<PAGE>
DEAN WITTER JAPAN FUND TWO WORLD TRADE CENTER, NEW YORK, NEW YORK
10048
LETTER TO THE SHAREHOLDERS MAY 31, 1997
DEAR SHAREHOLDER:
The fiscal year ended May 31, 1997, was characterized by considerable volatility
in Japan's equity and currency markets. The value of the yen ranged from 105 to
127 to the dollar, while the Nikkei Index traded between 17,000 to just above
22,000. Such a volatile environment contributed to the already depressed
Japanese domestic sentiment.
News that corporate results had been good for the year ended in March failed to
overcome more negative news contained in the quarterly "Tankan" survey of
business sentiment released by the Bank of Japan in June. Many investors adopted
a "wait and see" attitude, which had the effect of reducing the market's
volatility until November. This period of unusual stability saw the market
trading around 21,000. This environment came to an abrupt end in December 1996
and January 1997, however, when the market fell by almost 20 percent. Concern
over a slowing economy, the impact of impending fiscal tightening, continued
problems in the financial sector and a poor supply/demand environment were all
cited as reasons for the sudden sell-off.
In February 1997 the market rebounded and regained approximately half its
losses. However, this rally proved to be short-lived and the market retreated
once again in the face of further "Sokaiya" (gangster related) revelations at
Nomura, the declared insolvency of Nissan Life and rumors of yet more troubles
in the financial system.
On April 1, with the arrival of Japan's new fiscal year and corresponding
additional pension fund money, the market began to move higher. Foreigners,
encouraged by this domestic buying, escalated the movement and drove the market
to a new high for the year above 20,000. In May, the punitive currency
environment for U.S. dollar-based investors reversed dramatically, with the yen
strengthening to 112 to the dollar before settling to around 116 at month-end.
<PAGE>
DEAN WITTER JAPAN FUND
LETTER TO THE SHAREHOLDERS MAY 31, 1997, CONTINUED
PERFORMANCE AND PORTFOLIO
During the fiscal year ended May 31, 1997, the Fund produced a total return of
- -8.53 percent compared to -15.27 percent for the Morgan Stanley Capital
International (MSCI) Japan Index and -8.66 percent for the Lipper Japanese Funds
Average. The accompanying chart compares the performance of the Fund to that of
the MSCI Japan Index and the Lipper Japanese Funds Average.
We did not make significant portfolio allocation changes during the year. We
continued to underweight banks and favor international blue-chip companies. The
Fund currently maintains cash reserves of approximately 5 percent to take
advantage of any buying opportunities that may present themselves in this
volatile environment.
LOOKING AHEAD
[GRAPHIC]
The dramatic market rise in the last
two months of the period under review
may encourage some short-term profit
taking. However, the outlook for 1997
remains positive. Throughout the
period, evidence continued to emerge
that the economy was still growing,
that corporate profits were on their
way to posting double-digit gains and
that both the currency and interest
rates were supporting the renewed
growth. In addition, the forecasters
who had previously been the most
pessimistic are now revising their
predictions upwards and profit
estimates to March 1998 show a fourth
consecutive year of growth.
Confirmation of economic improvement,
possibly from the Tankan survey that is
due to be released on June 25, should
help domestic confidence and allow the
market to test the highs seen in June
1996.
[GRAPHIC]
While it is still too early to
determine the full impact of Japan's
fiscal tightening, rate increases are
an expected part of an accelerating
economy and
EDGAR REPRESENTATION OF DATA POINTS USED
IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
Growth of $10,000
($ in Thousands) 26-Apr-91 31-May-96 31-May-97
<S> <C> <C> <C>
Fund 10000 9610 8438(3)
MSCI Japan 10000 9481 8033
Lipper Avg. 10000 9653 8817
Average Annual Total Returns
Life of
1 Year Fund
- -8.53(1) -11.11(1)
- -13.11(2) -14.36(2)
Past performance is not predictive of future returns.
(1) Figure shown does not reflect the deduction of any
sales charges.
(2) Figure shown assumes the deduction of the maximum
applicable contingent deferred sales charge (CDSC) (one
year-
5%, since inception 4%). See the Fund's current
prospectus
for complete details on fees and sales charges.
(3) Closing value after the deduction of a 4% CDSC, as-
suming a
complete redemption on May 31, 1997.
(4) The Morgan Stanley Capital International Japan Index
is a
capitalization weighted index that measures performance,
in
US dollars of companies listed on the Japanese Stock
Exchange. The index does not include any expenses, fees
or
charges or reinvestment of dividends. The index is un-
managed
and should not be considered an investment.
(5) The Lipper Japanese Funds Average tracks the
performance
of all funds that concentrate their investments in equity
securities
of Japanese companies.
</TABLE>
<PAGE>
DEAN WITTER JAPAN FUND
LETTER TO THE SHAREHOLDERS MAY 31, 1997, CONTINUED
they are unlikely to choke off growth. They may, in fact, limit the flow of
capital out of Japan and into other world markets that offer higher bond yields.
On June 30, 1997, the Fund's Board of Trustees approved a proposal to adopt a
multiple class share structure. Through this arrangement, the Fund will offer
four classes of shares with various sales charges, ongoing fees and other
features. This conversion is scheduled to take place on July 28, 1997. A revised
prospectus, which includes complete details regarding this change, will be
mailed to shareholders in the coming weeks.
We appreciate your support over this difficult period and look forward to
continuing to serve your investment needs and objectives.
Very truly yours,
[SIGNATURE]
CHARLES A. FIUMEFREDDO
CHAIRMAN OF THE BOARD
<PAGE>
DEAN WITTER JAPAN FUND
RESULTS OF SPECIAL MEETING (UNAUDITED)
On May 21, 1997, a special meeting of the Fund's shareholders was held for the
purpose of voting on five separate matters, the results of which are as follows:
1) Approval of a new Investment Management Agreement between the Fund and Dean
Witter InterCapital Inc. in connection with the merger of Morgan Stanley
Group Inc. with Dean Witter Discover & Co.:
<TABLE>
<CAPTION>
VOTE NO. OF SHARES
- -------------------------------------------------- -------------
<S> <C>
For............................................... 12,554,397
Against........................................... 421,968
Abstain........................................... 1,014,909
</TABLE>
2) Approval of a new Sub-Advisory Agreement between Dean Witter InterCapital
Inc. and Morgan Grenfell Investment Services Limited, in connection with the
merger of Morgan Stanley Group Inc. with Dean Witter, Discover & Co.:
<TABLE>
<CAPTION>
NO. OF
VOTE SHARES
- -------------------------------------------------- ------------
<S> <C>
For............................................... 12,493,863
Against........................................... 468,290
Abstain........................................... 1,019,121
</TABLE>
3) Election of Trustees:
<TABLE>
<CAPTION>
FOR
-------------------
<S> <C>
Michael Bozic.......................................................................................... 13,024,424
Charles A. Fiumefreddo................................................................................. 13,025,153
Edwin J. Garn.......................................................................................... 13,032,072
John R. Haire.......................................................................................... 13,006,840
Wayne E. Hedien........................................................................................ 13,022,968
Dr. Manuel H. Johnson.................................................................................. 13,029,763
Michael E. Nugent...................................................................................... 13,035,164
Philip J. Purcell...................................................................................... 13,048,557
John L. Schroeder...................................................................................... 13,024,647
<CAPTION>
WITHHELD
--------------
<S> <C>
Michael Bozic.......................................................................................... 956,850
Charles A. Fiumefreddo................................................................................. 956,121
Edwin J. Garn.......................................................................................... 949,202
John R. Haire.......................................................................................... 974,434
Wayne E. Hedien........................................................................................ 958,306
Dr. Manuel H. Johnson.................................................................................. 951,511
Michael E. Nugent...................................................................................... 946,110
Philip J. Purcell...................................................................................... 932,717
John L. Schroeder...................................................................................... 956,627
</TABLE>
<PAGE>
DEAN WITTER JAPAN FUND
RESULTS OF SPECIAL MEETING (UNAUDITED), CONTINUED
4) Approval of a new investment policy with respect to investments in certain
other investment companies:
<TABLE>
<CAPTION>
VOTE NO. OF SHARES
- -------------------------------------------------- -------------
<S> <C>
For............................................... 12,193,663
Against........................................... 614,258
Abstain........................................... 1,173,353
</TABLE>
5) Ratification of the selection of Price Waterhouse LLP as the Fund's
independent accountants:
<TABLE>
<CAPTION>
VOTE NO. OF SHARES
- -------------------------------------------------- -------------
<S> <C>
For............................................... 12,828,025
Against........................................... 304,426
Abstain........................................... 848,823
</TABLE>
<PAGE>
DEAN WITTER JAPAN FUND
PORTFOLIO OF INVESTMENTS MAY 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (94.7%)
AUTOMOBILES (7.2%)
298,000 Bridgestone Corp................... $ 6,744,750
505,000 Mitsubishi Motors Corp............. 3,746,213
260,000 Nissan Motor Co. Ltd............... 1,727,367
401,000 Suzuki Motor Co. Ltd............... 5,038,382
---------------
17,256,712
---------------
BANKING (4.5%)
107,000 Asahi Bank, Ltd.................... 700,749
354,000 Bank of Tokyo-Mitsubishi Ltd....... 6,153,873
155,000 Mitsubishi Trust & Banking......... 2,227,625
180,000 Sumitomo Trust & Banking........... 1,595,525
---------------
10,677,772
---------------
BUILDING & CONSTRUCTION (0.9%)
164,000 National House Industrial.......... 2,258,176
---------------
BUSINESS & PUBLIC SERVICES (3.8%)
33,000 Asatsu Inc......................... 1,082,014
164,000 Mitsubishi Logistic................ 2,356,971
80,000 Secom Co........................... 5,769,363
---------------
9,208,348
---------------
BUSINESS EQUIPMENT (1.4%)
257,000 Ricoh Company, Ltd................. 3,383,907
---------------
CHEMICALS (5.6%)
810,000 Asahi Chemical Industrial Co.
Ltd.............................. 4,517,040
322,000 Nippon Zeon Co. Ltd................ 1,540,723
297,000 Shin-Etsu Chemical Co.............. 7,463,339
---------------
13,521,102
---------------
ELECTRICAL EQUIPMENT (15.4%)
368,000 Canon, Inc......................... 9,342,513
656,000 Hitachi, Ltd....................... 7,000,344
378,000 Matsushita Electric Industrial Co.,
Ltd.............................. 7,124,096
181,000 Matsushita Electric Works.......... 2,009,380
220,000 Omron Corp......................... 4,449,225
82,100 Sony Corp.......................... 6,931,162
---------------
36,856,720
---------------
ELECTRONICS (14.3%)
539,000 Furukawa Electric Co............... 3,200,602
43,000 Kyocera Corp....................... 3,104,733
41,500 Mabuchi Motor Co................... 2,364,286
248,000 Minebea Co., Ltd................... 2,433,046
93,000 Murata Manufacturing Co., Ltd...... 3,761,618
356,000 NGK Insulators, Ltd................ 3,492,599
<CAPTION>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------
<C> <S> <C>
106,000 Olympus Optical Co. Ltd............ $ 904,010
87,000 Rohm Co., Ltd...................... 9,059,380
380,000 Sumitomo Electric Industries....... 5,984,509
---------------
34,304,783
---------------
ENGINEERING & CONSTRUCTION (2.2%)
366,000 Kajima Corp........................ 2,050,482
146,000 Kandenko Co., Ltd.................. 1,155,938
154,000 Kinden Corp........................ 2,054,217
---------------
5,260,637
---------------
FINANCIAL SERVICES (3.2%)
33,000 Japan Associated Finance........... 2,572,978
313,000 New Japan Securities Co., Ltd...... 818,864
365,000 Nomura Securities Co. Ltd.......... 4,334,768
---------------
7,726,610
---------------
INSURANCE (2.2%)
245,000 Sumitomo Marine & Fire............. 1,855,422
286,000 Tokio Marine & Fire Insurance
Co............................... 3,371,945
---------------
5,227,367
---------------
INTERNATIONAL TRADE (2.9%)
593,000 Mitsubishi Corp.................... 6,991,480
---------------
MACHINERY (5.7%)
207,030 Asahi Diamond Industries Co.
Ltd.............................. 1,852,936
1,641,000 Kawasaki Heavy Industries.......... 7,117,590
719,000 NSK Ltd............................ 4,714,957
---------------
13,685,483
---------------
METALS (1.4%)
855,000 Mitsubishi Materials Corp.......... 3,318,460
---------------
PHARMACEUTICALS (3.2%)
193,000 Banyu Pharmaceutical Co. Ltd....... 3,504,561
130,000 Sankyo Co. Ltd..................... 4,128,227
---------------
7,632,788
---------------
REAL ESTATE (2.9%)
262,000 Mitsubishi Estate Co. Ltd.......... 3,585,026
273,000 Mitsui Fudosan Co.................. 3,453,614
---------------
7,038,640
---------------
RECREATION (1.7%)
28,000 H.I.S. Company Ltd................. 1,421,687
56,900 Sony Music Entertainment Inc....... 2,693,201
---------------
4,114,888
---------------
RETAIL (4.4%)
64,570 FamilyMart......................... 2,956,217
92,000 Ito-Yokado Co. Ltd................. 5,257,143
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER JAPAN FUND
PORTFOLIO OF INVESTMENTS MAY 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------
<C> <S> <C>
70,000 York-Benimaru...................... $ 2,222,892
---------------
10,436,252
---------------
RETAIL - DEPARTMENT STORES (0.5%)
93,000 Isetan............................. 1,200,516
---------------
RETAIL - SPECIALTY (0.4%)
95,000 Best Denki Co. Ltd................. 948,365
---------------
STEEL & IRON (2.9%)
889,000 Kobe Steel Ltd..................... 1,713,735
1,746,000 NKK Corp........................... 3,440,912
178,000 Yamato Kogyo Co., Ltd.............. 1,761,618
---------------
6,916,265
---------------
TELECOMMUNICATIONS (5.0%)
702 DDI Corp........................... 5,249,897
700 Nippon Telegraph & Telephone
Corp............................. 6,686,747
---------------
11,936,644
---------------
TEXTILES (2.7%)
432,000 Teijin Ltd......................... 1,825,405
327,000 Tokyo Style........................ 4,530,723
---------------
6,356,128
---------------
TRANSPORTATION (0.3%)
145,000 Tobu Railway Co. Ltd............... 651,377
---------------
TOTAL COMMON STOCKS
(IDENTIFIED COST $242,066,950)..... 226,909,420
---------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (a) (4.7%)
U.S. GOVERNMENT AGENCY
$ 11,300 Federal Home Loan Mortgage Corp.
5.55% due 06/02/97 (Amortized
Cost $11,298,258)................. $ 11,298,258
---------------
TOTAL INVESTMENTS
(IDENTIFIED COST $253,365,208) (b)..... 99.4% 238,207,678
CASH AND OTHER ASSETS IN EXCESS OF
LIABILITIES............................ 0.6 1,511,273
------ ----------------
NET ASSETS............................. 100.0% $ 239,718,951
------ ----------------
------ ----------------
<FN>
- ---------------------
(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 $17,719,480 and the
aggregate gross unrealized depreciation is $32,877,010, resulting in net
unrealized depreciation of $15,157,530.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER JAPAN FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $253,365,208)............................ $238,207,678
Cash........................................................ 40,543
Receivable for:
Shares of beneficial interest sold...................... 1,359,987
Dividends............................................... 554,991
Foreign withholding taxes reclaimed..................... 63,379
Deferred organizational expenses............................ 161,429
Prepaid expenses............................................ 47,115
------------
TOTAL ASSETS........................................... 240,435,122
------------
LIABILITIES:
Payable for:
Shares of beneficial interest repurchased............... 202,851
Plan of distribution fee................................ 195,012
Investment management fee............................... 195,012
Organizational expenses..................................... 10,624
Accrued expenses............................................ 112,672
------------
TOTAL LIABILITIES...................................... 716,171
------------
NET ASSETS:
Paid-in-capital............................................. 272,811,447
Net unrealized depreciation................................. (15,124,309)
Accumulated net realized loss............................... (17,968,187)
------------
NET ASSETS............................................. $239,718,951
------------
------------
NET ASSET VALUE PER SHARE,
27,271,151 SHARES OUTSTANDING (UNLIMITED SHARES AUTHORIZED
OF $.01 PAR VALUE)........................................
$8.79
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER JAPAN FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1997
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INCOME
Dividends (net of $233,365 foreign withholding tax)......... $ 1,284,631
Interest (net of $291 foreign withholding tax).............. 306,454
------------
TOTAL INCOME........................................... 1,591,085
------------
EXPENSES
Investment management fee................................... 2,415,212
Plan of distribution fee.................................... 2,415,212
Transfer agent fees and expenses............................ 520,023
Custodian fees.............................................. 260,257
Professional fees........................................... 88,710
Shareholder reports and notices............................. 64,248
Registration fees........................................... 44,608
Organizational expenses..................................... 41,858
Trustees' fees and expenses................................. 15,237
Other....................................................... 7,309
------------
TOTAL EXPENSES......................................... 5,872,674
------------
NET INVESTMENT LOSS.................................... (4,281,589)
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss on:
Investments............................................. (17,175,448)
Foreign exchange transactions........................... (283,295)
------------
NET LOSS............................................... (17,458,743)
------------
Net change in unrealized appreciation/depreciation on:
Investments............................................. (5,786,686)
Translation of forward foreign currency contracts, other
assets and liabilities denominated in foreign
currencies............................................ (22,247)
------------
NET DEPRECIATION....................................... (5,808,933)
------------
NET LOSS............................................... (23,267,676)
------------
NET DECREASE................................................ $(27,549,265)
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER JAPAN FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR APRIL 26, 1996*
ENDED THROUGH
MAY 31, 1997 MAY 31, 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss............................... $ (4,281,589) $ (129,720)
Net realized loss................................. (17,458,743) (805,476)
Net change in unrealized depreciation............. (5,808,933) (9,315,376)
---------------------- ----------------------
NET DECREASE................................. (27,549,265) (10,250,572)
Net increase (decrease) from transactions in
shares of beneficial interest................... (6,276,032) 283,694,820
---------------------- ----------------------
NET INCREASE (DECREASE)...................... (33,825,297) 273,444,248
NET ASSETS:
Beginning of period............................... 273,544,248 100,000
---------------------- ----------------------
END OF PERIOD................................ $239,718,951 $ 273,544,248
---------------------- ----------------------
---------------------- ----------------------
</TABLE>
- ---------------------
* Commencement of operations.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER JAPAN FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1997
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter Japan Fund (the "Fund") is registered under the Investment Company
Act of 1940, as amended (the "Act"), as a non-diversified, open-end management
investment company. The Fund's investment objective is to seek long-term capital
appreciation. The Fund seeks to meet its investment objective by investing
primarily in securities of issuers located in Japan. The Fund was organized as a
Massachusetts business trust on January 22, 1996 and had no operations other
than those relating to organizational matters and the issuance of 10,000 shares
of beneficial interest for $100,000 to Dean Witter InterCapital Inc. (the
"Investment Manager") to effect the Fund's initial capitalization. The Fund
commenced operations on April 26, 1996.
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 or 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 be based upon current market prices of
securities which are comparable in coupon, rating and maturity or an appropriate
matrix utilizing similar factors); (4) certain 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, if
available, 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 time of
<PAGE>
DEAN WITTER JAPAN FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1997, CONTINUED
purchase are valued on a mark-to-market basis until sixty days prior to maturity
and thereafter at amortized cost based on their value on the 61st day.
Short-term debt securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date
except for certain dividends on foreign securities which are recorded as soon as
the Fund is informed after the ex-dividend date. Discounts are accreted over the
life of the respective securities. Interest income is accrued daily.
C. FOREIGN CURRENCY TRANSLATION -- The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, other assets and liabilities and forward foreign currency
contracts are translated at the exchange rates prevailing at the end of the
period; and (2) purchases, sales, income and expenses are translated at the
exchange rates prevailing on the respective dates of such transactions. The
resultant exchange gains and losses are included in the Statement of Operations
as realized and unrealized gain/loss on foreign exchange transactions. Pursuant
to U.S. Federal income tax regulations, certain foreign exchange gains/losses
included in realized and unrealized gain/loss are included in or are a reduction
of ordinary income for federal income tax purposes. The Fund does not isolate
that portion of the results of operations arising as a result of changes in the
foreign exchange rates from the changes in the market prices of the securities.
D. FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may enter into forward
foreign currency contracts which are valued daily at the appropriate exchange
rates. The resultant unrealized exchange gains and losses are included in the
Statement of Operations as unrealized foreign currency gain or loss and in the
Statement of Assets and Liabilities as part of the related foreign currency
denominated asset or liability. The Fund records realized gains or losses on
delivery of the currency or at the time the forward contract is extinguished
(compensated) by entering into a closing transaction prior to delivery.
E. 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.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment
<PAGE>
DEAN WITTER JAPAN FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1997, CONTINUED
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.
G. ORGANIZATIONAL EXPENSES -- The Investment Manager paid the organizational
expenses of the Fund in the amount of approximately $207,000 and will be
reimbursed for the full amount thereof. Such expenses have been deferred and are
being amortized on the straight-line method over a period not to exceed five
years from the commencement of operations.
2. INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, calculated daily and payable monthly, by applying the
annual rate of 1.0% to the net assets of the Fund 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.
Under a Sub-Advisory Agreement between the Sub-Adviser and the Investment
Manager, the Sub-Adviser provides the Fund with investment advice and portfolio
management relating to the Fund's investments in securities, subject to the
overall supervision of the Investment Manager. As compensation for the services
provided pursuant to the Sub-Advisory Agreement, the Investment Manager pays the
Sub-Adviser monthly compensation equal to 40% of its monthly compensation.
<PAGE>
DEAN WITTER JAPAN FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1997, CONTINUED
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Fund has adopted a
Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act pursuant
to which the Fund pays the Distributor compensation, accrued daily and payable
monthly, at an annual rate of 1.0% of the lesser of: (a) the average daily
aggregate gross sales of the Fund's shares since the Fund's inception (not
including reinvestment of dividend or capital gain distributions) less the
average daily aggregate net asset value of the Fund's shares redeemed since the
Fund's inception upon which a contingent deferred sales charge has been imposed
or upon which such charge has been waived; or (b) the Fund's average daily net
assets. Amounts paid under the Plan are paid to the Distributor to compensate it
for the services provided and the expenses borne by it and others in the
distribution of the Fund's shares, including the payment of commissions for
sales of the Fund's shares and incentive compensation to, and expenses of, the
account executives of Dean Witter Reynolds Inc. ("DWR"), an affiliate of the
Investment Manager and Distributor, and others who engage in or support
distribution of the Fund's shares or who service shareholder accounts, including
overhead and telephone expenses, printing and distribution of prospectuses and
reports used in connection with the offering of the Fund's shares to other than
current shareholders and preparation, printing and distribution of sales
literature and advertising materials. In addition, the Distributor may utilize
fees paid pursuant to the Plan to compensate DWR and other selected
broker-dealers for their opportunity costs in advancing such amounts which
compensation would be in the form of a carrying charge on any unreimbursed
distribution expenses incurred by the Distributor.
Provided that the Plan continues in effect, any cumulative expenses incurred but
not yet recovered by the Distributor, may be recovered through future
distribution fees from the Fund and contingent deferred sales charges from the
Fund's shareholders.
Although there is no legal obligation for the Fund to pay expenses incurred in
excess of payments made to the Distributor under the Plan and the proceeds of
contingent deferred sales charges paid by investors upon redemption of shares,
if for any reason the Plan is terminated, the Trustees will consider at that
time the manner in which to treat such expenses. The Distributor has advised the
Fund that such excess amounts, including carrying charges, totaled $16,474,444
at May 31, 1997.
The Distributor has informed the Fund that for the year ended May 31, 1997, it
received approximately $1,042,000 in contingent deferred sales charges from
redemptions of the Fund's shares.
<PAGE>
DEAN WITTER JAPAN FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1997, CONTINUED
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended May 31, 1997 aggregated $58,866,362
and $58,160,947, respectively.
Dean Witter Trust Company, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At May 31, 1997, the Fund had
transfer agent fees and expenses payable of approximately $37,000.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR APRIL 26, 1996*
ENDED THROUGH
MAY 31, 1997 MAY 31, 1996
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Sold............................................................. 13,534,303 $ 114,115,612 28,633,915 $285,529,384
Repurchased...................................................... (14,718,440) (120,391,644) (188,627) (1,834,564)
----------- -------------- ----------- ------------
Net increase (decrease).......................................... (1,184,137) $ (6,276,032) 28,445,288 $283,694,820
----------- -------------- ----------- ------------
----------- -------------- ----------- ------------
<FN>
- ---------------------
* Commencement of operations.
</TABLE>
6. FEDERAL INCOME TAX STATUS
At May 31, 1997, the Fund had a net capital loss carryover of approximately
$871,000 which will be available through May 31, 2005 to offset future capital
gains to the extent provided by regulations.
Capital and foreign currency losses incurred after October 31 ("post-October
losses") within the taxable year are deemed to arise on the first business day
of the Fund's next taxable year. The Fund incurred and will elect to defer net
capital and foreign currency losses of approximately $16,741,000 and $357,000,
respectively during fiscal 1997.
As of May 31, 1997, the Fund had temporary book/tax differences primarily
attributable to post-October losses and permanent book/tax differences primarily
attributable to a net operating loss, foreign currency losses and tax
adjustments on passive foreign investment companies sold by the Fund. To reflect
reclassifications arising from the permanent differences, paid-in-capital was
charged $4,577,621, accumulated net realized loss was credited $296,032 and net
investment loss was credited $4,281,589.
<PAGE>
DEAN WITTER JAPAN FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1997, CONTINUED
7. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward foreign currency contracts ("forward contracts")
to facilitate settlement of foreign currency denominated portfolio transactions
or to manage foreign currency exposure associated with foreign currency
denominated securities.
Forward contracts involve elements of market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the foreign exchange rates underlying the forward
contracts. Risks may also arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
At May 31, 1997, there were no outstanding forward contracts.
8. SUBSEQUENT EVENT
On June 30, 1997, the Fund's Board of Trustees approved a proposal to adopt a
multiple class share structure. Through this arrangement, the Fund will offer
four classes of shares with various sales charges, ongoing fees and other
features. This conversion is scheduled to take place on July 28, 1997.
<PAGE>
DEAN WITTER JAPAN FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR APRIL 26, 1996*
ENDED THROUGH
MAY 31, 1997 MAY 31, 1996
- ------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 9.61 $ 10.00
-------- --------
Net investment loss................ (0.16) --
Net realized and unrealized loss... (0.66) (0.39)
-------- --------
Net asset value, end of period..... $ 8.79 $ 9.61
-------- --------
-------- --------
TOTAL INVESTMENT RETURN+........... (8.53)% (3.90)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses........................... 2.43% 2.84%(2)
Net investment loss................ (1.77)% (0.52)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands......................... $239,719 $273,544
Portfolio turnover rate............ 25% --
Average commission rate paid....... $ 0.0227 $ 0.0424
<FN>
- ---------------------
* Commencement of operations.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER JAPAN FUND
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER JAPAN FUND
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dean Witter Japan Fund (the "Fund")
at May 31, 1997, the results of its operations for the year then ended, and the
changes in its net assets and the financial highlights for the year then ended
and for the period April 26, 1996 (commencement of operations) through May 31,
1996, 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 May 31,
1997 by correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
JULY 10, 1997
