<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND Two World Trade Center,
LETTER TO THE SHAREHOLDERS July 31, 1998 New York, New York 10048
DEAR SHAREHOLDER:
The twelve-month period ending July 31, 1998, was a volatile one for the stock
market as a whole and a difficult period for small-cap stocks in particular.
Concerns regarding Asia, in addition to concerns about the durability of the
bull market in the United States, caused many investors to seek out the large
companies believed to be safer and more liquid. This sentiment has
characterized recent investor psychology in the small-cap market, despite the
historic low valuation levels of these equities relative to large caps.
PERFORMANCE
For the fiscal year ended July 31, 1998, Morgan Stanley Dean Witter Special
Value Fund's Class B shares returned 2.02 percent, compared with 19.28 percent
for the Standard & Poor's 500 Composite Stock Price Index (S&P 500), 2.31
percent for the Russell 2000 Index and 1.60 percent for the Lipper Small-Cap
Funds Index. During the same period, the Fund's Class A, C and D shares posted
total returns of 2.79 percent, 2.02 percent and 3.04 percent, respectively. The
performance of the Fund's four share classes varies because of differing
expenses.
The accompanying chart illustrates the growth of a hypothetical $10,000
investment in the Fund's Class B shares since inception on October 29, 1996,
versus similar hypothetical investments in the issues that comprise the S&P
500, the Russell 2000 Index and the Lipper Small-Cap Funds Index.
PORTFOLIO
During the period under review, the Fund was overweighted in select reinsurance
companies, which were among the Fund's strongest performing holdings. Berkshire
Hathaway and General Re (one of the largest reinsurance companies) announced a
definitive agreement to merge in June of this year, sparking investor interest
in the entire sector. The Fund's position in Tracor (aerospace/defense) also
contributed positively to
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
LETTER TO THE SHAREHOLDERS July 31, 1998, continued
performance during the fiscal year. This stock, one of the portfolio's largest
holdings during the period, benefited from General Electric's takeover of the
company at a 25 percent premium to its market value.
The Fund's underperforming stocks included Banctec (computer equipment), which,
unfortunately, was a relatively large position in the portfolio during the
period under review. In March, we reevaluated our basis for holding this stock
and began to reduce our position. Although this holding dampened overall Fund
performance, the potential greater damage this stock may have had on the
portfolio was limited; in July, this stock continued to fall significantly.
During the fiscal year we substantially increased our positions in Paxar and
Tetra Technology, because of our belief that these are unique businesses
selling at bargain prices. Paxar is a worldwide distributor and manufacturer of
product identification systems for use in the textile and apparel industries,
including bar-code systems and printed and woven labels. This year the company
integrated two large acquisitions while still generating a 12 percent return on
capital, yet it sells at only 13 times its 1998 estimated earnings. Tetra
Technology is a specialty chemical company with a leading market share in
completion fluids (used in drilling oil and gas wells), micronutrients (used in
fertilizers and animal feed) and calcium chloride. Tetra also controls one of
the world's largest reserves of bromine (used in photographic compounds and in
the production of natural gas and oil).
The Fund's cash position was relatively high during the period under review
(10.2 percent on July 31, 1998) for two reasons. First, the Fund reopened to
new investors on December 16, 1997 and the Fund subsequently received a flow of
new assets. (Total net assets in the Fund grew from $293.06 million on December
15, 1997 to $367.66 million on December 31, 1997.) Second, at about the time
that we received additional cash, we viewed the valuations in the small-cap
market as particularly high. However, we have been moving toward a more fully
invested position since then because we have added to some existing positions
whose valuations have come down but which still represent sound, long-term
investments. We have also recently added new positions in companies that we
have determined now represent exceptionally good value. In the semiconductor
capital equipment area, for example, the Fund acquired ETEC and DuPont
Photomasks, both of which are market leaders in their respective niches. We
believe that they are currently undervalued by the market, as a result of the
negative sentiment that has been hanging over that sector.
2
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
LETTER TO THE SHAREHOLDERS July 31, 1998, continued
LOOKING AHEAD
We believe that the small-cap market is likely to remain volatile over the
coming year. However, this volatility may present opportunities for the Fund to
acquire stocks at attractive valuations. We appreciate your ongoing support of
Morgan Stanley Dean Witter Special Value Fund and look forward to continuing to
serve your investment needs.
Very truly yours,
/s/ Charles A. Fiumefreddo
- --------------------------
CHARLES A. FIUMEFREDDO
Chairman of the Board
3
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
FUND PERFORMANCE July 31, 1998
GROWTH OF $10,000 CLASS B
<TABLE>
<CAPTION>
DATE TOTAL S&P 500 LIPPER RUSSELL 2000
- ---------------- ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
October 29, 1996 $10,000 $10,000 $10,000 $10,000
July 31, 1997 $12,241 $13,818 $11,454 $12,417
July 31, 1998 $12,088 (3) $16,482 $11,638 $12,705
</TABLE>
--FUND --S&P 500(4) --LIPPER (5) --RUSSELL 2000 (6)
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. PERFORMANCE FOR CLASS A,
CLASS C, AND CLASS D SHARES WILL VARY FROM THE PERFORMANCE OF CLASS B SHARES
SHOWN ABOVE DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS*
- ----------------------------------------------------------------------------------------------------------------
CLASS B SHARES** CLASS A SHARES+
- ----------------------------------------------------------------------------------------------------------------
PERIOD ENDED 7/31/98 PERIOD ENDED 7/31/98
- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
1 Year 2.02%(1) -2.73%(2) 1 Year 2.79%(1) -2.61%(2)
Since Inception (10/29/96) 13.52%(1) 11.43%(2) Since Inception (7/28/97) 3.69%(1) -1.71%(2)
CLASS C SHARES++ CLASS D SHARES+++
- ----------------------------------------------------------------------------------------------------------------
PERIOD ENDED 7/31/98 PERIOD ENDED 7/31/98
- -------------------- --------------------
1 Year 2.02%(1) 1.07%(2) 1 Year 3.04%(1)
Since Inception (7/28/97) 2.92%(1) 2.92%(2) Since Inception (7/28/97) 3.95%(1)
</TABLE>
- --------------
(1) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable sales charge. See the Fund's current prospectus for
complete details on fees and sales charges.
(3) Closing value after the deduction of a 4% contingent deferred sales charge
(CDSC), assuming a complete redemption on July 31, 1998.
(4) The Standard & Poor's 500 Stock Index (S&P 500) is a broad-based index, the
performance of which is based on the average performance of 500 widely held
common stocks. The performance of the Index does not include any expenses,
fees or charges. The Index is unmanaged and should not be considered an
investment.
(5) The Lipper Small Cap Funds Index is an equally-weighted performance index of
the largest-qualifying funds (based on net assets) in the small cap funds
objective. The Index, which is adjusted for capital gain distributions and
income dividends, is unmanaged and should not be considered an investment.
There are currently 30 funds represented in this Index.
(6) The Russell 2000 Index is a capitalization weighted index which is comprised
of 2000 of the smallest stocks (on the basis of capitalization) in the
Russell 3000 Index. The index does not include any expenses, fees, or
charges. The index is unmanaged and should not be considered an investment.
* For periods of less than one year, the fund quotes its total return on a
non-annualized basis.
** The maximum CDSC for Class B shares is 5.00%. The CDSC declines to 0% after
six years.
+ The maximum front-end sales charge for Class A shares is 5.25%.
++ The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of purchase.
+++ Class D shares have no sales charge.
4
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
PORTFOLIO OF INVESTMENTS July 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (88.6%)
Agriculture (0.3%)
80,000 Sylvan, Inc.* ............................ $ 1,105,000
------------
Apparel (2.3%)
285,000 Kellwood Co. ............................. 9,048,750
------------
Banks -- Regional (1.2%)
85,000 Pacific Bank, N.A. ....................... 4,505,000
------------
Chemicals (1.3%)
238,000 NL Industries, Inc. ...................... 4,938,500
------------
Computer Equipment (0.7%)
175,000 BancTec, Inc.* ........................... 2,810,937
------------
Computer Software (1.6%)
200,000 Sybase, Inc.* ............................ 1,762,500
195,000 Timberline Software Corp. ................ 4,363,125
------------
6,125,625
------------
Computer Software & Services (3.1%)
520,000 Wang Laboratories, Inc.* ................. 12,025,000
------------
Containers (1.4%)
350,000 Gaylord Container Corp. (Class A)* ....... 2,012,500
63,000 Liqui-Box Corp. .......................... 3,213,000
------------
5,225,500
------------
Electronic Components (0.5%)
125,000 DII Group, Inc.* ......................... 2,031,250
------------
Electronics (0.8%)
85,900 Oak Industries, Inc.* .................... 3,189,037
------------
Electronics -- Semiconductors (1.7%)
495,000 Unitrode Corp.* .......................... 6,558,750
------------
Electronics -- Semiconductors/
Components (1.4%)
295,000 Exar Corp.* .............................. 5,310,000
------------
Energy Exploration (0.8%)
950,820 Hurricane Hydrocarbons Ltd.
(Class A) (Canada)* ..................... 3,090,165
------------
Energy Related (1.8%)
475,000 USEC Inc.* ............................... 6,768,750
------------
Entertainment/Gaming (0.7%)
660,000 GameTech International, Inc.* ............ 2,598,750
------------
Environmental Control (3.1%)
916,000 TETRA Technologies, Inc.* ................ 12,137,000
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------
<S> <C> <C>
Financial (2.1%)
185,000 Bank United Corp. (Class A) .............. $ 8,255,625
------------
Foods (3.1%)
410,000 Fleming Companies, Inc. .................. 6,278,125
145,400 J & J Snack Foods Corp.* ................. 2,798,950
157,500 Lance, Inc. .............................. 2,972,812
------------
12,049,887
------------
Healthcare (3.1%)
495,000 Magellan Health Services, Inc.* .......... 9,961,875
150,000 Sun Healthcare Group, Inc.* .............. 2,193,750
------------
12,155,625
------------
Hospital Management (1.2%)
250,000 Veterinary Centers of America, Inc.* ..... 4,718,750
------------
Housing & Home Furnishings (0.2%)
25,000 Pillowtex Corp. .......................... 812,500
------------
Industrials (0.2%)
30,000 Elsag Bailey Process Automation
N.V. (Netherlands)* ..................... 808,125
------------
Insurance (0.9%)
150,000 United Wisconsin Services, Inc. .......... 3,506,250
------------
Insurance & Financial Services (1.6%)
455,000 CNA Surety Corp.* ........................ 6,085,625
------------
Insurance Brokers (1.2%)
275,000 Willis Corroon Group PLC (ADR)
(United Kingdom) ........................ 4,468,750
------------
Labels (3.6%)
1,471,400 Paxar Corp.* ............................. 13,794,375
------------
Leasing (1.4%)
239,000 Willis Lease Finance Corp.* .............. 5,377,500
------------
Leisure (1.5%)
396,900 Midway Games, Inc.* ...................... 5,879,081
------------
Machinery & Machine Tools (1.3%)
204,900 Gleason Corp. ............................ 5,122,500
------------
Manufacturing -- Consumer &
Industrial Products (2.9%)
400,000 Baldwin Technology Co., Inc. (Class A)* .. 2,325,000
278,000 Denison International PLC (ADR)
(United Kingdom)* ....................... 4,830,250
382,500 Farr Co.* ................................ 4,111,875
------------
11,267,125
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
PORTFOLIO OF INVESTMENTS July 31, 1998, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------
<S> <C> <C>
Manufacturing -- Diversified (2.8%)
220,000 AMETEK, Inc ........................... $ 5,513,750
360,300 Scott Technologies, Inc. (Class A)* ... 5,179,312
------------
10,693,062
------------
Medical Equipment (1.4%)
225,000 Marquette Medical Systems, Inc.*....... 5,428,125
------------
Medical Products & Supplies (3.1%)
200,300 Conmed Corp.* ......................... 4,732,088
175,000 DENTSPLY International, Inc. .......... 4,462,500
83,000 GP Strategies Corp.* .................. 1,141,250
95,000 PSS World Medical, Inc.* .............. 1,472,500
------------
11,808,338
------------
Medical Services (1.8%)
190,000 Corvel Corp.* ......................... 7,148,750
------------
Metals (0.2%)
32,000 Penn Engineering &
Manfacturing Corp. (Class A) ......... 686,000
------------
Metals & Mining (2.1%)
180,000 Getchell Gold Corp.* .................. 2,430,000
210,000 Stillwater Mining Co.* ................ 5,748,750
------------
8,178,750
------------
Oil & Gas (2.0%)
430,000 Snyder Oil Corp. ...................... 7,740,000
------------
Oil & Gas Products (0.7%)
227,600 Willbros Group, Inc.* ................. 2,845,000
------------
Oil -- Exploration & Production (2.1%)
475,600 Forest Oil Corp.* ..................... 5,826,100
312,500 Petroglyph Energy, Inc.* .............. 2,304,688
------------
8,130,788
------------
Paper & Forest Products (0.6%)
200,000 Longview Fibre Co. .................... 2,350,000
------------
Property -- Casualty Insurance (0.6%)
140,000 Gryphon Holdings, Inc.* ............... 2,170,000
------------
Publishing (3.0%)
260,000 Hollinger International, Inc. (Class A) 4,143,750
236,700 Houghton Mifflin Co. .................. 7,456,050
------------
11,599,800
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------
<S> <C> <C>
Real Estate Investment Trust (3.3%)
146,000 Brandywine Realty Trust ............... $ 2,910,875
512,800 Mid-Atlantic Realty Trust ............. 6,666,400
116,000 Tanger Factory Outlet Centers, Inc. ... 3,327,750
------------
12,905,025
------------
Reinsurers (5.0%)
393,500 Chartwell Re Corp. .................... 11,362,313
180,000 RenaissanceRe Holdings, Ltd. (Bermuda). 8,043,750
------------
19,406,063
------------
Restaurants (1.1%)
216,400 Morrison Health Care Inc. ............. 4,179,225
------------
Retail (0.6%)
200,000 Lazare Kaplan International Inc.*...... 2,200,000
------------
Savings & Loan Associations (0.1%)
26,100 TeleBanc Financial Corp.* ............. 541,575
------------
Semiconductor Equipment (1.2%)
270,000 SpeedFam International, Inc.* ......... 4,556,250
------------
Steel & Iron (1.0%)
83,000 Cleveland-Cliffs, Inc. ................ 4,009,938
------------
Telecommunications (3.9%)
204,000 Asia Satellite Telecommunications
Holdings Ltd. (ADR) (Hong Kong) ...... 3,442,500
230,000 ECI Telecommunications Limited
Designs (Israel) ..................... 7,820,000
180,000 Western Wireless Corp. (Class A)* ..... 3,746,250
------------
15,008,750
------------
Textiles & Apparel (1.1%)
400,000 Burlington Industries, Inc.* .......... 4,175,000
------------
Transportation -- Miscellaneous (0.9%)
300,000 RailWorks Corp.* ...................... 3,450,000
------------
Utilities -- Electric (1.7%)
322,000 Calpine Corp.* ........................ 6,500,375
------------
Water (1.3%)
200,100 American States Water Co. ............. 4,952,475
------------
TOTAL COMMON STOCKS
(Identified Cost $348,869,391)......... 342,433,021
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
PORTFOLIO OF INVESTMENTS July 31, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- -----------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BOND (0.9%)
Semiconductor Equipment
$ 4,000 Lam Research Corp.
5.00% due 09/01/02
(Identified Cost $3,332,500)...... $ 3,240,440
------------
SHORT-TERM INVESTMENTS (10.2%)
U.S. GOVERNMENT AGENCY (a) (7.2%)
28,000 Federal Farm Credit Bank
5.45% due 08/04/98
(Amortized Cost $27,987,283)...... 27,987,283
------------
REPURCHASE AGREEMENT (3.0%)
11,406 The Bank of New York 5.50%
due 08/03/98 (dated 07/31/98;
proceeds $11,410,839) (b)
(Identified Cost $11,405,612)..... 11,405,612
------------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $39,392,895)...... 39,392,895
------------
</TABLE>
<TABLE>
<CAPTION>
VALUE
- ---------------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENTS
(Identified Cost $391,594,786) (c)..... 99.7% $385,066,356
OTHER ASSETS IN EXCESS OF
LIABILITIES ........................... 0.3 1,308,373
----- ------------
NET ASSETS ............................ 100.0% $386,374,729
===== ============
</TABLE>
- --------------------
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) Collateralized by $11,454,164 U.S. Treasury Note 5.75% due 11/30/02
valued at $11,633,724.
(c) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $24,532,936 and the
aggregate gross unrealized depreciation is $31,061,366, resulting in net
unrealized depreciation of $6,528,430.
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value (identified cost $391,594,786)........ $385,066,356
Receivable for:
Investments sold ...................................................... 9,397,639
Shares of beneficial interest sold .................................... 449,456
Dividends ............................................................. 112,300
Interest .............................................................. 84,910
Deferred organizational expenses ......................................... 116,315
Prepaid expenses and other assets ........................................ 89,075
------------
TOTAL ASSETS .......................................................... 395,316,051
------------
LIABILITIES:
Payable for:
Investments purchased ................................................. 7,912,638
Plan of distribution fee .............................................. 345,544
Shares of beneficial interest repurchased ............................. 319,331
Investment management fee ............................................. 263,724
Accrued expenses and other payables ...................................... 100,085
------------
TOTAL LIABILITIES ..................................................... 8,941,322
------------
NET ASSETS ............................................................ $386,374,729
============
COMPOSITION OF NET ASSETS:
Paid-in-capital .......................................................... $356,126,673
Net unrealized depreciation .............................................. (6,528,430)
Accumulated undistributed net realized gain .............................. 36,776,486
------------
NET ASSETS ............................................................ $386,374,729
============
CLASS A SHARES:
Net Assets ............................................................... $7,265,459
Shares Outstanding (unlimited authorized, $.01 par value) ................ 622,040
NET ASSET VALUE PER SHARE .............................................. $11.68
======
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value) ..................... $12.33
======
CLASS B SHARES:
Net Assets ............................................................... $372,933,379
Shares Outstanding (unlimited authorized, $.01 par value) ................ 32,182,630
NET ASSET VALUE PER SHARE .............................................. $11.59
======
CLASS C SHARES:
Net Assets ............................................................... $4,728,273
Shares Outstanding (unlimited authorized, $.01 par value) ................ 408,024
NET ASSET VALUE PER SHARE .............................................. $11.59
======
CLASS D SHARES:
Net Assets ............................................................... $1,447,618
Shares Outstanding (unlimited authorized, $.01 par value) ................ 123,625
NET ASSET VALUE PER SHARE .............................................. $11.71
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended July 31, 1998
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INCOME
Dividends (net of $15,278 foreign withholding tax)......... $ 3,355,681
Interest .................................................. 2,469,051
-------------
TOTAL INCOME ........................................... 5,824,732
-------------
EXPENSES
Plan of distribution fee (Class A shares) ................. 8,994
Plan of distribution fee (Class B shares) ................. 3,612,182
Plan of distribution fee (Class C shares) ................. 26,114
Investment management fee ................................. 2,761,954
Transfer agent fees and expenses .......................... 369,825
Registration fees ......................................... 135,729
Shareholder reports and notices ........................... 56,557
Professional fees ......................................... 52,146
Custodian fees ............................................ 45,738
Organizational expenses ................................... 35,825
Trustees' fees and expenses ............................... 15,592
Other ..................................................... 4,420
-------------
TOTAL EXPENSES ......................................... 7,125,076
-------------
NET INVESTMENT LOSS .................................... (1,300,344)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain ......................................... 46,595,280
Net change in unrealized appreciation ..................... (43,285,803)
-------------
NET GAIN ............................................... 3,309,477
-------------
NET INCREASE .............................................. $ 2,009,133
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR OCTOBER 29, 1996*
ENDED THROUGH
JULY 31, 1998 JULY 31, 1997**
--------------- ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss .................................. $ (1,300,344) $ (54,583)
Net realized gain .................................... 46,595,280 12,293,884
Net change in unrealized appreciation ................ (43,285,803) 36,757,373
------------- ------------
NET INCREASE ...................................... 2,009,133 48,996,674
------------- ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class B shares ..................................... -- (99,469)
Net realized gain ....................................
Class A shares ..................................... (36,472) --
Class B shares ..................................... (20,393,805) (396,163)
Class C shares ..................................... (18,182) --
Class D shares ..................................... (1,549) --
------------- ------------
TOTAL DIVIDENDS AND DISTRIBUTIONS ................. (20,450,008) (495,632)
------------- ------------
Net increase from transactions in shares of beneficial
interest ........................................... 124,497,217 231,717,345
------------- ------------
NET INCREASE ...................................... 106,056,342 280,218,387
NET ASSETS:
Beginning of period .................................. 280,318,387 100,000
------------- ------------
END OF PERIOD ..................................... $ 386,374,729 $280,318,387
============= ============
</TABLE>
- ---------------------
* Commencement of operations.
** Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS July 31, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Special Value Fund (the "Fund"), formerly Dean
Witter Special Value Fund, is registered under the Investment Company Act of
1940, as amended (the "Act"), as a diversified, open-end management investment
company. The Fund's investment objective is long-term capital appreciation. The
Fund seeks to achieve its objective by investing primarily in domestic equity
securities of small capitalization companies. The Fund was organized as a
Massachusetts business trust on June 21, 1996 and had no other operations other
than those relating to organizational matters and the issuance of 10,000 shares
of beneficial interest for $100,000 to Morgan Stanley Dean Witter Advisors Inc.
(the "Investment Manager"), formerly Dean Witter InterCapital Inc., to effect
the Fund's initial capitalization. The Fund commenced operations on October 29,
1996. On July 28, 1997, the Fund commenced offering three additional classes of
shares, with the then current shares designated as Class B shares.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year,
six years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price
(in cases where securities are traded on more than one exchange, the security
is 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 be based upon current market
prices of securities which are comparable in coupon, rating and maturity or an
11
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS July 31, 1998, continued
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 portfolio securities valued by such pricing service; and (5) short-term
debt securities having a maturity date of more than sixty days at time of
purchase are valued on a mark-to-market basis until sixty days prior to
maturity and thereafter at amortized cost based on their value on the 61st day.
Short-term debt securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date
such items are recognized. Distribution fees are charged directly to the
respective class.
D. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which
may differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
12
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS July 31, 1998, continued
F. ORGANIZATIONAL EXPENSES -- The Investment Manager paid the organizational
expenses of the Fund in the amount of $179,229 which was reimbursed for the
full amount thereof. Such expenses have been deferred and are being amortized
on the straight-line method over a period not to exceed five years from the
commencement of operations.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.75% to the net assets of the Fund determined as of the close
of each business day.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services,
heat, light, power and other utilities provided to the Fund.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A -- up
to 0.25% of the average daily net assets of Class A; (ii) Class B -- 1.0% of
the average daily net assets of Class B; and (iii) Class C -- up to 1.0% of the
average daily net assets of Class C. In the case of Class A shares, amounts
paid under the Plan are paid to the Distributor for services provided. In the
case of Class B and Class C shares, amounts paid under the Plan are paid to the
Distributor for services provided and the expenses borne by it and others in
the distribution of the shares of these Classes, including the payment of
commissions for sales of these Classes and incentive compensation to, and
expenses of, Morgan Stanley Dean Witter Financial Advisors and others who
engage in or support distribution of the shares or who service shareholder
accounts, including overhead and telephone expenses; printing and distribution
of prospectuses and reports used in connection with the offering of these
shares to other than current shareholders; and preparation, printing and
distribution of sales literature and advertising materials. In addition, the
Distributor may utilize fees paid pursuant to the Plan, in the case of Class B
shares, to compensate Dean Witter Reynolds Inc. ("DWR"), an affiliate of the
Investment Manager and Distributor, and other selected broker-dealers for their
opportunity costs in advancing such amounts, which compensation would be in the
form of a carrying charge on any unreimbursed expenses.
13
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS July 31, 1998, continued
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund
pursuant to the Plan and contingent deferred sales charges paid by investors
upon redemption of Class B shares. Although there is no legal obligation for
the Fund to pay expenses incurred in excess of payments made to the Distributor
under the Plan and the proceeds of contingent deferred sales charges paid by
investors upon redemption of shares, if for any reason the Plan is terminated,
the Trustees will consider at that time the manner in which to treat such
expenses. The Distributor has advised the Fund that such excess amounts,
including carrying charges, totaled $14,671,514 at July 31, 1998.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the year ended July 31, 1998, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.25% and
1.0%, respectively.
The Distributor has informed the Fund that for the year ended July 31, 1998, it
received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $768,105 and $2,492, respectively
and received $176,211 in front-end sales from sales of the Fund's Class A
shares. The respective shareholders pay such charges which are not an expense
of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities,
excluding short-term investments, for the year ended July 31, 1998 aggregated
$492,285,463 and $396,703,986, respectively.
For the year ended July 31, 1998, the Fund incurred brokerage commissions of
$109,942 with DWR for portfolio transactions executed on behalf of the Fund.
Included at July 31, 1998 in the receivable for investments sold was $641,991
for unsettled trades with DWR.
For the year ended July 31, 1998, the Fund incurred brokerage commissions of
$48,620 with Morgan Stanley & Co., Inc., an affiliate of the Investment
Manager, for portfolio transactions executed on behalf of the Fund.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager
and Distributor, is the Fund's transfer agent. At July 31, 1998, the Fund had
transfer agent fees and expenses payable of approximately $2,000.
14
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS July 31, 1998, continued
5. SHARES OF BENEFICIAL INTEREST+
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR OCTOBER 29, 1996*
ENDED THROUGH
JULY 31, 1998 JULY 31, 1997**
---------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold ................................................ 699,033 $ 8,650,697 828 $ 10,015
Reinvestment of distributions ....................... 3,096 36,472 -- --
Redeemed ............................................ (80,917) (1,024,723) -- --
---------- ------------ ---------- ------------
Net increase -- Class A ............................. 621,212 7,662,446 828 10,015
---------- ------------ ---------- ------------
CLASS B SHARES
Sold ................................................ 12,864,278 157,244,896 24,952,042 253,387,961
Reinvestment of dividends and distributions ......... 1,627,397 19,105,644 45,626 464,015
Redeemed ............................................ (5,266,075) (65,987,673) (2,050,638) (22,165,133)
---------- ------------ ---------- ------------
Net increase -- Class B ............................. 9,225,600 110,362,867 22,947,030 231,686,843
---------- ------------ ---------- ------------
CLASS C SHARES
Sold ................................................ 454,511 5,568,035 865 10,472
Reinvestment of distributions ....................... 1,549 18,182 -- --
Redeemed ............................................ (48,901) (614,455) -- --
---------- ------------ ---------- ------------
Net increase -- Class C ............................. 407,159 4,971,762 865 10,472
---------- ------------ ---------- ------------
CLASS D SHARES
Sold ................................................ 123,097 1,504,096 828 10,015
Reinvestment of distributions ....................... 131 1,549 -- --
Redeemed ............................................ (431) (5,503) -- --
---------- ------------ ---------- ------------
Net increase -- Class D ............................. 122,797 1,500,142 828 10,015
---------- ------------ ---------- ------------
Net increase in Fund ................................ 10,376,768 $124,497,217 22,949,551 $231,717,345
========== ============ ========== ============
</TABLE>
- ---------------
+ For the period March 28, 1997 through December 15, 1997, the Fund
suspended the offering of its shares to new investors. The Fund intends
to suspend the offering of its shares to new investors from time to time
as may be determined by the Investment Manager.
* Commencement of operations.
** For Class A, C, and D shares, for the period July 28, 1997 (issue date)
through July 31, 1997.
6. FEDERAL INCOME TAX STATUS
As of July 31, 1998, the Fund had temporary book/tax differences attributable
to capital loss deferrals on wash sales and permanent book/tax differences
primarily attributable to a net operating loss. To reflect reclassifications
arising from the permanent differences, accumulated undistributed net realized
gain was charged $1,266,507, paid-in-capital was charged $33,837 and net
investment loss was credited $1,300,344.
15
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE 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 OCTOBER 29, 1996*
ENDED THROUGH
JULY 31, 1998++ JULY 31, 1997**++
- ------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS B SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............ $12.21 $10.00
------ ------
Net investment loss ............................. (0.05) --
Net realized and unrealized gain ................ 0.31 2.24
------ ------
Total from investment operations ................ 0.26 2.24
------ ------
Less dividends and distributions from:
Net investment income .......................... -- (0.01)
Net realized gain .............................. (0.88) (0.02)
------- ------
Total dividends and distributions ............... (0.88) (0.03)
------ -------
Net asset value, end of period .................. $11.59 $12.21
====== ======
TOTAL INVESTMENT RETURN+ ........................ 2.02 % 22.41 %(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................ 1.94 % 2.01 %(2)
Net investment loss ............................. (0.36)% (0.03)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ......... $372,933 $280,288
Portfolio turnover rate ......................... 123 % 57 %(1)
</TABLE>
- -------------
* Commencement of operations.
** Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date have been designated Class B shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
16
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
JULY 31, 1998++ JULY 31, 1997++
- ------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $12.21 $12.10
------ ------
Net investment income ............................. 0.03 --
Net realized and unrealized gain .................. 0.32 0.11
------ ------
Total from investment operations .................. 0.35 0.11
------ ------
Less distributions from net realized gain ......... (0.88) --
------ ------
Net asset value, end of period .................... $11.68 $12.21
====== ======
TOTAL INVESTMENT RETURN+ .......................... 2.79 % 0.91%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 1.20 % 1.20%(2)
Net investment income ............................. 0.25 % 2.27%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $7,265 $10
Portfolio turnover rate ........................... 123 % 57%(1)
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $12.21 $12.10
------ ------
Net investment loss ............................... (0.06) --
Net realized and unrealized gain .................. 0.32 0.11
------ ------
Total from investment operations .................. 0.26 0.11
------ ------
Less distributions from net realized gain ......... (0.88) --
------ ------
Net asset value, end of period .................... $11.59 $12.21
====== ======
TOTAL INVESTMENT RETURN+ .......................... 2.02 % 0.91%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 1.95 % 1.94%(2)
Net investment income (loss) ...................... (0.50)% 1.49%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $4,728 $11
Portfolio turnover rate ........................... 123 % 57%(1)
</TABLE>
- --------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
JULY 31, 1998++ JULY 31, 1997++
- ------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS D SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $12.21 $12.10
------ ------
Net investment income ............................. 0.06 --
Net realized and unrealized gain .................. 0.32 0.11
------ ------
Total from investment operations .................. 0.38 0.11
------ ------
Less distributions from net realized gain ......... (0.88) --
------ ------
Net asset value, end of period .................... $11.71 $12.21
====== ======
TOTAL INVESTMENT RETURN+ .......................... 3.04% 0.91%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 0.94% 0.94%(2)
Net investment income ............................. 0.50% 2.53%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $1,448 $10
Portfolio turnover rate ........................... 123% 57%(1)
</TABLE>
- --------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
18
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER SPECIAL VALUE 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 Morgan Stanley Dean Witter Special
Value Fund (the "Fund"), formerly Dean Witter Special Value Fund, at July 31,
1998, the results of its operations for the year then ended, and the changes in
its net assets and the financial highlights for each of the periods presented,
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at July 31, 1998 by correspondence with the custodian and brokers,
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
September 11, 1998
1998 FEDERAL TAX NOTICE (unaudited)
During the period ended July 31, 1998, 11.75% of the income paid
qualified for the dividends received deduction available to corporations.
19
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo MORGAN STANLEY
Edwin J. Garn DEAN WITTER
John R. Haire SPECIAL VALUE FUND
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Jenny Beth Jones
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center -- Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
This report is submitted for the general information ANNUAL REPORT
of shareholders of the Fund. For more detailed July 31, 1998
information about the Fund, its officers and trustees,
fees, expenses and other pertinent information, please
see the prospectus of the Fund.
This report is not authorized for distribution to
prospective investors in the Fund unless preceded or
accompanied by an effective prospectus.
