,302,271)........................................ 114,465,351 --------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS (15.0%) 2,000 Federal Home Loan Banks.............................................. 7.00 10/03/01 2,000,000 3,000 U.S. Treasury Bond................................................... 7.625 02/15/25 3,331,320 6,000 U.S. Treasury Note................................................... 5.625 11/30/00 5,894,460 3,000 U.S. Treasury Note................................................... 5.75 09/30/97 3,005,100 2,000 U.S. Treasury Note................................................... 5.75 08/15/03 1,938,100 6,000 U.S. Treasury Note................................................... 6.00 08/31/97 6,016,860 2,000 U.S. Treasury Note................................................... 6.375 05/15/99 2,018,080 500 U.S. Treasury Note................................................... 6.50 04/30/99 506,080 4,500 U.S. Treasury Note................................................... 6.75 04/30/00 4,587,345 2,000 U.S. Treasury Note................................................... 6.875 08/31/99 2,042,380 7,000 U.S. Treasury Note................................................... 6.875 03/31/00 7,160,650 4,000 U.S. Treasury Note................................................... 7.25 05/15/04 4,203,800 1,000 U.S. Treasury Note................................................... 7.25 08/15/04 1,051,380 19,000 U.S. Treasury Note................................................... 7.75 12/31/99 19,879,130 --------------- TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (IDENTIFIED COST $65,413,173)............................................................. 63,634,685 ---------------
95 DEAN WITTER VARIABLE INVESTMENT SERIES--STRATEGIST PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT (IN COUPON MATURITY THOUSANDS) RATE DATE VALUE - ----------- ---------- --------- --------------- SHORT-TERM INVESTMENTS (7.5%) U.S. GOVERNMENT AGENCIES (A) (7.1%) $ 20,000 Federal Home Loan Bank............................................... 6.50% 01/02/97 $ 19,996,389 10,000 Federal Home Loan Mortgage Corp...................................... 5.47 01/03/97 9,996,961 --------------- TOTAL U.S. GOVERNMENT AGENCIES (Amortized Cost $29,993,350).............................................................. 29,993,350 --------------- REPURCHASE AGREEMENT (0.4%) 1,635 The Bank of New York (dated 12/31/96; proceeds $1,635,330; collateralized by $1,308,510 U.S Treasury Bonds 7.25% to 7.625% due 05/15/16 to 11/15/22 valued at $1,436,508 and by $228,377 U.S Treasury Note 6.25% due 10/31/01 valued at $231,031) (Identified Cost $1,634,842)................................................... 5.375 01/02/97 1,634,842 --------------- TOTAL SHORT-TERM INVESTMENTS (IDENTIFIED COST $31,628,192).................................. 31,628,192 --------------- TOTAL INVESTMENTS (IDENTIFIED COST $377,670,767) (B)................... 99.3% 420,815,559 OTHER ASSETS IN EXCESS OF LIABILITIES.................................. 0.7 2,952,293 ---------- ------------- NET ASSETS............................................................. 100.0% $ 423,767,852 ---------- ------------- ---------- ------------- - ---------------- * NON-INCOME PRODUCING SECURITY. ** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. (A) SECURITIES WERE PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATES SHOWN HAVE BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $47,190,336 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $4,045,544, RESULTING IN NET UNREALIZED APPRECIATION OF $43,144,792.
SEE NOTES TO FINANCIAL STATEMENTS 96 (This page has been intentionally left blank.) 97 DEAN WITTER VARIABLE INVESTMENT SERIES STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1996 - --------------------------------------------------------------------------------
QUALITY MONEY MARKET INCOME PLUS HIGH YIELD UTILITIES ------------ ------------ ------------ ------------ ASSETS: Investments in securities, at value *... $340,232,603 $468,171,123 $254,650,969 $439,106,977 Cash.................................... 12,389 -- -- -- Receivable for: Investments sold...................... -- -- -- -- Shares of beneficial interest sold.... 44 -- 26,261 -- Dividends............................. -- -- -- 1,335,622 Interest.............................. 372,349 6,797,681 5,741,923 723,329 Foreign withholding taxes reclaimed... -- -- -- -- Prepaid expenses and other assets....... 3,020 3,338 26,976 6,847 ------------ ------------ ------------ ------------ TOTAL ASSETS.................... 340,620,405 474,972,142 260,446,129 441,172,775 ------------ ------------ ------------ ------------ LIABILITIES: Payable for: Investments purchased................. -- -- 748,750 -- Shares of beneficial interest repurchased......................... 193,366 41,164 364 217,257 Investment management fee............. 145,803 209,255 110,579 250,029 Accrued expenses and other payables..... 43,195 61,511 37,895 43,623 ------------ ------------ ------------ ------------ TOTAL LIABILITIES............... 382,364 311,930 897,588 510,909 ------------ ------------ ------------ ------------ NET ASSETS: Paid-in-capital......................... 340,237,797 492,383,880 348,017,773 356,859,427 Accumulated undistributed net investment income................................ 244 67,529 15,210 -- Accumulated undistributed net realized gain (loss)........................... -- (27,455,184) (72,098,239) 5,340,523 Net unrealized appreciation (depreciation)........................ -- 9,663,987 (16,386,203) 78,461,916 ------------ ------------ ------------ ------------ NET ASSETS...................... $340,238,041 $474,660,212 $259,548,541 $440,661,866 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ *IDENTIFIED COST........................ $340,232,603 $458,507,136 $271,037,172 $360,645,061 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ SHARES OF BENEFICIAL INTEREST OUTSTANDING........................... 340,237,797 45,752,768 42,004,612 28,734,976 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ NET ASSET VALUE PER SHARE (unlimited authorized shares of $.01 par value)................................ $1.00 $10.37 $6.18 $15.34 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ - ------------------ ** Includes foreign cash of $460,644 and $1,098,296, respectively.
SEE NOTES TO FINANCIAL STATEMENTS 98 - --------------------------------------------------------------------------------
GLOBAL DIVIDEND CAPITAL DIVIDEND EUROPEAN PACIFIC GROWTH GROWTH GROWTH GROWTH GROWTH EQUITY STRATEGIST -------------- ----------- ------------ ------------ ------------ ------------ ------------ ASSETS: Investments in securities, at value *..................... $1,286,987,922 $87,235,988 $337,514,490 $300,207,994 $143,703,692 $520,471,610 $420,815,559 Cash.......................... -- -- 1,279,230 1,569,071** 1,662,153** -- -- Receivable for: Investments sold............ 790,324 637,389 965,620 403,865 -- 4,680,611 -- Shares of beneficial interest sold............. 343,986 64 196,157 155,288 -- 131,351 2,967 Dividends................... 2,592,137 31,485 668,935 350,675 49,482 198,208 189,050 Interest.................... 955,133 63 13,826 13,987 28,049 730 2,996,688 Foreign withholding taxes reclaimed................. -- -- 294,384 330,180 1,157 -- -- Prepaid expenses and other assets...................... 10,044 1,922 3,502 4,330 5,525 5,600 2,994 -------------- ----------- ------------ ------------ ------------ ------------ ------------ TOTAL ASSETS.......... 1,291,679,546 87,906,911 340,936,144 303,035,390 145,450,058 525,488,110 424,007,258 -------------- ----------- ------------ ------------ ------------ ------------ ------------ LIABILITIES: Payable for: Investments purchased....... 2,604,050 963,365 5,790,815 268,425 478,468 3,300,270 -- Shares of beneficial interest repurchased...... -- 3,120 5,133 484 161,153 752 1,228 Investment management fee... 607,696 48,841 216,192 251,876 126,005 228,540 186,511 Accrued expenses and other payables.................... 63,373 29,435 103,062 92,551 147,975 50,124 51,667 -------------- ----------- ------------ ------------ ------------ ------------ ------------ TOTAL LIABILITIES..... 3,275,119 1,044,761 6,115,202 613,336 913,601 3,579,686 239,406 -------------- ----------- ------------ ------------ ------------ ------------ ------------ NET ASSETS: Paid-in-capital............... 915,310,805 65,244,908 276,789,851 208,223,367 143,272,989 437,122,352 370,797,235 Accumulated undistributed net investment income........... 105 406,472 348,453 2,259,627 1,663,988 763 16,567 Accumulated undistributed net realized gain (loss)........ 74,080,198 11,319,500 16,157,781 18,157,740 (7,597,217) 41,905,540 9,809,258 Net unrealized appreciation (depreciation).............. 299,013,319 9,891,270 41,524,857 73,781,320 7,196,697 42,879,769 43,144,792 -------------- ----------- ------------ ------------ ------------ ------------ ------------ NET ASSETS............ $1,288,404,427 $86,862,150 $334,820,942 $302,422,054 $144,536,457 $521,908,424 $423,767,852 -------------- ----------- ------------ ------------ ------------ ------------ ------------ -------------- ----------- ------------ ------------ ------------ ------------ ------------ *IDENTIFIED COST.............. $ 987,974,603 $77,344,718 $295,999,690 $226,432,845 $136,505,595 $477,591,841 $377,670,767 -------------- ----------- ------------ ------------ ------------ ------------ ------------ -------------- ----------- ------------ ------------ ------------ ------------ ------------ SHARES OF BENEFICIAL INTEREST OUTSTANDING................. 70,017,080 5,215,456 25,502,657 14,026,817 14,506,677 19,778,958 30,890,244 -------------- ----------- ------------ ------------ ------------ ------------ ------------ -------------- ----------- ------------ ------------ ------------ ------------ ------------ NET ASSET VALUE PER SHARE (unlimited authorized shares of $.01 par value)... $18.40 $16.65 $13.13 $21.56 $9.96 $26.39 $13.72 -------------- ----------- ------------ ------------ ------------ ------------ ------------ -------------- ----------- ------------ ------------ ------------ ------------ ------------
99 DEAN WITTER VARIABLE INVESTMENT SERIES STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 - --------------------------------------------------------------------------------
QUALITY MONEY MARKET INCOME PLUS HIGH YIELD UTILITIES ------------- ------------- ------------- ------------- INVESTMENT INCOME: Interest................................ $ 15,967,394 $ 35,505,039 $ 26,452,356 $ 4,021,333 Dividends............................... -- -- -- 15,549,589** ------------- ------------- ------------- ------------- TOTAL INCOME.................... 15,967,394 35,505,039 26,452,356 19,570,922 ------------- ------------- ------------- ------------- EXPENSES Investment management fee............... 1,454,423 2,407,993 1,009,452 2,972,835 Transfer agent fees and expenses........ 1,000 1,000 1,000 1,000 Shareholder reports and notices......... 14,143 21,368 -- 15,870 Professional fees....................... 28,258 29,970 1,825 28,226 Trustees' fees and expenses............. 1,109 4,670 807 1,952 Custodian fees.......................... 20,278 71,629 18,946 28,637 Other................................... 5,643 17,846 4,776 9,369 ------------- ------------- ------------- ------------- TOTAL EXPENSES.................. 1,524,854 2,554,476 1,036,806 3,057,889 ------------- ------------- ------------- ------------- NET INVESTMENT INCOME....... 14,442,540 32,950,563 25,415,550 16,513,033 ------------- ------------- ------------- ------------- NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments....................... -- (2,603,573) (5,282,128) 5,380,515 Foreign exchange transactions..... -- -- -- -- ------------- ------------- ------------- ------------- NET GAIN (LOSS)................. -- (2,603,573) (5,282,128) 5,380,515 ------------- ------------- ------------- ------------- Net change in unrealized appreciation/depreciation on: Investments....................... -- (24,916,368) 2,235,871 14,769,561 Translation of forward foreign currency contracts, other assets and liabilities denominated in foreign currencies.............. -- -- -- -- ------------- ------------- ------------- ------------- NET APPRECIATION (DEPRECIATION)................ -- (24,916,368) 2,235,871 14,769,561 ------------- ------------- ------------- ------------- NET GAIN (LOSS)................. -- (27,519,941) (3,046,257) 20,150,076 ------------- ------------- ------------- ------------- NET INCREASE................ $ 14,442,540 $ 5,430,622 $ 22,369,293 $ 36,663,109 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- - ------------------ * Net of $2,591 foreign witholding tax. ** Net of $158,294, $116,527, $564, $737,043, $731,249, $273,348 and $13,378 foreign witholding tax, respectively.
SEE NOTES TO FINANCIAL STATEMENTS 100 - --------------------------------------------------------------------------------
GLOBAL DIVIDEND CAPITAL DIVIDEND EUROPEAN PACIFIC GROWTH GROWTH GROWTH GROWTH GROWTH EQUITY STRATEGIST ------------ ---------- ----------- ------------- ---------- ----------- ----------- INVESTMENT INCOME: Interest...................... $ 3,060,823 $ 283,463 $ 186,926 $ 628,715 $ 412,382* $ 1,628,837 $10,578,267 Dividends..................... 29,108,427** 691,115** 7,259,862** 4,226,975** 2,911,717** 3,304,593** 4,655,430 ------------ ---------- ----------- ------------- ---------- ----------- ----------- TOTAL INCOME.......... 32,169,250 974,578 7,446,788 4,855,690 3,324,099 4,933,430 15,233,697 ------------ ---------- ----------- ------------- ---------- ----------- ----------- EXPENSES Investment management fee..... 5,902,896 509,004 2,005,162 2,332,742 1,397,813 2,211,777 1,994,396 Transfer agent fees and expenses.................... 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Shareholder reports and notices..................... 50,854 5,432 13,087 12,360 3,271 15,918 16,920 Professional fees............. 28,566 30,787 33,336 67,924 45,571 29,828 25,262 Trustees' fees and expenses... 4,406 201 1,425 985 1,060 1,158 1,922 Custodian fees................ 56,152 20,823 203,544 159,461 428,891 112,250 39,708 Other......................... 12,237 517 10,419 16,726 33,894 4,527 10,664 ------------ ---------- ----------- ------------- ---------- ----------- ----------- TOTAL EXPENSES........ 6,056,111 567,764 2,267,973 2,591,198 1,911,500 2,376,458 2,089,872 ------------ ---------- ----------- ------------- ---------- ----------- ----------- NET INVESTMENT INCOME.......... 26,113,139 406,814 5,178,815 2,264,492 1,412,599 2,556,972 13,143,825 ------------ ---------- ----------- ------------- ---------- ----------- ----------- NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments............. 76,341,307 11,957,509 17,474,321 19,107,457 (2,397,792) 42,116,968 9,836,251 Foreign exchange transactions.......... -- -- (20,026) 440,246 (77,285) -- -- ------------ ---------- ----------- ------------- ---------- ----------- ----------- NET GAIN (LOSS)....... 76,341,307 11,957,509 17,454,295 19,547,703 (2,475,077) 42,116,968 9,836,251 ------------ ---------- ----------- ------------- ---------- ----------- ----------- Net change in unrealized appreciation/depreciation on: Investments............. 126,566,513 (4,318,064) 21,226,194 41,045,757 3,540,486 5,775,201 32,734,426 Translation of forward foreign currency contracts, other assets and liabilities denominated in foreign currencies............ -- -- 10,306 28,906 (141) -- -- ------------ ---------- ----------- ------------- ---------- ----------- ----------- NET APPRECIATION (DEPRECIATION)...... 126,566,513 (4,318,064) 21,236,500 41,074,663 3,540,345 5,775,201 32,734,426 ------------ ---------- ----------- ------------- ---------- ----------- ----------- NET GAIN (LOSS)....... 202,907,820 7,639,445 38,690,795 60,622,366 1,065,268 47,892,169 42,570,677 ------------ ---------- ----------- ------------- ---------- ----------- ----------- NET INCREASE...... $229,020,959 $8,046,259 $43,869,610 $ 62,886,858 $2,477,867 $50,449,141 $55,714,502 ------------ ---------- ----------- ------------- ---------- ----------- ----------- ------------ ---------- ----------- ------------- ---------- ----------- -----------
101 DEAN WITTER VARIABLE INVESTMENT SERIES STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31,
MONEY MARKET QUALITY INCOME PLUS --------------------------- --------------------------- 1996 1995 1996 1995 ------------- ------------ ------------- ------------ INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income............... $ 14,442,540 $ 13,741,500 $ 32,950,563 $ 32,845,926 Net realized gain (loss)............ -- -- (2,603,573) 14,651,610 Net change in unrealized appreciation/depreciation......... -- -- (24,916,368) 53,023,332 ------------- ------------ ------------- ------------ Net increase.................... 14,442,540 13,741,500 5,430,622 100,520,868 ------------- ------------ ------------- ------------ Dividends and distributions from: Net investment income............... (14,442,318) (13,741,498) (33,491,200) (32,322,904) Net realized gain................... -- -- -- -- ------------- ------------ ------------- ------------ Total........................... (14,442,318) (13,741,498) (33,491,200) (32,322,904) ------------- ------------ ------------- ------------ Transactions in shares of beneficial interest: Net proceeds from sales............. 199,781,437 96,881,194 18,363,915 36,146,570 Reinvestment of dividends and distributions..................... 14,442,318 13,741,498 33,491,200 32,322,904 Cost of shares repurchased.......... (123,772,522) (129,460,561) (69,712,880) (30,993,795) ------------- ------------ ------------- ------------ Net increase (decrease)......... 90,451,233 (18,837,869) (17,857,765) 37,475,679 ------------- ------------ ------------- ------------ Total increase (decrease)....... 90,451,455 (18,837,867) (45,918,343) 105,673,643 NET ASSETS: Beginning of period................... 249,786,586 268,624,453 520,578,555 414,904,912 ------------- ------------ ------------- ------------ END OF PERIOD......................... $ 340,238,041 $249,786,586 $ 474,660,212 $520,578,555 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ Undistributed net investment income..... $ 244 $ 22 $ 67,529 $ 608,166 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ SHARES ISSUED AND REPURCHASED: Sold.................................. 199,781,437 96,881,194 1,751,757 3,515,633 Issued in reinvestment of dividends and distributions................... 14,442,318 13,741,498 3,241,058 3,154,028 Repurchased........................... (123,772,522) (129,460,561) (6,752,796) (3,077,582) ------------- ------------ ------------- ------------ Net increase (decrease)............... 90,451,233 (18,837,869) (1,759,981) 3,592,079 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------
SEE NOTES TO FINANCIAL STATEMENTS 102 - --------------------------------------------------------------------------------
HIGH YIELD UTILITIES DIVIDEND GROWTH --------------------------- --------------------------- -------------------------- 1996 1995 1996 1995 1996 1995 ------------- ------------ ------------- ------------ ------------ ------------ INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income..... $ 25,415,550 $ 17,067,326 $ 16,513,033 $ 16,939,135 $ 26,113,139 $ 19,552,389 Net realized gain (loss).................. (5,282,128) (1,098,358) 5,380,515 3,776,681 76,341,307 25,514,561 Net change in unrealized appreciation/depreciation.. 2,235,871 2,521,011 14,769,561 86,839,183 126,566,513 170,908,947 ------------- ------------ ------------- ------------ ------------ ------------ Net increase.......... 22,369,293 18,489,979 36,663,109 107,554,999 229,020,959 215,975,897 ------------- ------------ ------------- ------------ ------------ ------------ Dividends and distributions from: Net investment income..... (25,894,730) (16,648,733) (16,518,454) (18,544,715) (26,130,248) (20,821,765) Net realized gain......... -- -- (1,186,573) -- (25,851,911) (12,652,636) ------------- ------------ ------------- ------------ ------------ ------------ Total................. (25,894,730) (16,648,733) (17,705,027) (18,544,715) (51,982,159) (33,474,401) ------------- ------------ ------------- ------------ ------------ ------------ Transactions in shares of beneficial interest: Net proceeds from sales... 97,281,752 36,566,043 10,173,470 25,533,783 216,135,874 101,006,743 Reinvestment of dividends and distributions....... 25,894,730 16,648,733 17,705,027 18,544,715 51,982,159 33,474,401 Cost of shares repurchased............. (14,412,089) (12,680,679) (85,244,858) (36,430,389) (22,169,232) (24,518,137) ------------- ------------ ------------- ------------ ------------ ------------ Net increase (decrease).......... 108,764,393 40,534,097 (57,366,361) 7,648,109 245,948,801 109,963,007 ------------- ------------ ------------- ------------ ------------ ------------ Total increase (decrease).......... 105,238,956 42,375,343 (38,408,279) 96,658,393 422,987,601 292,464,503 NET ASSETS: Beginning of period......... 154,309,585 111,934,242 479,070,145 382,411,752 865,416,826 572,952,323 ------------- ------------ ------------- ------------ ------------ ------------ END OF PERIOD............... $ 259,548,541 $154,309,585 $ 440,661,866 $479,070,145 $1,288,404,427 $865,416,826 ------------- ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------- ------------ ------------ ------------ Undistributed net investment income...................... $ 15,210 $ 494,390 $ -- $ 5,421 $ 105 $ 17,214 ------------- ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------- ------------ ------------ ------------ SHARES ISSUED AND REPURCHASED: Sold........................ 15,513,116 5,834,627 688,255 1,947,513 12,705,268 7,140,373 Issued in reinvestment of dividends and distributions............. 4,153,525 2,658,293 1,195,247 1,407,989 3,121,829 2,413,931 Repurchased................. (2,293,681) (2,029,027) (5,772,285) (2,821,228) (1,315,470) (1,815,800) ------------- ------------ ------------- ------------ ------------ ------------ Net increase (decrease)..... 17,372,960 6,463,893 (3,888,783) 534,274 14,511,627 7,738,504 ------------- ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------- ------------ ------------ ------------
103 DEAN WITTER VARIABLE INVESTMENT SERIES STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) - -------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31,
CAPITAL GROWTH GLOBAL DIVIDEND GROWTH ---------------------- --------------------------- 1996 1995 1996 1995 ----------- --------- ------------- ------------ INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income............... $ 406,814 3$87,427 $ 5,178,815 $ 3,729,139 Net realized gain (loss)............ 11,957,509 2,153,798 17,454,295 6,300,237 Net change in unrealized appreciation/depreciation......... (4,318,064) 13,237,372 21,236,500 23,341,679 ----------- --------- ------------- ------------ Net increase.................... 8,046,259 15,778,597 43,869,610 33,371,055 ----------- --------- ------------- ------------ Dividends and distributions from: Net investment income............... (132,322) (310,895) (5,251,753) (4,044,117) Net realized gain................... (1,337,440) -- (6,985,312) (222,586) In excess of net investment income............................ -- -- -- -- ----------- --------- ------------- ------------ Total........................... (1,469,762) (310,895) (12,237,065) (4,266,703) ----------- --------- ------------- ------------ Transactions in shares of beneficial interest: Net proceeds from sales............. 21,627,226 14,176,359 90,625,831 41,054,512 Reinvestment of dividends and distributions..................... 1,469,762 310,895 12,237,065 4,266,703 Cost of shares repurchased.......... (9,806,505) (8,675,047) (5,413,023) (7,173,082) ----------- --------- ------------- ------------ Net increase (decrease)......... 13,290,483 5,812,207 97,449,873 38,148,133 ----------- --------- ------------- ------------ Total increase (decrease)....... 19,866,980 21,279,909 129,082,418 67,252,485 NET ASSETS: Beginning of period................... 66,995,170 45,715,261 205,738,524 138,486,039 ----------- --------- ------------- ------------ END OF PERIOD......................... $86,862,150 66,$995,170 $ 334,820,942 $205,738,524 ----------- --------- ------------- ------------ ----------- --------- ------------- ------------ Undistributed net investment income..... $ 406,472 1$31,980 $ 348,453 $ 73,685 ----------- --------- ------------- ------------ ----------- --------- ------------- ------------ SHARES ISSUED AND REPURCHASED: Sold.................................. 1,329,674 1,056,301 7,330,384 3,795,718 Issued in reinvestment of dividends and distributions................... 96,568 24,762 1,008,262 397,706 Repurchased........................... (611,382) (649,418) (440,583) (688,539) ----------- --------- ------------- ------------ Net increase (decrease)............... 814,860 431,645 7,898,063 3,504,885 ----------- --------- ------------- ------------ ----------- --------- ------------- ------------ - ------------------ * Dividends in excess of net investment income.
SEE NOTES TO FINANCIAL STATEMENTS 104 - --------------------------------------------------------------------------------
EUROPEAN GROWTH PACIFIC GROWTH --------------------------- ------------------------- 1996 1995 1996 1995 ------------ ------------- ------------ ----------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income..... $ 2,264,492 $ 2,114,492 $ 1,412,599 $ 1,021,997 Net realized gain (loss).................. 19,547,703 10,996,721 (2,475,077) (2,760,376) Net change in unrealized appreciation/depreciation... 41,074,663 24,638,745 3,540,345 6,493,134 ------------ ------------- ------------ ----------- Net increase.......... 62,886,858 37,749,958 2,477,867 4,754,755 ------------ ------------- ------------ ----------- Dividends and distributions from: Net investment income..... (531,371) (1,774,678) (1,651,362) (719,960) Net realized gain......... (11,996,632) (5,391,962) -- (15,252) In excess of net investment income....... -- (210,717) -- -- ------------ ------------- ------------ ----------- Total................. (12,528,003) (7,377,357) (1,651,362) (735,212) ------------ ------------- ------------ ----------- Transactions in shares of beneficial interest: Net proceeds from sales... 60,993,831 18,351,213 66,862,929 33,260,368 Reinvestment of dividends and distributions....... 12,528,003 7,377,357 1,651,362 735,212 Cost of shares repurchased............. (9,578,044) (20,019,201) (23,134,634) (15,110,167) ------------ ------------- ------------ ----------- Net increase (decrease).......... 63,943,790 5,709,369 45,379,657 18,885,413 ------------ ------------- ------------ ----------- Total increase (decrease).......... 114,302,645 36,081,970 46,206,162 22,904,956 NET ASSETS: Beginning of period......... 188,119,409 152,037,439 98,330,295 75,425,339 ------------ ------------- ------------ ----------- END OF PERIOD............... $302,422,054 $188,119,409 $144,536,457 $98,330,295 ------------ ------------- ------------ ----------- ------------ ------------- ------------ ----------- Undistributed net investment income...................... $ 2,259,627 $ (210,717)* $ 1,663,988 $ 1,563,457 ------------ ------------- ------------ ----------- ------------ ------------- ------------ ----------- SHARES ISSUED AND REPURCHASED: Sold........................ 3,131,701 1,106,630 6,522,537 3,543,683 Issued in reinvestment of dividends and distributions............. 677,922 454,397 173,462 79,076 Repurchased................. (514,185) (1,268,442) (2,326,246) (1,630,781) ------------ ------------- ------------ ----------- Net increase (decrease)..... 3,295,438 292,585 4,369,753 1,991,978 ------------ ------------- ------------ ----------- ------------ ------------- ------------ ----------- EQUITY STRATEGIST -------------------------- -------------------------- 1996 1995 1996 1995 ------------ ------------ ------------ ------------ INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income..... $ 2,556,972 $ 2,708,609 $ 13,143,825 $ 19,633,402 Net realized gain (loss).................. 42,116,968 66,181,855 9,836,251 4,287,366 Net change in unrealized appreciation/depreciation... 5,775,201 28,684,738 32,734,426 10,997,160 ------------ ------------ ------------ ------------ Net increase.......... 50,449,141 97,575,202 55,714,502 34,917,928 ------------ ------------ ------------ ------------ Dividends and distributions from: Net investment income..... (2,577,952) (3,058,144) (13,174,571) (21,267,198) Net realized gain......... (54,814,557) -- (3,569,367) (13,902,986) In excess of net investment income....... -- -- -- -- ------------ ------------ ------------ ------------ Total................. (57,392,509) (3,058,144) (16,743,938) (35,170,184) ------------ ------------ ------------ ------------ Transactions in shares of beneficial interest: Net proceeds from sales... 132,116,853 60,875,983 25,629,890 24,116,300 Reinvestment of dividends and distributions....... 57,392,509 3,058,144 16,743,938 35,170,184 Cost of shares repurchased............. (20,436,940) (23,961,072) (46,155,709) (63,215,404) ------------ ------------ ------------ ------------ Net increase (decrease).......... 169,072,422 39,973,055 (3,781,881) (3,928,920) ------------ ------------ ------------ ------------ Total increase (decrease).......... 162,129,054 134,490,113 35,188,683 (4,181,176) NET ASSETS: Beginning of period......... 359,779,370 225,289,257 388,579,169 392,760,345 ------------ ------------ ------------ ------------ END OF PERIOD............... $521,908,424 $359,779,370 $423,767,852 $388,579,169 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Undistributed net investment income...................... $ 763 $ 21,743 $ 16,567 $ 47,313 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ SHARES ISSUED AND REPURCHASED: Sold........................ 4,838,072 2,501,214 1,954,971 1,957,299 Issued in reinvestment of dividends and distributions............. 2,452,920 136,228 1,285,378 2,891,755 Repurchased................. (770,532) (1,080,135) (3,573,439) (5,160,690) ------------ ------------ ------------ ------------ Net increase (decrease)..... 6,520,460 1,557,307 (333,090) (311,636) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
105 DEAN WITTER VARIABLE INVESTMENT SERIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND ACCOUNTING POLICIES--Dean Witter Variable Investment Series (the "Fund") is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. Investments in the Fund may be made only by (1) Northbrook Life Insurance Company to fund the benefits under variable annuity contracts and variable life insurance contracts it issues; (2) Allstate Life Insurance Company of New York to fund the benefits under variable annuity contracts it issues; (3) Glenbrook Life and Annuity Company to fund the benefits under variable annuity contracts and variable life insurance contracts it issues; and (4) Paragon Life Insurance Company to fund the benefits under variable life insurance contracts it issues to certain employees of Dean Witter Discover & Co., the parent company of Dean Witter InterCapital Inc. (the "Investment Manager"). The Fund, organized on February 25, 1983 as a Massachusetts business trust, consists of eleven Portfolios ("Portfolios") which commenced operations as follows:
COMMENCEMENT OF PORTFOLIO OPERATIONS - ------------------------------- --------------------- Money Market................... March 9, 1984 Quality Income Plus............ March 1, 1987 High Yield..................... March 9, 1984 Utilities...................... March 1, 1990 Dividend Growth................ March 1, 1990 Capital Growth................. March 1, 1991 COMMENCEMENT OF PORTFOLIO OPERATIONS - ------------------------------- --------------------- Global Dividend Growth......... February 23, 1994 European Growth................ March 1, 1991 Pacific Growth................. February 23, 1994 Equity......................... March 9, 1984 Strategist..................... March 1, 1987
Subsequent to the date of this report, two additional portfolios, Capital Appreciation and Income Builder, commenced operations. The investment objectives of each Portfolio are as follows:
PORTFOLIO INVESTMENT OBJECTIVE Money Market Seeks high current income, preservation of capital and liquidity by investing in short-term money market instruments. Quality Income Seeks, as its primary objective, to earn a high level Plus of current income and, as a secondary objective, capital appreciation, but only when consistent with its primary objective, by investing primarily in U.S. Government securities and higher-rated fixed income securities. High Yield Seeks, as its primary objective, to earn a high level of current income and, as a secondary objective, capital appreciation, but only when consistent with its primary objective, by investing primarily in lower-rated fixed income securities. Utilities Seeks to provide current income and long-term growth of income and capital by investing primarily in equity and fixed income securities of companies engaged in the public utilities industry. Dividend Growth Seeks to provide reasonable current income and long-term growth of income and capital by investing primarily in common stock of companies with a record of paying dividends and the potential for increasing dividends.
106 DEAN WITTER VARIABLE INVESTMENT SERIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
PORTFOLIO INVESTMENT OBJECTIVE Capital Growth Seeks long-term capital growth by investing primarily in common stocks. Global Dividend Seeks to provide reasonable current income and Growth long-term growth of income and capital by investing primarily in common stocks of companies, issued by issuers worldwide, with a record of paying dividends and the potential for increasing dividends. European Growth Seeks to maximize the capital appreciation of its investments by investing primarily in securities issued by issuers located in Europe. Pacific Growth Seeks to maximize the capital appreciation of its investments by investing primarily in securities issued by issuers located in Asia, Australia and New Zealand. Equity Seeks, as its primary objective, capital growth and, as a secondary objective, income, but only when consistent with its primary objective, by investing primarily in common stocks. Strategist Seeks a high total investment return through a fully managed investment policy utilizing equity, investment grade fixed income and money market securities and writing covered options.
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--Money Market: Securities are valued at amortized cost which approximates market value. All remaining Portfolios: (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) listed options are valued at the latest sale price on the exchange on which they are listed unless no sales of such options have taken place that day, in which case they are valued at the mean between their latest bid and asked price; (4) when market quotations are not readily available, including circumstances under which it is determined by the Investment Manager (or, in the case of the European Growth and the Pacific Growth Portfolios, by Morgan Grenfell Investment Services Limited (the "Sub-Adviser")) that sale or bid prices are not reflective of a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Trustees (valuation of debt securities for which market quotations are not readily available may also be based upon current market prices of 107 DEAN WITTER VARIABLE INVESTMENT SERIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 (CONTINUED) - -------------------------------------------------------------------------------- securities which are comparable in coupon, rating and maturity or an appropriate matrix utilizing similar factors); (5) certain of the Fund's portfolio securities may be valued by an outside pricing service approved by the Trustees. The pricing service may utilize a matrix system incorporating security quality, maturity and coupon as the evaluation model parameters, and/or research and evaluations by its staff, including review of broker-dealer market price quotations in determining what it believes is the fair valuation of the securities valued by such pricing service; and (6) short-term debt securities having a maturity date of more than sixty days at the 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 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. Interest income is accrued daily except where collection is not expected. The Money Market Portfolio amortizes premiums and accretes discounts on securities owned; gains and losses realized upon the sale of securities are based on amortized cost. Discounts for all other Portfolios are accreted over the life of the respective securities. C. ACCOUNTING FOR OPTIONS--(1) Written options on debt obligations, equities and foreign currency: When the Fund writes a call or put option, an amount equal to the premium received is included in the Fund's Statement of Assets and Liabilities as a liability which is subsequently marked-to-market to reflect the current market value of the option written. If a written option either expires or the Fund enters into a closing purchase transaction, the Fund realizes a gain or loss without regard to any unrealized gain or loss on the underlying security or currency and the liability related to such option is extinguished. If a written call option is exercised, the Fund realizes a gain or loss from the sale of the underlying security or currency and the proceeds from such sale are increased by the premium originally received. If a put option which the Fund has written is exercised, the amount of the premium originally received reduces the cost of the security which the Fund purchases upon exercise of the option; and (2) purchased options on debt obligations, equities and foreign currency: When the Fund purchases a call or put option, the premium paid is recorded as an investment and is subsequently marked-to-market to reflect the current market value. If a purchased option expires, the Fund will realize a loss to the extent of the premium paid. If the Fund enters into a closing sale transaction, a gain or loss is realized for the difference between the proceeds from the sale and the cost of the option. If a put option is exercised, the cost of the security sold upon exercise will be increased by the premium originally paid. If a call option is exercised, the cost of the security purchased upon exercise will be increased by the premium originally paid. D. FOREIGN CURRENCY TRANSLATION--The books and records of the Portfolios investing in foreign currency denominated transactions are translated into U.S. dollars as follows: (1) the foreign currency market value of investment securities, other assets and liabilities and forward foreign currency contracts are translated at the exchange rates prevailing at the end of the period; and (2) purchases, sales, income and expenses are translated at the exchange rates prevailing on the respective dates of such transactions. The resultant exchange gains and losses are included in the Statement of Operations as realized and unrealized gain/loss on foreign exchange transactions. 108 DEAN WITTER VARIABLE INVESTMENT SERIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 (CONTINUED) - -------------------------------------------------------------------------------- Pursuant to U.S. Federal income tax regulations, certain foreign exchange gains/losses included in realized and unrealized gain/loss are included in or are a reduction of ordinary income for federal income tax purposes. The Portfolios do not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of the securities. E. FORWARD FOREIGN CURRENCY CONTRACTS--Some of the Portfolios may enter into forward foreign currency contracts which are valued daily at the appropriate exchange rates. The resultant unrealized exchange gains and losses are included in the Statement of Operations as unrealized gain/loss on foreign exchange transactions. The Portfolios record realized gains or losses on delivery of the currency or at the time the forward contract is extinguished (compensated) by entering into a closing transaction prior to delivery. F. FEDERAL INCOME TAX STATUS--It is the Fund's policy to comply individually for each Portfolio with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required. G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS--The Fund records dividends and distributions to its shareholders on the record date. The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for financial reporting purposes but not for tax purposes are reported as dividends in excess of net investment income or distributions in excess of net realized capital gains. To the extent they exceed net investment income and net realized capital gains for tax purposes, they are reported as distributions of paid-in-capital. H. EXPENSES--Direct expenses are charged to the respective Portfolio and general Fund expenses are allocated on the basis of relative net assets or equally among the Portfolios. 2. INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS--Pursuant to an Investment Management Agreement, the Fund pays the Investment Manager a management fee, accrued daily and payable monthly, by applying the following annual rates to each Portfolios' net assets determined at the close of each business day: Money Market, High Yield and Strategist - 0.50%; Quality Income Plus - 0.50% to the portion of daily net assets not exceeding $500 million and 0.45% to the portion of daily net assets exceeding $500 million; Utilities - 0.65% to the portion of daily net assets not exceeding $500 million and 0.55% to the portion of daily net assets exceeding $500 million; Capital Growth - 0.65%; Global Dividend Growth - 0.75%; European Growth and Pacific Growth - 1.0%; Dividend Growth - 0.625% to the portion of daily net assets not exceeding $500 million and 0.50% to the portion of daily net assets exceeding $500 million; and Equity - 0.50%. Effective May 1, 1996, both Dividend Growth and Equity reduced the fee to 0.475% to the portion of daily net assets exceeding $1 billion. 109 DEAN WITTER VARIABLE INVESTMENT SERIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 (CONTINUED) - -------------------------------------------------------------------------------- Under the terms of the Agreement, in addition to managing the Fund's investments, the Investment Manager maintains certain of the Fund's books and records and furnishes, at its own expense, office space, facilities, equipment, clerical, bookkeeping and certain legal services and pays the salaries of all personnel, including officers of the Fund who are employees of the Investment Manager. The Investment Manager also bears the cost of telephone services, heat, light, power and other utilities provided to the Fund. Under a Sub-Advisory Agreement between the Investment Manager and the Sub-Adviser, the Sub-Adviser provides the European Growth and the Pacific Growth Portfolios with investment advice and portfolio management relating to the Portfolios' investments in securities, subject to the overall supervision of the Investment Manager. As compensation for its services provided pursuant to the Sub-Advisory Agreement, the Investment Manager pays the Sub-Adviser monthly compensation equal to 40% of its monthly compensation. 3. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES--Purchases and sales/maturities of portfolio securities, excluding short-term investments (except for the Money Market Portfolio), for the year ended December 31, 1996 were as follows:
U.S. GOVERNMENT SECURITIES OTHER ---------------------------------- -------------------------------------- PURCHASES SALES/MATURITIES PURCHASES SALES/MATURITIES ---------------- ---------------- ------------------ ------------------ Money Market.......................... $ 34,727,080 $ 34,146,513 $ 1,364,792,850 $ 1,289,557,502 Quality Income Plus................... 540,237,465 537,800,364 327,453,423 342,350,395 High Yield............................ -- -- 193,637,673 107,500,195 Utilities............................. -- -- 39,515,210 86,337,177 Dividend Growth....................... 9,726,945 -- 450,355,560 245,956,315 Capital Growth........................ 276,950 482,131 76,773,736 70,773,986 Global Dividend Growth................ -- -- 188,880,870 103,806,207 European Growth....................... -- -- 147,909,438 95,507,480 Pacific Growth........................ -- -- 107,612,810 65,775,402 Equity................................ 25,736,705 68,057,156 1,259,806,434 1,111,280,254 Strategist............................ 151,982,528 125,116,517 414,261,509 460,798,455
Included in the aforementioned purchases and sales of portfolio securities of the Equity Portfolio are purchases and sales of equity securities of The Allstate Corporation, the parent company of Northbrook Life Insurance Company and Allstate Life Insurance Company of New York, affiliates of the Fund, in the amount of $5,701,295 and $5,059,117, respectively, as well as a realized gain of $491,975. Included in the payable for investments purchased at December 31, 1996 for the Capital Growth and Dividend Growth Portfolios are $476,125 and $1,234,400, respectively, for unsettled trades with DWR. Included in the receivable for investments sold at December 31, 1996 for the Global Dividend Growth and Equity Portfolios are $114,705 and $1,628,455, respectively, for unsettled trades with DWR. 110 DEAN WITTER VARIABLE INVESTMENT SERIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 (CONTINUED) - -------------------------------------------------------------------------------- For the year ended December 31, 1996, the following Portfolios incurred commissions with Dean Witter Reynolds Inc. ("DWR"), an affiliate of the Investment Manager, for portfolio transactions executed on behalf of the Portfolio:
GLOBAL DIVIDEND CAPITAL DIVIDEND UTILITIES GROWTH GROWTH GROWTH EQUITY STRATEGIST - --------- ----------- --------- --------- ----------- --------- $ 49,500 $ 181,121 $ 38,010 $ 35,401 $ 220,150 $ 34,525 - --------- ----------- --------- --------- ----------- --------- - --------- ----------- --------- --------- ----------- ---------
For the year ended December 31, 1996, the Pacific Growth Portfolio incurred brokerage commissions of $16,933 with affiliates of the Sub-Adviser for portfolio transactions executed. Dean Witter Trust Company, an affiliate of the Investment Manager, is the Fund's transfer agent. The Fund has an unfunded noncontributory defined benefit pension plan covering all independent Trustees of the Fund who will have served as independent Trustees for at least five years at the time of retirement. Benefits under this plan are based on years of service and compensation during the last five years of service. Aggregate pension costs for the year ended December 31, 1996 included in Trustees' fees and expenses in the Statement of Operations and the accrued pension liability included in accrued expenses in the Statement of Assets and Liabilities are as follows:
QUALITY MONEY INCOME HIGH DIVIDEND CAPITAL MARKET PLUS YIELD UTILITIES GROWTH GROWTH --------- --------- --------- --------- ----------- ----------- Aggregate Pension Cost............................. $ 91 $ 160 $ 59 $ 155 $ 332 $ 25 --------- --------- --------- --------- ----------- ----- --------- --------- --------- --------- ----------- ----- Accrued Pension Liability.......................... $ 11,251 $ 9,984 $ 3,383 $ 4,848 $ 7,933 $ 320 --------- --------- --------- --------- ----------- ----- --------- --------- --------- --------- ----------- -----
GLOBAL DIVIDEND EUROPEAN PACIFIC GROWTH GROWTH GROWTH EQUITY STRATEGIST ----------- ----------- --------- --------- ----------- Aggregate Pension Cost...................................... $ 609 $ 71 $ 328 $ 140 $ 131 ----- ----- --------- --------- ----------- ----- ----- --------- --------- ----------- Accrued Pension Liability................................... $ 485 $ 738 $ 1,094 $ 5,083 $ 8,645 ----- ----- --------- --------- ----------- ----- ----- --------- --------- -----------
4. FEDERAL INCOME TAX STATUS--At December 31, 1996, the following Portfolios had an approximate net capital loss carryover which may be used to offset future capital gains to the extent provided by regulations:
(AMOUNTS IN THOUSANDS) AVAILABLE THROUGH ------------------------------------------------------------------------------------------------- DECEMBER 31, 1997 1998 1999 2000 2001 2002 2003 2004 TOTAL - ------------------------------ --------- --------- --------- --------- --------- --------- --------- --------- --------- Quality Income Plus........... -- -- -- -- -- $ 24,848 -- $ 2,604 $ 27,452 High Yield.................... $ 10,694 $ 34,291 $ 7,336 $ 3,057 $ 4,736 3,256 $ 2,984 5,521 71,875 Pacific Growth................ -- -- -- -- -- -- 1,398 5,350 6,748
111 DEAN WITTER VARIABLE INVESTMENT SERIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 (CONTINUED) - -------------------------------------------------------------------------------- Net capital and net currency losses incurred after October 31 ("post-October losses") within the taxable year are deemed to arise on the first business day of the Portfolios' next taxable year. The following Portfolios incurred and will elect to defer post-October losses during fiscal 1996:
HIGH YIELD GLOBAL DIVIDEND GROWTH EUROPEAN GROWTH PACIFIC GROWTH - ----------- ---------------------- ---------------- -------------- $ 218,000 $ 9,000 $ 289,000 $ 488,000 - ----------- ------- ---------------- -------------- - ----------- ------- ---------------- --------------
At December 31, 1996, the primary reason(s) for significant temporary/permanent book/tax differences were as follows:
TEMPORARY DIFFERENCES PERMANENT DIFFERENCES ----------------------------- ------------------------------------------ POST-OCTOBER LOSS DEFERRALS FOREIGN CURRENCY EXPIRED CAPITAL LOSSES FROM WASH SALES GAINS/LOSSES LOSS CARRYFORWARD ------------ --------------- --------------------- ------------------- Quality Income Plus.................. - High Yield........................... - - - Utilities............................ - Dividend Growth...................... - Capital Growth....................... - Global Dividend Growth............... - - - European Growth...................... - - - Pacific Growth....................... - - - Equity............................... - Strategist........................... -
Additionally, Global Dividend Growth, European Growth and Pacific Growth Portfolios had temporary differences attributable to income from the mark-to-market of passive foreign investment companies ("PFICs") and permanent differences attributable to tax adjustments on PFICs sold. To reflect reclassifications arising from permanent book/tax differences for the year ended December 31, 1996, the following accounts were (charged) credited:
ACCUMULATED UNDISTRIBUTED NET REALIZED ACCUMULATED UNDISTRIBUTED GAIN/ACCUMULATED NET NET INVESTMENT INCOME REALIZED LOSS PAID-IN-CAPITAL ------------------------- ------------------------- -------------- High Yield.................................. -- $ 7,297,039 $ (7,297,039) Global Dividend Growth...................... $ 347,706 (347,706) -- European Growth............................. 737,223 (737,223) -- Pacific Growth.............................. 339,294 (339,294) --
5. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS--The Global Dividend Growth, European Growth and Pacific Growth Portfolios may enter into forward foreign currency contracts ("forward contracts") to facilitate settlement of foreign currency denominated portfolio transactions or to manage foreign currency exposure associated with foreign currency denominated securities. Such Portfolios may also purchase put options on foreign currencies in which the Portfolios' securities are denominated to protect against a decline in value of such securities due to currency devaluations. Forward contracts and over-the-counter purchased put options on foreign currencies involve elements of market risk in excess of the amounts reflected in the Statement of Assets and Liabilities. The 112 DEAN WITTER VARIABLE INVESTMENT SERIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 (CONTINUED) - -------------------------------------------------------------------------------- Portfolios bear the risk of an unfavorable change in the foreign exchange rates underlying the forward contracts. Risks may also arise upon entering into these contracts and over-the-counter purchased put options on foreign currencies from the potential inability of the counterparties to meet the terms of their contracts. At December 31, 1996, the Global Dividend Growth, European Growth and Pacific Growth Portfolios had outstanding forward contracts used to facilitate settlement of foreign currency denominated portfolio transactions and to manage foreign currency exposure. At December 31, 1996 the Global Dividend Growth Portfolio's investments in securities of issuers in Japan represented 25.5% of the Portfolio's net assets. These investments, which involve risks and considerations not present with respect to U.S. securities, may be affected by economic or political developments in this region. At December 31, 1996, the Global Dividend Growth, European Growth and Pacific Growth Portfolios' cash balance consisted principally of interest bearing deposits with Chase Manhattan Bank N.A., the Fund's custodian. 113 DEAN WITTER VARIABLE INVESTMENT SERIES FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- SELECTED RATIOS AND PER SHARE DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH PERIOD:
NET ASSET VALUE NET NET REALIZED TOTAL FROM BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO DISTRIBUTIONS TO YEAR ENDED DEC. 31 OF PERIOD INCOME GAIN (LOSS) OPERATIONS SHAREHOLDERS SHAREHOLDERS ---------- --------- ---------- -------------- ---------- ------------ ---------------- MONEY MARKET 1987 $ 1.00 $0.061 $-- $ 0.061 $(0.061) $-- 1988 1.00 0.070 -- 0.070 (0.070) -- 1989 1.00 0.086 -- 0.086 (0.086) -- 1990 1.00 0.076 -- 0.076 (0.076) -- 1991 1.00 0.056 -- 0.056 (0.056) -- 1992 1.00 0.034 -- 0.034 (0.034) -- 1993 1.00 0.027 -- 0.027 (0.027) -- 1994 1.00 0.037 -- 0.037 (0.037) -- 1995 1.00 0.055 -- 0.055 (0.055) -- 1996 1.00 0.050 -- 0.050 (0.050) -- QUALITY INCOME PLUS 1987(a) 10.00 0.64 (0.39) 0.25 (0.64) -- 1988 9.61 0.85 (0.16) 0.69 (0.85) -- 1989 9.45 0.88 0.28 1.16 (0.88) -- 1990 9.73 0.86 (0.24) 0.62 (0.86) -- 1991 9.49 0.85 0.85 1.70 (0.85) -- 1992 10.34 0.77 0.05 0.82 (0.77) -- 1993 10.39 0.69 0.64 1.33 (0.69) -- 1994 11.03 0.69 (1.40) (0.71) (0.69) (0.18) 1995 9.45 0.72 1.50 2.22 (0.71) -- 1996 10.96 0.71 (0.58) 0.13 (0.72) -- HIGH YIELD 1987 12.06 0.91 (1.15) (0.24) (0.91) (0.94) 1988 9.97 1.14 (0.05) 1.09 (1.14) -- 1989 9.92 1.30 (2.40) (1.10) (1.30) -- 1990 7.52 1.13 (2.91) (1.78) (1.13) (0.06)* 1991 4.55 0.70 1.81 2.51 (0.70) (0.11)* 1992 6.25 0.96 0.18 1.14 (0.96) -- 1993 6.43 0.81 0.68 1.49 (0.81) -- 1994 7.11 0.79 (0.95) (0.16) (0.79) -- 1995 6.16 0.80 0.08 0.88 (0.78) -- 1996 6.26 0.77 (0.06) 0.71 (0.79) -- UTILITIES 1990 (b) 10.00 0.47 (0.04) 0.43 (0.41) -- 1991 10.02 0.54 1.45 1.99 (0.54) -- 1992 11.47 0.51 0.88 1.39 (0.52) -- 1993 12.34 0.49 1.43 1.92 (0.50) (0.02) 1994 13.74 0.53 (1.75) (1.22) (0.52) (0.08) 1995 11.92 0.53 2.81 3.34 (0.58) -- 1996 14.68 0.55 0.70 1.25 (0.55) (0.04) DIVIDEND GROWTH 1990(b) 10.00 0.33 (1.10) (0.77) (0.30) -- 1991 8.93 0.36 2.08 2.44 (0.37) -- 1992 11.00 0.37 0.51 0.88 (0.37) -- 1993 11.51 0.36 1.27 1.63 (0.36) -- 1994 12.78 0.38 (0.80) (0.42) (0.37) -- 1995 11.99 0.38 3.89 4.27 (0.41) (0.26) 1996 15.59 0.41 3.22 3.63 (0.41) (0.41)
- ------------ Commencement of operations: (a) March 1, 1987. (b) March 1, 1990. + Calculated based on the net asset value as of the last business day of the period. * Distribution from capital. (1) Not annualized. (2) Annualized. (3) If the Investment Manager had not assumed all expenses and waived the management fee for the period March 1, 1987 through August 26, 1987, the ratio of expenses to average net assets would have been 0.74%. (4) If the Investment Manager had not assumed all expenses and waived the management fee for the period March 1, 1990 through August 31, 1990, the ratio of expenses to average net assets would have been 0.75%. SEE NOTES TO FINANCIAL STATEMENTS 114 - --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS --------------------- TOTAL DIVIDENDS NET ASSET TOTAL NET ASSETS AT NET PORTFOLIO AVERAGE AND VALUE END INVESTMENT END OF PERIOD INVESTMENT TURNOVER COMMISSION DISTRIBUTIONS OF PERIOD RETURN+ (000'S) EXPENSES INCOME RATE RATE PAID - ---------------- ----------- -------------- -------------- ---------- -------- --------- ------------ $ (0.061) $1.00 6.26% $ 69,467 0.65% 6.26% N/A N/A (0.070) 1.00 7.23 77,304 0.62 7.04 N/A N/A (0.086) 1.00 9.05 76,701 0.58 8.67 N/A N/A (0.076) 1.00 7.89 118,058 0.57 7.60 N/A N/A (0.056) 1.00 5.75 104,277 0.57 5.62 N/A N/A (0.034) 1.00 3.43 96,151 0.59 3.38 N/A N/A (0.027) 1.00 2.75 129,925 0.57 2.71 N/A N/A (0.037) 1.00 3.81 268,624 0.55 3.93 N/A N/A (0.055) 1.00 5.66 249,787 0.53 5.52 N/A N/A (0.050) 1.00 5.11 340,238 0.52 4.97 N/A N/A (0.64) 9.61 2.62(1) 24,094 0.35(2)(3) 8.33(2) 265%(1) N/A (0.85) 9.45 7.32 28,037 0.73 8.87 277 N/A (0.88) 9.73 12.78 48,784 0.70 9.09 242 N/A (0.86) 9.49 6.84 57,407 0.66 9.09 166 N/A (0.85) 10.34 18.75 81,918 0.60 8.39 105 N/A (0.77) 10.39 8.26 163,368 0.58 7.41 148 N/A (0.69) 11.03 12.99 487,647 0.56 6.17 219 N/A (0.87) 9.45 (6.63) 414,905 0.54 6.88 254 N/A (0.71) 10.96 24.30 520,579 0.54 7.07 162 N/A (0.72) 10.37 1.56 474,660 0.53 6.84 182 N/A (1.85) 9.97 (3.02) 191,631 0.53 7.66 287 N/A (1.14) 9.92 10.83 192,290 0.56 11.06 140 N/A (1.30) 7.52 (12.44) 96,359 0.55 13.94 54 N/A (1.19) 4.55 (25.54) 27,078 0.69 17.98 42 N/A (0.81) 6.25 58.14 34,603 1.01 12.29 300 N/A (0.96) 6.43 18.35 40,042 0.74 14.05 204 N/A (0.81) 7.11 24.08 90,200 0.60 11.80 177 N/A (0.79) 6.16 (2.47) 111,934 0.59 11.71 105 N/A (0.78) 6.26 14.93 154,310 0.54 12.67 58 N/A (0.79) 6.18 11.98 259,549 0.51 12.59 57 N/A (0.41) 10.02 4.52(1) 37,597 0.40(2)(4) 6.38(2) 46(1) -- (0.54) 11.47 20.56 68,449 0.80 5.23 25 -- (0.52) 12.34 12.64 153,748 0.73 4.63 26 -- (0.52) 13.74 15.69 490,934 0.71 3.75 11 -- (0.60) 11.92 (9.02) 382,412 0.68 4.21 15 -- (0.58) 14.68 28.65 479,070 0.68 4.00 13 -- (0.59) 15.34 8.68 440,662 0.67 3.61 9 $ 0.0543 (0.30) 8.93 (7.81)(1) 57,282 0.54(2)(4) 4.50(2) 19(1) -- (0.37) 11.00 27.76 98,023 0.73 3.61 6 -- (0.37) 11.51 8.16 192,551 0.69 3.42 4 -- (0.36) 12.78 14.34 483,145 0.68 3.01 6 -- (0.37) 11.99 (3.27) 572,952 0.64 3.13 20 -- (0.67) 15.59 36.38 865,417 0.61 2.75 24 -- (0.82) 18.40 23.96 1,288,404 0.57 2.46 23 0.0553
115 DEAN WITTER VARIABLE INVESTMENT SERIES FINANCIAL HIGHLIGHTS (CONTINUED) - -------------------------------------------------------------------------------- SELECTED RATIOS AND PER SHARE DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH PERIOD:
NET ASSET VALUE NET NET REALIZED TOTAL FROM BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO DISTRIBUTIONS TO YEAR ENDED DEC. 31 OF PERIOD INCOME GAIN (LOSS) OPERATIONS SHAREHOLDERS SHAREHOLDERS ---------- --------- ---------- -------------- ---------- ------------ ---------------- CAPITAL GROWTH 1991(b) $10.00 $ 0.15 $ 2.67 $ 2.82 $ (0.13) $ -- 1992 12.69 0.07 0.13 0.20 (0.08) (0.02) 1993 12.79 0.08 (0.98) (0.90) (0.08) -- 1994 11.81 0.10 (0.26) (0.16) (0.10) (0.03) 1995 11.52 0.10 3.68 3.78 (0.08) -- 1996 15.22 0.08 1.65 1.73 (0.03) (0.27) GLOBAL DIVIDEND GROWTH 1994(c) 10.00 0.23 (0.20) 0.03 (0.21) -- 1995 9.82 0.24 1.90 2.14 (0.26) (0.01) 1996 11.69 0.24 1.75 1.99 (0.24) (0.31) EUROPEAN GROWTH 1991(b) 10.00 0.25 (0.13) 0.12 (0.23) -- 1992 9.89 0.08 0.32 0.40 (0.10) (0.01) 1993 10.18 0.12 3.98 4.10 (0.12) (0.13) 1994 14.03 0.17 0.96 1.13 (0.16) (0.44) 1995 14.56 0.20 3.50 3.70 (0.19)** (0.54) 1996 17.53 0.17 4.91 5.08 (0.04) (1.01) PACIFIC GROWTH 1994(c) 10.00 0.07 (0.74) (0.67) -- (0.07) 1995 9.26 0.12 0.41 0.53 (0.09) -- 1996 9.70 0.05 0.32 0.37 (0.11) -- EQUITY 1987 14.41 0.30 (0.94) (0.64) (0.33) (0.95) 1988 12.49 0.39 0.83 1.22 (0.35) -- 1989 13.36 0.71 1.77 2.48 (0.70) -- 1990 15.14 0.48 (1.03) (0.55) (0.49) -- 1991 14.10 0.20 8.05 8.25 (0.21) -- 1992 22.14 0.23 (0.47) (0.24) (0.24) (1.86) 1993 19.80 0.15 3.63 3.78 (0.15) (1.28) 1994 22.15 0.23 (1.31) (1.08) (0.22) (1.60) 1995 19.25 0.22 7.92 8.14 (0.25) -- 1996 27.14 0.16 2.70 2.86 (0.16) (3.45) STRATEGIST 1987(a) 10.00 0.48 (0.35) 0.13 (0.48) -- 1988 9.65 0.70 0.51 1.21 (0.64) -- 1989 10.22 0.84 0.20 1.04 (0.79) (0.06) 1990 10.41 0.61 (0.46) 0.15 (0.67) (0.08) 1991 9.81 0.47 2.24 2.71 (0.50) -- 1992 12.02 0.44 0.41 0.85 (0.45) (0.13) 1993 12.29 0.38 0.86 1.24 (0.38) (0.47) 1994 12.68 0.48 0.01 0.49 (0.46) (0.26) 1995 12.45 0.62 0.49 1.11 (0.67) (0.44) 1996 12.45 0.43 1.39 1.82 (0.43) (0.12)
- ------------ Commencement of operations: (a) March 1, 1987. (b) March 1, 1991. (c) February 23, 1994. + Calculated based on the net asset value as of the last business day of the period. ** Includes distributions in excess of net investment income of $0.02. (1) Not annualized. (2) Annualized. (3) If the Investment Manager had not assumed all expenses and waived the management fee for the period March 1, 1987 through August 26, 1987, the ratio of expenses to average net assets would have been 0.74%. (4) If the Investment Manager had not assumed all expenses and waived the management fee for the period March 1, 1991 through December 31, 1991, the ratio of expenses to average net assets would have been 1.60% for Capital Growth and 4.12% for European Growth. (5) If the Investment Manager had not assumed all expenses and waived the management fee for the period February 23, 1994 through May 12, 1994 for Global Dividend Growth and February 23, 1994 through August 2, 1994 for Pacific Growth, the ratio of expenses to average net assets would have been 0.97% for Global Dividend Growth and 1.40% for Pacific Growth. SEE NOTES TO FINANCIAL STATEMENTS 116 - --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS --------------------------- TOTAL NET ASSET TOTAL NET ASSETS AT NET PORTFOLIO AVERAGE DIVIDENDS AND VALUE END INVESTMENT END OF PERIOD INVESTMENT TURNOVER COMMISSION DISTRIBUTIONS OF PERIOD RETURN+ (000'S) EXPENSES INCOME RATE RATE PAID - -------------- ----------- -------------- -------------- -------------- --------- --------- ------------ $ (0.13) $12.69 28.41%(1) $ 18,400 -- %(2)(4) 1.82%(2) 32%(1) $ -- (0.10) 12.79 1.64 45,105 0.86 0.62 22 -- (0.08) 11.81 (6.99) 50,309 0.74 0.78 36 -- (0.13) 11.52 (1.28) 45,715 0.77 0.90 37 -- (0.08) 15.22 32.92 66,995 0.74 0.70 34 -- (0.30) 16.65 11.55 86,862 0.73 0.52 98 0.0570 (0.21) 9.82 0.27(1) 138,486 0.87(2)(5) 2.62(2) 20(1) -- (0.27) 11.69 22.14 205,739 0.88 2.23 55 -- (0.55) 13.13 17.49 334,821 0.85 1.94 39 0.0360 (0.23) 9.89 1.34(1) 3,653 -- (2)(4) 3.18(2) 77(1) -- (0.11) 10.18 3.99 10,686 1.73 0.74 97 -- (0.25) 14.03 40.88 79,052 1.28 0.97 77 -- (0.60) 14.56 8.36 152,021 1.16 1.49 58 -- (0.73) 17.53 25.89 188,119 1.17 1.25 69 -- (1.05) 21.56 29.99 302,422 1.11 0.97 43 0.0453 (0.07) 9.26 (6.73)(1) 75,425 1.00(2)(5) 0.56(2) 22(1) -- (0.09) 9.70 5.74 98,330 1.44 1.23 53 -- (0.11) 9.96 3.89 144,536 1.37 1.01 50 0.0108 (1.28) 12.49 (6.23) 52,502 0.59 2.02 63 -- (0.35) 13.36 9.84 39,857 0.65 2.77 162 -- (0.70) 15.14 18.83 58,316 0.60 4.85 81 -- (0.49) 14.10 (3.62) 41,234 0.62 3.38 130 -- (0.21) 22.14 59.05 63,524 0.64 1.09 214 -- (2.10) 19.80 0.05 77,527 0.62 1.22 286 -- (1.43) 22.15 19.72 182,828 0.58 0.69 265 -- (1.82) 19.25 (4.91) 225,289 0.57 1.19 299 -- (0.25) 27.14 42.53 359,779 0.54 0.97 269 -- (3.61) 26.39 12.36 521,908 0.54 0.58 279 0.0587 (0.48) 9.65 1.23(1) 27,016 0.38(2)(3) 6.73(2) 172(1) -- (0.64) 10.22 12.79 61,947 0.66 7.29 310 -- (0.85) 10.41 10.67 88,712 0.57 8.38 282 -- (0.75) 9.81 1.56 68,447 0.58 6.10 163 -- (0.50) 12.02 28.26 87,779 0.60 4.34 86 -- (0.58) 12.29 7.24 136,741 0.58 3.74 87 -- (0.85) 12.68 10.38 287,502 0.57 3.11 57 -- (0.72) 12.45 3.94 392,760 0.54 3.93 125 -- (1.11) 12.45 9.48 388,579 0.52 5.03 329 -- (0.55) 13.72 15.02 423,768 0.52 3.30 153 0.0591
117 DEAN WITTER VARIABLE INVESTMENT SERIES REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- To the Shareholders and Trustees of Dean Witter Variable Investment Series In our opinion, the accompanying statements of assets and liabilities, including the portfolios 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 the Money Market Portfolio, the Quality Income Plus Portfolio, the High Yield Portfolio, the Utilities Portfolio, the Dividend Growth Portfolio, the Capital Growth Portfolio, the Global Dividend Growth Portfolio, the European Growth Portfolio, the Pacific Growth Portfolio, the Equity Portfolio, and the Strategist Portfolio (constituting Dean Witter Variable Investment Series, hereafter referred to as the "Fund") at December 31, 1996, the results of each of their operations for the year then ended, the changes in each of their net assets and the financial highlights for each of the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1996 by correspondence with the custodians 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 February 17, 1997 1996 FEDERAL INCOME TAX NOTICE (UNAUDITED) During the year ended December 31, 1996, the following Portfolios paid to shareholders the following long-term capital gains per share:
GLOBAL DIVIDEND CAPITAL DIVIDEND EUROPEAN UTILITIES GROWTH GROWTH GROWTH GROWTH EQUITY STRATEGIST - ----------- ----------- ----------- ----------- ----------- --------- ----------- $ 0.04 $ 0.41 $ 0.27 $ 0.14 $ 1.01 $ 0.58 $ 0.01 ----- ----- ----- ----- ----- --------- ----- ----- ----- ----- ----- ----- --------- -----
118 DEAN WITTER VARIABLE INVESTMENT SERIES--CAPITAL APPRECIATION PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED) - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- ------------ COMMON STOCKS (77.8%) ADVERTISING (1.0%) 3,600 Snyder Communications, Inc.*................................................................ $ 84,600 ------------ AEROSPACE & DEFENSE (1.1%) 3,900 BE Aerospace, Inc.*......................................................................... 95,550 ------------ BIOTECHNOLOGY (3.5%) 2,600 Centocor, Inc.*............................................................................. 79,300 3,700 Guilford Pharmaceuticals, Inc............................................................... 76,775 3,700 Interneuron Pharmaceuticals, Inc.*.......................................................... 63,825 4,000 Liposome Co., Inc.*......................................................................... 81,000 ------------ 300,900 ------------ BUSINESS SERVICES (0.9%) 3,500 Metzler Group, Inc.*........................................................................ 75,687 ------------ COMMERCIAL SERVICES (3.8%) 4,200 Employee Solutions, Inc..................................................................... 26,381 3,300 Learning Tree International, Inc............................................................ 91,575 4,000 Pharmaceutical Product Development, Inc.*................................................... 78,000 6,200 Whittman-Hart, Inc.......................................................................... 130,200 ------------ 326,156 ------------ COMPUTER SOFTWARE & SERVICES (13.0%) 2,300 Computer Task Group, Inc.................................................................... 81,650 4,400 Harbinger Corp.............................................................................. 93,500 8,200 Interlink Computer Sciences, Inc.*.......................................................... 88,150 6,100 ISG International Software Group Ltd.* (Israel)............................................. 58,712 3,200 Keane, Inc.................................................................................. 105,200 3,400 Madge Networks NV* (Netherlands)............................................................ 28,900 2,500 Manugistics Group, Inc.*.................................................................... 90,625 5,300 Pegasystems Inc.*........................................................................... 104,675 1,900 PRI Automation, Inc......................................................................... 89,300 3,100 Saville Systems Ireland PLC (ADR)* (Ireland)................................................ 87,575 3,900 Scopus Technology, Inc...................................................................... 117,000 3,300 Smart Modular Technologies, Inc.*........................................................... 78,375 3,200 STB Systems, Inc.*.......................................................................... 93,600 ------------ 1,117,262 ------------ COMPUTERS (4.1%) 4,900 Data General Corp.*......................................................................... 83,300 3,000 DST Systems, Inc.*.......................................................................... 85,500 5,100 Micron Electronics, Inc.*................................................................... 96,900 2,500 MICROS Systems, Inc.*....................................................................... 85,625 ------------ 351,325 ------------ ELECTRONICS (6.4%) 6,000 GaSonics International Corp.*............................................................... 85,500 3,100 Sawtek, Inc.*............................................................................... 86,800 3,200 Sipex Corp.*................................................................................ 93,600 2,500 Tencor Instruments*......................................................................... 90,000 3,800 Teradyne, Inc.*............................................................................. 109,725
119 DEAN WITTER VARIABLE INVESTMENT SERIES--CAPITAL APPRECIATION PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED) (CONTINUED) - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- ------------ 3,000 Vitesse Semiconductor Corp.................................................................. $ 82,875 ------------ 548,500 ------------ ELECTRONICS - SEMICONDUCTORS/COMPONENTS (6.0%) 2,800 CFM Technologies, Inc.*..................................................................... 81,900 4,100 ESS Technology, Inc.*....................................................................... 99,425 2,700 Etec Systems, Inc.*......................................................................... 84,712 4,100 Kulicke & Soffa Industries, Inc.*........................................................... 86,100 3,300 National Semiconductor Corp.*............................................................... 90,750 3,000 Triquint Semiconductor, Inc.*............................................................... 70,125 ------------ 513,012 ------------ ENVIRONMENTAL CONTROL (1.1%) 2,600 USA Waste Services, Inc.*................................................................... 92,300 ------------ FINANCIAL (1.0%) 3,000 Bank United Corp. (Class A)................................................................. 85,125 ------------ FINANCIAL SERVICES (2.0%) 3,600 First Financial Caribbean Corp.............................................................. 93,150 4,800 Southern Pacific Funding Corp............................................................... 83,400 ------------ 176,550 ------------ HOTELS/MOTELS (0.9%) 5,000 Extended Stay America, Inc.................................................................. 73,750 ------------ INDUSTRIALS (1.0%) 3,400 DT Industries, Inc.......................................................................... 86,700 ------------ INSURANCE (2.1%) 2,800 Delphi Financial Group, Inc. (Class A)...................................................... 93,100 3,600 Penn Treaty American Corp.*................................................................. 91,800 ------------ 184,900 ------------ INVESTMENT COMPANIES (1.0%) 2,400 Sirrom Capital Corp......................................................................... 86,100 ------------ MACHINERY - CONSTRUCTION & MATERIALS (0.4%) 1,000 Kennametal, Inc............................................................................. 36,250 ------------ MANUFACTURING (1.4%) 7,600 Ballantyne of Omaha, Inc.................................................................... 116,850 ------------ MEDICAL PRODUCTS & SUPPLIES (1.9%) 8,900 Graham-Field Health Products, Inc........................................................... 96,787 1,700 Vivus, Inc.................................................................................. 67,787 ------------ 164,574 ------------ MEDICAL SERVICES (1.0%) 8,000 Medical Alliance, Inc.*..................................................................... 88,000 ------------ OFFSHORE DRILLING (1.0%) 3,800 Reading & Bates Corp.*...................................................................... 85,975 ------------
120 DEAN WITTER VARIABLE INVESTMENT SERIES--CAPITAL APPRECIATION PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED) (CONTINUED) - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- ------------ OIL & GAS (2.1%) 5,100 Noble Drilling Corp.*....................................................................... $ 87,975 4,000 Swift Energy Co.*........................................................................... 94,500 ------------ 182,475 ------------ OIL EQUIPMENT & SERVICES (4.4%) 2,000 ENSCO International, Inc.*.................................................................. 98,500 2,100 Smith International, Inc.*.................................................................. 95,812 2,200 Tidewater, Inc.............................................................................. 101,200 3,500 Varco International, Inc.................................................................... 87,500 ------------ 383,012 ------------ PHARMACEUTICALS (4.5%) 3,600 Alkermes, Inc.*............................................................................. 50,400 3,500 Curative Health Services, Inc.*............................................................. 80,500 4,000 ICN Pharmaceuticals, Inc.................................................................... 89,000 4,500 North American Vaccine, Inc.*............................................................... 90,563 2,900 SangStat Medical Corp.*..................................................................... 78,663 ------------ 389,126 ------------ POLLUTION CONTROL (1.0%) 2,700 US Filter Corp.............................................................................. 83,363 ------------ RETAIL - DEPARTMENT STORES (1.1%) 2,500 Dollar Tree Stores, Inc..................................................................... 92,188 ------------ RETAIL - SPECIALTY (2.2%) 2,900 Cole National Corp.*........................................................................ 92,075 2,700 Consolidated Stores Corp.................................................................... 95,175 ------------ 187,250 ------------ SPECIALIZED SERVICES (1.0%) 6,700 National Education Corp.*................................................................... 84,588 ------------ TELECOMMUNICATION EQUIPMENT (3.0%) 4,100 Digital Microwave Corp.*.................................................................... 77,900 4,900 DSC Communications Corp.*................................................................... 102,288 2,900 P-COM, Inc.*................................................................................ 75,400 ------------ 255,588 ------------ TELECOMMUNICATIONS (2.0%) 1,600 QUALCOMM, Inc.*............................................................................. 90,200 5,800 Tel-Save Holdings, Inc...................................................................... 84,100 ------------ 174,300 ------------ TRANSPORTATION (1.2%) 2,100 Trico Marine Service, Inc................................................................... 99,225 ------------ WHOLESALE DISTRIBUTOR (1.0%) 7,200 ADFlex Solutions, Inc.*..................................................................... 83,700 ------------ TOTAL COMMON STOCKS (IDENTIFIED COST $7,663,930)............................................ 6,704,881 ------------
121 DEAN WITTER VARIABLE INVESTMENT SERIES--CAPITAL APPRECIATION PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED) (CONTINUED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT (IN THOUSANDS) VALUE - ----------- ------------ SHORT-TERM INVESTMENTS (22.9%) U.S. GOVERNMENT AGENCY (A) (20.9%) $ $1,800 Federal Home Loan Mortgage Corp. 6.50% due 04/01/97 (Amortized Cost $1,800,000)............ $ 1,800,000 ------------ REPURCHASE AGREEMENT (2.0%) 174 The Bank of New York 5.375% due 04/01/97 (dated 03/31/97; proceeds $173,533; collateralized by $177,643 U.S. Treasury Note 6.50% due 08/31/01 valued at $176,978) (Identified Cost $173,508)................................................................................ 173,508 ------------ TOTAL SHORT-TERM INVESTMENTS (IDENTIFIED COST $1,973,508).................................. 1,973,508 ------------ TOTAL INVESTMENTS (IDENTIFIED COST $9,637,438) (B)....................... 100.7% 8,678,389 LIABILITIES IN EXCESS OF OTHER ASSETS.................................... (0.7) (61,082) ---------- ----------- NET ASSETS............................................................... 100.0% $ 8,617,307 ---------- ----------- ---------- ----------- - ---------------- ADR AMERICAN DEPOSITORY RECEIPT. * NON-INCOME PRODUCING SECURITY. (A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $92,310 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $1,051,359, RESULTING IN NET UNREALIZED DEPRECIATION OF $959,049.
SEE NOTES TO FINANCIAL STATEMENTS 122 DEAN WITTER VARIABLE INVESTMENT SERIES--INCOME BUILDER PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED) - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- ------------- COMMON STOCKS (43.6%) APPAREL (0.8%) 3,400 Kellwood Co............................................................................... $ 85,000 ------------- AUTO PARTS (0.8%) 2,600 Dana Corp................................................................................. 85,475 ------------- AUTOMOTIVE (2.5%) 2,900 Chrysler Corp............................................................................. 87,000 2,800 Ford Motor Co............................................................................. 87,850 1,500 General Motors Corp....................................................................... 83,063 ------------- 257,913 ------------- BANKS (4.8%) 1,700 Corestates Financial Corp................................................................. 80,750 2,500 First Security Corp....................................................................... 80,312 1,900 First Tennessee National Corp............................................................. 80,275 1,700 KeyCorp................................................................................... 82,875 3,480 Washington Federal, Inc................................................................... 79,170 1,900 Wilmington Trust Corp..................................................................... 80,750 ------------- 484,132 ------------- BANKS - THRIFT INSTITUTIONS (0.8%) 1,700 Washington Mutual, Inc.................................................................... 82,025 ------------- BUILDING MATERIALS (0.8%) 1,300 Vulcan Materials Co....................................................................... 84,337 ------------- CHEMICALS (2.5%) 1,100 Dow Chemical Co........................................................................... 88,000 1,600 PPG Industries, Inc....................................................................... 86,400 1,100 Rohm & Haas Co............................................................................ 82,362 ------------- 256,762 ------------- CONGLOMERATES (0.8%) 2,100 Tenneco, Inc.............................................................................. 81,900 ------------- FINANCIAL (0.8%) 2,000 TCF Financial Corp........................................................................ 79,250 ------------- FINANCIAL - MISCELLANEOUS (1.6%) 2,300 Fannie Mae................................................................................ 83,087 900 Student Loan Marketing Assoc.............................................................. 85,725 ------------- 168,812 ------------- FOOD PROCESSING (0.8%) 3,200 Hormel Foods Corp......................................................................... 82,000 ------------- HEALTHCARE - DRUGS (0.8%) 1,100 Schering-Plough Corp...................................................................... 80,025 ------------- INSURANCE (3.3%) 1,500 Jefferson-Pilot Corp...................................................................... 81,563 1,600 Lincoln National Corp..................................................................... 85,600 1,500 Providian Corp............................................................................ 80,250 1,500 Torchmark Corp............................................................................ 83,063 ------------- 330,476 -------------
123 DEAN WITTER VARIABLE INVESTMENT SERIES--INCOME BUILDER PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED) (CONTINUED) - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- ------------- MACHINERY - DIVERSIFIED (0.9%) 1,100 Johnson Controls, Inc..................................................................... $ 88,550 ------------- MANUFACTURING - CONSUMER & INDUSTRIAL PRODUCTS (0.9%) 1,800 Whirlpool Corp............................................................................ 85,725 ------------- MISCELLANEOUS (0.9%) 2,700 American Greetings Corp. (Class A)........................................................ 85,725 ------------- MOBIL HOME & RECREATION (0.9%) 3,500 Fleetwood Enterprises, Inc................................................................ 87,500 ------------- OIL & GAS (0.8%) 2,100 Ashland Inc............................................................................... 84,525 ------------- REAL ESTATE INVESTMENT TRUST (5.4%) 4,000 American General Hospitality Corp......................................................... 109,000 2,800 Excel Realty Trust, Inc................................................................... 70,700 6,200 Glenborough Realty Trust Inc.............................................................. 124,000 750 Healthcare Realty Trust, Inc.............................................................. 20,531 700 Liberty Property Trust.................................................................... 17,150 3,800 LTC Properties, Inc....................................................................... 63,175 3,000 Reckson Associates Realty Corp............................................................ 138,375 ------------- 542,931 ------------- RESTAURANTS (0.9%) 3,100 Sbarro, Inc............................................................................... 87,575 ------------- RETAIL - SPECIALTY APPAREL (0.8%) 4,600 Limited (The), Inc........................................................................ 84,525 ------------- STEEL (0.8%) 1,600 Timken Co................................................................................. 85,600 ------------- TELECOMMUNICATIONS (1.7%) 1,400 Bell Atlantic Corp........................................................................ 85,225 2,600 U.S. West Communications Group, Inc....................................................... 88,400 ------------- 173,625 ------------- TELEPHONES (1.7%) 2,500 AT&T Corp................................................................................. 86,875 1,600 SBC Communications, Inc................................................................... 84,200 ------------- 171,075 ------------- TOBACCO (1.6%) 700 Philip Morris Companies, Inc.............................................................. 79,888 3,100 UST, Inc.................................................................................. 86,413 ------------- 166,301 ------------- UTILITIES - ELECTRIC (3.4%) 2,900 Consolidated Edison Company of New York, Inc.............................................. 87,000 2,400 New England Electric System............................................................... 82,500 4,300 Peco Energy Co............................................................................ 87,613 3,200 Public Service Enterprise Group, Inc...................................................... 84,000 ------------- 341,113 ------------- UTILITIES - TELEPHONE (0.9%) 1,900 GTE Corp.................................................................................. 88,588 -------------
124 DEAN WITTER VARIABLE INVESTMENT SERIES--INCOME BUILDER PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED) (CONTINUED) - --------------------------------------------------------------------------------
NUMBER OF SHARES VALUE - ----------- ------------- WHOLESALE DISTRIBUTOR (0.9%) 2,900 Supervalu, Inc............................................................................ $ 86,275 ------------- TOTAL COMMON STOCKS (IDENTIFIED COST $4,602,762).......................................... 4,417,740 -------------
CONVERTIBLE PREFERRED STOCKS (19.7%) AUTO PARTS (2.0%) 5,700 Mascotech, Inc. $1.20..................................................................... 105,450 3,700 Walbro Capital Trust $2.00................................................................ 96,200 ------------- 201,650 ------------- BANKS (1.2%) 5,000 National Australia Bank, Ltd. $1.969 (Australia) (Units)++................................ 125,000 ------------- BROADCAST MEDIA (3.0%) 2,770 Chancellor Broadcasting Co. $3.50 - 144A*................................................. 140,924 3,000 SFX Broadcasting, Inc. (Series D) $3.25................................................... 128,625 4,000 Triathlon Broadcasting Co. $0.945......................................................... 33,000 ------------- 302,549 ------------- CHEMICALS (1.4%) 6,300 Atlantic Richfield Co. $2.228............................................................. 138,600 ------------- COMPUTER SOFTWARE (0.9%) 1,180 Microsoft Corp. (Series A) $2.196......................................................... 95,580 ------------- FINANCE (2.7%) 1,890 Insignia Financing, Inc. $3.25 - 144A*.................................................... 85,169 1,500 Merrill Lynch & Co., Inc. $4.087.......................................................... 88,500 2,540 Merrill Lynch & Co., Inc. (STRYPES) $2.39 (1)............................................. 95,885 ------------- 269,554 ------------- METALS & MINING (0.9%) 1,740 Cyprus Amax Minerals Co. (Series A) $4.00................................................. 94,830 ------------- PUBLISHING (1.4%) 14,590 Hollinger International, Inc. $0.95....................................................... 145,900 ------------- REAL ESTATE (0.9%) 1,800 Rouse Co. (Series B) $3.00................................................................ 88,200 ------------- REAL ESTATE INVESTMENT TRUST (3.0%) 3,560 FelCor Suite Hotels, Inc. (Series A) $1.95................................................ 101,460 1,085 Merry Land & Investment Co., Inc. (Series C) $2.15........................................ 28,481 1,115 Oasis Residential, Inc. (Series A) $2.25.................................................. 29,966 6,000 Wellsford Residential Property Trust (Series A) $1.75..................................... 142,500 ------------- 302,407 ------------- TELECOMMUNICATIONS (2.3%) 2,680 Globalstar Telecommunications, Ltd. $3.25................................................. 138,690 1,830 Loral Space & Communications Ltd. $3.00 - 144A*........................................... 89,212 ------------- 227,902 ------------- TOTAL CONVERTIBLE PREFERRED STOCKS (IDENTIFIED COST $2,067,939)........................... 1,992,172 -------------
125 DEAN WITTER VARIABLE INVESTMENT SERIES--INCOME BUILDER PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED) (CONTINUED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT (IN THOUSANDS) COUPON VALUE ----- RATE ------------- MATURITY DATE -- ------------------------------ CORPORATE BONDS (27.3%) CONVERTIBLE BONDS (9.5%) CABLE/CELLULAR (1.3%) $ 400 U.S. Cellular Corp.................................................... 0.00% 06/15/15 $ 130,920 ------------- HEALTHCARE (1.7%) 30 Emeritus Corp. - 144A*................................................ 6.25 01/01/06 24,431 100 Phymatrix Corp........................................................ 6.75 06/15/03 84,486 75 Physicians Resource Group, Inc. - 144A*............................... 6.00 12/01/01 66,713 ------------- 175,630 ------------- HEATING & AIR CONDITIONING (1.5%) 150 American Residential Holdings Corp. - 144A*........................... 7.25 04/15/04 148,125 ------------- HOTELS/MOTELS (0.2%) 25 Signature Resorts, Inc................................................ 5.75 01/15/07 20,781 ------------- OFFICE EQUIPMENT & SUPPLIES (1.8%) 225 U.S. Office Products Co............................................... 5.50 05/15/03 188,156 ------------- REAL ESTATE INVESTMENT TRUST (1.6%) 175 Capstone Capital Corp................................................. 6.55 03/14/02 159,905 ------------- TECHNOLOGY (0.8%) 80 Eidos PLC - 144A* (United Kingdom).................................... 6.25 07/31/02 78,000 ------------- TELECOMMUNICATIONS (0.6%) 75 Midcom Communications Inc. - 144A*.................................... 8.25 08/15/03 64,875 ------------- TOTAL CONVERTIBLE BONDS (IDENTIFIED COST $1,008,673)......................................... 966,392 ------------- NON-CONVERTIBLE BONDS (17.8%) AUTO PARTS (1.2%) 125 Lear Seating Corp..................................................... 11.25 07/15/00 126,250 ------------- BROADCAST MEDIA (2.1%) 195 Outlet Broadcasting, Inc.............................................. 10.875 07/15/03 212,792 ------------- CABLE/CELLULAR (0.5%) 50 Continental Cablevision, Inc.......................................... 11.00 06/01/07 55,809 ------------- HEALTHCARE - DRUGS (2.7%) 250 Quorum Health Group, Inc.............................................. 11.875 12/15/02 271,250 ------------- INDUSTRIALS (2.9%) 275 American Standard, Inc................................................ 11.375 05/15/04 291,500 ------------- OIL & GAS (4.2%) 400 Global Marine, Inc.................................................... 12.75 12/15/99 423,000 ------------- RETAIL (4.2%) 400 Hook-SupeRX, Inc...................................................... 10.125 06/01/02 422,200 ------------- TOTAL NON-CONVERTIBLE BONDS (IDENTIFIED COST $1,815,452)..................................... 1,802,801 ------------- TOTAL CORPORATE BONDS (IDENTIFIED COST $2,824,125)........................................... 2,769,193 -------------
126 DEAN WITTER VARIABLE INVESTMENT SERIES--INCOME BUILDER PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED) (CONTINUED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT (IN THOUSANDS) VALUE - ----------- ---------- SHORT-TERM INVESTMENT (A) (12.3%) U.S. GOVERNMENT AGENCY $ $1,250 Federal Home Loan Mortgage Corp. 6.50% due 04/01/97 (Amortized Cost $1,250,000)........... $ 1,250,000 ------------- TOTAL INVESTMENTS (IDENTIFIED COST $10,744,826) (B)..................... 102.9% 10,429,105 LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS.......................... (2.9) (295,778) ---------- ------------ NET ASSETS.............................................................. 100.0% $ 10,133,327 ---------- ------------ ---------- ------------ - ---------------- STRYPES STRUCTURED YIELD PRODUCT EXCHANGEABLE FOR STOCK. * RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. ++ CONSISTS OF ONE OR MORE CLASS OF SECURITIES TRADED TOGETHER AS A UNIT; STOCKS WITH ATTACHED WARRANTS. (1) CONVERTIBLE INTO IMC GLOBAL COMMON STOCK. (A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $35,852 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $351,573, RESULTING IN NET UNREALIZED DEPRECIATION OF $315,721.
SEE NOTES TO FINANCIAL STATEMENTS 127 DEAN WITTER VARIABLE INVESTMENT SERIES STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1997 (UNAUDITED) - --------------------------------------------------------------------------------
CAPITAL INCOME APPRECIATION BUILDER ------------ ------------ ASSETS: Investments in securities, at value (identified cost $9,637,438 and $10,744,826, respectively)............... $ 8,678,389 $ 10,429,105 Cash.......................... -- 31,965 Receivable for: Shares of beneficial interest sold............. 82,281 113,345 Dividends................... -- 14,429 Interest.................... 26 68,575 Receivable from affiliate..... 9,990 8,266 ------------ ------------ TOTAL ASSETS.......... 8,770,686 10,665,685 ------------ ------------ LIABILITIES: Payable for: Investment purchased........ 100,350 522,527 Shares of beneficial interest repurchased...... 43,039 1,565 Accrued expenses and other payables.................... 9,990 8,266 ------------ ------------ TOTAL LIABILITIES..... 153,379 532,358 ------------ ------------ NET ASSETS: Paid-in-capital............... 9,541,116 10,440,626 Undistributed net investment income...................... 44,773 -- Undistributed net realized gain (loss)................. (9,533 ) 8,422 Net unrealized depreciation... (959,049 ) (315,721) ------------ ------------ NET ASSETS............ $ 8,617,307 $ 10,133,327 ------------ ------------ ------------ ------------ SHARES OF BENEFICIAL INTEREST OUTSTANDING................. 961,229 1,037,015 ------------ ------------ ------------ ------------ NET ASSET VALUE PER SHARE, (unlimited authorized shares of $.01 par value)... $8.96 $9.77 ------------ ------------ ------------ ------------
SEE NOTES TO FINANCIAL STATEMENTS 128 DEAN WITTER VARIABLE INVESTMENT SERIES STATEMENT OF OPERATIONS FOR THE PERIOD JANUARY 21, 1997* THROUGH MARCH 31, 1997 (UNAUDITED) - --------------------------------------------------------------------------------
CAPITAL INCOME APPRECIATION BUILDER ------------- ------------- NET INVESTMENT INCOME: Interest...................... $ 44,353 $ 32,211 Dividends..................... 420 29,237 ------------- ------------- TOTAL INCOME.......... 44,773 61,448 ------------- ------------- EXPENSES Investment management fee..... 8,781 7,851 Transfer agent fees and expenses.................... 123 96 Shareholder reports and notices..................... 1,162 267 Professional fees............. 5,710 5,820 Trustees' fees and expenses... 277 20 Custodian fees................ 2,717 3,090 Other......................... -- 73 ------------- ------------- TOTAL EXPENSES........ 18,770 17,217 LESS: AMOUNTS WAIVED/REIMBURSED..... (18,770 ) (17,217) ------------- ------------- NET EXPENSES.......... -- -- ------------- ------------- NET INVESTMENT INCOME.......... 44,773 61,448 ------------- ------------- NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss)................... (9,533 ) 8,422 Net unrealized depreciation............. (959,049 ) (315,721) ------------- ------------- NET LOSS.............. (968,582 ) (307,299) ------------- ------------- NET DECREASE...... $ (923,809 ) $ (245,851) ------------- ------------- ------------- ------------- - ------------------ * Commencement of operations.
SEE NOTES TO FINANCIAL STATEMENTS 129 DEAN WITTER VARIABLE INVESTMENT SERIES STATEMENT OF CHANGES IN NET ASSETS FOR THE PERIOD JANUARY 21, 1997* THROUGH MARCH 31, 1997 (UNAUDITED) - --------------------------------------------------------------------------------
CAPITAL INCOME APPRECIATION BUILDER ------------- ------------ INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income..... $ 44,773 $ 61,448 Net realized gain (loss)................... (9,533 ) 8,422 Net unrealized depreciation............. (959,049 ) (315,721) ------------- ------------ Net decrease.......... (923,809 ) (245,851) ------------- ------------ Dividends from net investment income......... -- (61,448) ------------- ------------ Transactions in shares of beneficial interest: Net proceeds from sales... 10,080,618 10,381,074 Reinvestment of dividends................ -- 61,448 Cost of shares repurchased.............. (539,512 ) (1,906) ------------- ------------ Net increase.......... 9,541,106 10,440,616 ------------- ------------ Total increase........ 8,617,297 10,133,317 NET ASSETS: Beginning of period......... 10 10 ------------- ------------ END OF PERIOD (Including undistributed net investment income of $44,773 and $0, respectively)............. $ 8,617,307 $ 10,133,327 ------------- ------------ ------------- ------------ SHARES ISSUED AND REPURCHASED: Sold........................ 1,015,449 1,030,918 Issued in reinvestment of dividends................. -- 6,290 Repurchased................. (54,221 ) (194) ------------- ------------ Net increase................ 961,228 1,037,014 ------------- ------------ ------------- ------------ - ------------------ * Commencement of operations.
SEE NOTES TO FINANCIAL STATEMENTS 130 DEAN WITTER VARIABLE INVESTMENT SERIES NOTES TO FINANCIAL STATEMENTS MARCH 31, 1997 (UNAUDITED) - -------------------------------------------------------------------------------- 1. ORGANIZATION AND ACCOUNTING POLICIES--Dean Witter Variable Investment Series (the "Fund") is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. Investments in the Fund may be made only by (1) Northbrook Life Insurance Company to fund the benefits under variable annuity contracts and variable life insurance contracts it issues; (2) Allstate Life Insurance Company of New York to fund the benefits under variable annuity contracts it issues; (3) Glenbrook Life and Annuity Company to fund the benefits under variable annuity contracts and variable life insurance contracts it issues; and (4) Paragon Life Insurance Company to fund the benefits under variable life insurance contracts it issues to certain employees of Dean Witter Discover & Co., the parent company of Dean Witter InterCapital Inc. (the "Investment Manager"). The Fund, organized on February 25, 1983 as a Massachusetts business trust, operates as a series, currently comprising 13 portfolios ("Portfolios"). The accompanying statements and notes, which relate only to Capital Appreciation and Income Builder, encompass the interim period of January 21, 1997 (commencement of operations) through March 31, 1997. The investment objectives of these Portfolios are as follows:
PORTFOLIO INVESTMENT OBJECTIVE Capital Appreciation Seeks long-term capital appreciation by investing primarily in the common stocks of U.S. companies that offer the potential for either superior earnings growth and/or appear to be undervalued. Income Builder Seeks, as its primary objective, to earn reasonable income and, as a secondary objective, growth of capital by investing primarily in income-producing equity securities.
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 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 also be based upon current market prices of securities which are comparable in coupon, rating and maturity or an appropriate matrix utilizing similar 131 DEAN WITTER VARIABLE INVESTMENT SERIES NOTES TO FINANCIAL STATEMENTS MARCH 31, 1997 (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- factors); (4) certain of the Fund's portfolio securities may be valued by an outside pricing service approved by the Trustees. The pricing service may utilize a matrix system incorporating security quality, maturity and coupon as the evaluation model parameters, and/or research and evaluations by its staff, including review of broker-dealer market price quotations in determining what it believes is the fair valuation of the securities valued by such pricing service; and (5) short-term debt securities having a maturity date of more than sixty days at the 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. Interest income is accrued daily. Discounts are accreted over the life of the respective securities. C. 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. D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS--The Fund records dividends and distributions to its shareholders on the record date. The amounts 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. E. EXPENSES--Direct expenses are charged to the respective Portfolio and general Fund expenses are allocated on the basis of relative net assets or equally among all thirteen Portfolios. 2. INVESTMENT MANAGEMENT AGREEMENTS--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 each Portfolio determined as of the close of each business day. 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. 132 DEAN WITTER VARIABLE INVESTMENT SERIES NOTES TO FINANCIAL STATEMENTS MARCH 31, 1997 (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- The Investment Manager has undertaken to reimburse all operating expenses and waive the compensation provided for in its Investment Management Agreement for each Portfolio until such time as the respective Portfolio has $50 million of net assets or July 21, 1997, whichever occurs first. At March 31, 1997, included in the Statements of Assets and Liabilities for each Portfolio is a receivable from an affiliate which represents expense reimbursements due to the respective Portfolio. 3. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES--Purchases and sales of portfolio securities, excluding short-term investments, for the period ended March 31, 1997 were as follows:
U.S. GOVERNMENT SECURITIES OTHER ------------------------ -------------------------- PURCHASES SALES PURCHASES SALES ----------- ----------- ------------- ----------- Capital Appreciation....................................... -- -- $ 7,722,378 $ 48,914 Income Builder............................................. $ 187,185 -- 9,495,898 197,640
For the period ended March 31, 1997, Capital Appreciation and Income Builder incurred $4,840 and $4,995, respectively, in commissions with Dean Witter Reynolds Inc. ("DWR"), an affiliate of the Investment Manager, for portfolio transactions executed on behalf of each Portfolio. Included in the payable for investments purchased at March 31, 1997 for Capital Appreciation and Income Builder are $100,350 and $268,553, respectively, for unsettled trades with DWR. Dean Witter Trust Company, an affiliate of the Investment Manager, is the Fund's transfer agent. 133 DEAN WITTER VARIABLE INVESTMENT SERIES FINANCIAL HIGHLIGHTS (UNAUDITED) - -------------------------------------------------------------------------------- SELECTED RATIOS AND PER SHARE DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE PERIOD: FOR THE PERIOD JANUARY 21, 1997* THROUGH MARCH 31, 1997
CAPITAL INCOME APPRECIATION BUILDER -------------- ------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.............. $ 10.00 $ 10.00 -------------- ------- Net investment income............................. 0.05 0.06 Net realized and unrealized loss.................. (1.09) (0.23) -------------- ------- Total from investment operations.................. (1.04) (0.17) -------------- ------- Less dividends from net investment income......... -- (0.06) -------------- ------- Net asset value, end of period.................... $ 8.96 $ 9.77 -------------- ------- -------------- ------- TOTAL INVESTMENT RETURN+.......................... (10.40)%(1) (1.70)%(1) RATIOS TO AVERAGE NET ASSETS: Expenses.......................................... --%(2)(3) --%(2)(4) Net investment income............................. 3.82%(2)(3) 5.87%(2)(4) SUPPLEMENTAL DATA: Net assets, end of period, in thousands........... $ 8,617 $10,133 Portfolio turnover rate........................... 1%(1) 4%(1) Average commission rate paid...................... $0.0486 $0.0531
- ---------- * Commencement of operations. + Calculated based on the net asset value as of the last business day of the period. (1) Not annualized. (2) Annualized. (3) If the Investment Manager had not assumed all expenses and waived its management fee, the annualized expense and net investment income ratios would have been 1.60% and 2.22%, respectively. (4) If the Investment Manager had not assumed all expenses and waived its management fee, the annualized expense and net investment income ratios would have been 1.64% and 4.23%, respectively. SEE NOTES TO FINANCIAL STATEMENTS 134 DEAN WITTER VARIABLE INVESTMENT SERIES PART C OTHER INFORMATION Item 24. Financial Statements and Exhibits (a) FINANCIAL STATEMENTS (1) Financial statements and schedules, included in Prospectus (Part A): Page in Prospectus ---------- Financial highlights for the years ended December 31, 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . 8 Financial highlights of the Capital Appreciation Portfolio and the Income Builder Portfolio for the period January 21, 1997 (commencement of operations) through March 31, 1997 (unaudited). . . . . . . . . . . . . . . . . 12 (2) Financial statements included in the Statement of Additional Information (Part B): Page in SAI ------- Portfolio of Investments at December 31, 1996 . . . . . . . 53 Statements of Assets and Liabilities at December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Statements of Operations for the year ended December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . 100 Statements of Changes in Net Assets for the years ended December 31, 1995 and December 31, 1996 . . . . . . . 102 Notes to Financial Statements . . . . . . . . . . . . . . . 106 Financial highlights for the years ended December 31, 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . 114 Portfolio of Investments (Capital Appreciation Portfolio and Income Builder Portfolio) at March 31, 1997 (unaudited) . . 119 Statement of Assets and Liabilities of Capital Appreciation Portfolio and Income Builder Portfolio at March 31, 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . 128 Statement of Operations (Capital Appreciation Portfolio and Income Builder Portfolio) at March 31, 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . 129 Statement of Changes in Net Assets of Capital Appreciation Portfolio and Income Builder Portfolio for the period January 21, 1997 (commencement of operations) through March 31, 1997 (unaudited) . . . . . . . . . . . . . . . . . 130 Notes to Finanical Statements of the Capital Appreciation Portfolio and the Income Builder Portfolio (unaudited) . . . 131 Financial Highlights of the Capital Appreciation Portfolio and the Income Builder Portfolio for the period January 21, 1997 (commencement of operations) through March 31, 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . 134 (3) Financial statements included in Part C: None (b) EXHIBITS: 2. - Amended and Restated By-Laws of the Registrant dated as of October 25, 1996 6. - Participation Agreement among the Registrant, Northbrook Life Insurance Company, Allstate Life Insurance Company of New York, Glenbrook Life and Annuity Company and Dean Witter Distributors Inc. 8. - Form of Global Custody Agreement with The Chase Manhattan Bank, N. A. 11. - Consent of Independent Accountants 16. - Schedules For Computation Of Performance Quotations 27. - Financial Data Schedules ------------------------------ All other exhibits were previously filed and are hereby incorporated by reference. Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT. None Item 26. NUMBER OF HOLDERS OF SECURITIES. (1) (2) Number of Record Holders Title of Class at March 31, 1997 -------------- ------------------------ Shares of Beneficial Interest 3 Item 27. INDEMNIFICATION. Pursuant to Section 5.3 of the Registrant's Declaration of Trust and under Section 4.8 of the Registrant's By-Laws, the indemnification of the Registrant's trustees, officers, employees and agents is permitted if it is determined that they acted under the belief that their actions were in or not opposed to the best interest of the Registrant, and, with respect to any criminal proceeding, they had reasonable cause to believe their conduct was not unlawful. In addition, indemnification is permitted only if it is determined that the actions in question did not render them liable by reason of willful misfeasance, bad faith or gross negligence in the performance of their duties or by reason of reckless disregard of their obligations and duties to the Registrant. Trustees, officers, employees and agents will be indemnified for the expense of litigation if it is determined that they are entitled to indemnification against any liability established in such litigation. The Registrant may also advance money for these expenses provided that they give their undertakings to repay the Registrant unless their conduct is later determined to permit indemnification. 2 Pursuant to Section 5.2 of the Registrant's Declaration of Trust and paragraph 8 of the Registrant's Investment Management Agreement, neither the Investment Manager nor any trustee, officer, employee or agent of the Registrant shall be liable for any action or failure to act, except in the case of bad faith, willful misfeasance, gross negligence or reckless disregard of duties to the Registrant. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer, or controlling person of the Registrant in connection with the successful defense of any action, suit or proceeding) is asserted against the Registrant by such trustee, officer or controlling person in connection with the shares being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act, and will be governed by the final adjudication of such issue. The Registrant hereby undertakes that it will apply the indemnification provision of its by-laws in a manner consistent with Release 11330 of the Securities and Exchange Commission under the Investment Company Act of 1940, so long as the interpretation of Sections 17(h) and 17(i) of such Act remains in effect. Registrant, in conjunction with the Investment Manager, Registrant's Trustees, and other registered investment management companies managed by the Investment Manager, maintains insurance on behalf of any person who is or was a Trustee, officer, employee, or agent of Registrant, or who is or was serving at the request of Registrant as a trustee, director, officer, employee or agent of another trust or corporation, against any liability asserted against him and incurred by him or arising out of his position. However, in no event will Registrant maintain insurance to indemnify any such person for any act for which Registrant itself is not permitted to indemnify him. Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER. See "The Fund and Its Management" in the Prospectus regarding the business of the investment adviser. The following information is given regarding officers of Dean Witter InterCapital Inc. InterCapital is a wholly-owned subsidiary of Dean Witter, Discover & Co. The principal address of the Dean Witter Funds is 3 Two World Trade Center, New York, New York 10048. The term "Dean Witter Funds" used below refers to the following registered investment companies: CLOSED-END INVESTMENT COMPANIES (1) InterCapital Income Securities Inc. (2) High Income Advantage Trust (3) High Income Advantage Trust II (4) High Income Advantage Trust III (5) Municipal Income Trust (6) Municipal Income Trust II (7) Municipal Income Trust III (8) Dean Witter Government Income Trust (9) Municipal Premium Income Trust (10) Municipal Income Opportunities Trust (11) Municipal Income Opportunities Trust II (12) Municipal Income Opportunities Trust III (13) Prime Income Trust (14) InterCapital Insured Municipal Bond Trust (15) InterCapital Quality Municipal Income Trust (16) InterCapital Quality Municipal Investment Trust (17) InterCapital Insured Municipal Income Trust (18) InterCapital California Insured Municipal Income Trust (19) InterCapital Insured Municipal Trust (20) InterCapital Quality Municipal Securities (21) InterCapital New York Quality Municipal Securities (22) InterCapital California Quality Municipal Securities (23) InterCapital Insured California Municipal Securities (24) InterCapital Insured Municipal Securities OPEN-END INVESTMENT COMPANIES: (1) Dean Witter Short-Term Bond Fund (2) Dean Witter Tax-Exempt Securities Trust (3) Dean Witter Tax-Free Daily Income Trust (4) Dean Witter Dividend Growth Securities Inc. (5) Dean Witter Convertible Securities Trust (6) Dean Witter Liquid Asset Fund Inc. (7) Dean Witter Developing Growth Securities Trust (8) Dean Witter Retirement Series (9) Dean Witter Federal Securities Trust (10) Dean Witter World Wide Investment Trust (11) Dean Witter U.S. Government Securities Trust (12) Dean Witter Select Municipal Reinvestment Fund (13) Dean Witter High Yield Securities Inc. (14) Dean Witter Intermediate Income Securities (15) Dean Witter New York Tax-Free Income Fund (16) Dean Witter California Tax-Free Income Fund (17) Dean Witter Health Sciences Trust (18) Dean Witter California Tax-Free Daily Income Trust (19) Dean Witter Global Asset Allocation Fund (20) Dean Witter American Value Fund 4 (21) Dean Witter Strategist Fund (22) Dean Witter Utilities Fund (23) Dean Witter World Wide Income Trust (24) Dean Witter New York Municipal Money Market Trust (25) Dean Witter Capital Growth Securities (26) Dean Witter Precious Metals and Minerals Trust (27) Dean Witter European Growth Fund Inc. (28) Dean Witter Global Short-Term Income Fund Inc. (29) Dean Witter Pacific Growth Fund Inc. (30) Dean Witter Multi-State Municipal Series Trust (31) Dean Witter Premier Income Trust (32) Dean Witter Short-Term U.S. Treasury Trust (33) Dean Witter Diversified Income Trust (34) Dean Witter U.S. Government Money Market Trust (35) Dean Witter Global Dividend Growth Securities (36) Active Assets California Tax-Free Trust (37) Dean Witter Natural Resource Development Securities Inc. (38) Active Assets Government Securities Trust (39) Active Assets Money Trust (40) Active Assets Tax-Free Trust (41) Dean Witter Limited Term Municipal Trust (42) Dean Witter Variable Investment Series (43) Dean Witter Value-Added Market Series (44) Dean Witter Global Utilities Fund (45) Dean Witter High Income Securities (46) Dean Witter National Municipal Trust (47) Dean Witter International SmallCap Fund (48) Dean Witter Mid-Cap Growth Fund (49) Dean Witter Select Dimensions Investment Series (50) Dean Witter Balanced Growth Fund (51) Dean Witter Balanced Income Fund (52) Dean Witter Hawaii Municipal Trust (53) Dean Witter Capital Appreciation Fund (54) Dean Witter Intermediate Term U.S. Treasury Trust (55) Dean Witter Information Fund (56) Dean Witter Japan Fund (57) Dean Witter Income Builder Fund (58) Dean Witter Special Value Fund (59) Dean Witter Financial Services Trust (60) Dean Witter Market Leader Trust The term "TCW/DW Funds" refers to the following registered investment companies: OPEN-END INVESTMENT COMPANIES (1) TCW/DW Core Equity Trust (2) TCW/DW North American Government Income Trust (3) TCW/DW Latin American Growth Fund (4) TCW/DW Income and Growth Fund (5) TCW/DW Small Cap Growth Fund (6) TCW/DW Balanced Fund (7) TCW/DW Total Return Trust (8) TCW/DW Mid-Cap Equity Trust 5 (9) TCW/DW Global Telecom Trust (10)TCW/DW Strategic Income Trust CLOSED-END INVESTMENT COMPANIES (1) TCW/DW Term Trust 2000 (2) TCW/DW Term Trust 2002 (3) TCW/DW Term Trust 2003 (4) TCW/DW Emerging Markets Opportunities Trust NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS INTERCAPITAL INC. AND NATURE OF CONNECTION - ----------------- ------------------------------------------------ Charles A. Fiumefreddo Executive Vice President and Director of Dean Chairman, Chief Witter Reynolds Inc. ("DWR"); Chairman, Chief Executive Officer and Executive Officer and Director of Dean Witter Director Distributors Inc. ("Distributors") and Dean Witter Services Company Inc. ("DWSC"); Chairman and Director of Dean Witter Trust Company ("DWTC"); Chairman, Director or Trustee, President and Chief Executive Officer of the Dean Witter Funds and Chairman, Chief Executive Officer and Trustee of the TCW/DW Funds; Formerly Executive Vice President and Director of Dean Witter, Discover & Co. ("DWDC"); Director and/or officer of various DWDC subsidiaries. Philip J. Purcell Chairman, Chief Executive Officer and Director of Director of DWDC and DWR; Director of DWSC and Distributors; Director or Trustee of the Dean Witter Funds; Director and/or officer of various DWDC subsidiaries. Richard M. DeMartini Executive Vice President of DWDC; President and Director Chief Operating Officer of Dean Witter Capital, a division of DWR; member of the DWDC Management Committee; Director of DWR, DWSC, Distributors and DWTC; Trustee of the TCW/DW Funds. James F. Higgins Executive Vice President of DWDC; President and Director Chief Operating Officer of Dean Witter Financial; Director of DWR, DWSC, Distributors and DWTC. Thomas C. Schneider Executive Vice President and Chief Financial Executive Vice Officer of DWDC, DWR, DWSC and Distributors; President, Chief Director of DWR, DWSC and Distributors. Financial Officer and Director 6 NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS INTERCAPITAL INC. AND NATURE OF CONNECTION - ----------------- ------------------------------------------------ Christine A. Edwards Executive Vice President, Secretary and General Director Counsel of DWDC and DWR; Executive Vice President, Secretary and Chief Legal Officer of Distributors; Director of DWR, DWSC and Distributors. Robert M. Scanlan President and Chief Operating Officer of DWSC, President and Chief Executive Vice President of Distributors; Operating Officer Executive Vice President and Director of DWTC; Vice President of the Dean Witter Funds and the TCW/DW Funds. John Van Heuvelen President, Chief Operating Officer and Director Executive Vice of DWTC. President Joseph J. McAlinden Vice President of the Dean Witter Funds and Executive Vice President Director of DWTC. and Chief Investment Officer Barry Fink Assistant Secretary of DWR;Senior Vice Senior Vice President, President,Secretary and General Counsel of Secretary and General DWSC;Senior Vice President,Assistant Counsel Secretary and Assistant General Counsel of Distributors;Vice President,Secretary and General Counsel of the Dean Witter Funds and the TCW/DW Funds. Peter M. Avelar Senior Vice President Vice President of various Dean Witter Funds. Mark Bavoso Senior Vice President Vice President of various Dean Witter Funds. Richard Felegy Senior Vice President Edward Gaylor Senior Vice President Vice President of various Dean Witter Funds. Robert S. Giambrone Senior Vice President of DWSC, Distributors Senior Vice President and DWTC and Director of DWTC; Vice President of the Dean Witter Funds and the TCW/DW Funds. Rajesh K. Gupta Senior Vice President Vice President of various Dean Witter Funds. Kenton J. Hinchcliffe Senior Vice President Vice President of various Dean Witter Funds. 7 NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS INTERCAPITAL INC. AND NATURE OF CONNECTION - ----------------- ------------------------------------------------ Kevin Hurley Senior Vice President Vice President of various Dean Witter Funds. Jenny Beth Jones Senior Vice President Vice President of Dean Witter Special Value Fund. John B. Kemp, III Director of the Provident Savings Bank, Jersey Senior Vice President City, New Jersey. Anita Kolleeny Senior Vice President Vice President of various Dean Witter Funds. Jonathan R. Page Senior Vice President Vice President of various Dean Witter Funds. Ira N. Ross Senior Vice President Vice President of various Dean Witter Funds. Guy G. Rutherfurd, Jr. Vice President of Dean Witter Market Leader Senior Vice President Trust. Rochelle G. Siegel Senior Vice President Vice President of various Dean Witter Funds. Paul D. Vance Senior Vice President Vice President of various Dean Witter Funds. Elizabeth A. Vetell Senior Vice President James F. Willison Senior Vice President Vice President of various Dean Witter Funds. Ronald J. Worobel Senior Vice President Vice President of various Dean Witter Funds. Thomas F. Caloia First Vice President and Assistant Treasurer of First Vice President DWSC, Assistant Treasurer of Distributors; and Assistant Treasurer and Chief Financial Officer of the Treasurer Dean Witter Funds and the TCW/DW Funds. Marilyn K. Cranney Assistant Secretary of DWR; First Vice President First Vice President and Assistant Secretary of DWSC; Assistant and Assistant Secretary Secretary of the Dean Witter Funds and the TCW/DW Funds. Michael Interrante First Vice President and Controller of DWSC; First Vice President Assistant Treasurer of Distributors;First Vice and Controller President and Treasurer of DWTC. 8 NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS INTERCAPITAL INC. AND NATURE OF CONNECTION - ----------------- ------------------------------------------------ Robert Zimmerman First Vice President Joan Allman Vice President Joseph Arcieri Vice President Vice President of various Dean Witter Funds. Kirk Balzer Vice President Vice President of various Dean Witter Funds. Douglas Brown Vice President Philip Casparius Vice President Thomas Chronert Vice President Rosalie Clough Vice President Patricia A. Cuddy Vice President Vice President of various Dean Witter Funds. B. Catherine Connelly Vice President Salvatore DeSteno Vice President Vice President of DWSC. Frank J. DeVito Vice President Vice President of DWSC. Bruce Dunn Vice President Jeffrey D. Geffen Vice President Deborah Genovese Vice President Peter W. Gurman Vice President John Hechtlinger Vice President 9 NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS INTERCAPITAL INC. AND NATURE OF CONNECTION - ----------------- ------------------------------------------------ Peter Hermann Vice President Vice President of various Dean Witter Funds. Elizabeth Hinchman Vice President David Hoffman Vice President David Johnson Vice President Christopher Jones Vice President James Kastberg Vice President Stanley Kapica Vice President Michael Knox Vice President Vice President of various Dean Witter Funds. Konrad J. Krill Vice President Vice President of various Dean Witter Funds. Paula LaCosta Vice President Vice President of various Dean Witter Funds. Thomas Lawlor Vice President Gerard Lian Vice President Vice President of various Dean Witter Funds. LouAnne D. McInnis Vice President and Assistant Secretary of DWSC; Vice President and Assistant Secretary of the Dean Witter Funds and Assistant Secretary the TCW/DW Funds. Sharon K. Milligan Vice President Julie Morrone Vice President David Myers Vice President 10 NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS INTERCAPITAL INC. AND NATURE OF CONNECTION - ----------------- ------------------------------------------------ James Nash Vice President Richard Norris Vice President Anne Pickrell Vice President Vice President of Dean Witter Global Short- Term Income Fund Inc. Hugh Rose Vice President Robert Rossetti Vice President of Dean Witter Precious Metals Vice President Trust. Ruth Rossi Vice President and Assistant Secretary of DWSC; Vice President and Assistant Secretary of the Dean Witter Funds and Assistant Secretary the TCW/DW Funds. Carl F. Sadler Vice President Rafael Scolari Vice President Vice President of Prime Income Trust. Peter Seeley Vice President of Dean Witter World Vice President Wide Income Trust. Jayne M. Stevlingson Vice President Vice President of various Dean Witter Funds. Kathleen Stromberg Vice President Vice President of various Dean Witter Funds. Vinh Q. Tran Vice President Vice President of various Dean Witter Funds. Alice Weiss Vice President Vice President of various Dean Witter Funds. Katherine Wickham Vice President 11 Item 29. PRINCIPAL UNDERWRITERS (a) Dean Witter Distributors Inc. ("Distributors"), a Delaware corporation, is the principal underwriter of the Registrant. Distributors is also the principal underwriter of the following investment companies: (1) Dean Witter Liquid Asset Fund Inc. (2) Dean Witter Tax-Free Daily Income Trust (3) Dean Witter California Tax-Free Daily Income Trust (4) Dean Witter Retirement Series (5) Dean Witter Dividend Growth Securities Inc. (6) Dean Witter Global Asset Allocation (7) Dean Witter World Wide Investment Trust (8) Dean Witter Capital Growth Securities (9) Dean Witter Convertible Securities Trust (10) Active Assets Tax-Free Trust (11) Active Assets Money Trust (12) Active Assets California Tax-Free Trust (13) Active Assets Government Securities Trust (14) Dean Witter Short-Term Bond Fund (15) Dean Witter Mid-Cap Growth Fund (16) Dean Witter U.S. Government Securities Trust (17) Dean Witter High Yield Securities Inc. (18) Dean Witter New York Tax-Free Income Fund (19) Dean Witter Tax-Exempt Securities Trust (20) Dean Witter California Tax-Free Income Fund (21) Dean Witter Limited Term Municipal Trust (22) Dean Witter Natural Resource Development Securities Inc. (23) Dean Witter World Wide Income Trust (24) Dean Witter Utilities Fund (25) Dean Witter Strategist Fund (26) Dean Witter New York Municipal Money Market Trust (27) Dean Witter Intermediate Income Securities (28) Prime Income Trust (29) Dean Witter European Growth Fund Inc. (30) Dean Witter Developing Growth Securities Trust (31) Dean Witter Precious Metals and Minerals Trust (32) Dean Witter Pacific Growth Fund Inc. (33) Dean Witter Multi-State Municipal Series Trust (34) Dean Witter Federal Securities Trust (35) Dean Witter Short-Term U.S. Treasury Trust (36) Dean Witter Diversified Income Trust (37) Dean Witter Health Sciences Trust (38) Dean Witter Global Dividend Growth Securities (39) Dean Witter American Value Fund (40) Dean Witter U.S. Government Money Market Trust (41) Dean Witter Global Short-Term Income Fund Inc. (42) Dean Witter Premier Income Trust (43) Dean Witter Value-Added Market Series (44) Dean Witter Global Utilities Fund (45) Dean Witter High Income Securities (46) Dean Witter National Municipal Trust (47) Dean Witter International SmallCap Fund 12 (48) Dean Witter Balanced Growth Fund (49) Dean Witter Balanced Income Fund (50) Dean Witter Hawaii Municipal Trust (51) Dean Witter Variable Investment Series (52) Dean Witter Capital Appreciation Fund (53) Dean Witter Intermediate Term U.S. Treasury Trust (54) Dean Witter Information Fund (55) Dean Witter Japan Fund (56) Dean Witter Income Builder Fund (57) Dean Witter Special Value Fund (58) Dean Witter Financial Services Trust (59) Dean Witter Market Leader Trust (1) TCW/DW Core Equity Trust (2) TCW/DW North American Government Income Trust (3) TCW/DW Latin American Growth Fund (4) TCW/DW Income and Growth Fund (5) TCW/DW Small Cap Growth Fund (6) TCW/DW Balanced Fund (7) TCW/DW Total Return Trust (8) TCW/DW Mid-Cap Equity Trust (9) TCW/DW Global Telecom Trust (10) TCW/DW Strategic Income Trust (b) The following information is given regarding directors and officers of Distributors not listed in Item 28 above. The principal address of Distributors is Two World Trade Center, New York, New York 10048. None of the following persons has any position or office with the Registrant. Positions and Office with Name Distributors ---- ------------- Fredrick K. Kubler Senior Vice President, Assistant Secretary and Chief Compliance Officer. Michael T. Gregg Vice President and Assistant Secretary. Item 30. LOCATION OF ACCOUNTS AND RECORDS All accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder are maintained by the Investment Manager at its offices, except records relating to holders of shares issued by the Registrant, which are maintained by the Registrant's Transfer Agent, at its place of business as shown in the prospectus. 13 Item 31. MANAGEMENT SERVICES Registrant is not a party to any such management-related service contract. Item 32. UNDERTAKINGS Registrant hereby undertakes to furnish each person to whom a prospectus is delivered with a copy of the Registrant's latest annual report to shareholders, upon request and without charge. 14 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Post- Effective Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and State of New York on the 18th day of April, 1997. DEAN WITTER VARIABLE INVESTMENT SERIES By /s/Barry Fink -------------------------------- Barry Fink Vice President and Secretary Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 21 has been signed below by the following persons in the capacities and on the dates indicated. Signatures Title Date ---------- ----- ---- (1) Principal Executive Officer President, Chief Executive Officer, Trustee and Chairman By /s/Charles A. Fiumefreddo 4/18/97 ---------------------------- Charles A. Fiumefreddo (2) Principal Financial Officer Treasurer and Principal Accounting Officer By /s/Thomas F. Caloia 4/18/97 ---------------------------- Thomas F. Caloia (3) Majority of the Trustees Charles A. Fiumefreddo (Chairman) Philip J. Purcell By /s/Barry Fink 4/18/97 ---------------------------- Barry Fink Attorney-in-Fact Michael Bozic Edwin J. Garn John R. Haire Manuel H. Johnson Michael E. Nugent John L. Schroeder By /s/David M. Butowsky 4/18/97 ---------------------------- David M. Butowsky Attorney-in-Fact EXHIBITS 2. Amended and Restated By-Laws of the Registrant dated as of October 25, 1996 6. Participation Agreement among the Registrant, Northbrook Life Insurance Company, Allstate Life Insurance Company of New York, Glenbrook Life and Annuity Company and Dean Witter Distributors Inc. 8. Form of Global Custody Agreement with The Chase Manhattan Bank, N. A. 11. Consent of Independent Accountants 27. Financial Data Schedules ---------------------------------- All other exhibits previously filed and incorporated by reference. EX-99.2 2 EXHIBIT 99.2 BY-LAWS OF DEAN WITTER VARIABLE INVESTMENT SERIES AMENDED AND RESTATED AS OF OCTOBER 25, 1996 ARTICLE I DEFINITIONS The terms "COMMISSION", "DECLARATION", "DISTRIBUTOR", "INVESTMENT ADVISER", "MAJORITY SHAREHOLDER VOTE", "1940 ACT", "SHAREHOLDER", "SHARES", "TRANSFER AGENT", "TRUST", "TRUST PROPERTY", and "TRUSTEES" have the respective meanings given them in the Declaration of Trust of Dean Witter Variable Investment Series dated February 24, 1983, as amended from time to time. ARTICLE II OFFICES SECTION 2.1. PRINCIPAL OFFICE. Until changed by the Trustees, the principal office of the Trust in the Commonwealth of Massachusetts shall be in the City of Boston, County of Suffolk. SECTION 2.2. OTHER OFFICES. In addition to its principal office in the Commonwealth of Massachusetts, the Trust may have an office or offices in the City of New York, State of New York, and at such other places within and without the Commonwealth as the Trustees may from time to time designate or the business of the Trust may require. ARTICLE III SHAREHOLDERS' MEETINGS SECTION 3.1. PLACE OF MEETINGS. Meetings of Shareholders shall be held at such place, within or without the Commonwealth of Massachusetts, as may be designated from time to time by the Trustees. SECTION 3.2. MEETINGS. Meetings of Shareholders of the Trust shall be held whenever called by the Trustees or the President of the Trust and whenever election of a Trustee or Trustees by Shareholders is required by the provisions of Section 16(a) of the 1940 Act, for that purpose. Meetings of Shareholders shall also be called by the Secretary upon the written request of the holders of Shares entitled to vote not less than twenty-five percent (25%) of all the votes entitled to be cast at such meeting. Such request shall state the purpose or purposes of such meeting and the matters proposed to be acted on thereat. The Secretary shall inform such Shareholders of the reasonable estimated cost of preparing and mailing such notice of the meeting, and upon payment to the Trust of such costs, the Secretary shall give notice stating the purpose or purposes of the meeting to all entitled to vote at such meeting. No meeting need be called upon the request of the holders of Shares entitled to cast less than a majority of all votes entitled to be cast at such meeting, to consider any matter which is substantially the same as a matter voted upon at any meeting of Shareholders held during the preceding twelve months. SECTION 3.3. NOTICE OF MEETINGS. Written or printed notice of every Shareholders' meeting stating the place, date, and purpose or purposes thereof, shall be given by the Secretary not less than ten (10) nor more than ninety (90) days before such meeting to each Shareholder entitled to vote at such meeting. Such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the Shareholder at his address as it appears on the records of the Trust. SECTION 3.4. QUORUM AND ADJOURNMENT OF MEETINGS. Except as otherwise provided by law, by the Declaration or by these By-Laws, at all meetings of Shareholders the holders of a majority of the Shares issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall be requisite and shall constitute a quorum for the transaction of business. In the absence of a quorum, the 1 Shareholders present or represented by proxy and entitled to vote thereat shall have power to adjourn the meeting from time to time. Any adjourned meeting may be held as adjourned without further notice. At any adjourned meeting at which a quorum shall be present, any business may be transacted as if the meeting had been held as originally called. SECTION 3.5. VOTING RIGHTS, PROXIES. At each meeting of Shareholders, each holder of record of Shares entitled to vote thereat shall be entitled to one vote in person or by proxy, executed in writing by the Shareholder or his duly authorized attorney-in-fact, for each Share of beneficial interest of the Trust and for the fractional portion of one vote for each fractional Share entitled to vote so registered in his name on the records of the Trust on the date fixed as the record date for the determination of Shareholders entitled to vote at such meeting. No proxy shall be valid after eleven months from its date, unless otherwise provided in the proxy. At all meetings of Shareholders, unless the voting is conducted by inspectors, all questions relating to the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided by the chairman of the meeting. Pursuant to a resolution of a majority of the Trustees, proxies may be solicited in the name of one or more Trustees or Officers of the Trust. SECTION 3.6. VOTE REQUIRED. Except as otherwise provided by law, by the Declaration of Trust, or by these By-Laws, at each meeting of Shareholders at which a quorum is present, all matters shall be decided by Majority Shareholder Vote. SECTION 3.7. INSPECTORS OF ELECTION. In advance of any meeting of Shareholders, the Trustees may appoint Inspectors of Election to act at the meeting or any adjournment thereof. If Inspectors of Election are not so appointed, the chairman of any meeting of Shareholders may, and on the request of any Shareholder or his proxy shall, appoint Inspectors of Election of the meeting. In case any person appointed as Inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the Trustees in advance of the convening of the meeting or at the meeting by the person acting as chairman. The Inspectors of Election shall determine the number of Shares outstanding, the Shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, shall receive votes, ballots or consents, shall hear and determine all challenges and questions in any way arising in connection with the right to vote, shall count and tabulate all votes or consents, determine the results, and do such other acts as may be proper to conduct the election or vote with fairness to all Shareholders. On request of the chairman of the meeting, or of any Shareholder or his proxy, the Inspectors of Election shall make a report in writing of any challenge or question or matter determined by them and shall execute a certificate of any facts found by them. SECTION 3.8. INSPECTION OF BOOKS AND RECORDS. Shareholders shall have such rights and procedures of inspection of the books and records of the Trust as are granted to Shareholders under the Corporations and Associations Law of the State of Maryland. SECTION 3.9. ACTION BY SHAREHOLDERS WITHOUT MEETING. Except as otherwise provided by law, the provisions of these By-Laws relating to notices and meetings to the contrary notwithstanding, any action required or permitted to be taken at any meeting of Shareholders may be taken without a meeting if a majority of the Shareholders entitled to vote upon the action consent to the action in writing and such consents are filed with the records of the Trust. Such consent shall be treated for all purposes as a vote taken at a meeting of Shareholders. SECTION 3.10. PRESENCE AT MEETINGS. Presence at meetings of shareholders requires physical attendance by the shareholder or his or her proxy at the meeting site and does not encompass attendance by telephonic or other electronic means. ARTICLE IV TRUSTEES SECTION 4.1. MEETINGS OF THE TRUSTEES. The Trustees may in their discretion provide for regular or special meetings of the Trustees. Regular meetings of the Trustees may be held at such time and place as shall be determined from time to time by the Trustees without further notice. Special meetings of the Trustees may be called at any time by the President and shall be called by the President or the Secretary upon the written request of any two (2) Trustees. 2 SECTION 4.2. NOTICE OF SPECIAL MEETINGS. Written notice of special meetings of the Trustees, stating the place, date and time thereof, shall be given not less than two (2) days before such meeting to each Trustee, personally, by telegram, by mail, or by leaving such notice at his place of residence or usual place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the Trustee at his address as it appears on the records of the Trust. Subject to the provisions of the 1940 Act, notice or waiver of notice need not specify the purpose of any special meeting. SECTION 4.3. TELEPHONE MEETINGS. Subject to the provisions of the 1940 Act, any Trustee, or any member or members of any committee designated by the Trustees, may participate in a meeting of the Trustees, or any such committee, as the case may be, by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means constitutes presence in person at the meeting. SECTION 4.4. QUORUM, VOTING AND ADJOURNMENT OF MEETINGS. At all meetings of the Trustees, a majority of the Trustees shall be requisite to and shall constitute a quorum for the transaction of business. If a quorum is present, the affirmative vote of a majority of the Trustees present shall be the act of the Trustees, unless the concurrence of a greater proportion is expressly required for such action by law, the Declaration or these By-Laws. If at any meeting of the Trustees there be less than a quorum present, the Trustees present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall have been obtained. SECTION 4.5. ACTION BY TRUSTEES WITHOUT MEETING. The provisions of these By-Laws covering notices and meetings to the contrary notwithstanding, and except as required by law, any action required or permitted to be taken at any meeting of the Trustees may be taken without a meeting if a consent in writing setting forth the action shall be signed by all of the Trustees entitled to vote upon the action and such written consent is filed with the minutes of proceedings of the Trustees. SECTION 4.6. EXPENSES AND FEES. Each Trustee may be allowed expenses, if any, for attendance at each regular or special meeting of the Trustees, and each Trustee who is not an officer or employee of the Trust or of its investment manager or underwriter or of any corporate affiliate of any of said persons shall receive for services rendered as a Trustee of the Trust such compensation as may be fixed by the Trustees. Nothing herein contained shall be construed to preclude any Trustee from serving the Trust in any other capacity and receiving compensation therefor. SECTION 4.7. EXECUTION OF INSTRUMENTS AND DOCUMENTS AND SIGNING OF CHECKS AND OTHER OBLIGATIONS AND TRANSFERS. All instruments, documents and other papers shall be executed in the name and on behalf of the Trust and all checks, notes, drafts and other obligations for the payment of money by the Trust shall be signed, and all transfer of securities standing in the name of the Trust shall be executed, by the Chairman, the President, any Vice President or the Treasurer or by any one or more officers or agents of the Trust as shall be designated for that purpose by vote of the Trustees; notwithstanding the above, nothing in this Section 4.7 shall be deemed to preclude the electronic authorization, by designated persons, of the Trust's Custodian (as described herein in Section 9.1) to transfer assets of the Trust, as provided for herein in Section 9.1. SECTION 4.8. INDEMNIFICATION OF TRUSTEES, OFFICERS, EMPLOYEES AND AGENTS. (a) The Trust shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Trust) by reason of the fact that he is or was a Trustee, officer, employee, or agent of the Trust. The indemnification shall be against expenses, including attorneys' fees, judgments, fines, and amounts paid in settlement, actually and reasonably incurred by him in connection with the action, suit, or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 3 (b) The Trust shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or on behalf of the Trust to obtain a judgment or decree in its favor by reason of the fact that he is or was a Trustee, officer, employee, or agent of the Trust. The indemnification shall be against expenses, including attorneys' fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust; except that no indemnification shall be made in respect of any claim, issue, or matter as to which the person has been adjudged to be liable for negligence or misconduct in the performance of his duty to the Trust, except to the extent that the court in which the action or suit was brought, or a court of equity in the county in which the Trust has its principal office, determines upon application that, despite the adjudication of liability but in view of all circumstances of the case, the person is fairly and reasonably entitled to indemnity for those expenses which the court shall deem proper, provided such Trustee, officer, employee or agent is not adjudged to be liable by reason of his willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. (c) To the extent that a Trustee, officer, employee, or agent of the Trust has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsection (a) or (b) or in defense of any claim, issue or matter therein, he shall be indemnified against expenses, including attorneys' fees, actually and reasonably incurred by him in connection therewith. (d) (1) Unless a court orders otherwise, any indemnification under subsections (a) or (b) of this section may be made by the Trust only as authorized in the specific case after a determination that indemnification of the Trustee, officer, employee, or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) or (b). (2) The determination shall be made: (i) By the Trustees, by a majority vote of a quorum which consists of Trustees who were not parties to the action, suit or proceeding; or (ii) If the required quorum is not obtainable, or if a quorum of disinterested Trustees so directs, by independent legal counsel in a written opinion; or (iii) By the Shareholders. (3) Notwithstanding any provision of this Section 4.8, no person shall be entitled to indemnification for any liability, whether or not there is an adjudication of liability, arising by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of duties as described in Section 17(h) and (i) of the Investment Company Act of 1940 ("disabling conduct"). A person shall be deemed not liable by reason of disabling conduct if, either: (i) a final decision on the merits is made by a court or other body before whom the proceeding was brought that the person to be indemnified ("indemnitee") was not liable by reason of disabling conduct; or (ii) in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the indemnitee was not liable by reason of disabling conduct, is made by either-- (A) a majority of a quorum of Trustees who are neither "interested persons" of the Trust, as defined in Section 2(a)(19) of the Investment Company Act of 1940, nor parties to the action, suit or proceeding, or (B) an independent legal counsel in a written opinion. (e) Expenses, including attorneys' fees, incurred by a Trustee, officer, employee or agent of the Trust in defending a civil or criminal action, suit or proceeding may be paid by the Trust in advance of the final disposition thereof if: (1) authorized in the specific case by the Trustees; and (2) the Trust receives an undertaking by or on behalf of the Trustee, officer, employee or agent of the Trust to repay the advance if it is not ultimately determined that such person is entitled to be indemnified by the Trust; and 4 (3) either, (i) such person provides a security for his undertaking, or (ii) the Trust is insured against losses by reason of any lawful advances, or (iii) a determination, based on a review of readily available facts, that there is reason to believe that such person ultimately will be found entitled to indemnification, is made by either-- (A) a majority of a quorum which consists of Trustees who are neither "interested persons" of the Trust, as defined in Section 2(a)(19) of the Investment Company Act of 1940, nor parties to the action, suit or proceeding, or (B) an independent legal counsel in a written opinion. (f) The indemnification provided by this Section shall not be deemed exclusive of any other rights to which a person may be entitled under any by-law, agreement, vote of Shareholders or disinterested Trustees or otherwise, both as to action in his official capacity and as to action in another capacity while holding the office, and shall continue as to a person who has ceased to be a Trustee, officer, employee, or agent and inure to the benefit of the heirs, executors and administrators of such person; provided that no person may satisfy any right of indemnity or reimbursement granted herein or to which he may be otherwise entitled except out of the property of the Trust, and no Shareholder shall be personally liable with respect to any claim for indemnity or reimbursement or otherwise. (g) The Trust may purchase and maintain insurance on behalf of any person who is or was a Trustee, officer, employee, or agent of the Trust, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such. However, in no event will the Trust purchase insurance to indemnify any officer or Trustee against liability for any act for which the Trust itself is not permitted to indemnify him. (h) Nothing contained in this Section shall be construed to protect any Trustee or officer of the Trust against any liability to the Trust or to its security holders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. ARTICLE V COMMITTEES SECTION 5.1. EXECUTIVE AND OTHER COMMITTEES. The Trustees, by resolution adopted by a majority of the Trustees, may designate an Executive Committee and/or committees, each committee to consist of two (2) or more of the Trustees of the Trust and may delegate to such committees, in the intervals between meetings of the Trustees, any or all of the powers of the Trustees in the management of the business and affairs of the Trust. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint a Trustee to act in place of such absent member. Each such committee shall keep a record of its proceedings. The Executive Committee and any other committee shall fix its own rules or procedure, but the presence of at least fifty percent (50%) of the members of the whole committee shall in each case be necessary to constitute a quorum of the committee and the affirmative vote of the majority of the members of the committee present at the meeting shall be necessary to take action. All actions of the Executive Committee shall be reported to the Trustees at the meeting thereof next succeeding to the taking of such action. SECTION 5.2. ADVISORY COMMITTEE. The Trustees may appoint an advisory committee which shall be composed of persons who do not serve the Trust in any other capacity and which shall have advisory functions with respect to the investments of the Trust but which shall have no power to determine that any security or other investment shall be purchased, sold or otherwise disposed of by the Trust. The number of persons constituting any such advisory committee shall be determined from time to time by the Trustees. The members of any such advisory committee may receive compensation for their services and may be allowed such fees and expenses for the attendance at meetings as the Trustees may from time to time determine to be appropriate. 5 SECTION 5.3. COMMITTEE ACTION WITHOUT MEETING. The provisions of these By-Laws covering notices and meetings to the contrary notwithstanding, and except as required by law, any action required or permitted to be taken at any meeting of any Committee of the Trustees appointed pursuant to Section 5.1 of these By-Laws may be taken without a meeting if a consent in writing setting forth the action shall be signed by all members of the Committee entitled to vote upon the action and such written consent is filed with the records of the proceedings of the Committee. ARTICLE VI OFFICERS SECTION 6.1. EXECUTIVE OFFICERS. The executive officers of the Trust shall be a Chairman, a President, one or more Vice Presidents, a Secretary and a Treasurer. The Chairman shall be selected from among the Trustees but none of the other executive officers need be a Trustee. Two or more offices, except those of President and any Vice President, may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity. The executive officers of the Trust shall be elected annually by the Trustees and each executive officer so elected shall hold office until his successor is elected and has qualified. SECTION 6.2. OTHER OFFICERS AND AGENTS. The Trustees may also elect one or more Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers and may elect, or may delegate to the President the power to appoint, such other officers and agents as the Trustees shall at any time or from time to time deem advisable. SECTION 6.3. TERM, REMOVAL AND VACANCIES. Each officer of the Trust shall hold office until his successor is elected and has qualified. Any officer or agent of the Trust may be removed by the Trustees whenever, in their judgment, the best interests of the Trust will be served thereby, but such removal shall be without prejudice to the contractual rights, if any, of the person so removed. SECTION 6.4. COMPENSATION OF OFFICERS. The compensation of officers and agents of the Trust shall be fixed by the Trustees, or by the President to the extent provided by the Trustees with respect to officers appointed by the President. SECTION 6.5. POWER AND DUTIES. All officers and agents of the Trust, as between themselves and the Trust, shall have such authority and perform such duties in the management of the Trust as may be provided in or pursuant to these By-Laws, or to the extent not so provided, as may be prescribed by the Trustees; provided, that no rights of any third party shall be affected or impaired by any such By-Law or resolution of the Trustees unless he has knowledge thereof. SECTION 6.6. THE CHAIRMAN. The Chairman shall preside at all meetings of the Shareholders and of the Trustees, shall be a signatory on all Annual and Semi-Annual Reports as may be sent to shareholders, and he shall perform such other duties as the Trustees may from time to time prescribe. SECTION 6.7. THE PRESIDENT. (a) The President shall be the chief executive officer of the Trust; he shall have general and active management of the business of the Trust, shall see that all orders and resolutions of the Board of Trustees are carried into effect, and, in connection therewith, shall be authorized to delegate to one or more Vice Presidents such of his powers and duties at such times and in such manner as he may deem advisable. (b) In the absence of the Chairman, the President shall preside at all meetings of the shareholders and the Board of Trustees; and he shall perform such other duties as the Board of Trustees may from time to time prescribe. SECTION 6.8. THE VICE PRESIDENTS. The Vice Presidents shall be of such number and shall have such titles as may be determined from time to time by the Trustees. The Vice President, or, if there be more than one, the Vice Presidents in the order of their seniority as may be determined from time to time by the Trustees or the President, shall, in the absence or disability of the President, exercise the powers and perform the duties of the President, and he or they shall perform such other duties as the Trustees or the President may from time to time prescribe. 6 SECTION 6.9. THE ASSISTANT VICE PRESIDENTS. The Assistant Vice President, or, if there be more than one, the Assistant Vice Presidents, shall perform such duties and have such powers as may be assigned them from time to time by the Trustees or the President. SECTION 6.10. THE SECRETARY. The Secretary shall attend all meetings of the Trustees and all meetings of the Shareholders and record all the proceedings of the meetings of the Shareholders and of the Trustees in a book to be kept for that purpose, and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the Shareholders and special meetings of the Trustees, and shall perform such other duties and have such powers as the Trustees, or the President, may from time to time prescribe. He shall keep in safe custody the seal of the Trust and affix or cause the same to be affixed to any instrument requiring it, and, when so affixed, it shall be attested by his signature or by the signature of an Assistant Secretary. SECTION 6.11. THE ASSISTANT SECRETARIES. The Assistant Secretary, or, if there be more than one, the Assistant Secretaries in the order determined by the Trustees or the President, shall in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such duties and have such other powers as the Trustees or the President may from time to time prescribe. SECTION 6.12. THE TREASURER. The Treasurer shall be the chief financial officer of the Trust. He shall keep or cause to be kept full and accurate accounts of receipts and disbursements in books belonging to the Trust, and he shall render to the Trustees and the President, whenever any of them require it, an account of his transactions as Treasurer and of the financial condition of the Trust; and he shall perform such other duties as the Trustees, or the President, may from time to time prescribe. SECTION 6.13. THE ASSISTANT TREASURERS. The Assistant Treasurer, or, if there shall be more than one, the Assistant Treasurers in the order determined by the Trustees or the President, shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Trustees, or the President, may from time to time prescribe. SECTION 6.14. DELEGATION OF DUTIES. Whenever an officer is absent or disabled, or whenever for any reason the Trustees may deem it desirable, the Trustees may delegate the powers and duties of an officer or officers to any other officer or officers or to any Trustee or Trustees. ARTICLE VII DIVIDENDS AND DISTRIBUTIONS Subject to any applicable provisions of law and the Declaration, dividends and distributions upon the Shares may be declared at such intervals as the Trustees may determine, in cash, in securities or other property, or in Shares, from any sources permitted by law, all as the Trustees shall from time to time determine. Inasmuch as the computation of net income and net profits from the sales of securities or other properties for federal income tax purposes may vary from the computation thereof on the records of the Trust, the Trustees shall have power, in their discretion, to distribute as income dividends and as capital gain distributions, respectively, amounts sufficient to enable the Trust to avoid or reduce liability for federal income taxes. 7 ARTICLE VIII CERTIFICATES OF SHARES SECTION 8.1. CERTIFICATES OF SHARES. Certificates for Shares of each series or class of Shares shall be in such form and of such design as the Trustees shall approve, subject to the right of the Trustees to change such form and design at any time or from time to time, and shall be entered in the records of the Trust as they are issued. Each such certificate shall bear a distinguishing number; shall exhibit the holder's name and certify the number of full Shares owned by such holder; shall be signed by or in the name of the Trust by the President, or a Vice President, and countersigned by the Secretary or an Assistant Secretary or the Treasurer and an Assistant Treasurer of the Trust; shall be sealed with the seal; and shall contain such recitals as may be required by law. Where any certificate is signed by a Transfer Agent or by a Registrar, the signature of such officers and the seal may be facsimile, printed or engraved. The Trust may, at its option, determine not to issue a certificate or certificates to evidence Shares owned of record by any Shareholder. In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall appear on, any such certificate or certificates shall cease to be such officer or officers of the Trust, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Trust, such certificate or certificates shall, nevertheless, be adopted by the Trust and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures shall appear therein had not ceased to be such officer or officers of the Trust. No certificate shall be issued for any share until such share is fully paid. SECTION 8.2. LOST, STOLEN, DESTROYED AND MUTILATED CERTIFICATES. The Trustees may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Trust alleged to have been lost, stolen or destroyed, upon satisfactory proof of such loss, theft, or destruction; and the Trustees may, in their discretion, require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give to the Trust and to such Registrar, Transfer Agent and/or Transfer Clerk as may be authorized or required to countersign such new certificate or certificates, a bond in such sum and of such type as they may direct, and with such surety or sureties, as they may direct, as indemnity against any claim that may be against them or any of them on account of or in connection with the alleged loss, theft or destruction of any such certificate. ARTICLE IX CUSTODIAN SECTION 9.1. APPOINTMENT AND DUTIES. The Trust shall at times employ a bank or trust company having capital, surplus and undivided profits of at least five million dollars ($5,000,000) as custodian with authority as its agent, but subject to such restrictions, limitations and other requirements, if any, as may be contained in these By-Laws and the 1940 Act: (1) to receive and hold the securities owned by the Trust and deliver the same upon written or electronically transmitted order. (2) to receive and receipt for any moneys due to the Trust and deposit the same in its own banking department or elsewhere as the Trustees may direct; (3) to disburse such funds upon orders or vouchers; all upon such basis of compensation as may be agreed upon between the Trustees and the custodian. If so directed by a Majority Shareholder Vote, the custodian shall deliver and pay over all property of the Trust held by it as specified in such vote. The Trustees may also authorize the custodian to employ one or more sub-custodians from time to time to perform such of the acts and services of the custodian and upon such terms and conditions, as may be agreed upon between the custodian and such sub-custodian and approved by the Trustees, provided that in every case such sub-custodian shall be a bank or trust company organized under the laws of the United States or one of the states thereof and having capital, surplus and undivided profits of at least five million dollars ($5,000,000). 8 SECTION 9.2. CENTRAL CERTIFICATE SYSTEM. Subject to such rules, regulations and orders as the Commission may adopt, the Trustees may direct the custodian to deposit all or any part of the securities owned by the Trust in a system for the central handling of securities established by a national securities exchange or a national securities association registered with the Commission under the Securities Exchange Act of 1934, or such other person as may be permitted by the Commission, or otherwise in accordance with the 1940 Act, pursuant to which system all securities of any particular class or series of any issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of such securities, provided that all such deposits shall be subject to withdrawal only upon the order of the Trust. ARTICLE X WAIVER OF NOTICE Whenever any notice of the time, place or purpose of any meeting of Shareholders, Trustees, or of any committee is required to be given in accordance with law or under the provisions of the Declaration or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to such notice and filed with the records of the meeting, whether before or after the holding thereof, or actual attendance at the meeting of Shareholders, Trustees or committee, as the case may be, in person, shall be deemed equivalent to the giving of such notice to such person. ARTICLE XI MISCELLANEOUS SECTION 11.1. LOCATION OF BOOKS AND RECORDS. The books and records of the Trust may be kept outside the Commonwealth of Massachusetts at such place or places as the Trustees may from time to time determine, except as otherwise required by law. SECTION 11.2. RECORD DATE. The Trustees may fix in advance a date as the record date for the purpose of determining Shareholders entitled to notice of, or to vote at, any meeting of Shareholders, or Shareholders entitled to receive payment of any dividend or the allotment of any rights, or in order to make a determination of Shareholders for any other proper purpose. Such date, in any case shall be not more than ninety (90) days, and in case of a meeting of Shareholders not less than ten (10) days prior to the date on which particular action requiring such determination of Shareholders is to be taken. In lieu of fixing a record date the Trustees may provide that the transfer books shall be closed for a stated period but not to exceed, in any case, twenty (20) days. If the transfer books are closed for the purpose of determining Shareholders entitled to notice of a vote at a meeting of Shareholders, such books shall be closed for at least ten (10) days immediately preceding such meeting. SECTION 11.3. SEAL. The Trustees shall adopt a seal, which shall be in such form and shall have such inscription thereon as the Trustees may from time to time provide. The seal of the Trust may be affixed to any document, and the seal and its attestation may be lithographed, engraved or otherwise printed on any document with the same force and effect as if it had been imprinted and attested manually in the same manner and with the same effect as if done by a Massachusetts business corporation under Massachusetts law. SECTION 11.4. FISCAL YEAR. The fiscal year of the Trust shall end on such date as the Trustees may by resolution specify, and the Trustees may by resolution change such date for future fiscal years at any time and from time to time. SECTION 11.5. ORDERS FOR PAYMENT OF MONEY. All orders or instructions for the payment of money of the Trust, and all notes or other evidences of indebtedness issued in the name of the Trust, shall be signed by such officer or officers or such other person or persons as the Trustees may from time to time designate, or as may be specified in or pursuant to the agreement between the Trust and the bank or trust company appointed as Custodian of the securities and funds of the Trust. 9 ARTICLE XII COMPLIANCE WITH FEDERAL REGULATIONS The Trustees are hereby empowered to take such action as they may deem to be necessary, desirable or appropriate so that the Trust is or shall be in compliance with any federal or state statute, rule or regulation with which compliance by the Trust is required. ARTICLE XIII AMENDMENTS These By-Laws may be amended, altered, or repealed, or new By-Laws may be adopted, (a) by a Majority Shareholder Vote, or (b) by the Trustees; provided, however, that no By-Law may be amended, adopted or repealed by the Trustees if such amendment, adoption or repeal requires, pursuant to law, the Declaration, or these By-Laws, a vote of the Shareholders. The Trustees shall in no event adopt By-Laws which are in conflict with the Declaration, and any apparent inconsistency shall be construed in favor of the related provisions in the Declaration. ARTICLE XIV DECLARATION OF TRUST The Declaration of Trust establishing Dean Witter Variable Investment Series, dated February 24, 1983, a copy of which, together with all amendments thereto, is on file in the office of the Secretary of the Commonwealth of Massachusetts, provides that the name Dean Witter Variable Investment Series refers to the Trustees under the Declaration collectively as Trustees, but not as individuals or personally; and no Trustee, Shareholder, officer, employee or agent of Dean Witter Variable Investment Series shall be held to any personal liability, nor shall resort be had to their private property for the satisfaction of any obligation or claim or otherwise, in connection with the affairs of said Dean Witter Variable Investment Series, but the Trust Estate only shall be liable. 10 EX-99.6 3 EXHIBIT 99.6 PARTICIPATION AGREEMENT THIS AGREEMENT, made and entered into this the 23rd day of January, 1997, by and between each of NORTHBROOK LIFE INSURANCE COMPANY, ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK and GLENBROOK LIFE AND ANNUITY COMPANY (hereinafter collectively the "Companies" and individually the "Company"), each on its own behalf and on behalf of each of the segregated asset accounts of the Company set forth in Schedule A hereto, as such Schedule A may be amended from time to time, (hereinafter the "Accounts") and DEAN WITTER VARIABLE INVESTMENT SERIES, an unincorporated business trust organized under the laws of the Commonwealth of Massachusetts, (hereinafter the "Trust") and DEAN WITTER DISTRIBUTORS INC. (hereinafter the "Distributor"). WHEREAS, the Trust is engaged in business as an open-end management investment company and is registered as such under the Investment Company Act of 1940, as amended, (hereinafter the "1940 Act") and has filed its registration statement with the Securities and Exchange Commission, (hereinafter "S.E.C."), which declared such registration statement effective on October 5, 1983; WHEREAS, the Distributor is registered as a broker-dealer with the S.E.C. under the Securities Exchange Act of 1934, as amended, (hereinafter the "1934 Act"), and is a member in good standing of the National Association of Securities Dealers, Inc. (hereinafter "NASD"); WHEREAS, the Trust is available to act as the investment vehicle for separate accounts established for variable annuity contracts and variable life insurance contracts offered or to be offered by insurance companies which have entered into participation agreements with the Trust and the Distributor (hereinafter "Participating Insurance Companies"); WHEREAS, the Trust has obtained an order from the S.E.C., dated November 23, 1994 (File No. 812-9128), granting Participating Insurance Companies and variable annuity and variable life insurance separate accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Trust to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated life insurance companies (hereinafter the "Shared Funding Exemptive Order"); WHEREAS, the Trust is presently comprised of thirteen Portfolios designated as the Money Market Portfolio, the Quality Income Plus Portfolio, the High Yield Portfolio, the Utilities Portfolio, the Income Builder Portfolio, the Dividend Growth Portfolio, the Capital Growth Portfolio, the Global Dividend Growth Portfolio, the European Growth Portfolio, the Pacific Growth Portfolio, the Capital Appreciation Portfolio, the Equity Portfolio and the Strategist Portfolio, and other Portfolios may be subsequently established by the Trust (hereinafter the "Portfolios"); WHEREAS, the Portfolios of the Trust offered by the Trust to the Companies and the Accounts are set forth on Schedule A attached hereto; WHEREAS, the Companies will issue certain variable annuity and/or variable life insurance contracts (hereinafter the "Contracts") which, if required by applicable law, will be registered under the Securities Act of 1933, as amended, (hereinafter the "1933 Act"); WHEREAS, the Accounts are duly organized, validly existing segregated asset accounts, established by resolution of the Board of Directors of the applicable Company, to set aside and invest assets attributable to the Contracts that are allocated to the Accounts (the Contracts and the Accounts covered by this Agreement, and each corresponding Portfolio covered by this Agreement in which the Accounts invest, are specified in Schedule A attached hereto as such Schedule A may be amended from time to time); WHEREAS, the Companies have registered or will register the Accounts as unit investment trusts under the 1940 Act (unless exempt therefrom); 1 WHEREAS, to the extent permitted by applicable insurance laws and regulations, each Company intends by purchasing shares of the Portfolios on behalf of the Accounts to fund the Contracts and the Distributor is authorized to sell such shares to the Companies for the benefit of the Accounts at net asset value without the imposition of any charges; NOW, THEREFORE, in consideration of their mutual promises, each Company, the Trust and the Distributor agree as follows: 1. PURCHASE OF SHARES. In accordance with the Trust's and the Distributor's Distribution Agreement dated June 30, 1993, as amended as of March 15, 1995, (the "Distribution Agreement"), the Company agrees to purchase and redeem the Trust shares of each Portfolio offered by the then current prospectus of the Trust (hereinafter the "Prospectus") included in the Trust's registration statement (hereinafter "the Registration Statement") most recently filed from time to time with the S.E.C. and effective under the 1933 Act and the 1940 Act or as the Prospectus may be amended or supplemented and filed with the S.E.C. pursuant to the 1933 Act. The Portfolios to be offered to each Account are set forth on Schedule A attached hereto. 2. SALE OF SHARES. The Distributor agrees to sell shares of the Trust to the Company for allocation to the Account as orders from the Company are received at the next determined net asset value per share after receipt by the Trust or its designee of the order for shares of the Trust, of the applicable Portfolio determined as set forth in the Prospectus, except as provided in paragraph 4(b). 3. REDEMPTION OF SHARES. At the Company's request, the Trust agrees to redeem for cash without charge, any full or fractional shares of the Trust held by the Company, executing such requests on a daily basis at the net asset value of applicable Portfolio computed after receipt of the redemption request provided, however, that the Trust reserves the right to suspend the right of redemption or to postpone the date of payment upon redemption of the shares of any Portfolio under the circumstances and for the period of time specified in the Prospectus. 4. AVAILABILITY OF SHARES. (a) Subject to Sections 3(c) and 4(b) of the Distribution Agreement, the terms of which are incorporated herein by reference, and except as provided in section (b) of this paragraph, the Trust agrees to make its shares available indefinitely for purchase by the Company. (b) With respect to shares made available for purchase by the Company in connection with products sold outside the Dean Witter distribution system, the Trust may cease to make such shares available for purchase by the Company, and the Distributor may cease to sell shares of the Trust to the Company, at the option of the Trust and the Distributor and upon 60 days' written notice to the Company, provided, however, that the Trust agrees to continue to make its shares available for purchase by the Company, and the Distributor agrees to continue to sell shares of the Trust to the Company, for allocation to the Account in connection with (i) reinvestments of dividends and distributions on shares of the Trust allocated to the Account in respect of Contracts in force as of the date such notice is given by the Trust and the Distributor to the Company, for which Contracts Trust shares serve as the underlying investment medium ("Existing Contracts"), (ii) investments in the Trust upon the making of additional purchase payments under Existing Contracts, and (iii) reallocation of investments from one Portfolio of the Trust to other Portfolios of the Trust under Existing Contracts. 5. PAYMENT OF SHARES. The Company shall pay for Trust shares within five days after it places the order for Trust shares. The Trust reserves the right to delay issuing or transferring Trust shares and/or to delay accruing or declaring dividends in accordance with any policy set forth in its then current prospectus with respect to such shares until any payment check has cleared. If the Trust or the Distributor does not receive payment within the five days period, the Trust may, without notice, cancel the order and require the Company to reimburse the Trust promptly for any loss the Trust suffered by reason of the Company failing to timely pay for its shares. 6. Fee for Shares. The Company shall purchase and redeem shares in the Trust at net asset value and the Company shall not pay any commission, dealers fee or other fee to the Distributor or any other broker dealer. 2 7. TRUST'S REGISTRATION STATEMENT AND PROSPECTUS. The Trust shall amend the Registration Statement for its shares under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of its shares and, at its own expense, shall provide the Company with as many copies of its current prospectus as the Company may reasonably request. 8. INVESTMENT OF ASSETS. The Trust agrees to invest its assets in accordance with Section 817(h) of the Internal Revenue Code and Treasury Regulation 1.817-5, as amended from time to time, and any Treasury interpretations thereof, relating to the diversification requirements for variable annuity contracts and any amendments or other modifications to such Section or Regulations. 9. ADMINISTRATION OF CONTRACTS. The Company shall be responsible for administering the Contracts and keeping records on the Contracts. 10. STOCKHOLDER INFORMATION. The Trust shall furnish the Company copies of its proxy material, reports to stockholders and other communication to stockholders in such quantity as the Company shall reasonably require for distributing to owners or participants under the Contracts. The Company will distribute these materials to such owners or participants as required. 11. VOTING. (a) To the extent required by law, the Company shall vote Trust shares in accordance with instructions received from contract owners. If, however, the 1940 Act or any regulation thereunder should be amended or if the present interpretation thereof should change, and as a result the Company determines that it is permitted to vote the Trust's shares in its own right, it may elect to do so. The Company shall vote shares of a Portfolio for which no instructions have been received in the same proportion as the vote of shareholders of such Portfolio from which instructions have been received. Neither the Company nor persons under its control shall recommend action in connection with solicitation of proxies for Trust shares allocated to the Account. The Company shall also vote shares it owns that are not attributable to contract owners in the same proportion. Participating Insurance Companies shall be responsible for assuring that each of their separate accounts participating in the Trust calculates voting privileges in a manner consistent with other Participating Insurance Companies. (b) The Trust will comply with all provisions of the 1940 Act requiring voting by shareholders, and in particular the Trust will either provide for annual meetings or comply with Section 16(c) of the 1940 Act (although the Trust is not one of the trusts described in Section 16(c) of that Act) as well as with Section 16(a) and, if and when applicable, 16(b). Further, the Trust will act in accordance with the S.E.C.'s interpretation of the requirements of Section 16(a) with respect to periodic elections of trustees and with whatever rules the S.E.C. may promulgate with respect thereto. 12. COMPANY APPROVAL. The Trust and the Distributor agree that the approval of the Company will be required prior to the Trust and the Distributor entering into any new agreements to sell shares of the Trust to other Participating Companies. 13. TRUST'S WARRANTY. The Trust represents and warrants that Trust shares sold pursuant to this Agreement shall be registered under the 1933 Act and duly authorized for issuance in accordance with all applicable federal and state laws. 14. COMPANY'S WARRANTY. Each of Northbrook Life Insurance Company and Glenbrook Life and Annuity Company represents and warrants that it is an insurance company duly organized and in good standing under Illinois law and that it has legally and validly established the Accounts under Section 245.21 of the Illinois Insurance Code. Allstate Life Insurance Company of New York represents and warrants that it is an insurance company duly organized and in good standing under New York law and that it has legally and validly established the Accounts under Section 424.40 of the New York Insurance Laws. The Company represents that it has registered the Accounts as unit investment trusts in accordance with the provisions of the 1940 Act, unless exempt therefrom, to serve as segregated investment accounts for certain Contracts. The Company further represents and warrants that the Contracts will be registered under the 1933 Act, unless exempt therefrom, and the Contracts will be issued and sold in compliance with all applicable Federal and State laws. 15. DISTRIBUTOR'S WARRANTY. The Distributor represents and warrants that it is a member in good standing of the NASD and is registered as a broker-dealer with the S.E.C. under the 1934 Act. The 3 Distributor further represents that it will sell and distribute the shares in accordance with the 1933, 1934 and 1940 Acts and will not make any representations concerning the Account except those contained in the then current registration statement or related prospectus and any sales literature approved by the Trust. For purposes of this paragraph, Section 6 of the Distribution Agreement is incorporated in this Agreement. 16. TERMINATION OF AGREEMENT. The parties may terminate this Agreement as follows: (1)(a) at the option of the Company or the Trust or the Distributor upon 90 days' written notice to the other party; (b) at the option of the Company if, for any reason, except for those specified in Sections 3(c) and 4(b) of the Distribution Agreement, Trust shares are not available to meet the requirements of the Contracts as determined by the Company; or (c) at the option of the Trust upon the NASD, the S.E.C., the Illinois Insurance Commissioner, the New York Insurance Commissioner or any other regulatory body instituting legal proceedings against the Company regarding its duties under this Agreement. (2) This Agreement shall automatically terminate in the event of its assignment. 17. COMPANY'S INDEMNIFICATION AGREEMENT. (a) The Company agrees to indemnify and hold harmless the Trust or Distributor and each of their Directors or Trustees who is not an "interested person" of the Trust, as defined in the 1940 Act (collectively the "Indemnified Parties" for purposes of this paragraph 17) against any losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Company) or expenses or actions to which such Indemnified Parties may become subject, under the Federal securities laws or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements arise as a result of any failure by the Company to provide the services and furnish the materials under terms of this Agreement or which arise from erroneous instructions by the Company to the Distributor concerning the particular Portfolio or Portfolios whose shares are to be allocated to the Account. This indemnity agreement is in addition to any liability which the Company may otherwise have. Provided, however, that in no case is the indemnity of the Company in favor of the Distributor deemed to protect the Distributor against any liability to the Trust or its shareholders to which the Distributor would otherwise be subject by reason of its bad faith, wilful misfeasance or negligence in the performance of its duties or by reason of reckless disregard of its obligations and duties under this Agreement. (b) The Company will reimburse the Indemnified Parties for any legal or other expenses reasonably incurred by the Indemnified Parties in connection with investigating or defending of any such loss, claim, damage, liability or action. (c) Promptly after receipt by any of the Indemnified Parties of notice of the commencement of any action, or the making of any claim for which indemnity may apply under this paragraph, the Indemnified Parties will, if a claim thereof is to be made against the Trust, notify the Company of the commencement thereof; but the omission so to notify the Company will not relieve the Company from any liability which it may have to the Indemnified Parties otherwise than under this Agreement. In case any such action is brought against the Indemnified Parties, and the Company is notified of the commencement thereof, the Company will be entitled to participate therein and to assume the defense thereof, with counsel satisfactory to the party named in the action, and after notice from the Company to such party of the Company's election to assume the defense thereof, the Company will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 18. TRUST AND DISTRIBUTOR INDEMNIFICATION AGREEMENTS. (a) The Trust and Distributor each agree to indemnify and hold harmless the Company and each of its Directors who is not an "interested person" of the Company, as defined in the 1940 Act (collectively the "Company's Indemnified Parties" for purposes of this paragraph 18) against any losses, claims, damages, liabilities (including amounts paid in 4 settlement with the written consent of the Trust) or expenses or actions to which such Indemnified Parties may become subject, under the Federal securities laws or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements: (i) arise as a result of any failure by the Trust or Distributor to provide the services and furnish the materials under the terms of this Agreement; or (ii) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in registration statement or prospectus or sales literature of the Trust (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this Agreement to indemnify shall not apply as to the Company's Indemnified Parties if such statement or omission was made in reliance upon and in conformity with information furnished to the Trust or Distributor by or on behalf of the Company for use in the registration statement or prospectus for the Trust or in sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Trust shares; or (iii) arise out of or result from any material breach of any representation and/or warranty made by the Trust or the Distributor in this Agreement or arise out of or result from any other material breach of this Agreement by the Trust or the Distributor, including a failure, whether unintentional or in good faith or otherwise, to comply with the requirements specified in paragraph 8 of this Agreement. (b) The Trust represents and warrants that the Trust will at all times invest its assets in such a manner as to ensure that the Contracts will be treated as an annuity under the Internal Revenue Code and the regulations thereunder. Without limiting the scope of the foregoing, the Trust will at all times comply with Section 817(h) of the Code and Treas. Reg. Sec. 1.817-5, as amended from time to time, and any Treasury interpretations thereof, relating to the diversification requirements for variable annuity contracts and any amendments or other modifications to such section or Regulations. (c) Trust shares will not be sold to any person or entity that would result in the Contracts not being treated as annuity contracts in accordance with the statutes and regulations referred to in the preceding paragraph. (d) The Trust and the Distributor will reimburse the Company for any legal or other expenses reasonably incurred by the Company's Indemnified Parties in connection with investigating or defending of any such loss, claim, damage, liability or action. (e) Promptly after receipt by any of the Company's Indemnified Parties of notice of the commencement of any action, or the making of any claim for which indemnity may apply under this paragraph, the Company's Indemnified Parties will, if a claim in respect thereof is to be made against the Company, notify the Trust or the Distributor of commencement thereof; but the omission so to notify the Trust or the Distributor will not relieve the Trust or the Distributor from any liability which it may have to the Company's Indemnified Parties otherwise than under this Agreement. In case any such action is brought against the Company's Indemnified Parties, and the Trust or the Distributor is notified of the commencement thereof, the Trust or the Distributor will be entitled to participate therein and to assume the defense thereof, with counsel satisfactory to the party named in the action, and after notice from the Trust or the Distributor to such party of the Trust's or the Distributor's election to assume the defense thereof, the Trust or the Distributor will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 19. INDEMNIFICATION OF TRUST BY OR OF DISTRIBUTOR. For purposes of this Agreement, the Trust and the Distributor shall indemnify each other according to the terms of the Distribution Agreement the terms of which are incorporated by reference. 20. POTENTIAL CONFLICTS. (a) The Trustees of the Trust will monitor the operations of the Trust for the existence of any material irreconcilable conflict between the interests of the contract owners of all 5 separate accounts investing in the Trust. An irreconcilable material conflict may arise for a variety of reasons, including: (i) an action by any state insurance regulatory authority; (ii) a change in applicable Federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (iii) an administrative or judicial decision in any relevant proceeding; (iv) the manner in which the investments of any Portfolio are being managed; (v) a difference in voting instructions given by variable annuity contract and variable life insurance contract owners; or (vi) a decision by an insurer to disregard the voting instructions of contract owners. The Trustees shall promptly inform the Company if they determine that an irreconcilable material conflict exists and the implications thereof. (b) The Company will report any potential or existing conflicts of which it is aware to the Trustees of the Trust. The Company will assist the Trustees in carrying out their responsibilities under the Shared Funding Exemptive Order, by providing the Trustees with all information reasonably necessary for the Trustees to consider any issues raised. This includes, but is not limited to, an obligation by the Company to inform the Trustees whenever contract owner voting instructions are disregarded. (c) If it is determined by a majority of the Trustees, or a majority of the Trustees who are not parties to this Agreement or interested persons of any such party and who have no direct or indirect financial interest in this Agreement or any agreement related thereto (the "Independent Trustees"), that a material irreconcilable conflict exists, the Company shall, at its expense and to the extent reasonably practicable (as determined by a majority of the Independent Trustees), take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, up to and including: (i) withdrawing the assets allocable to the affected Account from the Trust or any Portfolio and reinvesting such assets in a different investment medium, including (but not limited to) another Portfolio of the Trust, or submitting the question whether such segregation should be implemented to a vote of all affected contract owners and, as appropriate, segregating the assets of variable annuity contract owners invested in the Account from those of any other appropriate group (i.e., annuity contract owners, life insurance contract owners, or variable contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the contract owners the option of making such a change; and (ii) establishing a new registered management investment company or managed separate account. (d) If a material irreconcilable conflict arises because of a decision by the Company to disregard contract owner voting instructions and that decision represents a minority position or would preclude a majority vote, the Company may be required, at the Trust's election, to withdraw the Account's investment in the Trust and terminate this Agreement; provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the Independent Trustees. Any such withdrawal and termination must take place within six (6) months after the Trust gives written notice that this provision is being implemented, and until the end of that six month period the Distributor and Trust shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Trust. (e) If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state regulators, then the Company will withdraw the Account's investment in the Trust and terminate this Agreement within six months after the Trustees inform the Company in writing that they have determined that such decision has created an irreconcilable material conflict; provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the Independent Trustees. Until the end of the foregoing six month period, the Distributor and Trust shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Trust. (f) For purposes of sections (c) through (f) of this paragraph, a majority of the Independent Trustees shall determine whether any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Trust be required to establish a new funding medium for the Contracts. The Company shall not be required by section (c) to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of contract owners materially adversely affected by 6 the irreconcilable material conflict. In the event that the Trustees determine that any proposed action does not adequately remedy any irreconcilable material conflict, then the Company will withdraw the Account's investment in the Trust and terminate this Agreement within six (6) months after the Trustees inform the Company in writing of the foregoing determination, provided, however, that such withdrawal and termination shall be limited to the extent required by any such material irreconcilable conflict as determined by a majority of the Independent Trustees. (g) If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Shared Funding Exemptive Order) on terms and conditions materially different from those contained in the Shared Funding Exemptive Order, then (a) the Trust and/or the Participating Insurance Companies, as appropriate, shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such Rules are applicable; and (b) paragraphs 11(a), 11(b), 20(a), 20(b), 20(c), 20(d), 20(e) and 20(f) of this Agreement shall continue in effect only to the extent that terms and conditions substantially identical to such paragraphs are contained in such Rule(s) as so amended or adopted. 21. DURATION OF THIS AGREEMENT. This Agreement shall remain in force until April 30, 1997 and from year to year thereafter, but only so long as such continuance is specifically approved at least annually by the Trustees of the Trust, or by the vote of a majority of the outstanding voting securities of the Trust, cast in person or by proxy. This Agreement also may be terminated in accordance with paragraph 16 hereof. The terms "vote of a majority of the outstanding voting securities", "assignment" and "interested person", when used in this Agreement, shall have the respective meanings specified in the 1940 Act. 22. AMENDMENTS OF THIS AGREEMENT. This Agreement may be amended by the parties only if such amendment is specifically approved by (i) the Trustees of the Trust, or by the vote of a majority of outstanding voting securities of the Trust, and (ii) a majority of those Trustees of the Trust who are not parties to this Agreement or interested persons of any such party and who have no direct or indirect financial interest in this Agreement or in any agreement related thereto, cast in person at a meeting called for the purpose of voting on such approval. 23. GOVERNING LAW. This Agreement shall be construed in accordance with the law of the State of Illinois and the applicable provisions of the 1933, 1934 and 1940 Acts and the rules and regulations and rulings thereunder including such exemptions from those statutes, rules and regulations as the S.E.C. may grant and the terms hereof shall be interpreted and construed in accordance therewith. To the extent the applicable law of the State of Illinois, or any of the provisions herein, conflict with the applicable provisions of the 1940 Act, the latter shall control. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise the remainder of the Agreement shall not be affected thereby. 24. PERSONAL LIABILITY. The Declaration of Trust establishing Dean Witter Variable Investment Series, dated February 24, 1983, a copy of which, together with all amendments thereto (the "Declaration"), is on file in the office of the Secretary of the Commonwealth of Massachusetts, provides that the name Dean Witter Variable Investment Series refers to the Trustees under the Declaration collectively as Trustees, but not as individuals or personally; and no Trustee, shareholder, officer, employee or agent of Dean Witter Variable Investment Series shall be held to any personal liability, nor shall resort be had to their private property for the satisfaction of any obligation or claim or otherwise, in connection with the affairs of said Dean Witter Variable Investment Series, but the Trust Estate only shall be liable. 7 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of January 23, 1997. COMPANIES: ATTEST: NORTHBROOK LIFE INSURANCE COMPANY /s/ Michael By: /s/ Peter H. Hecke - -------------------------------------- ----------------------------------- ALLSTATE LIFE INSURANCE COMPANY ATTEST: OF NEW YORK /s/ Michael By: - -------------------------------------- ----------------------------------- ATTEST: GLENBROOK LIFE AND ANNUITY COMPANY /s/ Michael By: /s/ Peter H. Hecke - -------------------------------------- ----------------------------------- TRUST: ATTEST: DEAN WITTER VARIABLE INVESTMENT /s/ Marilyn K. Cranney By: /s/ Charles A. Fiumefreddo - -------------------------------------- ----------------------------------- DISTRIBUTOR: ATTEST: DEAN WITTER DISTRIBUTORS INC. /s/ Robert J. Hall By: /s/ Robert M. Scanlan - -------------------------------------- ----------------------------------- 8 As of January 23, 1997 SCHEDULE A ACCOUNTS AND PORTFOLIOS SUBJECT TO THE PARTICIPATION AGREEMENT
NAME OF SEPARATE ACCOUNT AND DATE NAME OF ESTABLISHED BY FUND PORTFOLIOS INSURANCE COMPANY BOARD OF DIRECTORS APPLICABLE TO CONTRACTS - ------------------------------------------------------------------------------------ Northbrook Life Northbrook Variable Insurance Company Annuity Account All (February 14, 1983) ---------------------------- Northbrook Variable Annuity Account II (May 18, 1990) ---------------------------- Northbrook Variable Annuity Account III (April 8, 1996) ---------------------------- Northbrook Life Variable Life Separate Account A (January 15, 1996) - ------------------------------------------------------------------------------------ Allstate Life Allstate Life of New York All Insurance Company Variable Annuity of New York Account (June 26, 1987) ---------------------------- Allstate Life of New York Variable Annuity Account II (June 28, 1990) - ------------------------------------------------------------------------------------ Glenbrook Life Glenbrook Life Dividend Growth Portfolio and Annuity Company Multi-Manager European Growth Portfolio Variable Account Quality Income Plus Portfolio (January 15, 1996) Utilities Portfolio ---------------------------- Glenbrook Life Variable Life Separate Account A (January 15, 1996) - ------------------------------------------------------------------------------------
EX-99.8 4 EXHIBIT 99.8 GLOBAL CUSTODY AGREEMENT This AGREEMENT is effective ___________________, , and is between THE CHASE MANHATTAN BANK, N.A. (the "Bank") and the (the "Customer"). 1. CUSTOMER ACCOUNTS. The Bank agrees to establish and maintain the following accounts ("Accounts"): (a) A custody account in the name of the Customer ("Custody Account") for any and all stocks, shares, bonds, debentures, notes, mortgages or other obligations for the payment of money, bullion, coin and any certificates, receipts, warrants or other instruments representing rights to receive, purchase or subscribe for the same or evidencing or representing any other rights or interests therein and other similar property whether certificated or uncertificated as may be received by the Bank or its Subcustodian (as defined in Section 3) for the account of the Customer ("Securities"); and (b) A deposit account in the name of the Customer ("Deposit Account") for any and all cash in any currency received by the Bank or its Subcustodian for the account of the Customer, which cash shall not be subject to withdrawal by draft or check. The Customer warrants its authority to: 1) deposit the cash and Securities ("Assets") received in the Accounts and 2) give Instructions (as defined in Section 11) concerning the Accounts. The Bank may deliver securities of the same class in place of those deposited in the Custody Account. Upon written agreement between the Bank and the Customer, additional Accounts may be established and separately accounted for as additional Accounts under the terms of this Agreement. 2. MAINTENANCE OF SECURITIES AND CASH AT BANK AND SUBCUSTODIAN LOCATIONS. Unless Instructions specifically require another location acceptable to the Bank: (a) Securities will be held in the country or other jurisdiction in which the principal trading market for such Securities is located, where such Securities are to be presented for payment or where such Securities are acquired; and (b) Cash will be credited to an account in a country or other jurisdiction in which such cash may be legally deposited or is the legal currency for the payment of public or private debts. Cash may be held pursuant to Instructions in either interest or non-interest bearing accounts as may be available for the particular currency. To the extent Instructions are issued and the Bank can comply with such Instructions, the Bank is authorized to maintain cash balances on deposit for the Customer with itself or one of its affiliates at such reasonable rates of interest as may from time to time be paid on such accounts, or in non-interest bearing accounts as the Customer may direct, if acceptable to the Bank. If the Customer wishes to have any of its Assets held in the custody of an institution other than the established Subcustodians as defined in Section 3 (or their securities depositories), such arrangement must be authorized by a written agreement, signed by the Bank and the Customer. 3. SUBCUSTODIANS AND SECURITIES DEPOSITORIES. The Bank may act under this Agreement through the subcustodians listed in Schedule A of this Agreement with which the Bank has entered into subcustodial agreements ("Subcustodians"). The Customer authorizes the Bank to hold Assets in the Accounts in accounts which the Bank has established with one or more of its branches or Subcustodians. The Bank and Subcustodians are authorized to hold any of the Securities in their account with any securities depository in which they participate. The Bank reserves the right to add new, replace or remove Subcustodians. The Customer will be given reasonable notice by the Bank of any amendment to Schedule A. Upon request by the Customer, the Bank will identify the name, address and principal place of business of any Subcustodian of the Customer's Assets and the name and address of the governmental agency or other regulatory authority that supervises or regulates such Subcustodian. 4. USE OF SUBCUSTODIAN. (a) The Bank will identify such Assets on its books as belonging to the Customer. (b) A Subcustodian will hold such Assets together with assets belonging to other customers of the Bank in accounts identified on such Subcustodian's books as special custody accounts for the exclusive benefit of customers of the Bank. (c) Any Assets in the Accounts held by a Subcustodian will be subject only to the instructions of the Bank or its agent. Any Securities held in a securities depository for the account of a Subcustodian will be subject only to the instructions of such Subcustodian. (d) Any agreement the Bank enters into with a Subcustodian for holding its customer's assets shall provide that such assets will not be subject to any right, charge, security interest, lien or claim of any kind in favor of such Subcustodian except for safe custody or administration, and that the beneficial ownership of such assets will be freely transferable without the payment of money or value other than for safe custody or administration. The foregoing shall not apply to the extent of any special agreement or arrangement made by the Customer with any particular Subcustodian. 5. DEPOSIT ACCOUNT TRANSACTIONS. (a) The Bank or its Subcustodians will make payments from the Deposit Account upon receipt of Instructions which include all information required by the Bank. (b) In the event that any payment to be made under this Section 5 exceeds the funds available in the Deposit Account, the Bank, in its discretion, may advance the Customer such excess amount which shall be deemed a loan payable on demand, bearing interest at the rate customarily charged by the Bank on similar loans. (c) If the Bank credits the Deposit Account on a payable date, or at any time prior to actual collection and reconciliation to the Deposit Account, with interest, dividends, redemptions or any other amount due, the Customer will promptly return any such amount upon oral or written notification: (i) that such amount has not been received in the ordinary course of business or (ii) that such amount was incorrectly credited. If the Customer does not promptly return any amount upon such notification, the Bank shall be entitled, upon oral or written notification to the Customer, to reverse such credit by debiting the Deposit Account for the amount previously credited. The Bank or its Subcustodian shall have no duty or obligation to institute legal proceedings, file a claim or a proof of claim in any 2 insolvency proceeding or take any other action with respect to the collection of such amount, but may act for the Customer upon Instructions after consultation with the Customer. 6. CUSTODY ACCOUNT TRANSACTIONS. (a) Securities will be transferred, exchanged or delivered by the Bank or its Subcustodian upon receipt by the Bank of Instructions which include all information required by the Bank. Settlement and payment for Securities received for, and delivery of Securities out of, the Custody Account may be made in accordance with the customary or established securities trading or securities processing practices and procedures in the jurisdiction or market in which the transaction occurs, including, without limitation, delivery of Securities to a purchaser, dealer or their agents against a receipt with the expectation of receiving later payment and free delivery. Delivery of Securities out of the Custody Account may also be made in any manner specifically required by Instructions acceptable to the Bank. (b) The Bank, in its discretion, may credit or debit the Accounts on a contractual settlement date with cash or Securities with respect to any sale, exchange or purchase of Securities. Otherwise, such transactions will be credited or debited to the Accounts on the date cash or Securities are actually received by the Bank and reconciled to the Account. (i) The Bank may reverse credits or debits made to the Accounts in its discretion if the related transaction fails to settle within a reasonable period, determined by the Bank in its discretion, after the contractual settlement date for the related transaction. (ii) If any Securities delivered pursuant to this Section 6 are returned by the recipient thereof, the Bank may reverse the credits and debits of the particular transaction at any time. 7. ACTIONS OF THE BANK. The Bank shall follow Instructions received regarding assets held in the Accounts. However, until it receives Instructions to the contrary, the Bank will: (a) Present for payment any Securities which are called, redeemed or retired or otherwise become payable and all coupons and other income items which call for payment upon presentation, to the extent that the Bank or Subcustodian is actually aware of such opportunities. (b) Execute in the name of the Customer such ownership and other certificates as may be required to obtain payments in respect of Securities. (c) Exchange interim receipts or temporary Securities for definitive Securities. (d) Appoint brokers and agents for any transaction involving the Securities, including, without limitation, affiliates of the Bank or any Subcustodian. (e) Issue statements to the Customer, at times mutually agreed upon, identifying the Assets in the Accounts. The Bank will send the Customer an advice or notification of any transfers of Assets to or from the Accounts. Such statements, advices or notifications shall indicate the identity of the entity having custody of the Assets. Unless the Customer sends the Bank a written exception or objection to any Bank statement within sixty (60) days of receipt, the Customer shall be deemed to have approved such statement. In such event, or where the Customer has otherwise 3 approved any such statement, the Bank shall, to the extent permitted by law, be released, relieved and discharged with respect to all matters set forth in such statement or reasonably implied therefrom as though it had been settled by the decree of a court of competent jurisdiction in an action where the Customer and all persons having or claiming an interest in the Customer or the Customer's Accounts were parties. All collections of funds or other property paid or distributed in respect of Securities in the Custody Account shall be made at the risk of the Customer. The Bank shall have no liability for any loss occasioned by delay in the actual receipt of notice by the Bank or by its Subcustodians of any payment, redemption or other transaction regarding Securities in the Custody Account in respect of which the Bank has agreed to take any action under this Agreement. 8. CORPORATE ACTIONS; PROXIES. Whenever the Bank receives information concerning the Securities which requires discretionary action by the beneficial owner of the Securities (other than a proxy), such as subscription rights, bonus issues, stock repurchase plans and rights offerings, or legal notices or other material intended to be transmitted to securities holders ("Corporate Actions"), the Bank will give the Customer notice of such Corporate Actions to the extent that the Bank's central corporate actions department has actual knowledge of a Corporate Action in time to notify its customers. When a rights entitlement or a fractional interest resulting from a rights issue, stock dividend, stock split or similar Corporate Action is received which bears an expiration date, the Bank will endeavor to obtain Instructions from the Customer or its Authorized Person, but if Instructions are not received in time for the Bank to take timely action, or actual notice of such Corporate Action was received too late to seek Instructions, the Bank is authorized to sell such rights entitlement or fractional interest and to credit the Deposit Account with the proceeds or take any other action it deems, in good faith, to be appropriate in which case it shall be held harmless for any such action. The Bank will deliver proxies to the Customer or its designated agent pursuant to special arrangements which may have been agreed to in writing. Such proxies shall be executed in the appropriate nominee name relating to Securities in the Custody Account registered in the name of such nominee but without indicating the manner in which such proxies are to be voted; and where bearer Securities are involved, proxies will be delivered in accordance with Instructions. 9. NOMINEES. Securities which are ordinarily held in registered form may be registered in a nominee name of the Bank, Subcustodian or securities depository, as the case may be. The Bank may without notice to the Customer cause any such Securities to cease to be registered in the name of any such nominee and to be registered in the name of the Customer. In the event that any Securities registered in a nominee name are called for partial redemption by the issuer, the Bank may allot the called portion to the respective beneficial holders of such class of security in any manner the Bank deems to be fair and equitable. The Customer agrees to hold the Bank, Subcustodians, and their respective nominees harmless from any liability arising directly or indirectly from their status as a mere record holder of Securities in the Custody Account. 10. AUTHORIZED PERSONS. As used in this Agreement, the term "Authorized Person" means employees or agents including investment managers as have been designated by written notice from the Customer or its designated agent to act on behalf of the Customer under this Agreement. Such persons shall continue to be Authorized Persons until such time as the Bank 4 receives Instructions from the Customer or its designated agent that any such employee or agent is no longer an Authorized Person. 11. INSTRUCTIONS. The term "Instructions" means instructions of any Authorized Person received by the Bank, via telephone, telex, TWX, facsimile transmission, bank wire or other teleprocess or electronic instruction or trade information system acceptable to the Bank which the Bank believes in good faith to have been given by Authorized Persons or which are transmitted with proper testing or authentication pursuant to terms and conditions which the Bank may specify. Unless otherwise expressly provided, all Instructions shall continue in full force and effect until canceled or superseded. Any Instructions delivered to the Bank by telephone shall promptly thereafter be confirmed in writing by an Authorized Person (which confirmation may bear the facsimile signature of such Person), but the Customer will hold the Bank harmless for the failure of an Authorized Person to send such confirmation in writing, the failure of such confirmation to conform to the telephone instructions received or the Bank's failure to produce such confirmation at any subsequent time. The Bank may electronically record any Instructions given by telephone, and any other telephone discussions with respect to the Custody Account. The Customer shall be responsible for safeguarding any testkeys, identification codes or other security devices which the Bank shall make available to the Customer or its Authorized Persons. 12. STANDARD OF CARE; LIABILITIES. (a) The Bank shall be responsible for the performance of only such duties as are set forth in this Agreement or expressly contained in Instructions which are consistent with the provisions of this Agreement as follows: (i) The Bank will use reasonable care with respect to its obligations under this Agreement and the safekeeping of Assets. The Bank shall be liable to the Customer for any loss which shall occur as the result of the failure of a Subcustodian to exercise reasonable care with respect to the safekeeping of such Assets to the same extent that the Bank would be liable to the Customer if the Bank were holding such Assets in New York. In the event of any loss to the Customer by reason of the failure of the Bank or its Subcustodian to utilize reasonable care, the Bank shall be liable to the Customer only to the extent of the Customer's direct damages, to be determined based on the market value of the property which is the subject of the loss at the date of discovery of such loss and without reference to any special conditions or circumstances. (ii) The Bank will not be responsible for any act, omission, default or for the solvency of any broker or agent which it or a Subcustodian appoints unless such appointment was made negligently or in bad faith. (iii) The Bank shall be indemnified by, and without liability to the Customer for any action taken or omitted by the Bank whether pursuant to Instructions or otherwise within the scope of this Agreement if such act or omission was in good faith, without negligence. In performing its obligations under this Agreement, the Bank may rely on the genuineness of any document which it believes in good faith to have been validly executed. 5 (iv) The Customer agrees to pay for and hold the Bank harmless from any liability or loss resulting from the imposition or assessment of any taxes or other governmental charges, and any related expenses with respect to income from or Assets in the Accounts. (v) The Bank shall be entitled to rely, and may act, upon the advice of counsel (who may be counsel for the Customer) on all matters and shall be without liability for any action reasonably taken or omitted pursuant to such advice. (vi) The Bank need not maintain any insurance for the benefit of the Customer. (vii) Without limiting the foregoing, the Bank shall not be liable for any loss which results from: 1) the general risk of investing, or 2) investing or holding Assets in a particular country including, but not limited to, losses resulting from nationalization, expropriation or other governmental actions; regulation of the banking or securities industry; currency restrictions, devaluations or fluctuations; and market conditions which prevent the orderly execution of securities transactions or affect the value of Assets. (viii) Neither party shall be liable to the other for any loss due to forces beyond their control including, but not limited to strikes or work stoppages, acts of war or terrorism, insurrection, revolution, nuclear fusion, fission or radiation, or acts of God. (b) Consistent with and without limiting the first paragraph of this Section 12, it is specifically acknowledged that the Bank shall have no duty or responsibility to: (i) question Instructions or make any suggestions to the Customer or an Authorized Person regarding such Instructions; (ii) supervise or make recommendations with respect to investments or the retention of Securities; (iii) advise the Customer or an Authorized Person regarding any default in the payment of principal or income of any security other than as provided in Section 5(c) of this Agreement; (iv) evaluate or report to the Customer or an Authorized Person regarding the financial condition of any broker, agent or other party to which Securities are delivered or payments are made pursuant to this Agreement; (v) review or reconcile trade confirmations received from brokers. The Customer or its Authorized Persons (as defined in Section 10) issuing Instructions shall bear any responsibility to review such confirmations against Instructions issued to and statements issued by the Bank. (c) The Customer authorizes the Bank to act under this Agreement notwithstanding that the Bank or any of its divisions or affiliates may have a material interest in a transaction, or circumstances are such that the Bank may have a potential conflict of duty or interest including the fact that the Bank or any of its affiliates may provide brokerage services to other customers, act as financial advisor to the issuer of Securities, act as a lender to the issuer of Securities, act in the same transaction as agent for more than one customer, have a material interest in the issue of Securities, or earn profits from any of the activities listed herein. 6 13. FEES AND EXPENSES. The Customer agrees to pay the Bank for its services under this Agreement such amount as may be agreed upon in writing, together with the Bank's reasonable out-of-pocket or incidental expenses, including, but not limited to, legal fees. The Bank shall have a lien on and is authorized to charge any Accounts of the Customer for any amount owing to the Bank under any provision of this Agreement. 14. MISCELLANEOUS. (a) FOREIGN EXCHANGE TRANSACTIONS. To facilitate the administration of the Customer's trading and investment activity, the Bank is authorized to enter into spot or forward foreign exchange contracts with the Customer or an Authorized Person for the Customer and may also provide foreign exchange through its subsidiaries, affiliates or Subcustodians. Instructions, including standing instructions, may be issued with respect to such contracts but the Bank may establish rules or limitations concerning any foreign exchange facility made available. In all cases where the Bank, its subsidiaries, affiliates or Subcustodians enter into a foreign exchange contract related to Accounts, the terms and conditions of the then current foreign exchange contract of the Bank, its subsidiary, affiliate or Subcustodian and, to the extent not inconsistent, this Agreement shall apply to such transaction. (b) CERTIFICATION OF RESIDENCY, ETC. The Customer certifies that it is a resident of the United States and agrees to notify the Bank of any changes in residency. The Bank may rely upon this certification or the certification of such other facts as may be required to administer the Bank's obligations under this Agreement. The Customer will indemnify the Bank against all losses, liability, claims or demands arising directly or indirectly from any such certifications. (c) ACCESS TO RECORDS. The Bank shall allow the Customer's independent public accountant reasonable access to the records of the Bank relating to the Assets as is required in connection with their examination of books and records pertaining to the Customer's affairs. Subject to restrictions under applicable law, the Bank shall also obtain an undertaking to permit the Customer's independent public accountants reasonable access to the records of any Subcustodian which has physical possession of any Assets as may be required in connection with the examination of the Customer's books and records. (d) GOVERNING LAW; SUCCESSORS AND ASSIGNS. This Agreement shall be governed by the laws of the State of New York and shall not be assignable by either party, but shall bind the successors in interest of the Customer and the Bank. (e) ENTIRE AGREEMENT; APPLICABLE RIDERS. Customer represents that the Assets deposited in the Accounts are (Check one): Employee Benefit Plan or other assets subject to the Employee ---- Retirement Income Security Act of 1974, as amended ("ERISA"); X Mutual Fund assets subject to certain Securities and Exchange ----- Commission ("SEC") rules and regulations; Neither of the above. ---- This Agreement consists exclusively of this document together with Schedule A, and the following Rider(s) [Check applicable rider(s)]: 7 ERISA ---- X MUTUAL FUND ----- SPECIAL TERMS AND CONDITIONS ---- There are no other provisions of this Agreement and this Agreement supersedes any other agreements, whether written or oral, between the parties. Any amendment to this Agreement must be in writing, executed by both parties. (f) SEVERABILITY. In the event that one or more provisions of this Agreement are held invalid, illegal or enforceable in any respect on the basis of any particular circumstances or in any jurisdiction, the validity, legality and enforceability of such provision or provisions under other circumstances or in other jurisdictions and of the remaining provisions will not in any way be affected or impaired. (g) WAIVER. Except as otherwise provided in this Agreement, no failure or delay on the part of either party in exercising any power or right under this Agreement operates as a waiver, nor does any single or partial exercise of any power or right preclude any other or further exercise, or the exercise of any other power or right. No waiver by a party of any provision of this Agreement, or waiver of any breach or default, is effective unless in writing and signed by the party against whom the waiver is to be enforced. (h) NOTICES. All notices under this Agreement shall be effective when actually received. Any notices or other communications which may be required under this Agreement are to be sent to the parties at the following addresses or such other addresses as may subsequently be given to the other party in writing: Bank: The Chase Manhattan Bank, N.A. Chase MetroTech Center Brooklyn, NY 11245 Attention: Global Securities Services Division or telex: ---------------------------------------------------- Customer: DEAN WITTER SERVICES ------------------------------------------- 2 WORLD TRADE CENTER, 72ND FLOOR -------------------------------------------------------------- NEW YORK, NY 10048 ------------------------------------------------------------ or telex: ---------------------------------------------------- 8 (i) TERMINATION. This Agreement may be terminated by the Customer or the Bank by giving sixty (60) days written notice to the other, provided that such notice to the Bank shall specify the names of the persons to whom the Bank shall deliver the Assets in the Accounts. If notice of termination is given by the Bank, the Customer shall, within sixty (60) days following receipt of the notice, deliver to the Bank Instructions specifying the names of the persons to whom the Bank shall deliver the Assets. In either case the Bank will deliver the Assets to the persons so specified, after deducting any amounts which the Bank determines in good faith to be owed to it under Section 13. If within sixty (60) days following receipt of a notice of termination by the Bank, the Bank does not receive Instructions from the Customer specifying the names of the persons to whom the Bank shall deliver the Assets, the Bank, at its election, may deliver the Assets to a bank or trust company doing business in the State of New York to be held and disposed of pursuant to the provisions of this Agreement, or to Authorized Persons, or may continue to hold the Assets until Instructions are provided to the Bank. CUSTOMER By: -------------------------------------------- Title THE CHASE MANHATTAN BANK, N.A. By: -------------------------------------------- Title Vice President 9 STATE OF NEW YORK ) )ss. ) COUNTY OF NEW YORK ) On this day of , 19 , before me personally came to me known, who being by me duly sworn, did depose and say that he resides in that he/she is of , the entity described in and which executed the foregoing instrument; that he/she knows the seal of said entity, that the seal affixed to said instrument is such seal, that it was so affixed by order of said entity, and that he/she signed his/her name thereto by like order. --------------------- Sworn to before me this day of , 19 . ------------ -- [NOTARY SEAL] - ---------------------------- Notary 10 STATE OF NEW YORK ) )ss. ) COUNTY OF NEW YORK ) On this day of ,19 before me personally came , to me known, who being by me duly sworn, did depose and say that he/she resides in at ; that he/she is a Vice President of THE CHASE MANHATTAN BANK, (National Association), the corporation described in and which executed the foregoing instrument; that he/she knows the seal of said corporation, that the seal affixed to said instrument is such corporate seal, that it was so affixed by order of the Board of Directors of said corporation, and that he/she signed his/her name thereto by like order. ------------------------ Sworn to before me this day of , 19 . ---------- -- - ---------------------------- Notary 11 Mutual Fund Rider Between The Chase Manhattan Bank, N.A. ------------------------ effective , ------------------------ Customer represents that the Assets being placed in the Bank's custody are subject to the Investment Company Act of 1940 (the Act), as the same may be amended from time to time. Except to the extent that the Bank has specifically agreed to comply with a condition of a rule, regulation, interpretation promulgated by or under the authority of the SEC or the Exemptive Order applicable to accounts of this nature issued to the Bank (Investment Company Act of 1940, Release No. 12053, November 20, 1981), as amended, or unless the Bank has otherwise specifically agreed, the Customer shall be solely responsible to assure that the maintenance of Assets under this Agreement complies with such rules, regulations, interpretations or exemptive order promulgated by or under the authority of the Securities Exchange Commission. The following modifications are made to the Agreement: Section 3. SUBCUSTODIANS AND SECURITIES DEPOSITORIES. Add the following language to the end of Section 3: The terms Subcustodian and securities depositories as used in this Agreement shall mean a branch of a qualified U.S. bank, an eligible foreign custodian or an eligible foreign securities depository, which are further defined as follows: (a) "qualified U.S. Bank" shall mean a qualified U.S. bank as defined in Rule 17f-5 under the Investment Company Act of 1940; (b) "eligible foreign custodian" shall mean (i) a banking institution or trust company incorporated or organized under the laws of a country other than the United States that is regulated as such by that country's government or an agency thereof and that has shareholders' equity in excess of $200 million in U.S. currency (or a foreign currency equivalent thereof), (ii) a majority owned direct or indirect subsidiary of a qualified 12 U.S. bank or bank holding company that is incorporated or organized under the laws of a country other than the United States and that has shareholders' equity in excess of $100 million in U.S. currency (or a foreign currency equivalent thereof)(iii) a banking institution or trust company incorporated or organized under the laws of a country other than the United States or a majority owned direct or indirect subsidiary of a qualified U.S. bank or bank holding company that is incorporated or organized under the laws of a country other than the United States which has such other qualifications as shall be specified in Instructions and approved by the Bank; or (iv) any other entity that shall have been so qualified by exemptive order, rule or other appropriate action of the SEC; and (c) "eligible foreign securities depository" shall mean a securities depository or clearing agency, incorporated or organized under the laws of a country other than the United States, which operates (i) the central system for handling securities or equivalent book-entries in that country, or (ii) a transnational system for the central handling of securities or equivalent book-entries. The Customer represents that its Board of Directors has approved each of the Subcustodians listed in Schedule A to this Agreement and the terms of the subcustody agreements between the Bank and each Subcustodian, which are attached as Schedule A, and further represents that its Board has determined that the use of each Subcustodian and the terms of each subcustody agreement are consistent with the best interests of the Fund(s) and its (their) shareholders. The Bank will supply the Customer with any amendment to Schedule A for approval. The Customer has supplied or will supply the Bank with certified copies of its Board of Directors resolution(s) with respect to the foregoing prior to placing Assets with any Subcustodian so approved. Section 11. INSTRUCTIONS. Add the following language to the end of Section 11: Deposit Account Payments and Custody Account Transactions made pursuant to Section 5 and 6 of this Agreement may be made only for the purposes listed below. Instructions must specify the purpose for which any transaction is to be made and Customer shall be solely responsible to assure that Instructions are in accord with any limitations or restrictions applicable to the Customer by law or as may be set forth in its prospectus. (a) In connection with the purchase or sale of Securities at prices as confirmed by Instructions; 13 (b) When Securities are called, redeemed or retired, or otherwise become payable; (c) In exchange for or upon conversion into other securities alone or other securities and cash pursuant to any plan or merger, consolidation, reorganization, recapitalization or readjustment; (d) Upon conversion of Securities pursuant to their terms into other securities; (e) Upon exercise of subscription, purchase or other similar rights represented by Securities; (f) For the payment of interest, taxes, management or supervisory fees, distributions or operating expenses; (g) In connection with any borrowings by the Customer requiring a pledge of Securities, but only against receipt of amounts borrowed; (h) In connection with any loans, but only against receipt of adequate collateral as specified in Instructions which shall reflect any restrictions applicable to the Customer; (i) For the purpose of redeeming shares of the capital stock of the Customer and the delivery to, or the crediting to the account of, the Bank, its Subcustodian or the Customer's transfer agent, such shares to be purchased or redeemed; (j) For the purpose of redeeming in kind shares of the Customer against delivery to the Bank, its Subcustodian or the Customer's transfer agent of such shares to be so redeemed; (k) For delivery in accordance with the provisions of any agreement among the Customer, the Bank and a broker-dealer registered under the Securities Exchange Act of 1934 (the "Exchange Act") and a member of The National Association of Securities Dealers, Inc. ("NASD"), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange, or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Customer; (l) For release of Securities to designated brokers under covered call options, provided, however, that such Securities shall be released only upon payment to the Bank of monies for the premium due and a receipt for the Securities which are to be held in escrow. Upon exercise of the option, or at expiration, the Bank will 14 receive from brokers the Securities previously deposited. The Bank will act strictly in accordance with Instructions in the delivery of Securities to be held in escrow and will have no responsibility or liability for any such Securities which are not returned promptly when due other than to make proper request for such return; (m) For spot or forward foreign exchange transactions to facilitate security trading, receipt of income from Securities or related transactions; (n) For other proper purposes as may be specified in Instructions issued by an officer of the Customer which shall include a statement of the purpose for which the delivery or payment is to be made, the amount of the payment or specific Securities to be delivered, the name of the person or persons to whom delivery or payment is to be made, and a certification that the purpose is a proper purpose under the instruments governing the Customer; and (o) Upon the termination of this Agreement as set forth in Section 14(i). Section 12. STANDARD OF CARE; LIABILITIES. Add the following subsection (c) to Section 12: (c) The Bank hereby warrants to the Customer that in its opinion, after due inquiry, the established procedures to be followed by each of its branches, each branch of a qualified U.S. bank, each eligible foreign custodian and each eligible foreign securities depository holding the Customer's Securities pursuant to this Agreement afford protection for such Securities at least equal to that afforded by the Bank's established procedures with respect to similar securities held by the Bank and its securities depositories in New York. SECTION 14. ACCESS TO RECORDS. ADD THE FOLLOWING LANGUAGE TO THE END OF SECTION 14(c): Upon reasonable request from the Customer, the Bank shall furnish the Customer such reports (or portions thereof) of the Bank's system of internal accounting controls applicable to the Bank's duties under this 15 Agreement. The Bank shall endeavor to obtain and furnish the Customer with such similar reports as it may reasonably request with respect to each Subcustodian and securities depository holding the Customer's assets. 16 EX-99.11 5 EXHIBIT 99.11 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Statement of Additional Information constituting part of this Post-Effective Amendment No. 21 to the registration statement on Form N-1A (the "Registration Statement") of our report dated February 17, 1997, relating to the financial statements and financial highlights of Dean Witter Variable Investment Series (comprised of the Money Market Portfolio, the Quality Income Plus Portfolio, the High Yield Portfolio, the Utilities Portfolio, the Dividend Growth Portfolio, the Capital Growth Portfolio, the Global Dividend Growth Portfolio, the European Growth Portfolio, the Pacific Growth Portfolio, the Equity Portfolio and the Strategist Portfolio), which appears in such Statement of Additional Information, and to the incorporation by reference of our report into the Prospectus which constitutes part of this Registration Statement. We also consent to the references to us under the headings "Independent Accountants" and "Experts" in such Statement of Additional Information and to the reference to us under the heading "Financial Highlights" in such Prospectus. /s/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP 1177 Avenue of the Americas New York, New York 10036 April 14, 1997 EX-99.16 6 EXHIBIT 99.16 DEAN WITTER VARIABLE MONEY MARKET Exhibit 16: Schedule for computation of each performance quotation provided in the Statement of Additional Information. (16) The Trust's current yield for the seven days ending December 29, 1996 (A-B) x 365/N (1.000952 - 1) x 365/7 = 4.96% The Trust's effective annualized yield for the seven days ending December 29, 1996 365/N A -1 365/7 1.000952 -1 = 5.09% A = Value of a share of the Trust at the end of period. B = Value of a share of the Trust at beginning of period. N = Number of days in the period. DEAN WITTER VARIABLE INVESTMENT SERIES - QUALITY INCOME PLUS SCHEDULE OF COMPUTATION OF YIELD QUOTATION DECEMBER 31, 1996 6 YIELD = 2 { [ ((a-b) /cd) +1] -1} WHERE: a = Dividends and interest earned during the period b = Expenses accrued for the period c = The average daily number of shares outstanding during the period that were entitled to receive dividends d = The maximum offering price per share on the last day of the period 6 YIELD = 2 { [ ((2,830,786.74 - 206,490.51) /45,605,754.525 X 10.37) +1] -1} = 6.75% DEAN WITTER VARIABLE HIGH YIELD SCHEDULE OF COMPUTATION OF YIELD QUOTATION 12/31/96 6 YIELD = 2 { [ ((a-b) /cd) +1] -1} WHERE: a = Dividends and interest earned during the period b = Expenses accrued for the period c = The average daily number of shares outstanding during the period that were entitled to receive dividends d = The maximum offering price per share on the last day of the period 6 YIELD = 2 { [ ((2,473,368.08-108,772.27) /40,929,300.456 X 6.18) +1] -1} = 11.483463 % DEAN WITTER VARIABLE INVESTMENT SERIES - UTILITIES PORTFOLIO SCHEDULE OF COMPUTATION OF YIELD QUOTATION DECEMBER 31, 1996 6 YIELD = 2 { [ ((a-b) /cd) +1] -1} WHERE: a = Dividends and interest earned during the period b = Expenses accrued for the period c = The average daily number of shares outstanding during the period that were entitled to receive dividends d = The maximum offering price per share on the last day of the period 6 YIELD = 2 { [ ((1,586,430.40 - 276,858..02) /28,655,893.893 X 15.34) +1] -1} 3.60% SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS VARIABLE ANNUITY - MONEY MARKET PORTFOLIO (A) AVERAGE ANNUAL TOTAL RETURNS (B) TOTAL RETURN _ _ | ______________________ | FORMULA: | | | | /\ n | EV | t = | \ | ------------- | - 1 | \ | P | | \| | |_ _| EV TR = ---------- - 1 P t = AVERAGE ANNUAL TOTAL RETURN n = NUMBER OF YEARS EV = ENDING VALUE P = INITIAL INVESTMENT TR = TOTAL RETURN
(B) (A) $1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL INVESTED - P 31-Dec-96 RETURN - TR YEARS - n COMPOUND RETURN - t - ------------- --------- ----------- --------- ------------------- 31-Dec-95 $1,051.10 5.11% 1 5.11% 31-Dec-91 $1,225.20 22.52% 5.00 4.14% 31-Dec-86 $1,737.10 73.71% 10.00 5.68%
(C) GROWTH OF $10,000 (D) GROWTH OF $50,000 (E) GROWTH OF $100,000 FORMULA: G = (TR+1)*P G = GROWTH OF INITIAL INVESTMENT P = INITIAL INVESTMENT TR = TOTAL RETURN SINCE INCEPTION
(C) (D) (E) $10,000 TOTAL GROWTH OF GROWTH OF GROWTH OF INVESTED - P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT - G $100,000 INVESTMENT - G - ----------- ----------- ---------------------- ---------------------- ----------------------- 09-Mar-84 114.51 $21,451 $107,255 $214,510
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS VARIABLE ANNUITY - QUALITY INCOME PORTFOLIO (A) AVERAGE ANNUAL TOTAL RETURNS (B) TOTAL RETURN _ _ | ______________________ | FORMULA: | | | | /\ n | EV | t = | \ | ------------- | - 1 | \ | P | | \| | |_ _| EV TR = ---------- - 1 P t = AVERAGE ANNUAL TOTAL RETURN n = NUMBER OF YEARS EV = ENDING VALUE P = INITIAL INVESTMENT TR = TOTAL RETURN
(B) (A) $1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL INVESTED - P 31-Dec-96 RETURN - TR YEARS - n COMPOUND RETURN - t - ------------ --------- ----------- --------- ------------------- 31-Dec-95 $1,015.60 1.56% 1 1.56% 31-Dec-91 $1,441.70 44.17% 5.00 7.59% 03-Mar-87 $2,271.90 127.19% 9.83 8.70%
(C) GROWTH OF $10,000 (D) GROWTH OF $50,000 (E) GROWTH OF $100,000 FORMULA: G= (TR+1)*P G= GROWTH OF INITIAL INVESTMENT P= INITIAL INVESTMENT TR= TOTAL RETURN SINCE INCEPTION
(C) (D) (E) $10,000 TOTAL GROWTH OF GROWTH OF GROWTH OF INVESTED - P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT - G $100,000 INVESTMENT - G - ------------ ----------- ---------------------- ---------------------- ----------------------- 03-Mar-87 127.19 $22,719 $113,595 $227,190
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS VARIABLE ANNUITY - HIGH YIELD PORTFOLIO (A) AVERAGE ANNUAL TOTAL RETURNS (B) TOTAL RETURN _ _ | ______________________ | FORMULA: | | | | /\ n | EV | t = | \ | ------------- | - 1 | \ | P | | \| | |_ _| EV TR = ---------- - 1 P t = AVERAGE ANNUAL TOTAL RETURN n = NUMBER OF YEARS EV = ENDING VALUE P = INITIAL INVESTMENT TR = TOTAL RETURN
(B) (A) $1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL INVESTED - P 31-Dec-96 RETURN - TR YEARS - n COMPOUND RETURN - t - ------------ --------- ----------- --------- ------------------- 31-Dec-95 $1,119.80 11.98% 1 11.98% 31-Dec-91 $1,843.30 84.33% 5.00 13.00% 31-Dec-86 $2,042.70 104.27% 10.00 7.40%
(C) GROWTH OF $10,000 (D) GROWTH OF $50,000 (E) GROWTH OF $100,000 FORMULA: G= (TR+1)*P G= GROWTH OF INITIAL INVESTMENT P= INITIAL INVESTMENT TR= TOTAL RETURN SINCE INCEPTION
(C) (D) (E) $10,000 TOTAL GROWTH OF GROWTH OF GROWTH OF INVESTED - P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT - G $100,000 INVESTMENT - G - ----------- ----------- ---------------------- ---------------------- ----------------------- 09-Mar-84 244.27 $34,427 $172,135 $344,270
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS VARIABLE ANNUITY - UTILITIES PORTFOLIO (A) AVERAGE ANNUAL TOTAL RETURNS (B) TOTAL RETURN _ _ | ______________________ | FORMULA: | | | | /\ n | EV | t = | \ | ------------- | - 1 | \ | P | | \| | |_ _| EV TR = ---------- - 1 P t = AVERAGE ANNUAL TOTAL RETURN n = NUMBER OF YEARS EV = ENDING VALUE P = INITIAL INVESTMENT TR = TOTAL RETURN
(B) (A) $1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL INVESTED - P 31-Dec-96 RETURN - TR YEARS - n COMPOUND RETURN - t - ------------ --------- ----------- --------- ------------------- 31-Dec-95 $1,086.80 8.68% 1.00 8.68% 31-Dec-91 $1,657.70 65.77% 5.00 10.64% 01-Mar-90 $2,088.90 108.89% 6.84 11.38%
(C) GROWTH OF $10,000 (D) GROWTH OF $50,000 (E) GROWTH OF $100,000 FORMULA: G = (TR+1)*P G = GROWTH OF INITIAL INVESTMENT P = INITIAL INVESTMENT TR = TOTAL RETURN SINCE INCEPTION
(C) (D) (E) $10,000 TOTAL GROWTH OF GROWTH OF GROWTH OF INVESTED - P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT - G $100,000 INVESTMENT - G - ------------ ----------- ---------------------- ---------------------- ----------------------- 01-Mar-90 108.89 $20,889 $104,445 $208,890
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS VARIABLE ANNUITY - DIVIDEND GROWTH PORTFOLIO (A) AVERAGE ANNUAL TOTAL RETURNS (B) TOTAL RETURN _ _ | ______________________ | FORMULA: | | | | /\ n | EV | t = | \ | ------------- | - 1 | \ | P | | \| | |_ _| EV TR = ---------- - 1 P t = AVERAGE ANNUAL TOTAL RETURN n = NUMBER OF YEARS EV = ENDING VALUE P = INITIAL INVESTMENT TR = TOTAL RETURN
(B) (A) $1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL INVESTED - P 31-Dec-96 RETURN - TR YEARS - n COMPOUND RETURN - t - ------------ --------- ----------- --------- ------------------- 31-Dec-95 $1,239.60 23.96% 1.00 23.89% 31-Dec-91 $2,022.50 102.25% 5.00 15.13% 01-Mar-90 $2,382.10 138.21% 6.84 13.54%
(C) GROWTH OF $10,000 (D) GROWTH OF $50,000 (E) GROWTH OF $100,000 FORMULA: G= (TR+1)*P G= GROWTH OF INITIAL INVESTMENT P= INITIAL INVESTMENT TR= TOTAL RETURN SINCE INCEPTION
(C) (D) (E) $10,000 TOTAL GROWTH OF GROWTH OF GROWTH OF INVESTED - P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT - G $100,000 INVESTMENT - G - ------------ ----------- ---------------------- ---------------------- ----------------------- 01-Mar-90 138.21 $23,821 $119,105 $238,210
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS VARIABLE ANNUITY - CAPITAL GROWTH PORTFOLIO (A) AVERAGE ANNUAL TOTAL RETURNS (B) TOTAL RETURN _ _ | ______________________ | FORMULA: | | | | /\ n | EV | t = | \ | ------------- | - 1 | \ | P | | \| | |_ _| EV TR = ---------- - 1 P t = AVERAGE ANNUAL TOTAL RETURN n = NUMBER OF YEARS EV = ENDING VALUE P = INITIAL INVESTMENT TR = TOTAL RETURN
(B) (A) $1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL INVESTED - P 31-Dec-96 RETURN - TR YEARS - n COMPOUND RETURN - t - ------------ --------- ----------- --------- ------------------- 31-Dec-95 $1,115.50 11.55% 1.00 11.55% 31-Dec-91 $1,383.70 38.37% 5.00 6.71% 01-Mar-91 $1,776.80 77.68% 5.84 10.35%
(C) GROWTH OF $10,000 (D) GROWTH OF $50,000 (E) GROWTH OF $100,000 FORMULA: G= (TR+1)*P G= GROWTH OF INITIAL INVESTMENT P= INITIAL INVESTMENT TR= TOTAL RETURN SINCE INCEPTION
(C) (D) (E) $10,000 TOTAL GROWTH OF GROWTH OF GROWTH OF INVESTED - P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT - G $100,000 INVESTMENT - G - ------------ ----------- ---------------------- ---------------------- ----------------------- 01-Mar-91 77.68 $17,768 $88,840 $177,680
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS VARIABLE ANNUITY - GLOBAL DIVIDEND GROWTH PORTFOLIO (A) AVERAGE ANNUAL TOTAL RETURNS (B) TOTAL RETURN _ _ | ______________________ | FORMULA: | | | | /\ n | EV | t = | \ | ------------- | - 1 | \ | P | | \| | |_ _| EV TR = ---------- - 1 P t = AVERAGE ANNUAL TOTAL RETURN n = NUMBER OF YEARS EV = ENDING VALUE P = INITIAL INVESTMENT TR = TOTAL RETURN
(B) (A) $1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL INVESTED - P 31-Dec-96 RETURN - TR YEARS - n COMPOUND RETURN - t - ------------ --------- ----------- --------- ------------------- 31-Dec-95 $1,174.90 17.49% 1.00 17.49% 23-Feb-94 $1,438.80 43.88% 2.85 13.60%
(C) GROWTH OF $10,000 (D) GROWTH OF $50,000 (E) GROWTH OF $100,000 FORMULA: G= (TR+1)*P G= GROWTH OF INITIAL INVESTMENT P= INITIAL INVESTMENT TR= TOTAL RETURN SINCE INCEPTION
(C) (D) (E) $10,000 TOTAL GROWTH OF GROWTH OF GROWTH OF INVESTED - P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT - G $100,000 INVESTMENT - G - ------------ ----------- ---------------------- ---------------------- ----------------------- 23-Feb-94 43.88 $14,388 $71,940 $143,880
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS VARIABLE ANNUITY - EUROPEAN GROWTH PORTFOLIO (A) AVERAGE ANNUAL TOTAL RETURNS (B) TOTAL RETURN _ _ | ______________________ | FORMULA: | | | | /\ n | EV | t = | \ | ------------- | - 1 | \ | P | | \| | |_ _| EV TR = ---------- - 1 P t = AVERAGE ANNUAL TOTAL RETURN n = NUMBER OF YEARS EV = ENDING VALUE P = INITIAL INVESTMENT TR = TOTAL RETURN
(B) (A) $1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL INVESTED - P 31-Dec-96 RETURN - TR YEARS - n COMPOUND RETURN - t - ------------ --------- ----------- --------- ------------------- 31-Dec-95 $1,299.90 29.99% 1.00 29.99% 31-Dec-91 $2,598.00 159.80% 5.00 21.04% 01-Mar-91 $2,632.90 163.29% 5.84 18.04%
(C) GROWTH OF $10,000 (D) GROWTH OF $50,000 (E) GROWTH OF $100,000 FORMULA: G= (TR+1)*P G= GROWTH OF INITIAL INVESTMENT P= INITIAL INVESTMENT TR= TOTAL RETURN SINCE INCEPTION
(C) (D) (E) $10,000 TOTAL GROWTH OF GROWTH OF GROWTH OF INVESTED - P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT - G $100,000 INVESTMENT - G - ------------ ----------- ---------------------- ---------------------- ----------------------- 01-Mar-91 163.29 $26,329 $131,645 $263,290
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS VARIABLE ANNUITY - PACIFIC GROWTH PORTFOLIO (A) AVERAGE ANNUAL TOTAL RETURNS (B) TOTAL RETURN _ _ | ______________________ | FORMULA: | | | | /\ n | EV | t = | \ | ------------- | - 1 | \ | P | | \| | |_ _| EV TR = ---------- - 1 P t = AVERAGE ANNUAL TOTAL RETURN n = NUMBER OF YEARS EV = ENDING VALUE P = INITIAL INVESTMENT TR = TOTAL RETURN
(B) (A) $1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL INVESTED - P 31-Dec-96 RETURN - TR YEARS - n COMPOUND RETURN - t - ------------ --------- ----------- --------- ------------------- 31-Dec-95 $1,038.90 3.89% 1.00 3.89% 23-Feb-94 $1,024.60 2.46% 2.85 0.85%
(C) GROWTH OF $10,000 (D) GROWTH OF $50,000 (E) GROWTH OF $100,000 FORMULA: G= (TR+1)*P G= GROWTH OF INITIAL INVESTMENT P= INITIAL INVESTMENT TR= TOTAL RETURN SINCE INCEPTION
(C) (D) (E) $10,000 TOTAL GROWTH OF GROWTH OF GROWTH OF INVESTED - P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT - G $100,000 INVESTMENT - G - ------------ ----------- ---------------------- ---------------------- ----------------------- 23-Feb-94 2.46 $10,246 $51,230 $102,460
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS VARIABLE ANNUITY - EQUITY PORTFOLIO (A) AVERAGE ANNUAL TOTAL RETURNS (B) TOTAL RETURN _ _ | ______________________ | FORMULA: | | | | /\ n | EV | t = | \ | ------------- | - 1 | \ | P | | \| | |_ _| EV TR = ---------- - 1 P t = AVERAGE ANNUAL TOTAL RETURN n = NUMBER OF YEARS EV = ENDING VALUE P = INITIAL INVESTMENT TR = TOTAL RETURN
(B) (A) $1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL INVESTED - P 31-Dec-96 RETURN - TR YEARS - n COMPOUND RETURN - t - ------------ --------- ----------- --------- ------------------- 31-Dec-95 $1,123.60 12.36% 1 12.36% 31-Dec-91 $1,824.10 82.41% 5 12.77% 31-Dec-86 $3,422.40 242.24% 10 13.09%
(C) GROWTH OF $10,000 (D) GROWTH OF $50,000 (E) GROWTH OF $100,000 FORMULA: G= (TR+1)*P G= GROWTH OF INITIAL INVESTMENT P= INITIAL INVESTMENT TR= TOTAL RETURN SINCE INCEPTION
(C) (D) (E) $10,000 TOTAL GROWTH OF GROWTH OF GROWTH OF INVESTED - P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT - G $100,000 INVESTMENT - G - ------------ ----------- ---------------------- ---------------------- ----------------------- 09-Mar-84 450.24 $55,024 $275,120 $550,240
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS VARIABLE ANNUITY - STRATEGIST PORTFOLIO (A) AVERAGE ANNUAL TOTAL RETURNS (B) TOTAL RETURN _ _ | ______________________ | FORMULA: | | | | /\ n | EV | t = | \ | ------------- | - 1 | \ | P | | \| | |_ _| EV TR = ---------- - 1 P t = AVERAGE ANNUAL TOTAL RETURN n = NUMBER OF YEARS EV = ENDING VALUE P = INITIAL INVESTMENT TR = TOTAL RETURN
(B) (A) $1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL INVESTED - P 31-Dec-96 RETURN - TR YEARS - n COMPOUND RETURN - t - ------------ --------- ----------- --------- ------------------- 31-Dec-95 $1,150.20 15.02% 1 15.02% 31-Dec-91 $1,548.10 54.81% 5.00 9.13% 04-Mar-87 $2,548.20 154.82% 9.83 9.98%
(C) GROWTH OF $10,000 (D) GROWTH OF $50,000 (E) GROWTH OF $100,000 FORMULA: G= (TR+1)*P G= GROWTH OF INITIAL INVESTMENT P= INITIAL INVESTMENT TR= TOTAL RETURN SINCE INCEPTION
(C) (D) (E) $10,000 TOTAL GROWTH OF GROWTH OF GROWTH OF INVESTED - P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT - G $100,000 INVESTMENT - G - ------------ ----------- ---------------------- ---------------------- ----------------------- 04-Mar-87 154.82 $25,482 $127,410 $254,820
EX-27.A 7 EXHIBIT 27A
6 001 VARIABLE MONEY MARKET 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 340,232,603 340,232,603 372,393 15,409 0 340,620,405 0 0 382,364 382,364 0 340,237,797 340,237,797 249,786,564 244 0 0 0 0 340,238,041 0 15,967,394 0 1,524,854 14,442,540 0 0 14,442,540 0 (14,442,318) 0 0 199,781,437 (123,772,522) 14,442,318 90,451,455 22 0 0 0 1,454,423 0 1,524,854 289,299,889 1.00 0.050 0 (0.050) 0 0 1.00 0.52 0 0
EX-27.B 8 EXHIBIT 27B
6 002 VARIABLE SERIES QUALITY INCOME PLUS 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 458,507,136 468,171,123 6,797,751 3,268 0 474,972,142 0 0 311,930 311,930 0 492,383,880 45,752,768 47,512,749 67,529 0 (27,455,184) 0 9,663,987 474,660,212 0 35,505,039 0 2,554,476 32,950,563 (2,603,573) 5,430,622 5,430,622 0 (33,491,200) 0 0 1,751,757 6,752,796 3,241,058 (1,759,981) 608,166 0 0 0 2,407,993 0 2,554,476 481,868,347 10.96 .71 (.58) (.72) 0 0 10.37 (.53) 0 0
EX-27.C 9 EXHIBIT 27C
6 003 VARIABLE HIGH YIELD 12-MOS DEC-31-1996 DEC-31-1996 271,037,172 254,650,969 5,768,186 26,976 0 260,446,129 748,750 0 148,838 897,588 0 355,214,812 42,004,612 24,631,052 15,210 0 (79,393,278) 0 (16,386,203) 239,548,541 0 26,452,356 0 1,036,806 25,415,550 (5,282,128) 2,235,871 22,369,293 0 25,844,750 0 0 15,513,116 2,293,681 4,153,525 105,258,856 17,067,326 (1,098,358) 0 0 1,009,452 0 1,036,806 20,890,318 6.26 0.77 (0.06) (0.79) 0 0 6.18 .51 0 0
EX-27.D 10 EXHIBIT 27D
6 004 VARIABLE UTILITIES 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 360,645,061 439,106,977 2,058,951 6,847 0 441,172,775 0 0 510,909 510,909 0 356,859,427 28,734,976 32,623,759 0 0 5,340,523 0 78,461,916 440,661,866 15,549,589 4,021,333 0 3,057,889 16,513,033 5,380,515 14,769,561 36,663,109 0 16,518,454 1,186,573 0 688,255 5,772,285 1,195,247 (38,408,279) 5,331 1,146,671 0 0 43,623 0 510,909 457,359,820 14.68 .55 .70 (.55) (.04) 0 15.34 .67 0 0
EX-27.E 11 EXHIBIT 27E
6 005 Variable Income Builder 2-MOS DEC-31-1997 MAR-31-1997 10,744,826 10,429,105 204,615 31,965 0 10,665,685 522,527 0 9,831 532,358 0 10,440,626 1,037,015 1 0 0 8,422 0 (315,721) 10,133,327 29,237 32,211 0 0 61,448 8,422 (315,721) (245,851) 0 (61,448) 0 0 1,030,918 (194) 6,290 10,133,317 0 0 0 0 7,851 0 17,217 5,458,653 10.00 .06 (.23) (.06) 0 0 9.77 0 0 0
EX-27.F 12 EXHIBIT 27F
6 006 DIVIDEND GROWTH 12-MOS DEC-31-1996 DEC-31-1996 987,974,603 1,286,987,922 4,681,580 10,044 0 1,291,679,546 2,604,650 0 671,069 3,275,119 0 915,310,805 70,017,080 55,505,453 105 0 74,080,198 0 297,013,317 1,288,404,427 29,108,427 3,060,823 0 6,056,111 26,113,139 76,341,307 126,566,513 229,020,959 0 26,130,285 25,851,874 0 12,705,268 1,315,470 3,121,829 422,987,601 17,214 23,590,802 0 0 5,902,896 0 6,056,111 1,059,543,372 15.59 .41 3.22 (.41) (.41) 0 18.4 .57 0 0
EX-27.G 13 EXHIBIT 27G
6 007 VARIABLE CAPITAL GROWTH 12-MOS DEC-31-1996 DEC-31-1996 77,344,718 87,235,988 669,001 1,922 0 87,906,911 963,365 0 81,396 1,044,761 0 65,244,908 5,215,456 4,400,596 406,472 0 11,319,500 0 9,981,270 86,860,150 691,115 283,463 0 567,764 406,814 11,957,509 (4,318,064) 8,046,259 0 (132,322) (1,337,440) 0 1,329,674 (611,382) 96,568 19,866,980 131,980 600,431 0 0 509,004 0 567,764 78,308,312 15.22 0.08 1.65 (0.03) (0.27) 0 16.65 0.73 0 0
EX-27.H 14 EXHIBIT 27H
6 008 VARIABLE GLOBAL DIVIDEND GROWTH 12-MOS DEC-31-1996 DEC-31-1996 295,999,690 337,514,490 2,138,922 1,282,732 0 340,936,144 5,790,815 0 324,387 6,115,202 0 276,789,851 25,502,657 17,604,594 348,453 0 16,157,781 0 41,524,857 334,820,942 7,259,862 186,926 0 2,267,973 5,178,815 17,454,295 21,236,500 43,869,610 0 5,251,754 6,985,311 0 7,330,384 440,583 1,008,262 129,082,418 73,685 6,036,504 0 0 2,005,162 0 2,267,973 267,354,995 11.69 .24 1.75 (.24) (.31) 0 13.13 .85 0 0
EX-27.I 15 EXHIBIT 27I
6 009 VARIABLE EUROPEAN GROWTH 12-MOS DEC-31-1996 DEC-31-1996 226,432,845 300,207,994 1,253,995 1,573,401 0 303,035,390 268,425 0 344,911 613,336 0 208,223,367 14,026,817 10,731,379 1,522,404 0 18,894,963 0 73,781,320 302,422,054 4,226,975 628,715 0 2,591,198 2,264,492 19,547,703 41,074,663 62,886,858 0 531,371 11,996,632 0 3,131,701 514,185 677,922 114,302,645 0 11,343,892 210,717 0 2,332,742 0 2,591,198 233,274,168 17.53 0.17 4.91 (0.04) (1.01) 0 21.56 1.11 0 0
EX-27.J 16 EXHIBIT 27J
6 010 VARIABLE PACIFIC GROWTH 12-MOS DEC-31-1996 DEC-31-1996 136,505,595 143,703,692 78,688 1,667,678 0 145,450,058 478,468 0 435,133 913,601 0 143,272,989 14,506,677 10,136,924 1,663,988 0 (7,597,217) 0 7,196,697 144,536,457 2,911,717 412,382 0 1,911,500 1,412,599 (2,475,077) 3,540,345 2,477,867 0 (1,651,362) 0 0 6,522,537 (2,326,246) 173,462 46,206,162 1,563,457 (4,782,846) 0 0 1,397,813 0 1,911,500 139,781,359 9.70 0.05 0.32 (0.11) 0 0 9.96 1.37 0 0
EX-27.K 17 EXHIBIT 27K
6 010 Variable Capital Appreciation 2-MOS DEC-31-1997 MAR-31-1997 9,637,438 8,678,389 92,297 0 0 8,770,686 100,350 0 53,029 153,379 0 9,541,116 961,229 1 44,773 0 (9,533) 0 (959,049) 8,617,307 420 44,353 0 0 44,773 (9,533) (959,049) (923,809) 0 0 0 0 1,015,449 (54,221) 0 8,617,297 0 0 0 0 8,781 0 18,770 6,104,824 10 .05 (1.09) 0 0 0 8.96 0 0 0
EX-27.L 18 EXHIBIT 27L
6 012 VARIABLE EQUITY 12-MOS DEC-31-1996 DEC-31-1996 477,591,841 520,471,610 5,010,900 5,600 0 525,488,110 3,300,270 0 279,416 3,579,686 0 437,122,352 19,778,958 13,258,498 763 0 41,905,540 0 42,879,769 521,908,424 3,304,593 1,628,837 0 2,376,458 2,556,972 42,116,968 5,775,201 50,449,141 0 (2,577,952) (54,814,557) 0 4,838,072 (770,532) 2,452,920 162,129,054 21,743 54,603,129 0 0 2,211,777 0 2,376,458 442,355,307 27.14 .16 2.70 (.16) (3.45) 0 26.39 .54 0 0
EX-27.M 19 EXHIBIT 27M
6 013 VARIABLE STRATEGIST 12-MOS DEC-31-1996 DEC-31-1996 377,670,767 420,815,559 3,188,705 2,994 0 424,007,258 0 0 239,406 239,406 0 370,797,235 30,890,244 31,223,334 16,567 0 9,809,258 0 43,144,792 423,767,852 4,655,430 10,578,267 0 2,089,872 13,143,825 9,836,251 32,734,426 55,714,502 0 13,174,571 3,569,367 0 1,954,971 3,573,439 1,285,378 35,188,683 47,313 3,542,374 0 0 1,994,396 0 2,089,872 398,879,165 12.45 .43 1.39 (.43) (.12) 0 13.72 .52 0 0
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