<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND Two World Trade Center,
LETTER TO THE SHAREHOLDERS January 31, 1999 New York, New York 10048
DEAR SHAREHOLDER:
During the six-month period ended January 31, 1999, the equity markets
continued to take investors on a wild ride. After soaring to a record high of
9338 in July, the Dow plunged nearly 1,800 points by the end of August. Several
factors combined to drag down the prices of stocks, including a slowdown in
profits growth, the persistent Asian contagion, Russia's debt default and
devaluation of the ruble, the worsening White House scandal and the near
collapse of a major hedge fund. Fortunately, the steadying influence of the
Goldilocks economy -- featuring economic expansion with low inflation -- pulled
the market out of its summer slump and propelled it toward new highs in
mid-January.
Throughout this period, growth stocks, led by technology and Internet issues,
significantly outperformed value stocks. This divergence became even more
severe when coupled with the continuing underperformance of small-caps relative
to large-caps.
PERFORMANCE AND PORTFOLIO STRATEGY
For the six-month period ended January 31, 1999, Morgan Stanley Dean Witter
Special Value Fund's Class B shares posted a total return of
- -3.35 percent, compared to returns of 2.40 percent for the Russell 2000 Index
and 0.98 percent for the Lipper Small Cap Index. During the same period, the
Fund's Class A, C and D shares returned -2.96 percent,
- -3.35 percent and -2.87 percent, respectively. The performance of the Fund's
four share classes varies because of differing expenses.
The Fund's performance was greatly affected by the continuing underperformance
of value stocks relative to growth stocks. This has resulted in the Fund
underperforming its benchmark indexes, which include many growth stocks. Like
many value-oriented funds, the Fund has been underweighted in the areas of
technology and health care (e.g., biotechnology), both of which outperformed
the overall market. In addition, the Fund has been overweighted in the basic
materials and capital goods industries, two sectors that have lagged the broad
market
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
LETTER TO THE SHAREHOLDERS January 31, 1999, continued
during its recent recovery. Currently, these sectors are selling at historic
lows that in some cases are below liquidating value.
PORTFOLIO STRATEGY
The Fund continues to follow a bottom-up investment strategy that focuses on
stock selection rather than sector selection. The Fund's portfolio managers
look for companies with attractive valuations. However, beyond merely investing
in attractively priced companies, the Fund's portfolio managers seek to
identify a catalyst they believe will lead to better market valuations for
these companies.
The Fund's exposure to the energy sector -- one of the market's
worst-performing sectors -- hurt its overall performance. Although the Fund's
energy-related investments have outperformed the overall energy sector, they
have underperformed relative to the broader market. Within this sector, the
Fund has avoided oil-service stocks because of their high valuations. Instead,
it has focused on exploration and production companies with good balance sheets
and an ability to increase production economically in a low price environment.
During the market's summer downturn, the Fund added some technology stocks to
the portfolio. Etec Systems, DuPont Photomasks and DIIG Inc., which were
purchased at bargain-level prices, were up more than 100 percent by the end of
January. The Fund's technology holdings, which are more service oriented,
represent low risks relative to other technology-related stocks.
Two of the Fund's larger holdings, Paxar and Tetra Technology, also hurt its
overall performance during the period. 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.
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. Although these holdings have not yet
performed up to our expectations, we believe that the case for investing in
each remains intact.
LOOKING AHEAD
Given their prolonged underperformance relative to large-cap stocks, we believe
that small-cap value stocks may currently offer investors an opportunity for
long-term growth at attractive valuations.
2
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
LETTER TO THE SHAREHOLDERS January 31, 1999, continued
Finally, we believe that the Fund's intense fundamental research, resulting in
a portfolio of approximately 65 to 70 companies, as well as our strict
adherence to our buy/sell valuation criteria, will contribute positively to the
Fund's performance over the long term.
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/ C. Fiumefreddo
CHARLES A. FIUMEFREDDO
Chairman of the Board
3
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
PORTFOLIO OF INVESTMENTS January 31, 1999 (unaudited)
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (89.2%)
Air Freight/Delivery
Services (0.8%)
250,000 Fritz Companies, Inc.* ................. $ 2,578,125
------------
Apparel (3.4%)
311,700 Burlington Industries, Inc.* ........... 2,065,012
325,100 Kellwood Co. ........................... 9,021,525
------------
11,086,537
------------
Books/Magazines (1.6%)
128,000 Houghton Mifflin Co. ................... 5,368,000
------------
Broadcast/Media (3.7%)
1,327,000 Paxar Corp.* ........................... 12,274,750
------------
Casino/Gambling (0.6%)
670,000 GameTech International, Inc.* .......... 2,093,750
------------
Catalog/Specialty Distribution (0.3%)
50,000 DM Management Co.* ..................... 862,500
------------
Clothing/Shoe/Accessory
Stores (0.7%)
55,000 Ross Stores, Inc. ...................... 2,172,500
------------
Computer Hardware (1.2%)
132,000 Zebra Technologies Corp.
(Class A)* ............................. 3,960,000
------------
Computer Software
& Services (2.5%)
85,000 JetForm Corp. (Canada)* ................ 993,437
320,000 Wang Laboratories, Inc.* ............... 7,040,000
------------
8,033,437
------------
Computers Software (0.6%)
114,166 Timberline Software Corp. .............. 1,912,280
------------
Consumer Electronics/
Appliances (1.8%)
140,000 Harman International Industries,
Inc. ................................... 5,880,000
------------
Containers/Packaging (1.6%)
355,000 Gaylord Container Corp.
(Class A)* ........................... 2,329,687
55,000 Liqui-Box Corp. ........................ 2,818,750
------------
5,148,437
------------
Diversified Commercial
Services (4.1%)
145,000 Interim Services, Inc.* ................ 3,081,250
1,137,500 TETRA Technologies, Inc.* .............. 10,450,781
------------
13,532,031
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------------
<S> <C> <C>
Diversified Manufacturing (1.3%)
270,300 Scott Technologies, Inc.* .............. $ 4,426,162
------------
E.D.P. Services (1.9%)
352,000 GP Strategies Corp.* ................... 6,072,000
------------
Electronic Components (1.7%)
200,000 DII Group, Inc.* ....................... 5,650,000
------------
Electronic Data Processing (1.3%)
185,000 Integrated Process Equipment
Corp.* ................................. 2,590,000
85,000 SpeedFam International, Inc.* .......... 1,763,750
------------
4,353,750
------------
Energy (0.4%)
1,080,820 Hurricane Hydrocarbons Ltd.
(Class A) (Canada)* .................. 1,182,147
------------
Entertainment & Leisure (1.1%)
430,000 Midway Games, Inc.* .................... 3,440,000
------------
Finance Companies (3.2%)
235,000 Bank United Corp. (Class A) ............ 9,341,250
100,000 Long Beach Financial Corp.* ............ 1,050,000
------------
10,391,250
------------
Industrial Machinery/
Components (0.8%)
160,000 Gleason Corp. .......................... 2,710,000
------------
Industrial Specialties (4.6%)
250,000 AMETEK, Inc ............................ 4,546,875
225,000 Baldwin Technology Co., Inc.
(Class A)* ........................... 1,279,687
278,000 Denison International PLC (ADR)
(United Kingdom)* .................... 3,753,000
450,000 Farr Co.* .............................. 4,443,750
100,000 Polymer Group, Inc.* ................... 1,031,250
------------
15,054,562
------------
Insurance (5.9%)
428,200 Chartwell Re Corp. ..................... 9,955,650
275,000 RenaissanceRe Holdings, Ltd.
(Bermuda) ............................ 9,212,500
------------
19,168,150
------------
Major Chemicals (1.1%)
300,000 NL Industries, Inc. .................... 3,712,500
------------
Medical Specialties (6.3%)
225,300 CONMED Corp.* .......................... 7,378,575
255,000 DENTSPLY International, Inc. ........... 6,980,625
370,000 Sola International, Inc.* .............. 6,174,375
------------
20,533,575
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
PORTFOLIO OF INVESTMENTS January 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
<S> <C> <C>
Medical/Nursing Services (2.2%)
201,000 Corvel Corp.* ....................... $ 7,336,500
------------
Metals Fabrications (0.4%)
123,900 Cyprus Amax Minerals Co. ............ 1,184,794
------------
Mid-Sized Banks (1.1%)
184,000 Pacific Bank, N.A. .................. 3,749,000
------------
Newspapers (1.2%)
300,000 Hollinger International, Inc.
(Class A) ......................... 3,937,500
------------
Oil & Gas Production (3.0%)
200,000 Forest Oil Corp.* ................... 1,287,500
287,500 Petroglyph Energy, Inc.* ............ 952,344
500,000 Snyder Oil Corp. .................... 5,687,500
100,000 St. Mary Land & Exploration Co....... 1,925,000
------------
9,852,344
------------
Other Transportation (0.9%)
320,000 RailWorks Corp.* .................... 2,800,000
------------
Property -- Casualty Insurers (1.7%)
425,000 CNA Surety Corp. .................... 5,684,375
------------
Real Estate Investment Trust (5.4%)
165,000 Bradley Real Estate, Inc. ........... 3,320,625
45,000 Equity Office Properties Trust ...... 1,147,500
50,000 MeriStar Hospitality Corp. .......... 962,500
547,800 Mid-Atlantic Realty Trust ........... 5,786,138
71,400 Parkway Properties, Inc. ............ 2,262,488
210,000 Tanger Factory Outlet Centers,
Inc. .............................. 4,226,250
------------
17,705,501
------------
Rental/Leasing Companies (1.5%)
295,000 Willis Lease Finance Corp.* ......... 4,904,375
------------
Semiconductors (2.3%)
392,500 Exar Corp.* ......................... 5,887,500
100,200 Unitrode Corp.* ..................... 1,603,200
------------
7,490,700
------------
Services to the Health Industry (2.5%)
324,200 Morrison Health Care Inc. ........... 6,402,950
300,000 ProMedCo Management Co.* ............ 1,650,000
------------
8,052,950
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------
<S> <C> <C>
Specialty Chemicals (0.5%)
140,000 Lawter International, Inc. .......... $ 1,487,500
------------
Specialty Foods/Candy (2.5%)
166,000 J & J Snack Foods Corp.* ............ 3,984,000
225,000 Lance, Inc. ......................... 4,190,625
------------
8,174,625
------------
Specialty Steels (1.3%)
200,000 Oregon Steel Mills, Inc. ............ 2,362,500
100,000 Quanex Corp. ........................ 1,981,250
------------
4,343,750
------------
Steel/Iron Ore (1.5%)
116,700 Cleveland-Cliffs, Inc. .............. 4,770,113
------------
Telecommunications (2.2%)
230,000 Asia Satellite Telecommunications
Holdings Ltd. (ADR)
(Hong Kong) ....................... 3,881,250
79,500 ECI Telecom Ltd. (Israel) ........... 3,448,313
------------
7,329,563
------------
Unregulated Power Generation (4.7%)
200,000 Calpine Corp.* ...................... 7,400,000
550,000 USEC Inc. ........................... 7,975,000
------------
15,375,000
------------
Water Supply (1.0%)
115,000 American States Water Co. ........... 3,284,688
------------
Wireless Communications (0.8%)
100,000 Western Wireless Corp.
(Class A)* ........................ 2,606,250
------------
TOTAL COMMON STOCKS
(Identified Cost $315,864,483)..... 291,665,971
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
- -------------
<S> <C> <C>
CONVERTIBLE BOND (1.0%)
Semiconductors
$ 4,000 Lam Research Corp. 5.00% due
09/01/02 (Identified Cost
$3,332,500)............................ 3,420,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
PORTFOLIO OF INVESTMENTS January 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (10.0%)
U.S. GOVERNMENT AGENCIES (a) (9.8%)
$ 17,000 Federal Home Loan Banks
4.62% due 02/01/99 .................. $ 17,000,000
15,000 Federal Home Loan Mortgage
Corp. 4.73% due 02/04/99 ............ 14,994,088
------------
TOTAL U.S. GOVERNMENT AGENCIES
(Amortized Cost $31,994,088)......... 31,994,088
------------
REPURCHASE AGREEMENT (0.2%)
583 The Bank of New York 4.688%
due 02/01/99 (dated 01/29/99;
proceeds $583,434) (b)
(Identified Cost $583,206)........... 583,206
------------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $32,577,294).......... 32,577,294
------------
TOTAL INVESTMENTS
(Identified Cost $351,774,277) (c)......... 100.2% 327,663,265
LIABILITIES IN EXCESS OF OTHER
ASSETS .................................... (0.2) (634,493)
----- ------------
NET ASSETS ................................ 100.0% $327,028,772
===== ============
</TABLE>
- --------------------------------
ADR American Depository Receipt.
* Non-income producing security.
(a) Securities were purchased on a discount basis. The interest rates shown
have been adjusted to reflect a money market equivalent yield.
(b) Collateralized by $586,517 U.S. Treasury Note 4.75% due 11/15/08 valued at
$594,870.
(c) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $26,015,924 and the
aggregate gross unrealized depreciation is $50,126,936, resulting in net
unrealized depreciation of $24,111,012.
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1999 (unaudited)
<TABLE>
<S> <C>
ASSETS :
Investments in securities, at value
(identified cost $351,774,277) ................................... $ 327,663,265
Receivable for :
Investments sold ................................................ 3,746,285
Dividends ...................................................... 204,780
Interest ........................................................ 84,682
Shares of beneficial interest sold .............................. 75,552
Deferred organizational expenses ................................... 98,255
Prepaid expenses and other assets ................................. 85,294
-------------
TOTAL ASSETS .................................................... 331,958,113
-------------
LIABILITIES:
Payable for :
Investments purchased ........................................... 3,027,581
Shares of beneficial interest repurchased ....................... 1,352,340
Plan of distribution fee ........................................ 281,713
Investment management fee ....................................... 215,568
Accrued expenses and other payables ............................... 52,139
-------------
TOTAL LIABILITIES ............................................... 4,929,341
-------------
NET ASSETS ...................................................... $ 327,028,772
=============
COMPOSITION OF NET ASSETS :
Paid-in-capital .................................................... $ 349,772,568
Net unrealized depreciation ....................................... (24,111,012)
Net investment loss ................................................ (496,508)
Accumulated undistributed net realized gain ........................ 1,863,724
-------------
NET ASSETS ...................................................... $ 327,028,772
=============
CLASS A SHARES:
Net Assets ......................................................... $6,634,229
Shares Outstanding (unlimited authorized, $.01 par value) .......... 658,957
NET ASSET VALUE PER SHARE ....................................... $10.07
======
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value) ................ $10.63
======
CLASS B SHARES:
Net Assets ......................................................... $314,253,549
Shares Outstanding (unlimited authorized, $.01 par value) ......... 31,620,712
NET ASSET VALUE PER SHARE ....................................... $9.94
=====
CLASS C SHARES:
Net Assets ......................................................... $4,588,875
Shares Outstanding (unlimited authorized, $.01 par value) .......... 461,737
NET ASSET VALUE PER SHARE ....................................... $9.94
=====
CLASS D SHARES :
Net Assets ......................................................... $1,552,119
Shares Outstanding (unlimited authorized, $.01 par value) .......... 153,555
NET ASSET VALUE PER SHARE ....................................... $10.11
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the six months ended January 31, 1999 (unaudited)
<TABLE>
<S> <C>
NET INVESTMENT LOSS:
INCOME
Dividends (net of $12,244 foreign withholding tax) ......... $ 1,943,680
Interest ................................................... 907,916
-------------
TOTAL INCOME ............................................ 2,851,596
-------------
EXPENSES
Plan of distribution fee (Class A shares) .................. 8,298
Plan of distribution fee (Class B shares) .................. 1,643,556
Plan of distribution fee (Class C shares) .................. 23,095
Investment management fee .................................. 1,278,665
Transfer agent fees and expenses ........................... 218,271
Registration fees .......................................... 59,559
Shareholder reports and notices ............................ 36,344
Professional fees .......................................... 28,685
Custodian fees ............................................. 21,682
Organizational expenses .................................... 18,060
Trustees' fees and expenses ................................ 6,449
Other ...................................................... 5,440
-------------
TOTAL EXPENSES .......................................... 3,348,104
-------------
NET INVESTMENT LOSS ..................................... (496,508)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain .......................................... 3,389,663
Net change in unrealized depreciation ...................... (17,582,582)
-------------
NET LOSS ................................................ (14,192,919)
-------------
NET DECREASE ............................................... $ (14,689,427)
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JANUARY 31, 1999 JULY 31, 1998
- ------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss .................................. $ (496,508) $ (1,300,344)
Net realized gain .................................... 3,389,663 46,595,280
Net change in unrealized depreciation ................ (17,582,582) (43,285,803)
------------- -------------
NET INCREASE (DECREASE) ........................... (14,689,427) 2,009,133
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET
REALIZED GAIN:
Class A shares ....................................... (748,492) (36,472)
Class B shares ....................................... (36,928,990) (20,393,805)
Class C shares ....................................... (560,902) (18,182)
Class D shares ....................................... (64,041) (1,549)
------------- -------------
TOTAL DISTRIBUTIONS ............................... (38,302,425) (20,450,008)
------------- -------------
Net increase (decrease) from transactions in shares of
beneficial interest ................................ (6,354,105) 124,497,217
------------- -------------
NET INCREASE (DECREASE) ........................... (59,345,957) 106,056,342
NET ASSETS:
Beginning of period .................................. 386,374,729 280,318,387
------------- -------------
END OF PERIOD
(Including an undistributed net investment loss of
$496,508 and $0, respectively) .................... $ 327,028,772 $ 386,374,729
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS January 31, 1999 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Special Value Fund (the "Fund"), is registered under
the Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is
long-term capital appreciation. The Fund 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 commenced operations on October 29, 1996. On July 28, 1997, the Fund
converted to a multiple class share structure.
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 Morgan Stanley Dean Witter Advisors Inc. (the "Investment
Manager"), that sale or bid prices are not reflective of a security's market
value, portfolio securities are valued at their fair value as determined in
good faith under procedures established by and under the general supervision of
the Trustees (valuation of debt securities for which market quotations are not
readily available may be based upon current market prices of securities which
are comparable in coupon, rating and maturity or an appropriate matrix
utilizing similar factors); (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
10
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS January 31, 1999 (unaudited) continued
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.
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.
11
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS January 31, 1999 (unaudited) continued
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.75% to the net assets of the Fund determined as of the close
of each business day.
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 (1) 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; (2) printing and
distribution of prospectuses and reports used in connection with the offering
of these shares to other than current shareholders; and (3) 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.
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
12
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS January 31, 1999 (unaudited) continued
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 $14,298,483 at January 31, 1999.
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 the six months ended January 31, 1999, 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 six months ended January 31,
1999, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $528,404 and $4,440,
respectively and received $12,540 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 six months ended January 31, 1999
aggregated $126,920,570 and $163,315,133, respectively.
For the six months ended January 31, 1999, the Fund incurred brokerage
commissions of $70,780 with DWR for portfolio transactions executed on behalf
of the Fund.
For the six months ended January 31, 1999, the Fund incurred brokerage
commissions of $31,515 with Morgan Stanley & Co., Inc., an affiliate of the
Investment Manager and Distributor, 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 January 31, 1999, the Fund
had transfer agent fees and expenses payable of approximately $10,000.
13
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS January 31, 1999 (unaudited) continued
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JANUARY 31, 1999 JULY 31, 1998+
------------------------------- ------------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold ....................................... 173,281 $ 1,806,440 699,033 $ 8,650,697
Reinvestment of distributions .............. 75,716 743,536 3,096 36,472
Redeemed ................................... (212,080) (2,186,314) (80,917) (1,024,723)
-------- ------------- ------- -------------
Net increase -- Class A .................... 36,917 363,662 621,212 7,662,446
-------- ------------- ------- -------------
CLASS B SHARES
Sold ....................................... 2,488,596 26,249,024 12,864,278 157,244,896
Reinvestment of distributions .............. 3,522,840 34,206,767 1,627,397 19,105,644
Redeemed ................................... (6,573,354) (67,997,695) (5,266,075) (65,987,673)
---------- ------------- ---------- -------------
Net increase (decrease) -- Class B ......... (561,918) (7,541,904) 9,225,600 110,362,867
---------- ------------- ---------- -------------
CLASS C SHARES
Sold ....................................... 107,842 1,126,850 454,511 5,568,035
Reinvestment of distributions .............. 56,098 544,708 1,549 18,182
Redeemed ................................... (110,227) (1,099,821) (48,901) (614,455)
---------- ------------- ---------- -------------
Net increase -- Class C .................... 53,713 571,737 407,159 4,971,762
---------- ------------- ---------- -------------
CLASS D SHARES
Sold ....................................... 101,220 988,761 123,097 1,504,096
Reinvestment of distributions .............. 832 8,206 131 1,549
Redeemed ................................... (72,122) (744,567) (431) (5,503)
---------- ------------- ---------- -------------
Net increase -- Class D .................... 29,930 252,400 122,797 1,500,142
---------- ------------- ---------- -------------
Net increase (decrease) in Fund ............ (441,358) $ (6,354,105) 10,376,768 $ 124,497,217
========== ============= ========== =============
</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.
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.
14
<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 SIX FOR THE YEAR OCTOBER 29, 1996*
MONTHS ENDED ENDED THROUGH
JANUARY 31, 1999 JULY 31, 1998 JULY 31, 1997**
- ----------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
CLASS B SHARES ++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $11.59 $12.21 $10.00
------ ------ ------
Income (loss) from investment operations:
Net investment loss ................................... (0.02) (0.05) --
Net realized and unrealized gain (loss) ............... (0.40) 0.31 2.24
------ ------ ------
Total income (loss) from investment operations ......... (0.42) 0.26 2.24
------ ------ ------
Less dividends and distributions from:
Net investment income ................................. -- -- (0.01)
Net realized gain ..................................... (1.23) (0.88) (0.02)
------ ------ ------
Total dividends and distributions ...................... (1.23) (0.88) (0.03)
------ ------ ------
Net asset value, end of period ......................... $ 9.94 $11.59 $12.21
====== ====== ======
TOTAL RETURN+ .......................................... (3.35)%(1) 2.02% 22.41%(1)
RATIOS TO AVERAGE NET ASSETS :
Expenses ............................................... 1.98%(2)(3) 1.94% 2.01%(2)
Net investment loss .................................... (0.31)%(2)(3) (0.36)% (0.03)%(2)
SUPPLEMENTAL DATA :
Net assets, end of period, in thousands ................ $314,254 $372,933 $280,288
Portfolio turnover rate ................................ 41%(1) 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.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED THROUGH
JANUARY 31, 1999 JULY 31, 1998 JULY 31, 1997
- -----------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
CLASS A SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $11.68 $12.21 $12.10
------ ------ ------
Income (loss) from investment operations:
Net investment income ................................. 0.02 0.03 --
Net realized and unrealized gain (loss) ............... (0.40) 0.32 0.11
------ ------ ------
Total income (loss) from investment operations.......... (0.38) 0.35 0.11
------ ------ ------
Less distributions from net realized gain .............. (1.23) (0.88) --
------ ------ ------
Net asset value, end of period ......................... $10.07 $11.68 $12.21
====== ====== ======
TOTAL RETURN+ .......................................... (2.96)%(1) 2.79% 0.91%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.23%(2)(3) 1.20% 1.20%(2)
Net investment income .................................. 0.44%(2)(3) 0.25% 2.27%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $6,634 $7,265 $10
Portfolio turnover rate ................................ 41%(1) 123% 57%(1)
CLASS C SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $11.59 $12.21 $12.10
------ ------ ------
Income (loss) from investment operations:
Net investment loss ................................... (0.02) (0.06) --
Net realized and unrealized gain (loss) ............... (0.40) 0.32 0.11
------ ------ ------
Total income (loss) from investment operations.......... (0.42) 0.26 0.11
------ ------ ------
Less distributions from net realized gain .............. (1.23) (0.88) --
------ ------ ------
Net asset value, end of period ......................... $ 9.94 $11.59 $12.21
====== ====== ======
TOTAL RETURN+ .......................................... (3.35)%(1) 2.02% 0.91%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.98%(2)(3) 1.95% 1.94%(2)
Net investment income (loss) ........................... (0.31)%(2)(3) (0.50)% 1.49%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $4,589 $4,728 $11
Portfolio turnover rate ................................ 41%(1) 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.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
16
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED THROUGH
JANUARY 31, 1999 JULY 31, 1998 JULY 31, 1997
- --------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
CLASS D SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $11.71 $12.21 $12.10
------ ------ ------
Income (loss) from investment operations:
Net investment income ................................. 0.04 0.06 --
Net realized and unrealized gain (loss) ............... (0.41) 0.32 0.11
------ ------ ------
Total income (loss) from investment operations ......... (0.37) 0.38 0.11
------ ------ ------
Less distributions from net realized gain .............. (1.23) (0.88) --
------ ------ ------
Net asset value, end of period ......................... $10.11 $11.71 $12.21
====== ====== ======
TOTAL RETURN+ .......................................... (2.87)%(1) 3.04% 0.91%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 0.98%(2)(3) 0.94% 0.94%(2)
Net investment income .................................. 0.69%(2)(3) 0.50% 2.53%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $1,552 $1,448 $10
Portfolio turnover rate ................................ 41%(1) 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.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE>
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<PAGE>
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<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
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
The financial statements included herein have been taken from the records of
the Fund without examination by the independent accountants and accordingly
they do not express an opinion thereon.
This report is submitted for the general information of shareholders of the
Fund. For more detailed 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.
MORGAN STANLEY
DEAN WITTER
SPECIAL VALUE FUND
[Graphic]
SEMIANNUAL REPORT
JANUARY 31, 1999
