<PAGE>
Two World Trade Center, New York, New York 10048
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
LETTER TO THE SHAREHOLDERS July 31, 2000
DEAR SHAREHOLDER:
During the 12-month period ended July 31, 2000, the U.S. equity market
experienced an increase in market volatility. From the beginning of the period
through March 2000, the market's performance was dominated by a concentrated
group of companies within the technology, telecommunications and biotech
industries. The best-performing stocks were generally those that had the
highest price/earnings valuations and those with no earnings; hardly the haven
for value investors. Following increased concerns about inflation, rising oil
and gas prices and impending interest rate increases, the Nasdaq began to
correct in March, exhibiting a strong and sudden reversal of the performance
trends seen during the previous several months.
Since March, small-cap value funds, which had been out of favor since 1998,
have posted strong performance numbers relative to other types of equity funds
and the major market indexes. Even taking this recent rally into account, the
one-year performance of the Russell 2000 Index's small-cap value component
still pales relative to its small-cap growth counterpart. However, value's
outperformance over the last few months has narrowed the gap between the two
segments.
PERFORMANCE
For the 12-month period ended July 31, 2000, Morgan Stanley Dean Witter Special
Value Fund's Class B shares posted a total return of 7.53 percent compared to
13.77 percent for the Russell 2000 Index. For the same period, the Fund's Class
A, C and D shares posted total returns of 8.32 percent, 7.52 percent and 8.56
percent, respectively. The performance of the Fund's four share classes varies
because each class has different expenses. The total return figures given
assume the reinvestment of all distributions but do not reflect the deduction
of any applicable sales charges. The accompanying chart compares the Fund's
performance to that of the Russell 2000 Index.
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
LETTER TO THE SHAREHOLDERS July 31, 2000, continued
The Fund's underperformance relative to the Russell 2000 Index during the
period was reflective of the difficult environment experienced by small-cap
value stocks during the first eight months of the period. For the fiscal year,
technology, telecommunications, and biotechnology accounted for 71 percent of
the Russell 2000 Index's return while 7 of its 12 industry groups posted
negative returns for the year. Because of the Fund's strict valuation
methodology, its allocation to the high-growth sectors declined over the fiscal
year, as we sold companies when they reached valuation levels we could not
justify.
Like other value-oriented funds, the Fund was hurt by its overweighting
relative to the Russell 2000 in financials, which underperformed during the
period. At the same time, our stock selection within that sector has generally
been positive. Catastrophic-reinsurance company Renaissance Re, the Fund's
largest holding at 5.38 percent of net assets, was up 31 percent for the fiscal
year.
PORTFOLIO STRATEGY
The Fund continues to follow a bottom-up, value-oriented investment strategy
that focuses on stock selection rather than sector selection. The Fund looks
for companies that the portfolio manager believes are underpriced, selling at
low values relative to earnings, free cash flow, book value and asset value.
However, beyond merely investing in attractively priced companies, the
portfolio manager seeks to identify catalysts that may lead to better market
valuations for these companies.
Over the past year we have been focusing our investments in small companies
that are proactively addressing e-commerce and business-to-business
initiatives. We believe that many of these companies are undervalued because
they are considered part of the old economy, when in fact they are using the
Internet to potentially enhance their earning power, growth and cost structure.
During recent periods of market weakness, we have opportunistically bought
technology and telecommunications companies that momentum investors were
dumping to reduce their technology exposure.
LOOKING AHEAD
Given their prolonged underperformance relative to growth stocks, we believe
that small-cap value stocks may currently offer investors some relative
stability in today's volatile market environment. Furthermore, we believe that
the Fund's intense fundamental research, resulting in a portfolio of
approximately 70 to 75 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.
2
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
LETTER TO THE SHAREHOLDERS July 31, 2000, continued
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 /s/ Mitchell M. Merin
MITCHELL M. MERIN
CHARLES A. FIUMEFREDDO
President
Chairman of the Board
3
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE
FUND PERFORMANCE July 31, 2000
GROWTH OF $10,000 CLASS B
Date Total Russell 2000
---- ----- ------------
October 29, 1996 10,000 10,000
July 31, 1997 12,241 12,323
July 31, 1998 12,488 12,608
July 31, 1999 13,005 13,542
July 31, 2000 13,784(3) 15,407
---- Fund ---- Russell 2000 (4)
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. 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.
AVERAGE ANNUAL TOTAL RETURNS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES*
------------------------------------------------------------
PERIOD ENDED 7/31/00
--------------------------
<S> <C> <C>
1 Year 8.32%(1) 2.63%(2)
From Inception (7/28/97) 5.63%(1) 3.75%(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES**
-------------------------------------------------------------
PERIOD ENDED 7/31/00
---------------------------
<S> <C> <C>
1 Year 7.53%(1) 2.53%(2)
From Inception (10/29/96) 9.35%(1) 8.93%(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES+
------------------------------------------------------------
PERIOD ENDED 7/31/00
--------------------------
<S> <C> <C>
1 Year 7.52%(1) 6.52%(2)
From Inception (7/28/97) 4.87%(1) 4.87%(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS D SHARES++
---------------------------------------------
PERIOD ENDED 7/31/00
--------------------------
<S> <C>
1 Year 8.56%(1)
From Inception (7/28/97) 5.85%(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 2% sales charge (CDSC), assuming a
complete redemption on July 31, 2000.
(4) The Russell 2000 Index is a capitalization-weighted index, which is
comprised of 2000 of the smallest stocks included 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.
* The maximum front-end sales charge for Class A is 5.25%.
** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%.
The CDSC declines to 0% after six years.
+ 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, 2000
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
---------- ------------
<S> <C> <C>
COMMON STOCKS (92.0%)
Advertising (1.4%)
45,000 Getty Images, Inc.* .................... $ 1,628,437
65,000 Netratings, Inc.* ...................... 1,308,125
------------
2,936,562
------------
Air Freight/Delivery Services (2.6%)
110,000 Circle International Group, Inc. ....... 3,107,500
175,000 Fritz Companies, Inc.* ................. 2,603,125
------------
5,710,625
------------
Airlines (0.3%)
25,000 Midwest Express Holdings, Inc.*......... 587,500
------------
Apparel (1.3%)
127,100 Kellwood Co. ........................... 2,843,862
------------
Beverages - Non-Alcoholic (0.4%)
225,000 Packaged Ice Inc.* ..................... 843,750
------------
Canadian Oil & Gas (0.8%)
490,000 Hurricane Hydrocarbons Ltd.
(Class A) (Canada)* .................... 1,812,363
------------
Casino/Gambling (0.8%)
430,500 GameTech International, Inc.* .......... 1,789,266
------------
Catalog/Specialty Distribution (0.4%)
150,000 1-800-Flowers.com, Inc. (Class A)*...... 895,312
------------
Clothing/Shoe/Accessory Stores (2.7%)
225,000 Charming Shoppes, Inc.* ................ 1,265,625
50,000 Men's Wearhouse, Inc. (The)* ........... 1,296,875
155,000 Ross Stores, Inc. ...................... 2,383,125
60,000 Venator Group, Inc.* ................... 847,500
------------
5,793,125
------------
Construction/Agricultural
Equipment/Trucks (1.8%)
230,000 Terex Corp.* ........................... 3,795,000
------------
Consumer Electronics/
Appliances (0.6%)
20,000 Harman International Industries,
Inc. ................................... 1,265,000
------------
Containers/Packaging (2.3%)
96,500 Aptargroup, Inc. ....................... 2,406,469
206,000 Gaylord Container Corp.
(Class A)* ............................. 540,750
178,000 Packaging Corp. of America* ............ 2,024,750
------------
4,971,969
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
---------- ------------
<S> <C> <C>
Discount Chains (0.2%)
100,000 Bradlees, Inc.* ........................ $ 362,500
------------
Diversified Commercial
Services (0.7%)
208,600 GP Strategies Corp.* ................... 1,173,375
16,100 MAXIMUS, Inc.* ......................... 384,387
------------
1,557,762
------------
Diversified Electronic
Products (5.6%)
260,000 Fargo Electronics Inc.* ................ 2,015,000
807,000 Paxar Corp.* ........................... 9,986,625
------------
12,001,625
------------
Diversified Manufacturing (2.2%)
182,500 Ametek, Inc. ........................... 3,798,281
50,000 Valmont Industries, Inc. ............... 1,015,625
------------
4,813,906
------------
E.D.P. Services (0.3%)
50,000 Complete Business Solutions, Inc.* 637,500
------------
Electrical Products (1.9%)
115,000 Cable Design Technologies Corp.*........ 4,053,750
------------
Electronic Components (1.0%)
60,000 Artesyn Technologies, Inc.* ............ 2,040,000
------------
Electronic Distributors (1.1%)
85,000 Anixter International, Inc.* ........... 2,470,312
------------
Industrial Machinery/Components (1.2%)
200,000 Denison International PLC (ADR)
(United Kingdom)* ...................... 2,600,000
------------
Industrial Specialties (1.2%)
73,000 Rogers Corp.* .......................... 2,609,750
------------
Insurance Brokers/Services (3.3%)
257,700 Corvel Corp.* .......................... 7,086,750
------------
Internet Services (0.2%)
20,000 Ask Jeeves, Inc.* ...................... 362,500
------------
Life Insurance (1.3%)
115,000 Annuity and Life Re (Holdings),
Ltd. ................................... 2,831,875
------------
Medical Equipment & Supplies (4.2%)
270,000 DENTSPLY International, Inc. ........... 9,129,375
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
PORTFOLIO OF INVESTMENTS July 31, 2000, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- ------------
<S> <C> <C>
Medical Specialties (5.8%)
121,300 CONMED Corp.* ......................... $ 1,622,387
92,700 Invacare Corp. ........................ 2,143,687
130,900 Orthofix International N.V.* .......... 2,601,637
300,000 ProMedCo Management Co.* .............. 403,125
195,400 Scott Technologies, Inc. * ............ 3,761,450
100,000 Sybron International Corp.* ........... 2,081,250
------------
12,613,536
------------
Military/Gov't/Technical (5.0%)
153,000 Alliant Techsystems, Inc.* ............ 10,824,750
------------
Natural Gas (3.9%)
166,500 MDU Resources Group, Inc. ............. 3,871,125
180,000 Washington Gas Light Co. .............. 4,432,500
------------
8,303,625
------------
Oil & Gas Production (3.7%)
68,100 Evergreen Resources, Inc.* ............ 1,864,238
165,000 Forest Oil Corp.* ..................... 2,124,375
225,000 Santa Fe Snyder Corp.* ................ 2,250,000
61,000 St. Mary Land & Exploration Co......... 1,826,188
------------
8,064,801
------------
Oil/Gas Transmission (1.0%)
115,000 Western Gas Resources, Inc. ........... 2,098,750
------------
Other Consumer Services (3.3%)
123,600 Ambassadors International, Inc.*....... 2,025,881
175,000 Chemed Corp. .......................... 5,042,188
------------
7,068,069
------------
Other Telecommunications (0.6%)
35,000 Asia Satellite Telecommunications
Holdings Ltd. (ADR) (Hong Kong) 1,174,688
------------
Package Goods/Cosmetics (1.5%)
262,000 Playtex Products, Inc.* ............... 3,176,750
------------
Property - Casualty Insurers (6.2%)
250,000 RenaissanceRe Holdings, Ltd.
(Bermuda) ............................. 11,640,625
105,000 Trenwick Group Inc. ................... 1,850,625
------------
13,491,250
------------
Railroads (0.9%)
214,000 RailWorks Corp.* ...................... 1,979,500
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- -------------
<S> <C> <C>
Real Estate Investment Trusts (6.6%)
125,000 Alexandria Real Estate Equities,
Inc. .................................. $ 4,476,563
125,000 INDYMAC Bancorp Inc.* ................. 2,140,625
402,800 Mid-Atlantic Realty Trust ............. 4,380,450
105,000 Parkway Properties, Inc. .............. 3,360,000
------------
14,357,638
------------
Rental/Leasing Companies (0.3%)
100,000 Willis Lease Finance Corp.* ........... 662,500
------------
Semiconductors (0.4%)
16,000 Intersil Holding Corp. (Class A)*...... 917,000
------------
Services to the Health Industry (3.1%)
235,440 Morrison Management Specialists,
Inc. .................................. 6,783,615
------------
Smaller Banks (2.0%)
200,000 Banknorth Group, Inc. ................. 3,062,500
55,400 Texas Regional Bancshares, Inc.
(Class A) ............................. 1,319,213
------------
4,381,713
------------
Specialty Chemicals (1.1%)
168,800 TETRA Technologies, Inc.* ............. 2,342,100
------------
Specialty Foods/Candy (3.2%)
189,100 American Italian Pasta Co.
(Class A)* ............................ 3,734,725
216,000 J & J Snack Foods Corp.* .............. 3,213,000
------------
6,947,725
------------
Specialty Insurers (1.3%)
264,100 CNA Surety Corp. ...................... 2,872,088
------------
Specialty Steels (0.8%)
100,000 Quanex Corp. .......................... 1,800,000
------------
Steel/Iron Ore (0.5%)
43,700 Cleveland-Cliffs, Inc. ................ 1,084,306
------------
Textiles (0.3%)
85,000 Polymer Group, Inc. ................... 653,438
------------
Water Supply (0.7%)
52,600 American States Water Co. ............. 1,584,575
------------
TOTAL COMMON STOCKS
(Cost $184,130,694).................... 198,984,356
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
PORTFOLIO OF INVESTMENTS July 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
----------- ------------
<S> <C> <C>
CONVERTIBLE BOND (0.5%)
$ 1,200 Charming Shoppes, Inc. 7.50%
due 07/15/06 (Cost $1,070,888)...... $ 1,092,756
------------
SHORT-TERM INVESTMENTS (7.3%)
U.S. GOVERNMENT AGENCY (a) (6.9%)
15,000 Federal Home Loan Banks 6.43%
due 08/01/00 (Cost $15,000,000) 15,000,000
------------
REPURCHASE AGREEMENT (0.4%)
878 The Bank of New York 6.50%
due 08/01/00 (dated 07/31/00;
proceeds $877,820) (b)
(Cost $877,661)..................... 877,661
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $15,877,661).................. 15,877,661
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(Cost $201,079,243) (c)......... 99.8% 215,954,773
OTHER ASSETS IN EXCESS OF
LIABILITIES .................... 0.2 376,771
----- -----------
NET ASSETS ..................... 100.0% $216,331,544
===== ============
</TABLE>
--------------------------------
ADR American Depository Receipt.
* Non-income producing security.
(a) Purchased on a discount basis. The interest rate shown has been
adjusted to reflect a money market equivalent yield.
(b) Collateralized by $882,599 U.S. Treasury Note 5.875% due
02/15/04 valued at $895,217.
(c) The aggregate cost for federal income tax purposes approximates
the aggregate cost for book purposes. The aggregate gross
unrealized appreciation is $30,206,655 and the aggregate gross
unrealized depreciation is $15,331,125, resulting in net
unrealized appreciation of $14,875,530.
SEE NOTES TO FINANCIAL STATEMENts
7
<PAGE>
Morgan Stanley Dean Witter Special Value Fund
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
July 31, 2000
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities, at value
(cost $201,079,243) ............................................. $215,954,773
Receivable for:
Investments sold ............................................... 1,448,339
Shares of beneficial interest sold ............................. 1,288,407
Dividends ...................................................... 66,875
Deferred organizational expenses .................................. 44,568
Prepaid expenses and other assets ................................. 38,508
------------
TOTAL ASSETS ................................................... 218,841,470
------------
LIABILITIES:
Payable for:
Investments purchased .......................................... 1,960,724
Plan of distribution fee ....................................... 177,107
Shares of beneficial interest repurchased ...................... 164,809
Investment management fee ...................................... 137,343
Accrued expenses and other payables ............................... 69,943
------------
TOTAL LIABILITIES .............................................. 2,509,926
------------
NET ASSETS ..................................................... $216,331,544
============
COMPOSITION OF NET ASSETS:
Paid-in-capital ................................................... $207,822,768
Net unrealized appreciation ....................................... 14,875,530
Accumulated undistributed net investment income ................... 148,748
Accumulated net realized loss ..................................... (6,515,502)
------------
NET ASSETS ..................................................... $216,331,544
============
CLASS A SHARES:
Net Assets ........................................................ $7,105,030
Shares Outstanding (unlimited authorized, $.01 par value) ......... 602,492
NET ASSET VALUE PER SHARE ...................................... $11.79
======
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value) .............. $12.44
======
CLASS B SHARES:
Net Assets ........................................................ $202,446,365
Shares Outstanding (unlimited authorized, $.01 par value) ......... 17,593,326
NET ASSET VALUE PER SHARE ...................................... $11.51
======
CLASS C SHARES:
Net Assets ........................................................ $4,905,387
Shares Outstanding (unlimited authorized, $.01 par value) ......... 425,746
NET ASSET VALUE PER SHARE ...................................... $11.52
======
CLASS D SHARES:
Net Assets ........................................................ $1,874,762
Shares Outstanding (unlimited authorized, $.01 par value) ......... 157,952
NET ASSET VALUE PER SHARE ...................................... $11.87
======
</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, 2000
<TABLE>
<CAPTION>
NET INVESTMENT INCOME:
<S> <C>
INCOME
Dividends (net of $1,350 foreign withholding tax) ......... $3,475,396
Interest .................................................. 1,145,942
-----------
TOTAL INCOME ........................................... 4,621,338
-----------
EXPENSES
Plan of distribution fee (Class A shares) ................. 15,173
Plan of distribution fee (Class B shares) ................. 2,207,883
Plan of distribution fee (Class C shares) ................. 44,541
Investment management fee ................................. 1,749,834
Transfer agent fees and expenses .......................... 285,698
Professional fees ......................................... 78,742
Registration fees ......................................... 72,560
Shareholder reports and notices ........................... 58,899
Organizational expenses ................................... 35,923
Custodian fees ............................................ 20,849
Trustees' fees and expenses ............................... 11,191
Other ..................................................... 9,965
-----------
TOTAL EXPENSES ......................................... 4,591,258
-----------
NET INVESTMENT INCOME .................................. 30,080
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss ......................................... (4,983,260)
Net change in unrealized depreciation ..................... 17,020,664
-----------
NET GAIN ............................................... 12,037,404
-----------
NET INCREASE .............................................. $12,067,484
===========
</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 YEAR FOR THE YEAR
ENDED ENDED
JULY 31, 2000 JULY 31, 1999
--------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) ......................... $ 30,080 $ (502,469)
Net realized loss .................................... (4,983,260) (23,565)
Net change in unrealized depreciation ................ 17,020,664 4,383,296
------------ ------------
NET INCREASE ...................................... 12,067,484 3,857,262
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAIN:
Class A shares ....................................... (3,427) (748,492)
Class B shares ....................................... (110,185) (36,928,990)
Class C shares ....................................... (2,468) (560,902)
Class D shares ....................................... (1,412) (64,041)
------------ ------------
TOTAL DISTRIBUTIONS ............................... (117,492) (38,302,425)
------------ ------------
Net decrease from transactions in shares of beneficial
interest ........................................... (78,453,260) (69,094,754)
------------ ------------
NET DECREASE ...................................... (66,503,268) (103,539,917)
NET ASSETS:
Beginning of period .................................. 282,834,812 386,374,729
------------ ------------
END OF PERIOD
(Including undistributed net investment income of
$148,748 and $33,585, respectively) ............... $216,331,544 $282,834,812
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS July 31, 2000
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 portfolio security listed or traded
on the New York or American Stock Exchange, NASDAQ, or other exchange is valued
at its latest sale price, 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; (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
parameters, and/or research and evaluations
11
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS July 31, 2000, continued
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 tax purposes 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.
12
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS July 31, 2000, 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
following annual rates to the net assets of the Fund determined as of the close
of each business day: 0.75% to the portion of net assets not exceeding $500
million and 0.725% to the portion of daily net assets exceeding $500 million.
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 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 totaled
$13,797,699 at July 31, 2000.
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, 2000, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.23% and
0.98%, respectively.
The Distributor has informed the Fund that for the year ended July 31, 2000, it
received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $2,671, $713,785
and $2,331, respectively and received $22,004 in front-end sales charges from
sales of the Fund's Class A shares. The respective shareholders pay such
charges which are not an expense of the Fund.
13
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS July 31, 2000, continued
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities,
excluding short-term investments, for the year ended July 31, 2000 aggregated
$149,278,317 and $217,632,611, respectively.
For the year ended July 31, 2000, the Fund incurred brokerage commissions of
$48,639 with Dean Witter Reynolds Inc., an affiliate of the Investment Manager
and Distributor, for portfolio transactions executed on behalf of the Fund
For the year ended July 31, 2000, the Fund incurred brokerage commissions of
$5,750 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 July 31, 2000, the Fund had
transfer agent fees and expenses payable of approximately $4,000.
5. FEDERAL INCOME TAX STATUS
Capital losses incurred after October 31 ("post-October losses") within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $3,353,000 during fiscal 2000.
As of July 31, 2000, the Fund had temporary book/tax differences primarily
attributable to post-October losses and capital loss deferrals on wash sales
and permanent book/tax differences primarily attributable to tax adjustments on
real estate investment trusts sold by the Fund. To reflect reclassifications
arising from the permanent differences, paid-in-capital was charged $253,422,
accumulated net realized loss was credited $168,339 and accumulated
undistributed net investment income was credited $85,083.
14
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS July 31, 2000, continued
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JULY 31, 2000 JULY 31, 1999
---------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold .................................. 743,193 $ 7,984,430 963,374 $ 9,880,837
Reinvestment of distributions ......... 308 3,364 75,716 743,536
Redeemed .............................. (755,160) (8,073,321) (1,046,979) (10,827,716)
-------- -------------- ---------- --------------
Net decrease - Class A ................ (11,659) (85,527) (7,889) (203,343)
-------- -------------- ---------- --------------
CLASS B SHARES
Sold .................................. 3,426,579 37,060,879 5,320,075 54,845,651
Reinvestment of distributions ......... 9,555 102,041 3,522,840 34,206,767
Redeemed .............................. (11,049,325) (115,616,179) (15,819,028) (158,291,490)
----------- -------------- ----------- --------------
Net decrease - Class B ................ (7,613,191) (78,453,259) (6,976,113) (69,239,072)
----------- -------------- ----------- --------------
CLASS C SHARES
Sold .................................. 194,982 2,045,906 219,871 2,236,613
Reinvestment of distributions ......... 221 2,365 56,098 544,707
Redeemed .............................. (232,333) (2,430,797) (221,117) (2,179,796)
----------- -------------- ----------- --------------
Net increase (decrease) - Class C ..... (37,130) (382,526) 54,852 601,524
----------- -------------- ----------- --------------
CLASS D SHARES
Sold .................................. 992,507 10,550,632 993,032 10,206,536
Reinvestment of distributions ......... 22 244 832 8,206
Redeemed .............................. (950,517) (10,082,824) (1,001,549) (10,468,605)
----------- -------------- ----------- --------------
Net increase (decrease) - Class D ..... 42,012 468,052 (7,685) (253,863)
----------- -------------- ----------- --------------
Net decrease in Fund .................. (7,619,968) $ (78,453,260) (6,936,835) $ (69,094,754)
=========== ============== =========== ==============
</TABLE>
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 ENDED JULY 31 JULY 28, 1997*
------------------------------------------------- THROUGH
2000 1999 1998 JULY 31, 1997
---------------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
CLASS A SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period .............. $10.89 $11.68 $12.21 $12.10
------ ------ ------ ------
Income from investment operations:
Net investment income ............................ 0.08 0.06 0.03 -
Net realized and unrealized gain ................. 0.83 0.38 0.32 0.11
------ ------ ------ ------
Total income from investment operations ........... 0.91 0.44 0.35 0.11
------ ------ ------ ------
Less distributions from net realized gain ......... (0.01) (1.23) (0.88) -
------ ------ ------ ------
Net asset value, end of period .................... $11.79 $10.89 $11.68 $12.21
====== ====== ====== ======
TOTAL RETURN+ ..................................... 8.32% 4.94% 2.79% 0.91%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 1.23%(3) 1.22%(3) 1.20% 1.20%(2)
Net investment income ............................. 0.75%(3) 0.59%(3) 0.25% 2.27%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $7,105 $6,689 $7,265 $10
Portfolio turnover rate ........................... 69% 74% 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 YEAR ENDED JULY 31 OCTOBER 29, 1996*
------------------------------------------------------- THROUGH
2000 1999 1998 JULY 31, 1997**
------------------ ------------------ ------------- ------------------
<S> <C> <C> <C> <C>
CLASS B SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............ $10.71 $11.59 $12.21 $10.00
------ ------ ------ ------
Income (loss) from investment operations:
Net investment loss ............................ - (0.02) (0.05) -
Net realized and unrealized gain ............... 0.81 0.37 0.31 2.24
------ ------ ------ ------
Total income from investment operations ......... 0.81 0.35 0.26 2.24
------ ------ ------ ------
Less dividends and distributions from:
Net investment income .......................... - - - (0.01)
Net realized gain .............................. (0.01) (1.23) (0.88) (0.02)
------ ------ ------ ------
Total dividends and distributions ............... (0.01) (1.23) (0.88) (0.03)
------ ------ ------ ------
Net asset value, end of period .................. $11.51 $10.71 $11.59 $12.21
====== ====== ====== ======
TOTAL RETURN+ ................................... 7.53 % 4.14 % 2.02 % 22.41 %(1)
====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................ 2.00 %(3) 1.99 %(3) 1.94 % 2.01 %(2)
Net investment loss ............................. (0.02)%(3) (0.18)%(3) (0.36)% (0.03)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ......... $202,446 $269,916 $372,933 $280,288
Portfolio turnover rate ......................... 69 % 74 % 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
17
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED JULY 31 JULY 28, 1997*
--------------------------------------------------- THROUGH
2000 1999 1998 JULY 31, 1997
---------------- ------------------ ----------- ------------------
<S> <C> <C> <C> <C>
CLASS C SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period .............. $10.72 $11.59 $12.21 $12.10
------ ------ ------ -------
Income (loss) from investment operations:
Net investment loss .............................. - (0.01) (0.06) -
Net realized and unrealized gain ................. 0.81 0.37 0.32 0.11
------ ------ ------ -------
Total income from investment operations ........... 0.81 0.36 0.26 0.11
------ ------ ------ -------
Less distributions from net realized gain ......... (0.01) (1.23) (0.88) -
------ ------ ------ -------
Net asset value, end of period .................... $11.52 $10.72 $11.59 $12.21
====== ====== ====== =======
TOTAL RETURN+ ..................................... 7.52% 4.24 % 2.02 % 0.91%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 1.98%(3) 1.88 %(3) 1.95 % 1.94%(2)
Net investment income (loss) ...................... 0.00%(3) (0.07)%(3) (0.50)% 1.49%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $4,905 $4,962 $4,728 $11
Portfolio turnover rate ........................... 69% 74 % 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
18
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED JULY 31 JULY 28, 1997*
------------------------------------------------- THROUGH
2000 1999 1998 JULY 31, 1997
---------------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
CLASS D SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period .............. $10.94 $11.71 $12.21 $12.10
------ ------ ------ ------
Income from investment operations:
Net investment income ............................ 0.09 0.09 0.06 -
Net realized and unrealized gain ................. 0.85 0.37 0.32 0.11
------ ------ ------ ------
Total income from investment operations ........... 0.94 0.46 0.38 0.11
------ ------ ------ ------
Less distributions from net realized gain ......... (0.01) (1.23) (0.88) -
------ ------ ------ ------
Net asset value, end of period .................... $11.87 $10.94 $11.71 $12.21
====== ====== ====== ======
TOTAL RETURN+ ..................................... 8.56% 5.11% 3.04% 0.91%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 1.00%(3) 0.99%(3) 0.94% 0.94%(2)
Net investment income ............................. 0.98%(3) 0.82%(3) 0.50% 2.53%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $1,875 $1,268 $1,448 $10
Portfolio turnover rate ........................... 69% 74% 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
19
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OF MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Dean Witter Special Value Fund (the "Fund"), including the portfolio of
investments, as of July 31, 2000, and the related statements of operations and
changes in net assets, and financial highlights for the year then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit. The statement
of changes in net assets for the year ended July 31, 1999 and the financial
highlights for each of the respective stated periods ended July 31, 1999 were
audited by other auditors whose report, dated September 10, 1999, expressed an
unqualified opinion on that statement and the financial highlights.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. Our procedures included confirmation of securities owned at July
31, 2000 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Morgan Stanley Dean
Witter Special Value Fund as of July 31, 2000, the results of its operations,
the changes in its net assets and the financial highlights for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
Deloitte & Touche LLP
New York, New York
September 18, 2000
2000 FEDERAL TAX NOTICE (unaudited)
During the fiscal year ended July 31, 2000, the Fund paid to its
shareholders $0.01 per share from long-term capital gains.
20
<PAGE>
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND
CHANGE IN INDEPENDENT ACCOUNTANTS
On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.
The reports of PricewaterhouseCoopers LLP on the financial statements of the
Fund for the past two fiscal years contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle.
In connection with its audits for the two most recent fiscal years and through
July 1, 2000, there have been no disagreements with PricewaterhouseCoopers LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to
make reference thereto in their report on the financial statements for such
years.
The Fund, with the approval of its Board of Trustees and its Audit Committee,
engaged Deloitte & Touche LLP as its new independent accountants as of July 1,
2000.
21
<PAGE>
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<PAGE>
(This page has been left blank intentionally.)
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
James F. Higgins
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
Mitchell M. Merin
President
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
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
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 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. Read the
prospectus carefully before investing.
Morgan Stanley Dean Witter Distributors Inc., member NASD.
MORGAN STANLEY
DEAN WITTER
SPECIAL VALUE FUND
[GRAPHIC OMITTED]
ANNUAL REPORT
JULY 31, 2000
