<PAGE>
PROSPECTUS - MAY 1, 1999
Morgan Stanley Dean Witter
U.S. GOVERNMENT SECURITIES TRUST
[COVER PHOTO]
A MUTUAL FUND THAT SEEKS A HIGH LEVEL OF
CURRENT INCOME CONSISTENT WITH SAFETY OF PRINCIPAL
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this PROSPECTUS. Any representation
to the contrary is a criminal offense.
<PAGE>
CONTENTS
<TABLE>
<S> <C> <C>
The Fund Investment Objective........................................ 1
Principal Investment Strategies............................. 1
Principal Risks............................................. 2
Past Performance............................................ 4
Fees and Expenses........................................... 5
Fund Management............................................. 6
Shareholder Information Pricing Fund Shares......................................... 7
How to Buy Shares........................................... 7
How to Exchange Shares...................................... 9
How to Sell Shares.......................................... 11
Distributions............................................... 13
Tax Consequences............................................ 13
Share Class Arrangements.................................... 14
Financial Highlights ............................................................ 21
Our Family of Funds ............................................................ Inside Back Cover
THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE FUND.
PLEASE READ IT CAREFULLY AND KEEP IT FOR FUTURE REFERENCE.
</TABLE>
FUND CATEGORY
---------------------------
/ / Growth
/ / Growth and Income
/X/ INCOME
/ / Money Market
<PAGE>
(Sidebar)
INCOME
An investment objective having the goal of selecting securities to pay out
income rather than rise in value.
(End Sidebar)
THE FUND
ICON INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
Morgan Stanley Dean Witter U.S. Government Securities Trust
(the "Fund") is a mutual fund that seeks a high level of
current income consistent with safety of principal. There is
no guarantee that the Fund will achieve this objective.
ICON PRINCIPAL INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
The Fund will invest all of its assets in U.S. Government
securities. In making investment decisions, the Fund's
"Investment Manager," Morgan Stanley Dean Witter Advisors
Inc., considers economic developments, interest rate trends
and other factors.
The U.S. Government securities (including zero coupon
securities) that the Fund may purchase include:
- U.S. Treasury bills, notes and bonds, all of which are
direct obligations of the U.S. Government.
- Securities (including mortgage-backed securities) issued
by agencies and instrumentalities of the U.S. Government
which are backed by the full faith and credit of the
United States. Among the agencies and instrumentalities
issuing these obligations are the Government National
Mortgage Association, the Federal Housing Administration,
and Resolution Funding Corporation.
One type of mortgage-backed security, in which the Fund may
invest, is a mortgage pass-through security. These
securities represent a participation interest in a pool of
residential mortgage loans originated by U.S. Governmental
or private lenders such as banks. They differ from
conventional debt securities, which provide for periodic
payment of interest in fixed amounts and principal payments
at maturity or on specified call dates. Mortgage
pass-through securities provide for monthly payments that
are a "pass-through" of the monthly interest and principal
payments made by the individual borrowers on the pooled
mortgage loans. Mortgage pass-through securities may be
collateralized by mortgages with fixed rates of interest or
adjustable rates.
Fixed-income securities are debt securities such as bonds or
notes. The issuer of the debt security borrows money from
the investor who buys the security. Most debt securities pay
either fixed or adjustable rates of interest at regular
intervals until they mature, at which point investors get
their principal back.
In pursuing the Fund's investment objective, the Investment
Manager has considerable leeway in deciding which
investments it buys, holds or sells on a day-to-day basis --
and which trading or investment strategies it uses. For
example, the Investment Manager in its discretion may
determine to use some permitted trading strategies while not
using others.
1
<PAGE>
ICON PRINCIPAL RISKS
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The Fund's share price will fluctuate with changes in the
market value of the Fund's portfolio securities. The Fund's
yield also will vary based on the yield of the Fund's
portfolio securities. Neither the value nor the yield of the
U.S. Government securities that the Fund invests in (or the
value or yield of the Fund's shares) is guaranteed by the
U.S. Government. When you sell Fund shares, they may be
worth less than what you paid for them and, accordingly, you
can lose money investing in this Fund.
FIXED-INCOME SECURITIES. Principal risks of investing in the
Fund are associated with its U.S. Government securities,
which are fixed-income securities. All fixed-income
securities are subject to two types of risk: credit risk and
interest rate risk. Credit risk refers to the possibility
that the issuer of a security will be unable to make
interest payments and/or repay the principal on its debt.
Interest rate risk refers to fluctuations in the value of a
fixed-income security resulting from changes in the general
level of interest rates. When the general level of interest
rates goes up, the prices of most fixed-income securities go
down. When the general level of interest rates goes down,
the prices of most fixed-income securities go up. (Zero
coupon securities are typically subject to greater price
fluctuations than comparable securities that pay interest.)
As merely illustrative of the relationship between
fixed-income securities and interest rates, the following
table shows how interest rates affect bond prices.
<TABLE>
<CAPTION>
PRICE PER $1,000 OF A BOND IF
HOW INTEREST RATES AFFECT BOND INTEREST RATES:
PRICES
------------------------------
INCREASE DECREASE
-------------- --------------
- ------------------------------------------------------
BOND MATURITY COUPON 1% 2% 1% 2%
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------
1 year N/A $1,000 $1,000 $1,000 $1,000
- ----------------------------------------------------------------------
5 years 4.25% $967 $934 $1,038 $1,076
- ----------------------------------------------------------------------
10 years 4.75% $930 $867 $1,074 $1,155
- ----------------------------------------------------------------------
30 years 5.25% $865 $756 $1,166 $1,376
- ----------------------------------------------------------------------
</TABLE>
Coupons reflect yields on Treasury securities as of December
31, 1998. The table is not representative of price changes
for mortgage-backed securities principally because of
prepayment risk. In addition, the table is an illustration
and does not represent expected yields or share price
changes of any Morgan Stanley Dean Witter mutual fund.
While the credit risk associated with U.S. Government
securities is minimal, the interest rate risk can be
substantial. The Fund is not limited as to the maturities of
the securities in which it may invest, except the Fund will
not purchase zero coupon securities with remaining
maturities of longer than ten years. Thus, a rise in the
general level of interest rates may cause the price of the
Fund's portfolio securities to fall substantially.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities in
which the Fund may invest have different risk
characteristics than traditional debt securities. Although
generally the value of fixed-income securities increases
during periods of falling interest rates and decreases
during periods of rising rates, this is not always the case
with mortgage-backed securities. This is due to the fact
that principal on underlying mortgages may be prepaid at any
time as well as other factors. Generally, prepayments will
increase during a period of falling interest rates and
decrease during a period of rising interest rates. The rate
of prepayments also may
2
<PAGE>
be influenced by economic and other factors. Prepayment risk
includes the possibility that, as interest rates fall,
securities with stated interest rates may have the principal
prepaid earlier than expected, requiring the Fund to invest
the proceeds at generally lower interest rates.
Investments in mortgage-backed securities are made based
upon, among other things, expectations regarding the rate of
prepayments on underlying mortgage pools. Rates of
prepayment, faster or slower than expected by the Investment
Manager, could reduce the Fund's yield, increase the
volatility of the Fund and/or cause a decline in net asset
value. Certain mortgage-backed securities may be more
volatile and less liquid than other traditional types of
debt securities.
ZERO COUPON SECURITIES. A portion of the U.S. Government
securities purchased by the Fund may be zero coupon
securities. Such securities are purchased at a discount from
their face amount, giving the purchaser the right to receive
their full value at maturity. The interest earned on such
securities is, implicitly, automatically compounded and paid
out at maturity. While such compounding at a constant rate
eliminates the risk of receiving lower yields upon
reinvestment of interest if prevailing interest rates
decline, the owner of a zero coupon security will be unable
to participate in higher yields upon reinvestment of
interest received on interest-paying securities if
prevailing interest rates rise.
A zero coupon security pays no interest to its holder during
its life. Therefore, to the extent the Fund invests in zero
coupon securities, it will not receive current cash
available for distribution to shareholders. In addition,
zero coupon securities are subject to substantially greater
price fluctuations during periods of changing prevailing
interest rates than are comparable securities which pay
interest on a current basis. Current federal tax law
requires that a holder (such as the Fund) of a zero coupon
security accrue a portion of the discount at which the
security was purchased as income each year even though the
Fund receives no interest payments in cash on the security
during the year.
OTHER RISKS. The performance of the Fund also will depend on
whether or not the Investment Manager is successful in
pursuing the Fund's investment strategy.
Shares of the Fund are not bank deposits and are not
guaranteed or insured by any bank, governmental entity, or
the FDIC.
YEAR 2000. The Fund could be adversely affected if the
computer systems necessary for the efficient operation of
the Investment Manager, the Fund's other service providers
and the markets and individual and governmental issuers in
which the Fund invests do not properly process and calculate
date-related information from and after January 1, 2000.
While year 2000-related computer problems could have a
negative effect on the Fund, the Investment Manager and
affiliates are working hard to avoid any problems and to
obtain assurances from their service providers that they are
taking similar steps.
In addition, it is possible that the markets for securities
in which the Fund invests may be detrimentally affected by
computer failures throughout the financial services industry
beginning January 1, 2000. Improperly functioning trading
systems may
3
<PAGE>
result in settlement problems and liquidity issues. In
addition, governmental data processing errors may result in
overall economic uncertainties. Accordingly, the Fund's
investments may be adversely affected.
(Sidebar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Fund's Class B shares has varied
from year to year over the past 10 calendar years.
AVERAGE ANNUAL
TOTAL RETURNS
This table compares the Fund's average annual returns with those of a broad
measure of market performance over time. The Fund's returns include the maximum
applicable sales charge for each Class and assume you sold your shares at the
end of each period.
(End Sidebar)
ICON PAST PERFORMANCE
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The bar chart and table below provide some indication of the
risks of investing in the Fund. The Fund's past performance
does not indicate how the Fund will perform in the future.
ANNUAL TOTAL RETURNS -- CALENDAR YEARS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989 11.10%
'90 8.49%
'91 11.43%
'92 5.76%
'93 7.13%
'94 -3.61%
'95 16.74%
'96 3.16%
'97 8.56%
'98 7.27%
</TABLE>
The bar chart reflects the performance of Class B shares;
the performance of the other Classes will differ because the
Classes have different ongoing fees. The performance
information in the bar chart does not reflect the deduction
of sales charges; if these amounts were reflected, returns
would be less than shown.
During the periods shown in the bar chart, the highest
return for a calendar quarter was 5.48% (quarter ended June
30, 1995) and the lowest return for a calendar quarter was
-3.23% (quarter ended March 31, 1994). Year-to-date total
return as of March 31, 1999 was -0.23%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED THE 1998 CALENDAR YEAR)
- -------------------------------------------------------------------------------
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
Class A 3.13% -- --
- -------------------------------------------------------------------------------
Class B(1) 2.27% 5.92% 7.49%
- -------------------------------------------------------------------------------
Class C 6.14% -- --
- -------------------------------------------------------------------------------
Class D 7.72% -- --
- -------------------------------------------------------------------------------
Lehman Brothers General U.S.
Government Index(2) 9.85% 7.18% 9.17%
- -------------------------------------------------------------------------------
Lipper General U.S. Government
Funds Index(3) 7.85% 6.01% 7.92%
- -------------------------------------------------------------------------------
</TABLE>
1 Prior to July 28, 1997, the Fund only issued Class B shares.
2 The Lehman Brothers General U.S. Government Index is a broad-based measure
of all U.S. Government and U.S. Treasury securities. The Index does not
include any expenses or fees. The Index is unmanaged and should not be
considered an investment.
3 The Lipper General U.S. Government Funds Index is an equally-weighted
performance index of the largest-qualifying funds (based on net assets) in
the Lipper General U.S. Government Funds objective. The Index, which is
adjusted for capital gains distributions and income dividends, is unmanaged
and should not be considered an investment. There are currently thirty
funds represented in the Index.
4
<PAGE>
(Sidebar)
SHAREHOLDER FEES
These fees are paid directly from your investment.
ANNUAL FUND
OPERATING EXPENSES
These expenses are deducted from the Fund's assets and are based on expenses
paid for the fiscal year ended December 31, 1998.
(End Sidebar)
ICON FEES AND EXPENSES
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The Fund offers four Classes of shares: Classes A, B, C and
D. Each Class has a different combination of fees, expenses
and other features. The table below briefly describes the
fees and expenses that you may pay if you buy and hold
shares of the Fund. The Fund does not charge account or
exchange fees. See the "Share Class Arrangements" section
for further fee and expense information.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
SHAREHOLDER FEES
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Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 4.25%(1) None None None
- ---------------------------------------------------------------------------------------------------
Maximum deferred sales charge (load) (as a percentage based
on the lesser of the offering price or net asset value at
redemption) None(2) 5.00%(3) 1.00%(4) None
- ---------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
- ---------------------------------------------------------------------------------------------------
Management Fee 0.43% 0.43% 0.43% 0.43%
- ---------------------------------------------------------------------------------------------------
Distribution and service (12b-1) fees 0.24% 0.75% 0.75% None
- ---------------------------------------------------------------------------------------------------
Other expenses 0.09% 0.09% 0.09% 0.09%
- ---------------------------------------------------------------------------------------------------
Total annual Fund operating expenses 0.76% 1.27% 1.27% 0.52%
- ---------------------------------------------------------------------------------------------------
</TABLE>
1 Reduced for purchases of $25,000 and over.
2 Investments that are not subject to any sales charge at the time of
purchase are subject to a contingent deferred sales charge ("CDSC") of
1.00% that will be imposed on sales made within one year after purchase,
except for certain specific circumstances.
3 The CDSC is scaled down to 1.00% during the sixth year, reaching zero
thereafter. See "Share Class Arrangements" for a complete discussion of the
CDSC.
4 Only applicable to sales made within one year after purchase.
EXAMPLE
This example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other
mutual funds.
The example assumes that you invest $10,000 in the Fund,
your investment has a 5% return each year, and the Fund's
operating expenses remain the same. Although your actual
costs may be higher or lower, the tables below show your
costs at the end of each period based on these assumptions
depending upon whether or not you sell your shares at the
end of each period.
<TABLE>
<CAPTION>
IF YOU SOLD YOUR SHARES: IF YOU HELD YOUR SHARES:
----------------------------------------- -----------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------- -----------------------------------------
CLASS A $499 $658 $829 $1,327 $499 $658 $829 $1,327
- ---------------------------------------------------------- -----------------------------------------
CLASS B $629 $703 $897 $1,534 $129 $403 $697 $1,534
- ---------------------------------------------------------- -----------------------------------------
CLASS C $229 $403 $697 $1,534 $129 $403 $697 $1,534
- ---------------------------------------------------------- -----------------------------------------
CLASS D $ 53 $167 $291 $ 653 $ 53 $167 $291 $ 653
- ---------------------------------------------------------- -----------------------------------------
</TABLE>
5
<PAGE>
(SIDEBAR)
MORGAN STANLEY DEAN WITTER ADVISORS INC.
The Investment Manager is widely recognized as a leader in the mutual fund
industry and together with Morgan Stanley Dean Witter Services Company Inc., its
wholly-owned subsidiary, has more than $129 billion in assets under management
or administration as of March 31, 1999.
(End Sidebar)
ICON FUND MANAGEMENT
- --------------------------------------------------------------------------------
The Fund has retained the Investment Manager -- Morgan
Stanley Dean Witter Advisors Inc. -- to provide
administrative services, manage its business affairs and
invest its assets, including the placing of orders for the
purchase and sale of portfolio securities. The Investment
Manager is a wholly-owned subsidiary of Morgan Stanley Dean
Witter & Co., a preeminent global financial services firm
that maintains leading market positions in each of its three
primary businesses: securities, asset management and credit
services. Its main business office is located at Two World
Trade Center, New York, New York 10048.
The Fund's portfolio is managed within the Investment
Manager's Taxable Fixed-Income Group. Rajesh K. Gupta, a
Senior Vice President of the Investment Manager, has been
the primary portfolio manager of the Fund and a portfolio
manager with the Investment Manager for over five years.
The Fund pays the Investment Manager a monthly management
fee as full compensation for the services and facilities
furnished to the Fund, and for Fund expenses assumed by the
Investment Manager. The fee is based on the Fund's average
daily net assets. For the fiscal year ended December 31,
1998, the Fund accrued total compensation to the Investment
Manager amounting to 0.43% of the Fund's average daily net
assets.
6
<PAGE>
(Sidebar)
CONTACTING A FINANCIAL ADVISOR
If you are new to the Morgan Stanley Dean Witter Family of Funds and would like
to contact a Financial Advisor, call (800)
THE-DEAN for the telephone number of the Morgan Stanley Dean Witter office
nearest you. You may also access our office locator on our Internet site at:
www.deanwitter.com/funds
(End Sidebar)
SHAREHOLDER INFORMATION
ICON PRICING FUND SHARES
- --------------------------------------------------------------------------------
The price of Fund shares (excluding sales charges), called
"net asset value," is based on the value of the Fund's
portfolio securities. While the assets of each Class are
invested in a single portfolio of securities, the net asset
value of each Class will differ because the Classes have
different ongoing distribution fees.
The net asset value per share of the Fund is determined once
daily at 4:00 p.m. Eastern time on each day that the New
York Stock Exchange is open (or, on days when the New York
Stock Exchange closes prior to 4:00 p.m., at such earlier
time). Shares will not be priced on days that the New York
Stock Exchange is closed.
The value of the Fund's portfolio securities is based on the
securities' market price when available. When a market price
is not readily available, including circumstances under
which the Investment Manager determines that a security's
market price is not accurate, a portfolio security is valued
at its fair value, as determined under procedures
established by the Fund's Board of Trustees. In these cases,
the Fund's net asset value will reflect certain portfolio
securities' fair value rather than their market price.
An exception to the Fund's general policy of using market
prices concerns its short-term debt portfolio securities.
Debt securities with remaining maturities of sixty days or
less at the time of purchase are valued at amortized cost.
However, if the cost does not reflect the securities' market
value, these securities will be valued at their fair value.
ICON HOW TO BUY SHARES
- --------------------------------------------------------------------------------
You may open a new account to buy Fund shares or buy
additional Fund shares for an existing account by contacting
your Morgan Stanley Dean Witter Financial Advisor or other
authorized financial representative. Your Financial Advisor
will assist you, step-by-step, with the procedures to invest
in the Fund. You may also purchase shares directly by
calling the Fund's transfer agent and requesting an
application.
Because every investor has different immediate financial
needs and long-term investment goals, the Fund offers
investors four Classes of shares: Classes A, B, C and D.
Class D shares are only offered to a limited group of
investors. Each Class of shares offers a distinct structure
of sales charges, distribution and service fees, and other
features that are designed to address a variety of needs.
Your Financial Advisor or other authorized financial
representative can help you decide which Class may be most
appropriate for you. When purchasing Fund shares, you must
specify which Class of shares you wish to purchase.
When you buy Fund shares, the shares are purchased at the
next share price calculated (less any applicable front-end
sales charge for Class A shares) after we receive your
investment order in proper form. We reserve the right to
reject any order for the purchase of Fund shares.
7
<PAGE>
(Sidebar)
EASYINVEST-SM-
A purchase plan that allows you to transfer money automatically from your
checking or savings account or from a Money Market Fund on a semi-monthly,
monthly or quarterly basis. Contact your Morgan Stanley Dean Witter Financial
Advisor for further information about this service.
(End Sidebar)
<TABLE>
<CAPTION>
MINIMUM INVESTMENT AMOUNTS
- ------------------------------------------------------------------------------------------------
MINIMUM INVESTMENT
----------------------
INVESTMENT OPTIONS INITIAL ADDITIONAL
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Regular Accounts $ 1,000 $ 100
- ------------------------------------------------------------------------------------------------
Individual Retirement Accounts: Regular IRAs $ 1,000 $ 100
Education IRAs $500 $ 100
- ------------------------------------------------------------------------------------------------
EASYINVEST-SM- (automatically from your checking
or savings account or Money Market
Fund) $100* $ 100*
- ------------------------------------------------------------------------------------------------
</TABLE>
* Provided your schedule of investments totals $1,000 in twelve months.
There is no minimum investment amount if you purchase Fund
shares through: (1) the Investment Manager's mutual fund
asset allocation plan, (2) a program, approved by the Fund's
distributor, in which you pay an asset-based fee for
advisory, administrative and/or brokerage services, or (3)
employer-sponsored employee benefit plan accounts.
INVESTMENT OPTIONS FOR CERTAIN INSTITUTIONAL AND OTHER
INVESTORS/CLASS D SHARES. To be eligible to purchase Class D
shares, you must qualify under one of the investor
categories specified in the "Share Class Arrangements"
section of this PROSPECTUS.
THREE DAY SETTLEMENT. Fund shares are sold through the
Fund's distributors. Morgan Stanley Dean Witter Distributors
Inc., on a normal three business day basis; that is, your
payment for Fund shares is due on the third business day
(settlement day) after you place a purchase order.
SUBSEQUENT INVESTMENTS SENT DIRECTLY TO THE FUND. In
addition to buying additional Fund shares for an existing
account by contacting your Morgan Stanley Dean Witter
Financial Advisor, you may send a check directly to the
Fund. To buy additional shares in this manner:
- Write a "letter of instruction" to the Fund specifying the
name(s) on the account, the account number, the social
security or tax identification number, the Class of shares
you wish to purchase and the investment amount (which
would include any applicable front-end sales charge). The
letter must be signed by the account owner(s).
- Make out a check for the total amount payable to: Morgan
Stanley Dean Witter U.S. Government Securities Trust.
- Mail the letter and check to Morgan Stanley Dean Witter
Trust FSB at P.O. Box 1040, Jersey City, NJ 07303.
8
<PAGE>
ICON HOW TO EXCHANGE SHARES
- --------------------------------------------------------------------------------
PERMISSIBLE FUND EXCHANGES. You may exchange shares of any Class of the
Fund for the same Class of any other continuously offered Multi-Class
Fund, or for shares of a No-Load Fund, Money Market Fund or Short-Term
U.S. Treasury Trust, without the imposition of an exchange fee. See the
inside back cover of this PROSPECTUS for each Morgan Stanley Dean Witter
Fund's designation as a Multi-Class Fund, No-Load Fund or Money Market
Fund. If a Morgan Stanley Dean Witter Fund is not listed, consult the
inside back cover of that Fund's PROSPECTUS for its designation. For
purposes of exchanges, shares of FSC Funds (subject to a front-end sales
charge) are treated as Class A shares of a Multi-Class Fund.
Exchanges may be made after shares of the Fund acquired by purchase have
been held for thirty days. There is no waiting period for exchanges of
shares acquired by exchange or dividend reinvestment. The current
PROSPECTUS for each fund describes its investment objective(s), policies
and and investment minimums, should be read before investment.
EXCHANGE PROCEDURES. You can process an exchange by contacting your
Morgan Stanley Dean Witter Financial Advisor or other authorized
financial representative. Otherwise, you must forward an exchange
privilege authorization form to the Fund's transfer agent - Morgan
Stanley Dean Witter Trust FSB - and then write the transfer agent or
call (800) 869-NEWS to place an exchange order. You can obtain an
exchange privilege authorization form by contacting your Financial
Advisor or other authorized financial representative, or by calling
(800) 869-NEWS. If you hold share certificates, no exchanges may be
processed until we have received all applicable share certificates.
An exchange to any Morgan Stanley Dean Witter Fund (except a Money
Market Fund) is made on the basis of the next calculated net asset
values of the Funds involved after the exchange instructions are
accepted. When exchanging into a Money Market Fund, the Fund's shares
are sold at their next calculated net asset value and the Money Market
Fund's shares are purchased at their net asset value on the following
business day.
The Fund may terminate or revise the exchange privilege upon required
notice. Certain services normally available to shareholders of Money
Market Funds, including the check writing privilege, are not available
for Money Market Fund shares you acquire in an exchange.
TELEPHONE EXCHANGES. For your protection when calling Morgan Stanley
Dean Witter Trust FSB, we will employ reasonable procedures to confirm
that exchange instructions communicated over the telephone are genuine.
These procedures may include requiring various forms of personal
identification such as name, mailing address, social security or other
tax identification number. Telephone instructions also may be recorded.
Telephone instructions will be accepted if received by the Fund's
transfer agent between 9:00 a.m. and 4:00 p.m. Eastern time, on any day
the New York Stock
9
<PAGE>
Exchange is open for business. During periods of drastic economic or
market changes, it is possible that the telephone exchange procedures
may be difficult to implement, although this has not been the case with
the Fund in the past.
MARGIN ACCOUNTS. If you have pledged your Fund shares in a margin
account, contact your Morgan Stanley Dean Witter Financial Advisor or
other authorized financial representative regarding restrictions on the
exchange of such shares.
TAX CONSIDERATIONS OF EXCHANGES. If you exchange shares of the Fund for
shares of another Morgan Stanley Dean Witter Fund there are important
tax considerations. For tax purposes, the exchange out of the Fund is
considered a sale of Fund shares - and the exchange into the other Fund
is considered a purchase. As a result, you may realize a capital gain or
loss.
You should review the "Tax Consequences" section and consult your own
tax professional about the tax consequences of an exchange.
FREQUENT EXCHANGES. A pattern of frequent exchanges may result in the
Fund limiting or prohibiting, at its discretion, additional purchases
and/or exchanges. The Fund will notify you in advance of limiting your
exchange privileges.
CDSC CALCULATIONS ON EXCHANGES. See the "Share Class Arrangements"
section of this PROSPECTUS for a further discussion of how applicable
contingent deferred sales charges (CDSCs) are calculated for shares of
one Morgan Stanley Dean Witter Fund that are exchanged for shares of
another.
For further information regarding exchange privileges, you should
contact your Morgan Stanley Dean Witter Financial Advisor or call (800)
869-NEWS.
10
<PAGE>
ICON HOW TO SELL SHARES
- --------------------------------------------------------------------------------
You can sell some or all of your Fund shares at any time. If
you sell Class A, Class B or Class C shares, your net sale
proceeds are reduced by the amount of any applicable CDSC.
Your shares will be sold at the next price calculated after
we receive your order to sell as described below.
<TABLE>
<CAPTION>
OPTIONS PROCEDURES
<S> <C>
- --------------------------------------------------------------------------------
Contact your To sell your shares, simply call your Morgan Stanley Dean
Financial Advisor Witter Financial Advisor or other authorized financial
representative.
------------------------------------------------------------
ICON Payment will be sent to the address to which the account is
registered or deposited in your brokerage account.
- --------------------------------------------------------------------------------
By Letter You can also sell your shares by writing a "letter of
instruction" that includes:
ICON - your account number;
- the dollar amount or the number of shares you wish to
sell;
- the Class of shares you wish to sell; and
- the signature of each owner as it appears on the account.
------------------------------------------------------------
If you are requesting payment to anyone other than the
registered owner(s) or that payment be sent to any address
other than the address of the registered owner(s) or
pre-designated bank account, you will need a signature
guarantee. You can obtain a signature guarantee from an
eligible guarantor acceptable to Morgan Stanley Dean Witter
Trust FSB. (You should contact Morgan Stanley Dean Witter
Trust FSB at (800) 869-NEWS for a determination as to
whether a particular institution is an eligible guarantor.)
A notary public CANNOT provide a signature guarantee.
Additional documentation may be required for shares held by
a corporation, partnership, trustee or executor.
------------------------------------------------------------
Mail the letter to Morgan Stanley Dean Witter Trust FSB at
P.O. Box 983, Jersey City, NJ 07303. If you hold share
certificates, you must return the certificates, along with
the letter and any required additional documentation.
------------------------------------------------------------
A check will be mailed to the name(s) and address in which
the account is registered, or otherwise according to your
instructions.
- --------------------------------------------------------------------------------
Systematic If your investment in all of the Morgan Stanley Dean Witter
Withdrawal Plan Family of Funds has a total market value of at least
$10,000, you may elect to withdraw amounts of $25 or more,
or in any whole percentage of a Fund's balance (provided the
amount is at least $25), on a monthly, quarterly,
semi-annual or annual basis, from any Fund with a balance of
at least $1,000. Each time you add a Fund to the plan, you
must meet the plan requirements.
------------------------------------------------------------
Amounts withdrawn are subject to any applicable CDSC. A CDSC
may be waived under certain circumstances. See the Class B
waiver categories listed in the "Share Class Arrangements"
section of this PROSPECTUS.
------------------------------------------------------------
To sign up for the Systematic Withdrawal Plan, contact your
Morgan Stanley Dean Witter Financial Advisor or call (800)
869-NEWS. You may terminate or suspend your plan at any
time. Please remember that withdrawals from the plan are
sales of shares, not Fund "distributions," and ultimately
may exhaust your account balance. The Fund may terminate or
revise the plan at any time.
- --------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
PAYMENT FOR SOLD SHARES. After we receive your complete
instructions to sell as described below, a check will be
mailed to you within seven days, although we will attempt to
make payment within one business day. Payment may also be
sent to your brokerage account.
Payment may be postponed or the right to sell your shares
suspended under unusual circumstances. If you request to
sell shares that were recently purchased by check, payment
of the sale proceeds may be delayed for the minimum time
needed to verify that the check has been honored (not more
than fifteen days from the time we receive the check).
TAX CONSIDERATIONS. Normally, your sale of Fund shares is
subject to federal and state income tax. You should review
the "Tax Consequences" section of this PROSPECTUS and
consult your own tax professional about the tax consequences
of a sale.
REINSTATEMENT PRIVILEGE. If you sell Fund shares and have
not previously exercised the reinstatement privilege, you
may, within 35 days after the date of sale, invest any
portion of the proceeds in the same Class of Fund shares at
their net asset value and receive a pro rata credit for any
CDSC paid in connection with the sale.
INVOLUNTARY SALES. The Fund reserves the right, on sixty
days' notice, to sell the shares of any shareholder (other
than shares held in an IRA or 403(b) Custodial Account)
whose shares, due to sales by the shareholder, have a value
below $100, or in the case of an account opened through
EASYINVEST -SM-, if after 12 months the shareholder has
invested less than $1,000 in the account.
However, before the Fund sells your shares in this manner,
we will notify you and allow you sixty days to make an
additional investment in an amount that will increase the
value of your account to at least the required amount before
the sale is processed. No CDSC will be imposed on any
involuntary sale.
MARGIN ACCOUNTS. Certain restrictions may apply to Fund
shares pledged in margin accounts with Dean Witter Reynolds
or another authorized broker-dealer of Fund shares. If you
hold Fund shares in this manner, please contact your Morgan
Stanley Dean Witter Financial Advisor or other authorized
financial representative for more details.
12
<PAGE>
(Sidebar)
TARGETED DIVIDENDS-SM-
You may select to have your Fund distributions automatically invested in other
Classes of Fund shares or Classes of another Morgan Stanley Dean Witter Fund
that you own. Contact your Morgan Stanley Dean Witter Financial Advisor for
further information about this service.
(End Sidebar)
ICON DISTRIBUTIONS
- --------------------------------------------------------------------------------
The Fund passes substantially all of its earnings from income and
capital gains along to its investors as "distributions." The Fund earns
interest from fixed-income investments. These amounts are passed along
to Fund shareholders as "income dividend distributions." The Fund
realizes capital gains whenever it sells securities for a higher price
than it paid for them. These amounts may be passed along as "capital
gain distributions."
The Fund declares income dividends separately for each Class.
Distributions paid on Class A and Class D shares usually will be higher
than for Class B and Class C because distribution fees that Class B and
Class C pay are higher. Normally, income dividends are declared on each
day the New York Stock Exchange is open for business, and distributed
monthly and capital gains are distributed annually in December. The
Fund, however, may retain and reinvest any long-term capital gains. The
Fund may at times make payments from sources other than income or
capital gains that represent a return of a portion of your investment.
Distributions are reinvested automatically in additional shares of the
same Class and automatically credited to your account, unless you
request in writing that all distributions be paid in cash. If you elect
the cash option, processing of your dividend checks begins immediately
following the monthly payment date, and the Fund will mail a monthly
dividend check to you normally during the first seven days of the
following month. No interest will accrue on uncashed checks. If you wish
to change how your distributions are paid, your request should be
received by the Fund's transfer agent, Morgan Stanley Dean Witter Trust
FSB, at least five business days prior to the record date of the
distributions.
ICON TAX CONSEQUENCES
- --------------------------------------------------------------------------------
As with any investment, you should consider how your Fund investment
will be taxed. The tax information in this PROSPECTUS is provided as
general information. You should consult your own tax professional about
the tax consequences of an investment in the Fund.
Unless your investment in the Fund is through a tax-deferred retirement
account, such as a 401(k) plan or IRA, you need to be aware of the
possible tax consequences when:
- The Fund makes distributions; and
- You sell Fund shares, including an exchange to another Morgan Stanley
Dean Witter Fund.
TAXES ON DISTRIBUTIONS. Your distributions are normally subject to
federal and state income tax when they are paid, whether you take them
in cash or reinvest them in Fund shares. A distribution also may be
subject to local income tax. Any income dividend distributions and any
short-term capital gain distributions are taxable to you as ordinary
income. Any long-term capital gain distributions are taxable as
long-term capital gains, no matter how long you have owned shares in the
Fund.
13
<PAGE>
Every January, you will be sent a statement (IRS Form 1099-DIV) showing
the taxable distributions paid to you in the previous year. The
statement provides full information on your dividends and capital gains
for tax purposes.
TAXES ON SALES. Your sale of Fund shares normally is subject to federal
and state income tax and may result in a taxable gain or loss to you. A
sale also may be subject to local income tax. Your exchange of Fund
shares for shares of another Morgan Stanley Dean Witter Fund is treated
for tax purposes like a sale of your original shares and a purchase of
your new shares. Thus, the exchange may, like a sale, result in a
taxable gain or loss to you and will give you a new tax basis for your
new shares.
When you open your Fund account, you should provide your social security
or tax identification number on your investment application. By
providing this information, you will avoid being subject to a federal
backup withholding tax of 31% on taxable distributions and redemption
proceeds. Any withheld amount would be sent to the IRS as an advance tax
payment.
ICON SHARE CLASS ARRANGEMENTS
- --------------------------------------------------------------------------------
The Fund offers several Classes of shares having different distribution
arrangements designed to provide you with different purchase options
according to your investment needs. Your Morgan Stanley Dean Witter
Financial Advisor or other authorized financial representative can help
you decide which Class may be appropriate for you.
The general public is offered three Classes: Class A shares, Class B
shares and Class C shares, which differ principally in terms of sales
charges and ongoing expenses. A fourth Class, Class D shares, is offered
only to a limited category of investors. Shares that you acquire through
reinvested distributions will not be subject to any front-end sales
charge or CDSC - contingent deferred sales charge. Sales personnel may
receive different compensation for selling each Class of shares. The
sales charges applicable to each Class provide for the distribution
financing of shares of that Class.
The chart below compares the sales charge and annual 12b-1 fee
applicable to each Class:
<TABLE>
<CAPTION>
CLASS SALES CHARGE ANNUAL 12B-1 FEE
<S> <C> <C>
- ------------------------------------------------------------------
A Maximum 4.25% initial sales charge
reduced for purchase of $25,000 or more;
shares sold without an initial sales
charge are generally subject to a 1.0%
CDSC during the first year 0.25%
- ------------------------------------------------------------------
B Maximum 5.0% CDSC during the first year
decreasing to 0% after six years 0.75%
- ------------------------------------------------------------------
C 1.0% CDSC during the first year 0.75%
- ------------------------------------------------------------------
D None None
- ------------------------------------------------------------------
</TABLE>
14
<PAGE>
(SIDEBAR)
FRONT-END SALES
CHARGE OR FSC
An initial sales charge you pay when purchasing Class A shares that is based on
a percentage of the offering price. The percentage declines based upon the
dollar value of Class A shares you purchase. We offer three ways to reduce your
Class A sales charges - the COMBINED PURCHASE PRIVILEGE, RIGHT OF ACCUMULATION
and LETTER OF INTENT.
(End Sidebar)
CLASS A SHARES Class A shares are sold at net asset value
plus an initial sales charge of up to 4.25%. The initial
sales charge is reduced for purchases of $25,000 or more
according to the schedule below. Investments of $1 million
or more are not subject to an initial sales charge, but are
generally subject to a contingent deferred sales charge, or
CDSC, of 1.0% on sales made within one year after the last
day of the month of purchase. The CDSC will be assessed in
the same manner and with the same CDSC waivers as with Class
B shares. Class A shares are also subject to a distribution
(12b-1) fee of up to 0.25% of the average daily net assets
of the Class.
The offering price of Class A shares includes a sales charge
(expressed as a percentage of the offering price) on a
single transaction as shown in the following table:
<TABLE>
<CAPTION>
FRONT-END SALES CHARGE
----------------------------------------------
PERCENTAGE OF PUBLIC APPROXIMATE PERCENTAGE
AMOUNT OF SINGLE TRANSACTION OFFERING PRICE OF AMOUNT INVESTED
<S> <C> <C>
- ----------------------------------------------------------------------------------------
Less than $25,000 4.25% 4.44%
- ----------------------------------------------------------------------------------------
$25,000 but less than $50,000 4.00% 4.17%
- ----------------------------------------------------------------------------------------
$50,000 but less than $100,000 3.50% 3.63%
- ----------------------------------------------------------------------------------------
$100,000 but less than $250,000 2.75% 2.83%
- ----------------------------------------------------------------------------------------
$250,000 but less than $1 million 1.75% 1.78%
- ----------------------------------------------------------------------------------------
$1 million and over 0 0
- ----------------------------------------------------------------------------------------
</TABLE>
The reduced sales charge schedule is applicable to purchases
of Class A shares in a single transaction by:
- A single account (including an individual, trust or
fiduciary account).
- Family member accounts (limited to husband, wife and
children under the age
of 21).
- Pension, profit sharing or other employee benefit plans of
companies and their affiliates.
- Tax-exempt organizations.
- Groups organized for a purpose other than to buy mutual
fund shares.
COMBINED PURCHASE PRIVILEGE. You also will have the benefit
of reduced sales charges by combining purchases of Class A
shares of the Fund in a single transaction with purchases of
Class A shares of other Multi-Class Funds and shares of FSC
Funds.
RIGHT OF ACCUMULATION. You also may benefit from a reduction
of sales charges if the cumulative net asset value of Class
A shares of the Fund purchased in a single transaction,
together with shares of other Funds you currently own which
were previously purchased at a price including a front-end
sales charge (including shares acquired through reinvestment
of distributions), amounts to $25,000 or more. Also, if you
have a cumulative net asset value of all your Class A and
Class D shares equal to at least $5 million (or $25 million
for certain employee benefit plans), you are eligible to
purchase Class D shares of any Fund subject to the Fund's
minimum initial investment requirement.
15
<PAGE>
You must notify your Morgan Stanley Dean Witter Financial
Advisor or other authorized financial representative (or
Morgan Stanley Dean Witter Trust FSB if you purchase
directly through the Fund), at the time a purchase order is
placed, that the purchase qualifies for the reduced charge
under the Right of Accumulation. Similar notification must
be made in writing when an order is placed by mail. The
reduced sales charge will not be granted if: (i)
notification is not furnished at the time of the order; or
(ii) a review of the records of Dean Witter Reynolds or
other authorized dealer of Fund shares or the Fund's
transfer agent does not confirm your represented holdings.
LETTER OF INTENT. The schedule of reduced sales charges for
larger purchases also will be available to you if you enter
into a written "letter of intent." A letter of intent
provides for the purchase of Class A shares of the Fund or
other Multi-Class Funds or shares of FSC Funds within a
thirteen-month period. The initial purchase under a letter
of intent must be at least 5% of the stated investment goal.
To determine the applicable sales charge reduction, you may
also include: (1) the cost of shares of other Morgan Stanley
Dean Witter Funds which were previously purchased at a price
including a front-end sales charge during the 90-day period
prior to the distributor receiving the letter of intent, and
(2) the cost of shares of other Funds you currently own
acquired in exchange for shares of Funds purchased during
that period at a price including a front-end sales charge.
You can obtain a letter of intent by contacting your Morgan
Stanley Dean Witter Financial Advisor or other authorized
financial representative, or by calling (800) 869-NEWS. If
you do not achieve the stated investment goal within the
thirteen-month period, you are required to pay the
difference between the sales charges otherwise applicable
and sales charges actually paid.
OTHER FRONT-END SALES CHARGE WAIVERS. In addition to
investments of $1 million or more, your purchase of Class A
shares is not subject to a front-end sales charge (or a CDSC
upon sale) if your account qualifies under one of the
following categories:
- A trust for which Morgan Stanley Dean Witter Trust FSB
provides discretionary trustee services.
- Persons participating in a fee-based investment program
(subject to all of its terms and conditions, including
mandatory sale or transfer restrictions on termination)
approved by the Fund's distributor pursuant to which they
pay an asset-based fee for investment advisory,
administrative and/or brokerage services.
- Employer-sponsored employee benefit plans, whether or not
qualified under the Internal Revenue Code, for which
Morgan Stanley Dean Witter Trust FSB serves as trustee or
Dean Witter Reynolds' Retirement Plan Services serves as
recordkeeper under a written Recordkeeping Services
Agreement ("MSDW Eligible Plans") which have at least 200
eligible employees.
- A MSDW Eligible Plan whose Class B shares have converted
to Class A shares, regardless of the plan's asset size or
number of eligible employees.
16
<PAGE>
- A client of a Morgan Stanley Dean Witter Financial Advisor
who joined us from another investment firm within six
months prior to the date of purchase of Fund shares, and
used the proceeds from the sale of shares of a proprietary
mutual fund of that Financial Advisor's previous firm that
imposed either a front-end or deferred sales charge to
purchase Class A shares, provided that: (1) you sold the
shares not more than 60 days prior to the purchase of Fund
shares, and (2) the sale proceeds were maintained in the
interim in cash or a money market fund.
- Current or retired Directors/Trustees of the Morgan
Stanley Dean Witter Funds, such persons' spouses and
children under the age of 21, and trust accounts for which
any of such persons is a beneficiary.
- Current or retired directors, officers and employees of
Morgan Stanley Dean Witter & Co. and any of its
subsidiaries, such persons' spouses and children under the
age of 21, and trust accounts for which any of such
persons is a beneficiary.
(Sidebar)
CONTINGENT DEFERRED SALES CHARGE OR CDSC
A fee you pay when you sell shares of certain Morgan Stanley Dean Witter Funds
purchased without an initial sales charge. This fee declines the longer you hold
your shares as set forth in the table.
(End Sidebar)
CLASS B SHARES Class B shares are offered at net asset
value with no initial sales charge but are subject to a
contingent deferred sales charge, or CDSC, as set forth in
the table below. For the purpose of calculating the CDSC,
shares are deemed to have been purchased on the last day of
the month during which they were purchased.
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE PAYMENT MADE CDSC AS A PERCENTAGE OF AMOUNT REDEEMED
<S> <C>
- --------------------------------------------------------------------------------------------
First 5.0%
- --------------------------------------------------------------------------------------------
Second 4.0%
- --------------------------------------------------------------------------------------------
Third 3.0%
- --------------------------------------------------------------------------------------------
Fourth 2.0%
- --------------------------------------------------------------------------------------------
Fifth 2.0%
- --------------------------------------------------------------------------------------------
Sixth 1.0%
- --------------------------------------------------------------------------------------------
Seventh and thereafter None
- --------------------------------------------------------------------------------------------
</TABLE>
Each time you place an order to sell or exchange shares,
shares with no CDSC will be sold or exchanged first, then
shares with the lowest CDSC will be sold or exchanged next.
For any shares subject to a CDSC, the CDSC will be assessed
on an amount equal to the lesser of the current market value
or the cost of the shares being sold.
CDSC WAIVERS. A CDSC, if otherwise applicable, will be
waived in the case of:
- Sales of shares held at the time you die or become
disabled (within the definition in Section 72(m)(7) of the
Internal Revenue Code which relates to the ability to
engage in gainful employment), if the shares are: (i)
registered either in your name (not a trust) or in the
names of you and your spouse as joint tenants with right
of survivorship; or (ii) held in a qualified corporate or
self-employed retirement plan, IRA or 403(b) Custodial
Account, provided in either case that the sale is
requested within one year of your death or initial
determination of disability.
17
<PAGE>
- Sales in connection with the following retirement plan
"distributions:" (i) lump-sum or other distributions from
a qualified corporate or self-employed retirement plan
following retirement (or, in the case of a "key employee"
of a "top heavy" plan, following attainment of age
59 1/2); (ii) distributions from an IRA or 403(b)
Custodial Account following attainment of age 59 1/2; or
(iii) a tax-free return of an excess IRA contribution (a
distribution does not include a direct transfer of IRA,
403(b) Custodial Account or retirement plan assets to a
successor custodian or trustee).
- Sales of shares held for you as a participant in a MSDW
Eligible Plan.
- Sales of shares in connection with the Systematic
Withdrawal Plan of up to 12% annually of the value of each
Fund from which plan sales are made. The percentage is
determined on the date you establish the Systematic
Withdrawal Plan and based on the next calculated share
price. You may have this CDSC waiver applied in amounts up
to 1% per month, 3% per quarter, 6% semi-annually or 12%
annually. Shares with no CDSC will be sold first, followed
by those with the lowest CDSC. As such, the waiver benefit
will be reduced by the amount of your shares that are not
subject to a CDSC. If you suspend your participation in
the plan, you may later resume plan payments without
requiring a new determination of the account value for the
12% CDSC waiver.
All waivers will be granted only following the Distributor
receiving confirmation of your entitlement. If you believe
you are eligible for a CDSC waiver, please contact your
Financial Advisor or call (800) 869-NEWS.
DISTRIBUTION FEE. Class B shares also are subject to an
annual distribution (12b-1) fee of 0.75% (0.65% on amounts
over $10 billion) of the lesser of: (a) the average daily
aggregate gross purchases by all shareholders of the Fund's
Class B shares since the inception of the Fund (not
including reinvestments of dividends or capital gains
distributions), less the average daily aggregate net asset
value of the Fund's Class B shares sold by all shareholders
since the Fund's inception upon which a CDSC has been
imposed or waived, or (b) the average daily net assets of
Class B.
CONVERSION FEATURE. After ten (10) years, Class B shares
will convert automatically to Class A shares of the Fund
with no initial sales charge. The ten year period runs from
the last day of the month in which the shares were
purchased, or in the case of Class B shares acquired through
an exchange, from the last day of the month in which the
original Class B shares were purchased; the shares will
convert to Class A shares based on their relative net asset
values in the month following the ten year period. At the
same time, an equal proportion of Class B shares acquired
through automatically reinvested distributions will convert
to Class A shares on the same basis. (Class B shares held
before May 1, 1997, however, will convert to Class A shares
in May 2007.)
In the case of Class B shares held in a MSDW Eligible Plan,
the plan is treated as a single investor and all Class B
shares will convert to Class A shares on the conversion date
of the Class B shares of a Morgan Stanley Dean Witter Fund
purchased by that plan.
18
<PAGE>
Currently, the Class B share conversion is not a taxable
event; the conversion feature may be cancelled if it is
deemed a taxable event in the future by the Internal Revenue
Service.
If you exchange your Class B shares for shares of a Money
Market Fund, No-Load Fund or Short-Term U.S. Treasury Trust,
the holding period for conversion is frozen as of the last
day of the month of the exchange and resumes on the last day
of the month you exchange back into Class B shares.
EXCHANGING SHARES SUBJECT TO A CDSC. There are special
considerations when you exchange Fund shares that are
subject to a CDSC. When determining the length of time you
held the shares and the corresponding CDSC rate, any period
(starting at the end of the month) during which you held
shares of a fund that does NOT charge a CDSC WILL NOT BE
COUNTED. Thus, in effect the "holding period" for purposes
of calculating the CDSC is frozen upon exchanging into a
fund that does not charge a CDSC.
For example, if you held Class B shares of the Fund for one
year, exchanged to Class B of another Morgan Stanley Dean
Witter Multi-Class Fund for another year, then sold your
shares, a CDSC rate of 4% would be imposed on the shares
based on a two year holding period -- one year for each
Fund. However, if you had exchanged the shares of the Fund
for a Money Market Fund (which does not charge a CDSC)
instead of the Multi-Class Fund, then sold your shares, a
CDSC rate of 5% would be imposed on the shares based on a
one year holding period. The one year in the Money Market
Fund would not be counted. Nevertheless, if shares subject
to a CDSC are exchanged for a Fund that does not charge a
CDSC, you will receive a credit when you sell the shares
equal to the distribution (12b-1) fees, if any, you paid on
those shares while in that Fund up to the amount of any
applicable CDSC.
In addition, shares that are exchanged into or from a Morgan
Stanley Dean Witter Fund subject to a higher CDSC rate will
be subject to the higher rate, even if the shares are
re-exchanged into a Fund with a lower CDSC rate.
CLASS C SHARES Class C shares are sold at net asset value
with no initial sales charge but are subject to a CDSC of
1.0% on sales made within one year after the last day of the
month of purchase. The CDSC will be assessed in the same
manner and with the same CDSC waivers as with Class B
shares.
DISTRIBUTION FEE. Class C shares are subject to an annual
distribution (12b-1) fee of 0.75% of the average daily net
assets of that Class. The Class C shares' distribution fee
may cause that Class to have higher expenses and pay lower
dividends than Class A or Class D shares. Unlike Class B
shares, Class C shares have no conversion feature and,
accordingly, an investor that purchases Class C shares may
be subject to distribution (12b-1) fees applicable to Class
C shares for an indefinite period.
19
<PAGE>
CLASS D SHARES Class D shares are offered without any
sales charge on purchases or sales and without any
distribution (12b-1) fee. Class D shares are offered only to
investors meeting an initial investment minimum of $5
million ($25 million for MSDW Eligible Plans) and the
following investor categories:
- Investors participating in the Investment Manager's mutual
fund asset allocation program (subject to all of its terms
and conditions, including mandatory sale or transfer
restrictions on termination) pursuant to which they pay an
asset-based fee.
- Persons participating in a fee-based investment program
(subject to all of its terms and conditions, including
mandatory sale or transfer restrictions on termination)
approved by the Fund's distributor pursuant to which they
pay an asset-based fee for investment advisory,
administrative and/or brokerage services.
- Employee benefit plans maintained by Morgan Stanley Dean
Witter & Co. or any of its subsidiaries for the benefit of
certain employees of Morgan Stanley Dean Witter & Co. and
its subsidiaries.
- Certain unit investment trusts sponsored by Dean Witter
Reynolds.
- Certain other open-end investment companies whose shares
are distributed by the Fund's distributor.
- Investors who were shareholders of the Dean Witter
Retirement Series on September 11, 1998 for additional
purchases for their former Dean Witter Retirement Series
accounts.
MEETING CLASS D ELIGIBILITY MINIMUMS. To meet the $5 million
($25 million for MSDW Eligible Plans) initial investment to
qualify to purchase Class D shares you may combine: (1)
purchases in a single transaction of Class D shares of the
Fund and other Morgan Stanley Dean Witter Multi-Class Funds
and/or (2) previous purchases of Class A and Class D shares
of Multi-Class Funds and shares of FSC Funds you currently
own, along with shares of Morgan Stanley Dean Witter Funds
you currently own that you acquired in exchange for those
shares.
NO SALES CHARGES FOR REINVESTED CASH DISTRIBUTIONS If you
receive a cash payment representing an income dividend or
capital gain and you reinvest that amount in the applicable
Class of shares by returning the check within 30 days of the
payment date, the purchased shares would not be subject to
an initial sales charge or CDSC.
PLAN OF DISTRIBUTION (RULE 12B-1 FEES) The Fund has
adopted a Plan of Distribution in accordance with Rule 12b-1
under the Investment Company Act of 1940 with respect to the
distribution of Class A, Class B and Class C shares. The
Plan allows the Fund to pay distribution fees for the sale
and distribution of these shares. It also allows the Fund to
pay for services to shareholders of Class A, Class B and
Class C shares. Because these fees are paid out of the
Fund's assets on an ongoing basis, over time these fees will
increase the cost of your investment in these Classes and
may cost you more than paying other types of sales charges.
20
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance for the past 5 fiscal years of the Fund.
Certain information reflects financial results for a single Fund share.
The total returns in the table represent the rate an investor would have
earned or lost on an investment in the Fund (assuming reinvestment of
all dividends and distributions).
This information has been audited by PricewaterhouseCoopers LLP, whose
report, along with the Fund's financial statements, is included in the
annual report, which is available upon request.
<TABLE>
<CAPTION>
CLASS B SHARES
- ----------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998 1997* 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA:
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.10 $ 8.92 $ 9.21 $ 8.41 $ 9.31
- ----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.54 0.56 0.56 0.57 0.58
Net realized and unrealized gain (loss) 0.10 0.18 (0.29) 0.80 (0.90)
------- ------- -------- -------- -----------
Total income (loss) from investment operations 0.64 0.74 0.27 1.37 (0.32)
- ----------------------------------------------------------------------------------------------------------------------------
Less dividends from net investment income (0.54) (0.56) (0.56) (0.57) (0.58)
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.20 $ 9.10 $ 8.92 $ 9.21 $ 8.41
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ 7.27% 8.56% 3.16% 16.74% (3.51)%
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ----------------------------------------------------------------------------------------------------------------------------
Expenses 1.27%(1) 1.26% 1.25% 1.24% 1.22%
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income 5.94%(1) 6.22% 6.28% 6.44% 6.57%
- ----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in millions $ 4,996 $ 5,429 $ 6,450 $ 7,955 $ 8,211
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 14% 4% 8% 14% 26%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Prior to July 28, 1997, the Fund issued one class of shares. All shares of the
Fund held prior to that date, other than shares held by certain employee
benefit plans established by Dean Witter Reynolds Inc. and its affiliate, SPS
Transaction Services, Inc., have been designated Class B shares. Shares held
by those employee benefit plans prior to July 28, 1997 have been designated
Class D shares.
+ 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) Reflects overall Fund ratios for investment income and non-class specific
expenses.
21
<PAGE>
<TABLE>
<CAPTION>
CLASS A SHARES
- --------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD JULY 28, 1997*
SELECTED PER SHARE DATA: DECEMBER 31, 1998 THROUGH DECEMBER 31, 1997
<S> <C> <C>
- --------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.09 $ 9.03
- --------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.59 0.25
Net realized and unrealized gain 0.09 0.06
------- -------
Total income from investment
operations 0.68 0.31
- --------------------------------------------------------------------------------------------
Less dividends from net investment
income (0.59) (0.25)
- --------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.18 $ 9.09
- --------------------------------------------------------------------------------------------
TOTAL RETURN+ 7.70% 3.50%(1)
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- --------------------------------------------------------------------------------------------
Expenses 0.76%(3) 0.77%(2)
- --------------------------------------------------------------------------------------------
Net investment income 6.45%(3) 6.57%(2)
- --------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------------
Net assets, end of period, in
thousands $58,538 $20,841
- --------------------------------------------------------------------------------------------
Portfolio turnover rate 14% 4%
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES
- ---------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA:
<S> <C> <C>
- ---------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.17 $ 9.03
- ---------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.55 0.23
Net realized and unrealized gain 0.09 0.14
------- -------
Total income from investment
operations 0.64 0.37
- ---------------------------------------------------------------------------------------------
Less dividends from net investment
income (0.55) (0.23)
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.26 $ 9.17
- ---------------------------------------------------------------------------------------------
TOTAL RETURN+ 7.14% 4.14%(1)
- ---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------
Expenses 1.27%(3) 1.25%(2)
- ---------------------------------------------------------------------------------------------
Net investment income 5.94%(3) 5.81%(2)
- ---------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------
Net assets, end of period, in
thousands $17,087 $4,385
- ---------------------------------------------------------------------------------------------
Portfolio turnover rate 14% 4%
- ---------------------------------------------------------------------------------------------
</TABLE>
* The date shares were first issued.
+ 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.
22
<PAGE>
<TABLE>
<CAPTION>
CLASS D SHARES
- --------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD JULY 28, 1997*
SELECTED PER SHARE DATA: DECEMBER 31, 1998 THROUGH DECEMBER 31, 1997
<S> <C> <C>
- --------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.11 $ 9.03
- --------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.61 0.27
Net realized and unrealized gain 0.07 0.08
------- -------
Total income from investment
operations 0.68 0.35
- --------------------------------------------------------------------------------------------
Less dividends from net investment
income (0.61) (0.27)
- --------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.18 $ 9.11
- --------------------------------------------------------------------------------------------
TOTAL RETURN+ 7.72% 3.87%(1)
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- --------------------------------------------------------------------------------------------
Expenses 0.52%(3) 0.52%(2)
- --------------------------------------------------------------------------------------------
Net investment income 6.69%(3) 6.91%(2)
- --------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------------
Net assets, end of period, in
thousands $20,392 $11,367
- --------------------------------------------------------------------------------------------
Portfolio turnover rate 14% 4%
- --------------------------------------------------------------------------------------------
</TABLE>
*The date shares were first issued. Shareholders who held shares of the Fund
prior to July 28, 1997 (the date the Fund converted to a multiple class share
structure) should refer to the Financial Highlights of Class B to obtain the
historical per share data and ratio information of their shares.
+ 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.
23
<PAGE>
NOTES
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24
<PAGE>
MORGAN STANLEY DEAN WITTER
FAMILY OF FUNDS
The Morgan Stanley Dean Witter Family of Funds offers investors a
wide range of investment choices. Come on in and meet the family!
- --------------------------------------------------------------------------------
GROWTH FUNDS
- --------------------------------
GROWTH FUNDS
Aggressive Equity Fund
American Opportunities Fund
Capital Growth Securities
Developing Growth Securities
Equity Fund
Growth Fund
Market Leader Trust
Mid-Cap Growth Fund
Special Value Fund
Value Fund
THEME FUNDS
Financial Services Trust
Health Sciences Trust
Information Fund
Natural Resource Development Securities
Precious Metals and Minerals Trust
Utilities Fund
GLOBAL/INTERNATIONAL FUNDS
Competitive Edge Fund - "Best Ideas" Portfolio
European Growth Fund
Fund of Funds - International Portfolio
Global Dividend Growth Securities
Global Utilities Fund
International SmallCap Fund
Japan Fund
Pacific Growth Fund
- --------------------------------------------------------------------------------
GROWTH AND INCOME FUNDS
- --------------------------------
Balanced Growth Fund
Balanced Income Fund
Convertible Securities Trust
Dividend Growth Securities
Fund of Funds - Domestic Portfolio
Income Builder Fund
Mid-Cap Dividend Growth Securities
S&P 500 Index Fund
S&P 500 Select Fund
Strategist Fund
Value-Added Market Series/Equity Portfolio
THEME FUNDS
Global Utilities Fund
Real Estate Fund
Utilities Fund
- --------------------------------------------------------------------------------
INCOME FUNDS
- --------------------------------
GOVERNMENT INCOME FUNDS
Federal Securities Trust
Short-Term U.S. Treasury Trust
U.S. Government Securities Trust
DIVERSIFIED INCOME FUNDS
Diversified Income Trust
CORPORATE INCOME FUNDS
High Yield Securities
<PAGE>
Intermediate Income Securities
Short-Term Bond Fund (NL)
GLOBAL INCOME FUNDS
World Wide Income Trust
TAX-FREE INCOME FUNDS
California Tax-Free Income Fund
Hawaii Municipal Trust (FSC)
Limited Term Municipal Trust (NL)
Multi-State Municipal Series Trust (FSC)
New York Tax-Free Income Fund
Tax-Exempt Securities Trust
- --------------------------------------------------------------------------------
MONEY MARKET FUNDS
- --------------------------------
TAXABLE MONEY MARKET FUNDS
Liquid Asset Fund (MM)
U.S. Government Money Market Trust (MM)
TAX-FREE MONEY MARKET FUNDS
California Tax-Free Daily Income Trust (MM)
N.Y. Municipal Money Market Trust (MM)
Tax-Free Daily Income Trust (MM)
Unless otherwise noted, there may be Funds created after this PROSPECTUS was
published. Please consult the inside front cover of a new Fund's PROSPECTUS for
its designation, e.g., Multi-Class Fund or Money Market Fund.
Unless otherwise noted, each listed Morgan Stanley Dean Witter Fund, except for
Short-Term U.S. Treasury Trust, is a Multi-Class Fund. A Multi-Class Fund is a
mutual fund offering multiple Classes of shares. The other types of Funds are:
NL - No-Load (Mutual) Fund; MM - Money Market Fund; FSC - A mutual fund sold
with a front-end sales charge and a distribution (12b-1) fee.
<PAGE>
MORGAN STANLEY DEAN WITTER
U.S. GOVERNMENT SECURITIES TRUST
(Sidebar)
TICKER SYMBOLS:
CLASS A: USGAX
- -------------------
CLASS B: USGBX
- -------------------
CLASS C: USGCX
- -------------------
CLASS D: USGDX
- -------------------
(End Sidebar)
Additional information about the Fund's investments is
available in the Fund's ANNUAL AND SEMI-ANNUAL REPORTS TO
SHAREHOLDERS. In the Fund's ANNUAL REPORT, you will find a
discussion of the market conditions and investment
strategies that significantly affected the Fund's
performance during its last fiscal year. The Fund's
STATEMENT OF ADDITIONAL INFORMATION also provides additional
information about the Fund. The STATEMENT OF ADDITIONAL
INFORMATION is incorporated herein by reference (legally is
part of this PROSPECTUS). For a free copy of any of these
documents, to request other information about the Fund, or
to make shareholder inquiries, please call:
(800) 869-NEWS
You also may obtain information about the Fund by calling
your Morgan Stanley Dean Witter Financial Advisor or by
visiting our Internet site at:
WWW.DEANWITTER.COM/FUNDS
Information about the Fund (including the STATEMENT OF
ADDITIONAL INFORMATION) can be viewed and copied at the
Securities and Exchange Commission's Public Reference Room
in Washington, DC. Information about the Reference Room's
operations may be obtained by calling the SEC at (800)
SEC-0330. Reports and other information about the Fund are
available on the SEC's Internet site (www.sec.gov) and
copies of this information may be obtained, upon payment of
a duplicating fee, by writing the Public Reference Section
of the SEC, Washington, DC 20549-6009.
(INVESTMENT COMPANY ACT FILE NO. 811-3870)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION MORGAN
MAY 1, 1999 STANLEY
DEAN WITTER
U.S.
GOVERNMENT
SECURITIES
TRUST
- --------------------------------------------------------------------------------
This STATEMENT OF ADDITIONAL INFORMATION is not a PROSPECTUS. The PROSPECTUS
(dated May 1, 1999) for the Morgan Stanley Dean Witter U.S. Government
Securities Trust may be obtained without charge from the Fund at its address or
telephone number listed below or from Dean Witter Reynolds at any of its branch
offices.
Morgan Stanley Dean Witter
U.S. Government Securities Trust
Two World Trade Center
New York, New York 10048
(800) 869-NEWS
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
I. Fund History........................................................................ 4
II. Description of the Fund and Its Investments and Risks.............................. 4
A. Classification.................................................................... 4
B. Investment Strategies and Risks................................................... 4
C. Fund Policies/Investment Restrictions............................................. 5
III. Management of the Fund............................................................ 6
A. Board of Trustees................................................................. 6
B. Management Information............................................................ 6
C. Compensation...................................................................... 11
IV. Control Persons and Principal Holders of Securities................................ 13
V. Investment Management and Other Services............................................ 14
A. Investment Manager................................................................ 14
B. Principal Underwriter............................................................. 14
C. Services Provided by the Investment Manager and Fund Expenses Paid by Third
Parties............................................................................. 15
D. Dealer Reallowances............................................................... 16
E. Rule 12b-1 Plan................................................................... 16
F. Other Service Providers........................................................... 20
VI. Brokerage Allocation and Other Practices........................................... 20
A. Brokerage Transactions............................................................ 20
B. Commissions....................................................................... 20
C. Brokerage Selection............................................................... 21
D. Directed Brokerage................................................................ 21
E. Regular Broker-Dealers............................................................ 21
VII. Capital Stock and Other Securities................................................ 21
VIII. Purchase, Redemption and Pricing of Shares....................................... 22
A. Purchase/Redemption of Shares..................................................... 22
B. Offering Price.................................................................... 23
IX. Taxation of the Fund and Shareholders.............................................. 24
X. Underwriters........................................................................ 25
XI. Calculation of Performance Data.................................................... 26
XII. Financial Statements.............................................................. 27
</TABLE>
2
<PAGE>
GLOSSARY OF SELECTED DEFINED TERMS
- --------------------------------------------------------------------------------
The terms defined in this glossary are frequently used in this STATEMENT OF
ADDITIONAL INFORMATION (other terms used occasionally are defined in the text of
the document).
"CUSTODIAN"--The Bank of New York.
"DEAN WITTER REYNOLDS"--Dean Witter Reynolds Inc., a wholly-owned broker-dealer
subsidiary of MSDW.
"DISTRIBUTOR"--Morgan Stanley Dean Witter Distributors Inc., a wholly-owned
broker-dealer subsidiary of MSDW.
"FINANCIAL ADVISORS"--Morgan Stanley Dean Witter authorized financial services
representatives.
"FUND"--Morgan Stanley Dean Witter U.S. Government Securities Trust, a
registered open-end investment company.
"INVESTMENT MANAGER"--Morgan Stanley Dean Witter Advisors Inc., a wholly-owned
investment advisor subsidiary of MSDW.
"INDEPENDENT TRUSTEES"--Trustees who are not "interested persons" (as defined by
the Investment Company Act) of the Fund.
"MORGAN STANLEY & CO."--Morgan Stanley & Co. Incorporated, a wholly-owned
broker-dealer subsidiary of MSDW.
"MORGAN STANLEY DEAN WITTER FUNDS"--Registered investment companies (i) for
which the Investment Manager serves as the investment advisor and (ii) that hold
themselves out to investors as related companies for investment and investor
services.
"MSDW"--Morgan Stanley Dean Witter & Co., a preeminent global financial services
firm.
"MSDW SERVICES COMPANY"--Morgan Stanley Dean Witter Services Company Inc., a
wholly-owned fund services subsidiary of the Investment Manager.
"TRANSFER AGENT"--Morgan Stanley Dean Witter Trust FSB, a wholly-owned transfer
agent subsidiary of MSDW.
"TRUSTEES"--The Board of Trustees of the Fund.
3
<PAGE>
I. FUND HISTORY
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust, under a
Declaration of Trust, on September 29, 1983, with the name Dean Witter U.S.
Government Securities Trust. Effective June 22, 1998, the Fund's name was
changed to Morgan Stanley Dean Witter U.S. Government Securities Trust.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
- --------------------------------------------------------------------------------
A. CLASSIFICATION
The Fund is an open-end, diversified management investment company whose
investment objective is a high level of current income.
B. INVESTMENT STRATEGIES AND RISKS
The following discussion of the Fund's investment strategies and risks
should be read with the sections of the Fund's PROSPECTUS titled "Principal
Investment Strategies," and "Principal Risks."
COLLATERALIZED MORTGAGE OBLIGATIONS. The Fund may invest in "CMOs"--
collateralized mortgage obligations. CMOs are debt obligations collateralized by
mortgage loans or mortgage pass-through securities (collectively "Mortgage
Assets"). Payments of principal and interest on the Mortgage Assets and any
reinvestment income are used to make payments on the CMOs. CMOs are issued in
multiple classes. Each class has a specific fixed or floating coupon rate and a
stated maturity or final distribution date. The principal and interest on the
Mortgage Assets may be allocated among the classes in a number of different
ways. Certain classes will, as a result of the collection, have more predictable
cash flows than others. As a general matter, the more predictable the cash flow,
the lower the yield relative to other Mortgage Assets. The less predictable the
cash flow, the higher the yield and the greater the risk. The Fund may invest in
any class of CMO.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. Certain CMOs may have variable or floating
interest rates and others may be stripped (securities which provide only the
principal or interest feature of the underlying security).
Certain mortgage-backed securities in which the Fund may invest (e.g.,
certain classes of CMOs) may increase or decrease in value substantially with
changes in interest rates and/or the rates of prepayment. In addition, if the
collateral securing CMOs or any third party guarantees are insufficient to make
payments, the Fund could sustain a loss.
In addition, the purchase or retention of stripped mortgage-backed
securities, CMOs and REMICs investments will be made only in conformity with the
provisions of Section 703.5 of the National Credit Union Administration Rules
and Regulations, as such provisions became effective on December 2, 1991.
MONEY MARKET SECURITIES. In addition to the short-term fixed-income
securities in which the Fund may otherwise invest in, the Fund may invest in
various money market securities for cash management purposes, which are limited
to U.S. Government securities.
U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed as to
principal and interest by the United States or its agencies (such as the
Export-Import Bank of the United States. Federal Housing Administration and
Government National Mortgage Association) or its instrumentalities (such as the
Federal Home Loan Bank), including Treasury bills, notes and bonds.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. The
Fund may purchase securities on a when-issued or delayed delivery basis or may
purchase or sell securities on a forward commitment basis. When these
transactions are negotiated, the price is fixed at the time of the commitment,
but delivery and payment can take place between one month and 120 days after the
date
4
<PAGE>
of commitment. While the Fund will only purchase securities on a when-issued,
delayed delivery or forward commitment basis with the intention of acquiring the
securities, the Fund may sell the securities before the settlement date, if it
is deemed advisable. The securities so purchased or sold are subject to market
fluctuation and no interest or dividends accrue to the purchaser prior to the
settlement date.
At the time the Fund makes the commitment to purchase or sell securities on
a when-issued, delayed delivery or forward commitment basis, it will record the
transaction and thereafter reflect the value, each day, of such security
purchased, or if a sale, the proceeds to be received, in determining its net
asset value. At the time of delivery of the securities, their value may be more
or less than the purchase or sale price. An increase in the percentage of the
Fund's assets committed to the purchase of securities on a when-issued, delayed
delivery or forward commitment basis may increase the volatility of its net
asset value. The Fund will also establish a segregated account on the Fund's
books in which it will continually maintain cash or cash equivalents or other
liquid portfolio securities equal in value to commitments to purchase securities
on a when-issued, delayed delivery or forward commitment basis.
YEAR 2000. The investment management services provided to the Fund by the
Investment Manager and the services provided to shareholders by the Distributor
and the Transfer Agent depend on the smooth functioning of their computer
systems. Many computer software systems in use today cannot recognize the year
2000, but revert to 1900 or some other date, due to the manner in which dates
were encoded and calculated. That failure could have a negative impact on the
handling of securities trades, pricing and account services. The Investment
Manager, the Distributor and the Transfer Agent have been actively working on
necessary changes to their own computer systems to prepare for the year 2000 and
expect that their systems will be adapted before that date, but there can be no
assurance that they will be successful, or that interaction with other
non-complying computer systems will not impair their services at that time.
In addition, it is possible that the markets for securities in which the
Fund invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues. In
addition, corporate and governmental data processing errors may result in
production problems for individual companies and overall economic uncertainties.
Earnings of individual issuers will be affected by remediation costs, which may
be substantial and may be reported inconsistently in U.S. and foreign financial
statements. Accordingly, the Fund's investments may be adversely affected.
C. FUND POLICIES/INVESTMENT RESTRICTIONS
The investment objective, policies and restrictions listed below have been
adopted by the Fund as fundamental policies. Under the Investment Company Act of
1940 (the "Investment Company Act"), a fundamental policy may not be changed
without the vote of a majority of the outstanding voting securities of the Fund.
The Investment Company Act defines a majority as the lesser of (a) 67% or more
of the shares present at a meeting of shareholders, if the holders of 50% of the
outstanding shares of the Fund are present or represented by proxy; or (b) more
than 50% of the outstanding shares of the Fund. For purposes of the following
restrictions: (i) all percentage limitations apply immediately after a purchase
or initial investment; and (ii) any subsequent change in any applicable
percentage resulting from market fluctuations or other changes in total or net
assets does not require elimination of any security from the portfolio.
The Fund will:
1. Seek high current income consistent with safety of principal.
The Fund may not:
1. Purchase any securities other than obligations issued or guaranteed
by the United States Government. Such obligations are backed by the full
faith and credit of the United States. There is no limit on the amount of
its assets which may be invested in the securities of any one issuer of such
obligations.
5
<PAGE>
2. Borrow money except from banks for temporary or emergency purposes,
including the meeting of redemption requests which might otherwise require
the untimely disposition of securities. Borrowing in the aggregate may not
exceed 20%, and borrowing for purposes other than meeting redemptions may
not exceed 5%, of the value of the Fund's total assets (including the amount
borrowed) at the time the borrowing is made. It is the Fund's current
intention not to borrow for other than meeting redemptions requests.
Borrowings in excess of 5% will be repaid before additional investments are
made. Interest on borrowings will reduce net investment income.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except in an amount not exceeding 10% of the value of its net assets but
only to secure borrowings for temporary or emergency purposes.
4. Sell securities short or purchase securities on margin.
5. Make loans to others except through the purchase of debt
obligations in accordance with the Fund's investment objective and policies.
6. Issue senior securities as defined in the Act except insofar as the
Fund may be deemed to have a senior security by reason of (a) borrowing
money in accordance with restriction (2) described above, or (b) by
purchasing securities on a when-issued or delayed delivery basis or
purchasing or selling securities on a forward commitment basis.
7. Underwrite the securities of other issuers or purchase restricted
securities.
8. Purchase or sell real estate or interests therein, although the
Fund may purchase securities of issuers which engage in real estate
operations and securities which are secured by real estate or interests
therein.
Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objective by investing all or substantially all
of its assets in another investment company having substantially the same
investment objective and policies as the Fund.
III. MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
A. BOARD OF TRUSTEES
The Board of Trustees of the Fund oversees the management of the Fund but
does not itself manage the Fund. The Trustees review various services provided
by or under the direction of the Investment Manager to ensure that the Fund's
general investment policies and programs are properly carried out. The Trustees
also conduct their review to ensure that administrative services are provided to
the Fund in a satisfactory manner.
Under state law, the duties of the Trustees are generally characterized as a
duty of loyalty and a duty of care. The duty of loyalty requires a Trustee to
exercise his or her powers in the interest of the Fund and not the Trustee's own
interest or the interest of another person or organization. A Trustee satisfies
his or her duty of care by acting in good faith with the care of an ordinarily
prudent person and in a manner the Trustee reasonably believes to be in the best
interest of the Fund and its shareholders.
B. MANAGEMENT INFORMATION
TRUSTEES AND OFFICERS. The Board of the Fund consists of eight (8)
Trustees. These same individuals also serve as directors or trustees for all of
the Morgan Stanley Dean Witter Funds. Six Trustees (75% of the total number)
have no affiliation or business connection with the Investment Manager or any of
its affiliated persons and do not own any stock or other securities issued by
the Investment Manager's parent company, MSDW. These are the "non-interested" or
"independent" Trustees. The other two Trustees (the "management Trustees") are
affiliated with the Investment Manager. All of the Independent Trustees also
serve as Independent Trustees of "Discover Brokerage Index Series," a mutual
fund for
6
<PAGE>
which the Investment Manager is the investment advisor. Three of the six
Independent Trustees are also Independent Trustees of certain other mutual
funds, referred to as the "TCW/DW Funds," for which MSDW Services Company is the
manager and TCW Funds Management, Inc. is the investment advisor.
The Trustees and executive officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with the
Investment Manager, and with the 85 Morgan Stanley Dean Witter Funds, the 11
TCW/DW Funds and Discover Brokerage Index Series, are shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ---------------------------------------------- ------------------------------------------------------------------
<S> <C>
Michael Bozic (58) ........................... Vice Chairman of Kmart Corporation (since December, 1998);
Trustee Director or Trustee of the Morgan Stanley Dean Witter Funds and
c/o Kmart Corporation Discover Brokerage Index Series; formerly Chairman and Chief
3100 West Big Beaver Road Executive Officer of Levitz Furniture Corporation (November,
Troy, Michigan 1995-November, 1998) and President and Chief Executive Officer of
Hills Department Stores (May, 1991-July, 1995); formerly variously
Chairman, Chief Executive Officer, President and Chief Operating
Officer (1987-1991) of the Sears Merchandise Group of Sears, Roe-
buck and Co.; Director of Eaglemark Financial Services, Inc. and
Weirton Steel Corporation.
Charles A. Fiumefreddo* (65) ................. Chairman, Director or Trustee and Chief Executive Officer of the
Chairman of the Board, President, Morgan Stanley Dean Witter Funds, the TCW/DW Funds and Discover
Chief Executive Officer and Trustee Brokerage Index Series; formerly Chairman, Chief Executive Officer
Two World Trade Center and Director of the Investment Manager, the Distributor and MSDW
New York, New York Services Company; Executive Vice President and Director of Dean
Witter Reynolds; Chairman and Director of the Transfer Agent;
formerly Director and/or officer of various MSDW subsidiaries
(until June, 1998).
Edwin J. Garn (66) ........................... Director or Trustee of the Morgan Stanley Dean Witter Funds and
Trustee Discover Brokerage Index Series; formerly United States Senator
c/o Huntsman Corporation (R-Utah)(1974-1992) and Chairman, Senate Banking Committee
500 Huntsman Way (1980-1986); formerly Mayor of Salt Lake City, Utah (1971-1974);
Salt Lake City, Utah formerly Astronaut, Space Shuttle Discovery (April 12-19, 1985);
Vice Chairman, Huntsman Corporation; Director of Franklin Covey
(time management systems), BMW Bank of North America, Inc.
(industrial loan corporation), United Space Alliance (joint
venture between Lockheed Martin and the Boeing Company) and Nuskin
Asia Pacific (multilevel marketing); member of the board of
various civic and charitable organizations.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ---------------------------------------------- ------------------------------------------------------------------
<S> <C>
Wayne E. Hedien (65) ......................... Retired; Director or Trustee of the Morgan Stanley Dean Witter
Trustee Funds; Trustee of Discover Brokerage Index Series; Director of The
c/o Gordon Altman Butowsky PMI Group, Inc. (private mortgage insurance); Trustee and Vice
Weitzen Shalov & Wein Chairman of The Field Museum of Natural History; formerly
Counsel to the Independent Trustees associated with the Allstate Companies (1966-1994), most recently
114 West 47th Street as Chairman of The Allstate Corporation (March, 1993-December,
New York, New York 1994) and Chairman and Chief Executive Officer of its wholly-owned
subsidiary, Allstate Insurance Company (July, 1989-December,
1994); director of various other business and charitable
organizations.
Dr. Manuel H. Johnson (50) ................... Senior Partner, Johnson Smick International, Inc., a consulting
Trustee firm; Co-Chairman and a founder of the Group of Seven Council
c/o Johnson Smick International, Inc. (G7C), an international economic commission; Chairman of the Audit
1133 Connecticut Avenue, N.W. Committee and Director of Trustee of the Morgan Stanley Dean
Washington, D.C. Witter Funds, the TCW/DW Funds and Discover Brokerage Index
Series; Director of Greenwich Capital Markets, Inc.
(broker-dealer) and NVR, Inc. (home construction); Chairman and
Trustee of the Financial Accounting Foundation (oversight
organization of the Financial Accounting Standards Board);
formerly Vice Chairman of the Board of Governors of the Federal
Reserve System (1986-1990) and Assistant Secretary of the U.S.
Treasury.
Michael E. Nugent (62) ....................... General Partner, Triumph Capital, L.P., a private investment
Trustee partnership; Chairman of the Insurance Committee and Director or
c/o Triumph Capital, L.P. Trustee of the Morgan Stanley Dean Witter Funds, the TCW/DW Funds
237 Park Avenue and Discover Brokerage Index Series; formerly Vice President,
New York, New York Bankers Trust Company and BT Capital Corporation (1984-1988);
director of various business organizations.
Philip J. Purcell* (55) ...................... Chairman of the Board of Directors and Chief Executive Officer of
Trustee MSDW, Dean Witter Reynolds and Novus Credit Services Inc.;
1585 Broadway Director of the Distributor; Director or Trustee of the Morgan
New York, New York Stanley Dean Witter Funds, and Discover Brokerage Index Series;
Director and/or officer of various MSDW subsidiaries.
John L. Schroeder (68) ....................... Retired; Chairman of the Insurance Committee and Director or
Trustee Trustee of the Morgan Stanley Dean Witter Funds, the TCW/DW Funds
c/o Gordon Altman Butowsky and Discover Brokerage Index Series; Director of Citizens
Weitzen Shalov & Wein Utilities Company; formerly Executive Vice President and Chief
Counsel to the Independent Trustees Investment Officer of the Home Insurance Company (August,
114 West 47th Street 1991-September, 1995).
New York, New York
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ---------------------------------------------- ------------------------------------------------------------------
<S> <C>
Mitchell M. Merin (45) ....................... President and Chief Operating Officer of Asset Management of MSDW
President (since December, 1998); President and Director (since April, 1997)
Two World Trade Center and Chief Executive Officer (since June, 1998) of the Investment
New York, New York Manager and MSDW Services Company; Chairman, Chief Executive
Officer and Director of the Distributor (since June, 1998);
Chairman and Chief Executive Officer (since June, 1998) and
Director (since January, 1998) of the Transfer Agent; Director of
various MSDW subsidiaries; President of the Morgan Stanley Dean
Witter Funds, the TCW/DW Funds and Discover Brokerage Index Series
since May, 1999); previously Chief Strategic Officer of the
investment Manager and MSDW Services Company and Executive Vice
President of the Distributor (April, 1997-June, 1998), Vice
President of the Morgan Stanley Dean Witter Funds, the TCW/DW
Funds and Discover Brokerage Index Series (May, 1997-April, 1999),
and Executive Vice President of Dean Witter, Discover & Co.
Barry Fink (44) .............................. Senior Vice President (since March, 1997) and Secretary and
Vice President, General Counsel (since February, 1997) and Director (since July,
Secretary and General Counsel 1998) of the Investment Manager and MSDW Services Company; Senior
Two World Trade Center Vice President (since March, 1997) and Assistant Secretary and
New York, New York Assistant General Counsel (since February, 1997) of the
Distributor; Assistant Secretary of Dean Witter Reynolds (since
August, 1996); Vice President, Secretary and General Counsel of
the Morgan Stanley Dean Witter Funds and the TCW/DW Funds (since
February, 1997); Vice President, Secretary and General Counsel of
Discover Brokerage Index Series; previously First Vice President
(June, 1993-February, 1997), Vice President and Assistant
Secretary and Assistant General Counsel of the Investment Manager
and MSDW Services Company and Assistant Secretary of the Morgan
Stanley Dean Witter Funds and the TCW/DW Funds.
Rajesh K. Gupta (38) ......................... Senior Vice President of the Investment Manager; Vice President of
Vice President various Morgan Stanley Dean Witter Funds.
Two World Trade Center
New York, New York
Thomas F. Caloia (53) ........................ First Vice President and Assistant Treasurer of the Investment
Treasurer Manager and MSDW Services Company; Treasurer of the Morgan Stanley
Two World Trade Center Dean Witter Funds, the TCW/DW Funds and Discover Brokerage Index
New York, New York Series.
</TABLE>
- ------------
*Denotes Trustees who are "interested persons" of the Fund as defined by the
Investment Company Act.
In addition, RONALD E. ROBISON, Executive Vice President, Chief
Administrative Officer and Director of the Investment Manager and MSDW Services
Company, ROBERT S. GIAMBRONE, Senior Vice President of the Investment Manager,
MSDW Services Company, the Distributor and the Transfer Agent and Director
9
<PAGE>
of the Transfer Agent, JOSEPH J. MCALINDEN, Executive Vice President and Chief
Investment Officer of the Investment Manager and Director of the Transfer Agent
and PETER M. AVELAR, JONATHAN R. PAGE and JAMES F. WILLISON, Senior Vice
Presidents of the Investment Manager, are Vice Presidents of the Fund.
In addition, FRANK BRUTTOMESSO, MARILYN K. CRANNEY, LOUANNE D. MCINNIS,
CARSTEN OTTO and RUTH ROSSI, Vice Presidents and Assistant General Counsels of
the Investment Manager and MSDW Services Company, TODD LEBO, Vice President and
Assistant General Counsel of the Investment Manager and MSDW Services Company,
are Assistant Secretaries of the Fund.
INDEPENDENT TRUSTEES AND THE COMMITTEES. Law and regulation establish both
general guidelines and specific duties for the Independent Trustees. The Morgan
Stanley Dean Witter Funds seek as Independent Trustees individuals of
distinction and experience in business and finance, government service or
academia; these are people whose advice and counsel are in demand by others and
for whom there is often competition. To accept a position on the Funds' Boards,
such individuals may reject other attractive assignments because the Funds make
substantial demands on their time. All of the Independent Trustees serve as
members of the Audit Committee. Three of them also serve as members of the
Derivatives Committee. In addition, three of the Trustees, including two
Independent Trustees, serve as members of the Derivatives Committee and the
Insurance Committee.
The Independent Trustees are charged with recommending to the full Board
approval of man-agement, advisory and administration contracts, Rule 12b-1 plans
and distribution and underwriting agreements; continually reviewing Fund
performance; checking on the pricing of portfolio securities, brokerage
commissions, transfer agent costs and performance, and trading among Funds in
the same complex; and approving fidelity bond and related insurance coverage and
allo-cations, as well as other matters that arise from time to time. The
Independent Trustees are re-quired to select and nominate individuals to fill
any Independent Trustee vacancy on the Board of any Fund that has a Rule 12b-1
plan of distribution. Most of the Morgan Stanley Dean Witter Funds have a Rule
12b-1 plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; re-viewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of the services; reviewing the
independence of the independent ac-countants; considering the range of audit and
non-audit fees; reviewing the adequacy of the Fund's system of internal
controls; and preparing and submitting Committee meeting minutes to the full
Board.
The Board of each Fund has a Derivatives Committee to approve parameters for
and monitor the activities of the Fund with respect to derivative investments,
if any, made by the Fund.
Finally, the Board of each Fund has formed an Insurance Committee to review
and monitor the insurance coverage maintained by the Fund.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL MORGAN
STANLEY DEAN WITTER FUNDS. The Independent Trustees and the Funds' management
believe that having the same Independent Trustees for each of the Morgan Stanley
Dean Witter Funds avoids the duplication of effort that would arise from having
different groups of individuals serving as Independent Trustees for each of the
Funds or even of sub-groups of Funds. They believe that having the same
individuals serve as Independent Trustees of all the Funds tends to increase
their knowledge and expertise regarding matters which affect the Fund complex
generally and enhances their ability to negotiate on behalf of each Fund with
the Fund's service providers. This arrangement also precludes the possibility of
separate groups of Independent Trustees arriving at conflicting decisions
regarding operations and management of the Funds and avoids the cost and
confusion that would likely ensue. Finally, having the same Independent Trustees
serve on all Fund Boards enhances the ability of each Fund to obtain, at modest
10
<PAGE>
cost to each separate Fund, the services of Independent Trustees, of the
caliber, experience and business acumen of the individuals who serve as
Independent Trustees of the Morgan Stanley Dean Witter Funds.
TRUSTEE AND OFFICER INDEMNIFICATION. The Fund's Declaration of Trust
provides that no Trustee, officer, employee or agent of the Fund is liable to
the Fund or to a shareholder, nor is any Trustee, officer, employee or agent
liable to any third persons in connection with the affairs of the Fund, except
as such liability may arise from his/her or its own bad faith, willful
misfeasance, gross negligence or reckless disregard of his/her or its duties. It
also provides that all third persons shall look solely to the Fund property for
satisfaction of claims arising in connection with the affairs of the Fund. With
the exceptions stated, the Declaration of Trust provides that a Trustee,
officer, employee or agent is entitled to be indemnified against all liability
in connection with the affairs of the Fund.
C. COMPENSATION
The Fund pays each Independent Trustee an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Trustees, the Independent
Trustees or Committees of the Board of Trustees attended by the Trustee (the
Fund pays the Chairman of the Audit Committee an additional annual fee of $750,
and the Chairmen of the Derivatives and Insurance Committees additional annual
fee of $500). If a Board meeting and a meeting of the Independent Trustees or a
Committee meeting, or a meeting of the Independent Trustees and/or more than one
Committee meeting, take place on a single day, the Trustees are paid a single
meeting fee by the Fund. The Fund also reimburses such Trustees for travel and
other out-of-pocket expenses incurred by them in connection with attending such
meetings. Trustees and officers of the Fund who are or have been employed by the
Investment Manager or an affiliated company receive no compensation or expense
reimbursement from the Fund for their services as Trustee.
The following table illustrates the compensation that the Fund paid to its
Independent Trustees for the fiscal year ended December 31, 1998.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
FROM THE
NAME OF INDEPENDENT TRUSTEE FUND
- ------------------------------------------------------------------ ------------
<S> <C>
Michael Bozic..................................................... $ 1,450
Edwin J. Garn..................................................... 1,600
Wayne E. Hedien................................................... 1,600
Dr. Manuel H. Johnson............................................. 1,550
Michael E. Nugent................................................. 1,600
John L. Schroeder................................................. 1,600
</TABLE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1998 for services
to the 85 Morgan Stanley Dean Witter Funds and, in the case of Messrs. Johnson,
Nugent and Schroeder, the 11 TCW/DW Funds that were in operation at December 31,
1998. With respect to Messrs. Johnson, Nugent and Schroeder, the TCW/DW Funds
are included solely because of a limited exchange privilege between those Funds
and five Morgan Stanley Dean Witter Money Market Funds. No compensation was paid
to the Fund's Independent Trustees by Discover Brokerage Index Series for the
calendar year ended December 31, 1998.
11
<PAGE>
CASH COMPENSATION FROM MORGAN STANLEY DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
TOTAL CASH
COMPENSATION
FOR SERVICES
FOR SERVICE TO
AS DIRECTOR OR 85 MORGAN
TRUSTEE AND FOR SERVICE AS STANLEY DEAN
COMMITTEE MEMBER TRUSTEE AND WITTER FUNDS
OF 85 MORGAN COMMITTEE MEMBER AND 11
NAME OF STANLEY DEAN OF 11 TCW/DW TCW/DW
INDEPENDENT TRUSTEE WITTER FUNDS FUNDS FUNDS
- --------------------------- ---------------- ---------------- -------------
<S> <C> <C> <C>
Michael Bozic.............. $120,150 -- $120,150
Edwin J. Garn.............. 132,450 -- 132,450
Wayne E. Hedien............ 132,350 -- 132,350
Dr. Manuel H. Johnson...... 128,400 62,331 190,731
Michael E. Nugent.......... 132,450 62,131 197,581
John L. Schroeder.......... 132,450 64,731 197,181
</TABLE>
As of the date of this STATEMENT OF ADDITIONAL INFORMATION, 55 of the Morgan
Stanley Dean Witter Funds, including the Fund, have adopted a retirement program
under which an Independent Trustee who retires after serving for at least five
years (or such lesser period as may be determined by the Board) as an
Independent Director or Trustee of any Morgan Stanley Dean Witter Fund that has
adopted the retirement program (each such Fund referred to as an "Adopting Fund"
and each such Trustee referred to as an "Eligible Trustee") is entitled to
retirement payments upon reaching the eligible retirement age (normally, after
attaining age 72). Annual payments are based upon length of service.
Currently, upon retirement, each Eligible Trustee is entitled to receive
from the Adopting Fund, commencing as of his or her retirement date and
continuing for the remainder of his or her life, an annual retirement benefit
(the "Regular Benefit") equal to 30.22% of his or her Eligible Compensation plus
0.5036667% of such Eligible Compensation for each full month of service as an
Independent Director or Trustee of any Adopting Fund in excess of five years up
to a maximum of 60.44% after ten years of service. The foregoing percentages may
be changed by the Board(1). "Eligible Compensation" is one-fifth of the total
compensation earned by such Eligible Trustee for service to the Adopting Fund in
the five year period prior to the date of the Eligible Trustee's retirement.
Benefits under the retirement program are not secured or funded by the Adopting
Funds.
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the Fund for the fiscal year ended December 31,
1998 and by the 55 Morgan Stanley Dean Witter Funds (including the Fund) for the
year ended December 31, 1998, and the estimated retirement benefits for the
Independent Trustees, to commence upon their retirement, from the Fund as of
December 31, 1998 and from the 55 Morgan Stanley Dean Witter Funds as of
December 31, 1998.
RETIREMENT BENEFITS FROM THE FUND AND ALL MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS RETIREMENT BENEFITS ESTIMATED ANNUAL
--------------------------------- ACCRUED AS EXPENSES BENEFITS
ESTIMATED UPON RETIREMENT2
CREDITED YEARS ESTIMATED --------------------- -------------------
OF SERVICE AT PERCENTAGE OF BY ALL FROM FROM ALL
RETIREMENT ELIGIBLE BY THE ADOPTING THE ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS
- ----------------------------------- --------------- --------------- ------ ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic...................... 10 60.44% $ 396 $ 22,377 $ 997 $ 52,250
Edwin J. Garn...................... 10 60.44 599 35,225 997 52,250
Wayne E. Hedien.................... 9 51.37 740 41,979 848 44,413
Dr. Manuel H. Johnson.............. 10 60.44 240 14,047 997 52,250
Michael E. Nugent.................. 10 60.44 421 25,336 997 52,250
John L. Schroeder.................. 8 50.37 807 45,117 838 44,343
</TABLE>
- ------------------------
12
<PAGE>
1 An Eligible Trustee may elect alternative payments of his or her retirement
benefits based upon the combined life expectancy of the Eligible Trustee
and his or her spouse on the date of such Eligible Trustee's retirement. In
addition, the Eligible Trustee may elect that the surviving spouse's
periodic payment of benefits will be equal to a lower percentage of the
periodic amount when both spouses were alive. The amount estimated to be
payable under this method, through the remainder of the later of the lives
of the Eligible Trustee and spouse, will be the actuarial equivalent of the
Regular Benefit.
2 Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote 1 above.
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
- --------------------------------------------------------------------------------
The following owned more than 5% of the outstanding shares of Class A of the
Fund on April 6, 1999: Meridian Charter Township, Attn: Thomas E. Klunzinger
Treasure, 5151 Marsh Road, Okomos MI 48864 - 6.28%. The following owned more
than 5% of the outstanding shares of Class D of the Fund on April 6, 1999:
Mellon Bank N.A., Mutual Funds, P.O. Box 3198, Pittsburgh, PA 15230, as trustee
of the Morgan Stanley Dean Witter START Plan, an employee benefit plan
established under sections 401 (a) and 401(k) of the Internal Revenue Code for
the benefit of certain employees of MSDW and its subsidiaries - 44.77%; Morgan
Stanley Dean Witter Trust FSB Trustee Kulicke & Soffa IND Inc. Incentive Savings
Plan, P.O. Box 957, Jersey City, NJ 07303 - 13.33%; MSDW Trust as trustee
Bulkmatic 401(k), P.O. Box 957, Jersey City, NJ 07303 - 6.41%.
As of the date of this STATEMENT OF ADDITIONAL INFORMATION, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's officers
and Trustees as a group was less than 1% of the Fund's shares of beneficial
interest outstanding.
13
<PAGE>
V. INVESTMENT MANAGEMENT AND OTHER SERVICES
- --------------------------------------------------------------------------------
A. INVESTMENT MANAGER
The Investment Manager to the Fund is Morgan Stanley Dean Witter Advisors
Inc., a Delaware corporation, whose address is Two World Trade Center, New York,
New York 10048. The Investment Manager is a wholly-owned subsidiary of MSDW, a
Delaware corporation. MSDW is a preeminent global financial services firm that
maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services.
Pursuant to an Investment Management Agreement (the "Management Agreement")
with the Investment Manager, the Fund has retained the Investment Manager to
provide administrative services and manage the investment of the Fund's assets,
including the placing of orders for the purchase and sale of portfolio
securities. The Fund pays the Investment Manager monthly compensation calculated
daily by applying the following annual rates to the Fund's daily net assets:
-0.50% of the portion of the daily net assets of the Fund not
exceeding $1 billion;
-0.475% of the portion of the Fund's daily net assets exceeding $1
billion but not exceeding $1.5 billion;
-0.45% of the portion of the Fund's daily net assets exceeding
$1.5 billion but not exceeding $2 billion;
-0.425% of the portion of the Fund's daily net assets exceeding $2
billion but not exceeding $2.5 billion;
-0.40% of the portion of the Fund's daily net assets exceeding
$2.5 billion but not exceeding $5 billion;
-0.375% of the portion of the Fund's daily net assets exceeding $5
billion but not exceeding $7.5 billion;
-0.35% of the portion of the Fund's daily net assets exceeding
$7.5 billion but not exceeding $10 billion;
-0.325% of the portion of the Fund's daily net assets exceeding
$10 billion but not exceeding $12.5 billion; and
-0.30% of the portion of the Fund's daily net assets exceeding
$12.5 billion.
The management fee is allocated among the Classes pro rata based on the net
assets of the Fund attributable to each Class. For the fiscal years ended
December 31, 1996, 1997 and 1998, the Investment Manager accrued total
compensation under the Management Agreement in the amounts of $29,579,546,
$24,916,951 and $22,607,800, respectively.
The Investment Manager has retained its wholly-owned subsidiary, MSDW
Services Company, to perform administrative services for the Fund.
B. PRINCIPAL UNDERWRITER
The Fund's principal underwriter is the Distributor (which has the same
address as the Investment Manager). In this capacity, the Fund's shares are
distributed by the Distributor. The Distributor has entered into a selected
dealer agreement with Dean Witter Reynolds, which through its own sales
organization sells shares of the Fund. In addition, the Distributor may enter
into similar agreements with other selected broker-dealers. The Distributor, a
Delaware corporation, is a wholly-owned subsidiary of MSDW.
The Distributor bears all expenses it may incur in providing services under
the Distribution Agreement. These expenses include the payment of commissions
for sales of the Fund's shares and incentive compensation to Financial Advisors.
The Distributor also pays certain expenses in connection with the distribution
of the Fund's shares, including the costs of preparing, printing and
distributing advertising or promotional materials, and the costs of printing and
distributing prospectuses and supplements thereto used in connection with the
offering and sale of the Fund's shares. The Fund bears the costs of initial
14
<PAGE>
typesetting, printing and distribution of prospectuses and supplements thereto
to shareholders. The Fund also bears the costs of registering the Fund and its
shares under federal and state securities laws and pays filing fees in
accordance with state securities laws.
The Fund and the Distributor have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act. Under the
Distribution Agreement, the Distributor uses its best efforts in rendering
services to the Fund, but in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations, the Distributor is
not liable to the Fund or any of its shareholders for any error of judgment or
mistake of law or for any act or omission or for any losses sustained by the
Fund or its shareholders.
C. SERVICES PROVIDED BY THE INVESTMENT MANAGER AND FUND EXPENSES PAID BY THIRD
PARTIES
The Investment Manager manages the investment of the Fund's assets,
including the placing of orders for the purchase and sale of portfolio
securities. The Investment Manager obtains and evaluates the information and
advice relating to the economy, securities markets, and specific securities as
it considers necessary or useful to continuously manage the assets of the Fund
in a manner consistent with its investment objective.
Under the terms of the Management 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, the office space, facilities,
equipment, clerical help, bookkeeping and certain legal services as the Fund may
reasonably require in the conduct of its business, including the preparation of
prospectuses, proxy statements and reports required to be filed with federal and
state securities commissions (except insofar as the participation or assistance
of independent accountants and attorneys is, in the opinion of the Investment
Manager, necessary or desirable). In addition, the Investment Manager pays the
salaries of all personnel, including officers of the Fund, who are employees of
the Investment Manager. The Investment Manager also bears the cost of telephone
service, heat, light, power and other utilities provided to the Fund.
Expenses not expressly assumed by the Investment Manager under the
Management Agreement or by the Distributor, will be paid by the Fund. These
expenses will be allocated among the four Classes of shares pro rata based on
the net assets of the Fund attributable to each Class, except as described
below. Such expenses include, but are not limited to: expenses of the Plan of
Distribution pursuant to Rule 12b-1; charges and expenses of any registrar,
custodian, stock transfer and dividend disbursing agent; brokerage commissions;
taxes; engraving and printing share certificates; registration costs of the Fund
and its shares under federal and state securities laws; the cost and expense of
printing, including typesetting, and distributing prospectuses of the Fund and
supplements thereto to the Fund's shareholders; all expenses of shareholders'
and Trustees' meetings and of preparing, printing and mailing of proxy
statements and reports to shareholders; fees and travel expenses of Trustees or
members of any advisory board or committee who are not employees of the
Investment Manager or any corporate affiliate of the Investment Manager; all
expenses incident to any dividend, withdrawal or redemption options; charges and
expenses of any outside service used for pricing of the Fund's shares; fees and
expenses of legal counsel, including counsel to the Trustees who are not
interested persons of the Fund or of the Investment Manager (not including
compensation or expenses of attorneys who are employees of the Investment
Manager); fees and expenses of the Fund's independent accountants; membership
dues of industry associations; interest on Fund borrowings; postage; insurance
premiums on property or personnel (including officers and Trustees) of the Fund
which inure to its benefit; extraordinary expenses (including, but not limited
to, legal claims and liabilities and litigation costs and any indemnification
relating thereto); and all other costs of the Fund's operation. The 12b-1 fees
relating to a particular Class will be allocated directly to that Class. In
addition, other expenses associated with a particular Class (except advisory or
custodial fees) may be allocated directly to that Class, provided that such
expenses are reasonably identified as specifically attributable to that Class
and the direct allocation to that Class is approved by the Trustees.
15
<PAGE>
The Management Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Investment Manager is not liable to the Fund or any
of its investors for any act or omission by the Investment Manager or for any
losses sustained by the Fund or its investors.
The Management Agreement will remain in effect from year to year, provided
continuance of the Management Agreement is approved at least annually by the
vote of the holders of a majority, as defined in the Investment Company Act, of
the outstanding shares of the Fund, or by the Trustees; provided that in either
event such continuance is approved annually by the vote of a majority of the
Trustees.
D. DEALER REALLOWANCES
Upon notice to selected broker-dealers, the Distributor may reallow up to
the full applicable front-end sales charge during periods specified in such
notice. During periods when 90% or more of the sales charge is reallowed, such
selected broker-dealers may be deemed to be underwriters as that term is defined
in the Securities Act.
E. RULE 12B-1 PLAN
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Investment Company Act (the "Plan") pursuant to which each Class, other than
Class D, pays the Distributor compensation accrued daily and payable monthly at
the following annual rates: 0.25% and 0.75% of the average daily net assets of
Class A and Class C, respectively, and, with respect to Class B, 0.75% of the
lesser of: (a) the average daily aggregate gross sales of the Fund's Class B
shares since the inception of the Fund (not including reinvestment of dividends
or capital gains distributions), less the average daily aggregate net asset
value of the Fund's Class B shares redeemed since the Fund's inception upon
which a contingent deferred sales charge has been imposed or upon which such
charge has been waived, or (b) the average daily net assets of Class B.
The Distributor also receives the proceeds of front-end sales charges
("FSCs") and of contingent deferred sales charges ("CDSCs") imposed on certain
redemptions of shares, which are separate and apart from payments made pursuant
to the Plan. The Distributor has informed the Fund that it and/or Dean Witter
Reynolds received the proceeds of CDSCs and FSCs, for the last three fiscal
years ended December 31, in approximate amounts as provided in the table below
(the Distributor did not retain any of these amounts).
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Class A............................ FSCs: (1) $ 64,425 FSCs: $159,161 FSCs: N/A(2)
CDSCs: $ 9,698 CDSCs: $ 25 CDSCs: N/A(2)
Class B............................ CDSCs: $3,058,326 CDSCs: $5,836,190 CDSCs: $8,964,262
Class C............................ CDSCs: $ 19,701 CDSCs: $ 7,040 CDSCs: N/A(2)
</TABLE>
- ------------------------
1 FSCs apply to Class A only.
2 This Class commenced operations on July 28, 1997.
The Distributor has informed the Fund that the entire fee payable by Class A
and a portion of the fees payable by each of Class B and Class C each year
pursuant to the Plan equal to 0.20% of the average daily net assets of Class B
and 0.25% of the average daily net assets of Class C are currently each
characterized as a "service fee" under the Rules of the National Association of
Securities Dealers, Inc. (of which the Distributor is a member). The "service
fee" is a payment made for personal service and/or the maintenance of
shareholder accounts. The remaining portion of the Plan fees payable by a Class,
if any, is characterized as an "asset-based sales charge" as such is defined by
the Rules of the Association.
Under the Plan and as required by Rule 12b-1, the Trustees receive and
review promptly after the end of each calendar quarter a written report provided
by the Distributor of the amounts expended under the Plan and the purpose for
which such expenditures were made. Class B shares of the Fund accrued amounts
payable to the Distributor under the Plan, during the fiscal year ended December
31, 1998, of $38,748,945. This amount is equal to 0.75% of the average daily net
assets of Class B for the fiscal year
16
<PAGE>
and was calculated pursuant to clause (b) of the compensation formula under the
Plan. For the fiscal year ended December 31, 1998, Class A and Class C shares of
the Fund accrued payments under the Plan amounting to $91,004 and $77,373,
respectively, which amounts are equal to 0.24% and 0.75% of the average daily
net assets of Class A and Class C, respectively, for the fiscal year.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method the Fund offers four
Classes, each with a different distribution arrangement.
With respect to Class A shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from proceeds of the FSC, commissions for the
sale of Class A shares, currently a gross sales credit of up to 4.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.20% of the current value of
the respective accounts for which they are the Financial Advisors or dealers of
record in all cases. On orders of $1 million or more (for which no sales charge
was paid) or net asset value purchases by employer-sponsored employee benefit
plans, whether or not qualified under the Internal Revenue Code, for which the
Transfer Agent serves as Trustee or Dean Witter Reynolds Retirement Plan
Services serves as recordkeeper pursuant to a written Recordkeeping Services
Agreement ("MSDW Eligible Plans"), the Investment Manager compensates Financial
Advisors by paying them, from its own funds, a gross sales credit of 1.0% of the
amount sold.
With respect to Class B shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class B shares, currently a gross sales credit of up to 4.0% of the amount
sold (except as provided in the following sentence) and an annual residual
commission, currently a residual of up to 0.20% of the current value (not
including reinvested dividends or distributions) of the amount sold in all
cases. In the case of Class B shares purchased by MSDW Eligible Plans, Dean
Witter Reynolds compensates its Financial Advisors by paying them, from its own
funds, a gross sales credit of 3.0% of the amount sold.
With respect to Class C shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class C shares, currently a gross sales credit of up to 1.0% of the amount
sold and an annual residual commission, currently up to 0.75% of the current
value of the respective accounts for which they are the Financial Advisors of
record.
With respect to Class D shares other than shares held by participants in the
Investment Manager's mutual fund asset allocation program, the Investment
Manager compensates Dean Witter Reynolds's Financial Advisors by paying them,
from its own funds, commissions for the sale of Class D shares, currently a
gross sales credit of up to 1.0% of the amount sold. There is a chargeback of
100% of the amount paid if the Class D shares are redeemed in the first year and
a chargeback of 50% of the amount paid if the Class D shares are redeemed in the
second year after purchase. The Investment Manager also compensates Dean Witter
Reynolds's Financial Advisors by paying them, from its own funds, an annual
residual commission, currently up to 0.10% of the current value of the
respective accounts for which they are the Financial Advisors of record (not
including accounts of participants in the Investment Manager's mutual fund asset
allocation program).
The gross sales credit is a charge which reflects commissions paid by Dean
Witter Reynolds to its Financial Advisors and Dean Witter Reynolds's
Fund-associated distribution-related expenses, including sales compensation, and
overhead and other branch office distribution-related expenses including (a) the
expenses of operating Dean Witter Reynolds's branch offices in connection with
the sale of Fund shares, including lease costs, the salaries and employee
benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies, (b) the costs of
client sales seminars, (c) travel expenses of mutual fund sales coordinators to
promote the sale of Fund shares and (d) other expenses relating to branch
promotion of Fund sales.
The distribution fee that the Distributor receives from the Fund under the
Plan, in effect, offsets distribution expenses incurred under the Plan on behalf
of the Fund and, in the case of Class B shares,
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<PAGE>
opportunity costs, such as the gross sales credit and an assumed interest charge
thereon ("carrying charge"). In the Distributor's reporting of the distribution
expenses to the Fund, in the case of Class B shares, such assumed interest
(computed at the "broker's call rate") has been calculated on the gross credit
as it is reduced by amounts received by the Distributor under the Plan and any
contingent deferred sales charges received by the Distributor upon redemption of
shares of the Fund. No other interest charge is included as a distribution
expense in the Distributor's calculation of its distribution costs for this
purpose. The broker's call rate is the interest rate charged to securities
brokers on loans secured by exchange-listed securities.
The Fund is authorized to reimburse expenses incurred or to be incurred in
promoting the distribution of the Fund's Class A and Class C shares and in
servicing shareholder accounts. Reimbursement will be made through payments at
the end of each month. The amount of each monthly payment may in no event exceed
an amount equal to a payment at the annual rate of 0.25%, in the case of Class
A, and 0.75%, in the case of Class C, of the average net assets of the
respective Class during the month. No interest or other financing charges, if
any, incurred on any distribution expenses on behalf of Class A and Class C will
be reimbursable under the Plan. With respect to Class A, in the case of all
expenses other than expenses representing the service fee, and, with respect to
Class C, in the case of all expenses other than expenses representing a gross
sales credit or a residual to Financial Advisors and other authorized financial
representatives, such amounts shall be determined at the beginning of each
calendar quarter by the Trustees, including, a majority of the Independent
Trustees. Expenses representing the service fee (for Class A) or a gross sales
credit or a residual to Financial Advisors and other authorized financial
representatives (for Class C) may be reimbursed without prior determination. In
the event that the Distributor proposes that monies shall be reimbursed for
other than such expenses, then in making quarterly determinations of the amounts
that may be reimbursed by the Fund, the Distributor will provide and the
Trustees will review a quarterly budget of projected distribution expenses to be
incurred on behalf of the Fund, together with a report explaining the purposes
and anticipated benefits of incurring such expenses. The Trustees will determine
which particular expenses, and the portions thereof, that may be borne by the
Fund, and in making such a determination shall consider the scope of the
Distributor's commitment to promoting the distribution of the Fund's Class A and
Class C shares.
Each Class paid 100% of the amounts accrued under the Plan with respect to
that Class for the fiscal year ended December 31, 1998 to the Distributor. The
Distributor and Dean Witter Reynolds estimate that they have spent, pursuant to
the Plan, $1,185,635,388 on behalf of Class B since the inception of the Plan.
It is estimated that this amount was spent in approximately the following ways:
(i) 0.67% ($7,929,520)--advertising and promotional expenses; (ii) 0.12%
($1,434,871)--printing of prospectuses for distribution to other than current
shareholders; and (iii) 99.21% ($1,176,270,997)--other expenses, including the
gross sales credit and the carrying charge, of which 14.81% ($174,182,270)
represents carrying charges, 34.84% ($409,854,289) represents commission credits
to Dean Witter Reynolds branch offices and other selected broker-dealers for
payments of commissions to Financial Advisors and other authorized financial
representatives, and 50.35% ($592,234,438) represents overhead and other branch
office distribution-related expenses. The amounts accrued by Class A and Class C
for distribution during the fiscal year ended December 31, 1998 were for
expenses which relate to compensation of sales personnel and associated overhead
expenses.
In the case of Class B shares, at any given time, the expenses of
distributing shares of the Fund may be more or less than the total of (i) the
payments made by the Fund pursuant to the Plan; and (ii) the proceeds of CDSCs
paid by investors upon redemption of shares. For example, if $1 million in
expenses in distributing Class B shares of the Fund had been incurred and
$750,000 had been received as described in (i) and (ii) above, the excess
expense would amount to $250,000. The Distributor has advised the Fund that in
the case of Class B shares the excess distribution expenses, including the
carrying charge designed to approximate the opportunity costs incurred by Dean
Witter Reynolds which arise from it having advanced monies without having
received the amount of any sales charges imposed at the time of sale of the
Fund's Class B shares, totaled $8,899,443 as of December 31, 1998 (the end of
the Fund's fiscal year), which was equal to 0.18% of the net assets of Class B
on such date. Because there is no requirement under the Plan that the
Distributor be reimbursed for all distribution expenses
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<PAGE>
with respect to Class B shares or any requirement that the Plan be continued
from year to year, this excess amount does not constitute a liability of the
Fund. 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 CDSCs 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. Any cumulative expenses incurred, but not yet
recovered through distribution fees or CDSCs, may or may not be recovered
through future distribution fees or CDSCs.
In the case of Class A 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 commission credited to Morgan Stanley Dean Witter Financial Advisors
and other authorized financial representatives at the time of sale may be
reimbursed in the subsequent calendar year. The Distributor has advised the Fund
that unreimbursed expenses representing a gross sales commission credited to
Morgan Stanley Dean Witter Financial Advisors and other authorized financial
representatives at the time of sale totaled $47,595 in the case of Class C at
December 31, 1998 (the end of the calendar year), which amount was equal to
0.28% of the net assets of Class C on such date, and that there were no such
expenses that may be reimbursed in the subsequent year in the case of Class A on
such date. No interest or other financing charges will be incurred on any Class
A or Class C distribution expenses incurred by the Distributor under the Plan or
on any unreimbursed expenses due to the Distributor pursuant to the Plan.
No interested person of the Fund nor any Independent Trustee has any direct
financial interest in the operation of the Plan except to the extent that the
Distributor, the Investment Manager, Dean Witter Reynolds, MSDW Services Company
or certain of their employees may be deemed to have such an interest as a result
of benefits derived from the successful operation of the Plan or as a result of
receiving a portion of the amounts expended thereunder by the Fund.
On an annual basis, the Trustees, including a majority of the Independent
Trustees, consider whether the Plan should be continued. Prior to approving the
last continuation of the Plan, the Trustees requested and received from the
Distributor and reviewed all the information which they deemed necessary to
arrive at an informed determination. In making their determination to continue
the Plan, the Trustees considered: (1) the Fund's experience under the Plan and
whether such experience indicates that the Plan is operating as anticipated; (2)
the benefits the Fund had obtained, was obtaining and would be likely to obtain
under the Plan, including that: (a) the Plan is essential in order to give Fund
investors a choice of alternatives for payment of distribution and service
charges and to enable the Fund to continue to grow and avoid a pattern of net
redemptions which, in turn, are essential for effective investment management;
and (b) without the compensation to individual brokers and the reimbursement of
distribution and account maintenance expenses of Dean Witter Reynolds's branch
offices made possible by the 12b-1 fees, Dean Witter Reynolds could not
establish and maintain an effective system for distribution, servicing of Fund
shareholders and maintenance of shareholder accounts; and (3) what services had
been provided and were continuing to be provided under the Plan to the Fund and
its shareholders. Based upon their review, the Trustees, including each of the
Independent Trustees, determined that continuation of the Plan would be in the
best interest of the Fund and would have a reasonable likelihood of continuing
to benefit the Fund and its shareholders. In the Trustees' quarterly review of
the Plan, they will consider its continued appropriateness and the level of
compensation provided therein.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of the
affected Class or Classes of the Fund, and all material amendments to the Plan
must also be approved by the Trustees in the manner described above. The Plan
may be terminated at any time, without payment of any penalty, by vote of a
majority of the Independent Trustees or by a vote of a majority of the
outstanding voting securities of the Fund (as defined in the Investment Company
Act) on not more than thirty days' written notice to any other party to the
Plan. So long as the Plan is in effect, the election and nomination of
Independent Trustees shall be committed to the discretion of the Independent
Trustees.
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F. OTHER SERVICE PROVIDERS
(1) TRANSFER AGENT/DIVIDEND-PAYING AGENT
Morgan Stanley Dean Witter Trust FSB is the Transfer Agent for the Fund's
shares and the Dividend Disbursing Agent for payment of dividends and
distributions on Fund shares and Agent for shareholders under various investment
plans. The principal business address of the Transfer Agent is Harborside
Financial Center, Plaza Two, Jersey City, New Jersey 07311.
(2) CUSTODIAN AND INDEPENDENT ACCOUNTANTS
The Bank of New York, 90 Washington Street, New York, New York 10286 is the
Custodian of the Fund's assets. Any of the Fund's cash balances with either
Custodian in excess of $100,000 are unprotected by federal deposit insurance.
These balances may, at times, be substantial.
PricewaterhouseCoopers LLP 1177 Avenue of the Americas, New York, New York
10036 serves as the independent accountants of the Fund. The independent
accountants are responsible for auditing the annual financial statements of the
Fund.
(3) AFFILIATED PERSONS
The Transfer Agent is an affiliate of the Investment Manager, and of the
Distributor. As Transfer Agent and Dividend Disbursing Agent, the Transfer
Agent's responsibilities include maintaining shareholder accounts, disbursing
cash dividends and reinvesting dividends, processing account registration
changes, handling purchase and redemption transactions, mailing prospectuses and
reports, mailing and tabulating proxies, processing share certificate
transactions, and maintaining shareholder records and lists. For these services,
the Transfer Agent receives a per shareholder account fee from the Fund and is
reimbursed for its out-of-pocket expenses in connection with such services.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
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A. BROKERAGE TRANSACTIONS
Subject to the general supervision of the Trustees of the Fund, the
Investment Manager is responsible for the investment decisions and the placing
of the orders for portfolio transactions for the Fund. The Fund's portfolio
transactions will occur primarily with issuers, underwriters or major dealers in
U.S. Government securities acting as principals. Such transactions are normally
on a net basis and do not involve payment of brokerage commissions. The cost of
securities purchased from an underwriter usually includes a commission paid by
the issuer to the underwriters; transactions with dealers normally reflect the
spread between bid and asked prices. Options and futures transactions will
usually be effected through a broker and a commission will be charged.
For the fiscal years ended December 31, 1996, 1997 and 1998, the Fund did
not pay any brokerage commissions.
B. COMMISSIONS
Pursuant to an order of the SEC, the Fund may effect principal transactions
in certain money market instruments with Dean Witter Reynolds. The Fund will
limit its transactions with Dean Witter Reynolds to U.S. Government Securities.
The transactions will be effected with Dean Witter Reynolds only when the price
available from Dean Witter Reynolds is better than that available from other
dealers.
During the fiscal years ended December 31, 1996, 1997 and 1998, the Fund did
not effect any principal transactions with Dean Witter Reynolds.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may be
effected through Dean Witter Reynolds, Morgan Stanley & Co. and other affiliated
brokers and dealers. In order for an affiliated broker or dealer to effect any
portfolio transactions on an exchange for the Fund, the commissions, fees or
other remuneration received by the affiliated broker or dealer must be
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers in connection with comparable
transac-
20
<PAGE>
tions involving similar securities being purchased or sold on an exchange during
a comparable period of time. This standard would allow the affiliated broker or
dealer to receive no more than the remuneration which would be expected to be
received by an unaffiliated broker in a commensurate arm's-length transaction.
Furthermore, the Trustees, including the Independent Trustees, have adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to an affiliated broker or dealer are consistent with
the foregoing standard. The Fund does not reduce the management fee it pays to
the Investment Manager by any amount of the brokerage commissions it may pay to
an affiliated broker or dealer.
During the fiscal years ended December 31, 1996, 1997 and 1998, the Fund did
not effect any securities transactions through an affiliated broker or dealer.
C. BROKERAGE SELECTION
The policy of the Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions.
In seeking to implement the Fund's policies, the Investment Manager effects
transactions with those brokers and dealers who the Investment Manager believes
provide the most favorable prices and are capable of providing efficient
executions. If the Investment Manager believes the prices and executions are
obtainable from more than one broker or dealer, it may give consideration to
placing portfolio transactions with those brokers and dealers who also furnish
research and other services to the Fund or the Investment Manager. The services
may include, but are not limited to, any one or more of the following:
information as to the availability of securities for purchase or sale;
statistical or factual information or opinions pertaining to investment; wire
services; and appraisals or evaluations of portfolio securities. The information
and services received by the Investment Manager from brokers and dealers may be
of benefit to the Investment Manager in the management of accounts of some of
its other clients and may not in all cases benefit the Fund directly.
The Investment Manager currently serves as investment manager to a number of
clients, including other investment companies, and may in the future act as
investment manager or advisor to others. It is the practice of the Investment
Manager to cause purchase and sale transactions to be allocated among the Fund
and others whose assets it manages in such manner as it deems equitable. In
making such allocations among the Fund and other client accounts, various
factors may be considered, including the respective investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held and the opinions of the persons responsible for managing the
portfolios of the Fund and other client accounts. In the case of certain initial
and secondary public offerings, the Investment Manager utilizes a pro rata
allocation process based on the size of the Morgan Stanley Dean Witter Funds
involved and the number of shares available from the public offering.
D. DIRECTED BROKERAGE
During the fiscal year ended December 31, 1998, the Fund did not pay any
brokerage commissions to brokers because of research services provided.
E. REGULAR BROKER-DEALERS
During the fiscal year ended December 31, 1998, the Fund did not purchase
securities issued by brokers or dealers that were among the ten brokers or the
ten dealers which executed transactions for or with the Fund in the largest
dollar amounts during the year. At December 31, 1998, the Fund did not own any
securities issued by any of such issuers.
VII. CAPITAL STOCK AND OTHER SECURITIES
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The shareholders of the Fund are entitled to a full vote for each full share
of beneficial interest held. The Fund is authorized to issue an unlimited number
of shares of beneficial interest. All shares of
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<PAGE>
beneficial interest of the Fund are of $0.01 par value and are equal as to
earnings, assets and voting privileges except that each Class will have
exclusive voting privileges with respect to matters relating to distribution
expenses borne solely by such Class or any other matter in which the interests
of one Class differ from the interests of any other Class. In addition, Class B
shareholders will have the right to vote on any proposed material increase in
Class A's expenses, if such proposal is submitted separately to Class A
shareholders. Also, Class A, Class B and Class C bear expenses related to the
distribution of their respective shares.
The Fund's Declaration of Trust permits the Trustees to authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios) and additional Classes of shares
within any series. The Trustees have not presently authorized any such
additional series or Classes of shares other than as set forth in the
PROSPECTUS.
The Fund is not required to hold annual meetings of shareholders and in
ordinary circumstances the Fund does not intend to hold such meetings. The
Trustees may call special meetings of shareholders for action by shareholder
vote as may be required by the Investment Company Act or the Declaration of
Trust. Under certain circumstances, the Trustees may be removed by action of the
Trustees or by the shareholders.
Under Massachusetts law, shareholders of a business trust may, under certain
limited circumstances, be held personally liable as partners for the obligations
of the Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that notice
of such Fund obligations include such disclaimer, and provides for
indemnification out of the Fund's property for any shareholder held personally
liable for the obligations of the Fund. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations.
Given the above limitations on shareholder personal liability, and the nature of
the Fund's assets and operations, the possibility of the Fund being unable to
meet its obligations is remote and thus, in the opinion of Massachusetts counsel
to the Fund, the risk to Fund shareholders of personal liability is remote.
All of the Trustees have been elected by the shareholders of the Fund, most
recently at a Special Meeting of Shareholders held on May 21, 1997. The Trustees
themselves have the power to alter the number and the terms of office of the
Trustees (as provided for in the Declaration of Trust), and they may at any time
lengthen or shorten their own terms or make their terms of unlimited duration
and appoint their own successors, provided that always at least a majority of
the Trustees has been elected by the shareholders of the Fund.
VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
- --------------------------------------------------------------------------------
A. PURCHASE/REDEMPTION OF SHARES
Information concerning how Fund shares are offered to the public (and how
they are redeemed and exchanged) is provided in the Fund's PROSPECTUS.
TRANSFER AGENT AS AGENT. With respect to the redemption or repurchase of
Fund shares, the application of proceeds to the purchase of new shares in the
Fund or any other Morgan Stanley Dean Witter Funds and the general
administration of the exchange privilege, the Transfer Agent acts as agent for
the Distributor and for the shareholder's authorized broker-dealer, if any, in
the performance of such functions. With respect to exchanges, redemptions or
repurchases, the Transfer Agent shall be liable for its own negligence and not
for the default or negligence of its correspondents or for losses in transit.
The Fund shall not be liable for any default or negligence of the Transfer
Agent, the Distributor or any authorized broker-dealer.
The Distributor and any authorized broker-dealer have appointed the Transfer
Agent to act as their agent in connection with the application of proceeds of
any redemption of Fund shares to the purchase
22
<PAGE>
of shares of any other Morgan Stanley Dean Witter Fund and the general
administration of the exchange privilege. No commission or discounts will be
paid to the Distributor or any authorized broker-dealer for any transaction
pursuant to the exchange privilege.
TRANSFERS OF SHARES. In the event a shareholder requests a transfer of Fund
shares to a new registration, the shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the CDSC or free of such charge (and with regard to the length
of time shares subject to the charge have been held), any transfer involving
less than all of the shares in an account will be made on a pro rata basis (that
is, by transferring shares in the same proportion that the transferred shares
bear to the total shares in the account immediately prior to the transfer). The
transferred shares will continue to be subject to any applicable CDSC as if they
had not been so transferred.
B. OFFERING PRICE
The Fund's Class B, Class C and Class D shares are offered at net asset
value per share plus any applicable FSC which is distributed among the Fund's
Distributor, Dean Witter Reynolds and other authorized dealers as described in
"Section V. Investment Management and Other Services-- E. Rule 12b-1 Plan."
The price of Fund shares, called "net asset value," is based on the value of
the Fund's portfolio securities. Net asset value per share of each Class is
calculated by dividing the value of the portion of the Fund's securities and
other assets attributable to that Class, less the liabilities attributable to
that Class, by the number of shares of that Class outstanding. The assets of
each Class of shares are invested in a single portfolio. The net asset value of
each Class, however, will differ because the Classes have different ongoing
fees.
In the calculation of the Fund's net asset value: (1) all portfolio
securities for which over-the-counter market quotations are readily available
are valued at the latest bid price prior to the time of valuation, and (2) when
market quotations are not readily available, including circumstances under which
it is determined by the Investment Manager that sale or bid prices are not
reflective of a security's market value, portfolio securities are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Fund's Trustees (valuation of securities
for which market quotations are not readily available may also be based upon
current market prices of securities which are comparable in coupon, rating and
maturity or an appropriate matrix utilizing similar factors).
Short-term debt securities with remaining maturities of sixty days or less
at the time of purchase are valued at amortized cost, unless the Trustees
determine such does not reflect the securities' market value, in which case
these securities will be valued at their fair value as determined by the
Trustees.
Certain of the Fund's portfolio securities may be valued by an outside
pricing service approved by the Fund's Trustees. The pricing service may utilize
a matrix system incorporating security quality, maturity and coupon as the
evaluation model parameters, and/or research evaluations by its staff, including
review of broker-dealer market price quotations in determining what it believes
is the fair valuation of the portfolio securities valued by such pricing
service.
Listed options on debt securities are valued at the latest sale price on the
exchange on which they are listed unless no sales of such options have taken
place that day, in which case they will be valued at the mean between their
latest bid and asked prices. Unlisted options on debt securities are valued at
the mean between their latest bid and asked prices. Futures are valued at the
latest sale price on the commodities exchange on which they trade unless the
Trustees determine such price does not reflect their market value, in which case
they will be valued at their fair value as determined in good faith under
procedures established by and under the supervision of the Trustees.
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<PAGE>
IX. TAXATION OF THE FUND AND SHAREHOLDERS
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The Fund generally will make two basic types of distributions: ordinary
dividends and long-term capital gain distributions. These two types of
distributions are reported differently on a shareholder's income tax return and
they are also subject to different rates of tax. The tax treatment of the
investment activities of the Fund will affect the amount and timing and
character of the distributions made by the Fund. Tax issues relating to the Fund
are not generally a consideration for shareholders such as tax exempt entities
and tax-advantaged retirement vehicles such as an IRA or 401(k) plan.
Shareholders are urged to consult their own tax professionals regarding specific
questions as to federal, state or local taxes.
INVESTMENT COMPANY TAXATION. The Fund intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986. As such, the Fund will not be subject to federal income tax on its net
investment income and capital gains, if any, to the extent that it distributes
such income and capital gains to its shareholders.
The Fund generally intends to distribute sufficient income and gains so that
the Fund will not pay corporate income tax on its earnings. The Fund also
generally intends to distribute to its shareholders in each calendar year a
sufficient amount of ordinary income and capital gains to avoid the imposition
of a 4% excise tax. However, the Fund may instead determine to retain all or
part of any net long-term capital gains in any year for reinvestment. In such
event, the Fund will pay federal income tax (and possibly excise tax) on such
retained gains.
Gains or losses on sales of securities by the Fund will be long-term capital
gains or losses if the securities have a tax holding period of more than one
year. Gains or losses on the sale of securities with a tax holding period of one
year or less will be short-term gains or losses.
Gains or losses on the Fund's transactions in listed non-equity options,
futures and options on futures generally are treated as 60% long-term and 40%
short-term. When the Fund engages in options and futures transactions, various
tax rules may accelerate or defer recognition of certain gains and losses,
change the character of certain gains or losses, or alter the holding period of
other investments held by the Fund. The application of these rules would
therefore also affect the amount, timing and character of distributions made by
the Fund.
Under certain tax rules, the Fund may be required to accrue a portion of any
discount at which certain securities are purchased as income each year even
though the Fund receives no payments in cash on the security during the year. To
the extent that the Fund invests in such securities, it would be required to pay
out such accrued discount as an income distribution in each year in order to
avoid taxation at the Fund level. Such distributions will be made from the
available cash of the Fund or by liquidation of portfolio securities if
necessary. If a distribution of cash necessitates the liquidation of portfolio
securities, the Investment Manager will select which securities to sell. The
Fund may realize a gain or loss from such sales. In the event the Fund realizes
net capital gains from such transactions, its shareholders may receive a larger
capital gain distribution, if any, than they would in the absence of such
transactions.
TAXATION OF DIVIDENDS AND DISTRIBUTIONS. Shareholders normally will have to
pay federal income taxes, and any state and/or local income taxes, on the
dividends and other distributions they receive from the Fund. Such dividends and
distributions, to the extent that they are derived from net investment income or
short-term capital gains, are taxable to the shareholder as ordinary income
regardless of whether the shareholder receives such payments in additional
shares or in cash.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder has
held the Fund's shares and regardless of whether the distribution is received in
additional shares or in cash. The Taxpayer Relief Act of 1997 reduced the
maximum tax on long-term capital gains applicable to individuals from 28% to
20%.
24
<PAGE>
Shareholders are generally taxed on any ordinary dividend or capital gain
distributions from the Fund in the year they are actually distributed. However,
if any such dividends or distributions are declared in October, November or
December and paid in January then such amounts will be treated for tax purposes
as received by the shareholders on December 31, to shareholders of record of
such month.
Shareholders who are not citizens or residents of the United States and
certain foreign entities may be subject to withholding of United States tax on
distributions made by the Fund of investment income and short term capital
gains.
After the end of each calendar year, shareholders will be sent full
information on their dividends and capital gain distributions for tax purposes,
including the portion taxable as ordinary income, the portion taxable as
long-term capital gains and the amount of any dividends eligible for the federal
dividends received deduction for corporations.
PURCHASES AND REDEMPTIONS AND EXCHANGES OF FUND SHARES. Any dividend or
capital gains distribution received by a shareholder from any investment company
will have the effect of reducing the net asset value of the shareholder's stock
in that company by the exact amount of the dividend or capital gains
distribution. Furthermore, such dividends and capital gains distributions are
subject to federal income taxes. If the net asset value of the shares should be
reduced below a shareholder's cost as a result of the payment of dividends or
the distribution of realized long-term capital gains, such payment or
distribution would be in part a return of the shareholder's investment but
nonetheless would be taxable to the shareholder. Therefore, an investor should
consider the tax implications of purchasing Fund shares immediately prior to a
distribution record date.
In general, a sale of shares results in capital gain or loss, and for
individual shareholders, is taxable at a federal rate dependent upon the length
of time the shares were held. A redemption of a shareholder's Fund shares is
normally treated as a sale for tax purposes. Fund shares held for a period of
one year or less will, for tax purposes, generally result in short-term gains or
losses and those held for more than one year generally result in long-term gain
or loss. Any loss realized by shareholders upon a redemption of shares within
six months of the date of their purchase will be treated as a long-term capital
loss to the extent of any distributions of net long-term capital gains with
respect to such shares during the six-month period.
Gain or loss on the sale or redemption of shares in the Fund is measured by
the difference between the amount received and the tax basis of the shares.
Shareholders should keep records of investments made (including shares acquired
through reinvestment of dividends and distributions) so they can compute the tax
basis of their shares. Under certain circumstances a shareholder may compute and
use an average cost basis in determining the gain or loss on the sale or
redemption of shares.
Exchanges of Fund shares for shares of another fund, including shares of
other Morgan Stanley Dean Witter Funds, are also subject to similar tax
treatment. Such an exchange is treated for tax purposes as a sale of the
original shares in the first fund, followed by the purchase of shares in the
second fund.
If a shareholder realizes a loss on the redemption or exchange of a fund's
shares and reinvests in that fund's shares within 30 days before or after the
redemption or exchange, the transactions may be subject to the "wash sale"
rules, resulting in a postponement of the recognition of such loss for tax
purposes.
X. UNDERWRITERS
- --------------------------------------------------------------------------------
The Fund's shares are offered to the public on a continuous basis. The
Distributor, as the principal underwriter of the shares, has certain obligations
under the Distribution Agreement concerning the distribution of the shares.
These obligations and the compensation the Distributor receives are described
above in the sections titled "Principal Underwriter" and "Rule 12b-1 Plans."
25
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XI. CALCULATION OF PERFORMANCE DATA
- --------------------------------------------------------------------------------
From time to time the Fund may quote its "yield" and/or its "total return"
in advertisements and sales literature. These figures are computed separately
for Class A, Class B, Class C and Class D shares. Yield is calculated for any
30-day period as follows: the amount of interest income for each security in the
Fund's portfolio is determined in accordance with regulatory requirements; the
total for the entire portfolio constitutes the Fund's gross income for the
period. Expenses accrued during the period are subtracted to arrive at "net
investment income" of each Class. The resulting amount is divided by the product
of the maximum offering price per share on the last day of the period,
multiplied by the average number of shares of the applicable Class outstanding
during the period that were entitled to dividends. This amount is added to 1 and
raised to the sixth power. 1 is then subtracted from the result and the
difference is multiplied by 2 to arrive at the annualized yield. For the 30-day
period ended December 31, 1998, the yield, calculated pursuant to the formula
described above, was approximately 5.65%, 5.39%, 5.39% and 6.16% for Class A,
Class B, Class C and Class D, respectively.
The Fund's "average annual total return" represents an annualization of the
Fund's total return over a particular period and is computed by finding the
annual percentage rate which will result in the ending redeemable value of a
hypothetical $1,000 investment made at the beginning of a one, five or ten year
period, or for the period from the date of commencement of operations, if
shorter than any of the foregoing. The ending redeemable value is reduced by any
contingent deferred sales charge ("CDSC") at the end of the one, five, ten year
or other period. For the purpose of this calculation, it is assumed that all
dividends and distributions are reinvested. The formula for computing the
average annual total return involves a percentage obtained by dividing the
ending redeemable value by the amount of the initial investment (which in the
case of Class A shares is reduced by the Class A initial sales charge), taking a
root of the quotient (where the root is equivalent to the number of years in the
period) and subtracting 1 from the result. The average annual total returns for
Class B for the one, five and ten year periods ended December 31, 1998 were
2.27%, 5.92% and 7.49%, respectively. The average annual total returns of Class
A for the fiscal year ended December 31, 1998 and for the period July 28, 1997
(inception of the Class) through December 31, 1998 were 3.13% and 4.67%,
respectively. The average annual total returns of Class C for the fiscal year
ended December 31, 1998 and for the period July 28, 1997 (inception of the
Class) through December 31, 1998 were 6.14% and 7.98%, respectively. The average
annual total returns of Class D for the fiscal year ended December 31, 1998 and
for the period July 28, 1997 (inception of the Class) through December 31, 1998
were 7.72% and 8.20%, respectively.
In addition, the Fund may advertise its total return for each Class over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. These calculations may or may not reflect the
imposition of the maximum front-end sales charge for Class A or the deduction of
the CDSC for each of Class B and Class C which, if reflected, would reduce the
performance quoted. For example, the average annual total return of the Fund may
be calculated in the manner described above, but without deduction for any
applicable sales charge. Based on this calculation, the average annual total
returns of Class B for the one, five and ten year periods ended December 31,
1998, were 7.27%, 6.24% and 7.49%, respectively. The average annual total
returns of Class A for the fiscal year ended December 31, 1998 and for the
period July 28, 1997 through December 31, 1998 were 7.70% and 7.91%,
respectively. The average annual total returns of Class C for the fiscal year
ended December 31, 1998 and for the period July 28, 1997 through December 31,
1998 were 7.14% and 7.98%, respectively. The average annual total returns of
Class D for the fiscal year ended December 31, 1998 and for the period July 28,
1997 through December 31, 1998 were 7.72% and 8.20%, respectively.
In addition, the Fund may compute its aggregate total return for each Class
for specified periods by determining the aggregate percentage rate which will
result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is assumed that
all dividends and distributions are reinvested. The formula for computing
aggregate total return involves a percentage obtained by dividing the ending
value (without reduction for any sales charge) by the initial $1,000 investment
and subtracting 1 from the result. Based on the foregoing calculation, the
aggregate total returns for Class B for the one, five and ten year period ended
December 31, 1998, were 7.27%, 35.31% and 105.91%, respectively. The total
returns of Class A for the fiscal year ended December 31, 1998 and for the
period July 28, 1997 through December 31, 1998 were 7.70% and 11.47%,
respectively.
26
<PAGE>
The total returns of Class C for the fiscal year ended December 31, 1998 and for
the period July 28, 1997 through December 31, 1998 were 7.14% and 11.58%,
respectively. The total returns of Class D for the fiscal year ended December
31, 1998 and for the period July 28, 1997 through December 31, 1998 were 7.72%
and 11.90%, respectively.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in each Class of shares of the Fund by adding 1 to
the Fund's aggregate total return to date (expressed as a decimal and without
taking into account the effect of any applicable CDSC) and multiplying by
$9,575, $48,250 and $97,250 in the case of Class A (investments of $10,000,
$50,000 and $100,000 adjusted for the initial sales charge) or by $10,000,
$50,000 and $100,000 in the case of each of Class B, Class C and Class D, as the
case may be. Investments of $10,000, $50,000 and $100,000 in each Class at
inception of the Class would have grown to the following amounts at December 31,
1998:
<TABLE>
<CAPTION>
INVESTMENT AT INCEPTION OF:
INCEPTION ---------------------------------
CLASS DATE: $10,000 $50,000 $100,000
- ----------------------------------------------------------------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C>
Class A.......................................................... 07/28/97 $ 10,673 $ 53,784 $ 108,405
Class B.......................................................... 06/29/84 31,244 156,220 312,440
Class C.......................................................... 07/28/97 11,158 55,790 111,580
Class D.......................................................... 07/28/97 11,190 55,750 111,900
</TABLE>
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by recognized organizations.
XII. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
EXPERTS. The financial statements of the Fund for the fiscal year ended
December 31, 1998 included in this STATEMENT OF ADDITIONAL INFORMATION and
incorporated by reference in the PROSPECTUS have been so included and
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
*****
This STATEMENT OF ADDITIONAL INFORMATION and the PROSPECTUS do not contain
all of the information set forth in the REGISTRATION STATEMENT the Fund has
filed with the SEC. The complete REGISTRATION STATEMENT may be obtained from the
SEC.
27
<PAGE>
MORGAN STANLEY DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT IN AND COUPON
THOUSANDS MATURITY DATE RATE VALUE
- -------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
MORTGAGE-BACKED SECURITIES (66.4%)
Government National Mortgage Assoc. I (65.5%)
$ 25,250 12/15/28............................................................................ 6.00% $ 25,029,060
50,000 *................................................................................... 6.00 49,515,625
286,158 12/15/22............................................................................ 6.50 288,930,055
1,387,277 11/15/17............................................................................ 7.00 1,418,923,770
641,620 11/15/02 - 10/15/16................................................................. 7.50 661,470,131
222,525 10/15/16 - 01/15/20................................................................. 8.00 231,147,703
223,063 07/15/06 - 01/15/20................................................................. 8.50 236,446,536
164,570 07/15/16 - 01/15/20................................................................. 9.00 175,575,138
107,705 07/15/13 - 04/15/18................................................................. 9.50 116,220,299
119,848 12/15/10 - 09/15/16................................................................. 10.00 130,821,592
349 10/15/13............................................................................ 12.50 398,484
--------------
3,334,478,393
--------------
Government National Mortgage Assoc. II (0.8%)
38,984 01/20/24............................................................................ 6.50 39,117,792
775 03/20/26............................................................................ 7.00 787,709
--------------
39,905,501
--------------
Government National Mortgage Assoc. GPM I (0.1%)
4,755 12/15/13 - 04/15/14................................................................. 12.25 5,493,884
--------------
TOTAL MORTGAGE-BACKED SECURITIES
(IDENTIFIED COST $3,262,739,029)............................................................ 3,379,877,778
--------------
U.S. GOVERNMENT OBLIGATIONS (25.1%)
U.S. Treasury Notes (9.9%)
50,000 05/31/03............................................................................ 5.50 51,625,000
75,000 08/15/07............................................................................ 6.125 81,898,500
2,300 05/31/99............................................................................ 6.25 2,314,858
60,000 02/15/07............................................................................ 6.25 65,788,200
9,300 05/15/99............................................................................ 6.375 9,357,474
4,000 07/15/99............................................................................ 6.375 4,037,480
1,050 09/30/01............................................................................ 6.375 1,096,841
104,800 05/31/99............................................................................ 6.75 105,665,648
47,300 04/15/99............................................................................ 7.00 47,609,815
133,000 02/15/99............................................................................ 8.875 133,615,790
--------------
503,009,606
--------------
U.S. Treasury Principal Strips (15.2%)
13,000 05/15/03............................................................................ 0.00 10,606,180
123,000 02/15/04**.......................................................................... 0.00 96,946,140
380,000 05/15/04............................................................................ 0.00 295,514,600
385,000 08/15/04............................................................................ 0.00 295,499,050
75,000 11/15/04............................................................................ 0.00 56,878,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
28
<PAGE>
MORGAN STANLEY DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1998, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT IN AND COUPON
THOUSANDS MATURITY DATE RATE VALUE
- -------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$ 26,000 02/15/05............................................................................ 0.00% $ 19,424,860
--------------
774,869,330
--------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(IDENTIFIED COST $1,139,814,676)............................................................ 1,277,878,936
--------------
U.S. GOVERNMENT AGENCIES (9.3%)
Resolution Funding Corp. Zero Coupon Strips
33,500 07/15/02............................................................................ 0.00 28,216,380
5,049 10/15/02............................................................................ 0.00 4,199,809
109,000 04/15/03............................................................................ 0.00 88,671,500
55,000 07/15/03............................................................................ 0.00 44,166,650
69,000 10/15/03............................................................................ 0.00 54,736,320
89,882 01/15/04............................................................................ 0.00 70,210,425
84,419 04/15/04............................................................................ 0.00 65,247,445
68,000 07/15/04............................................................................ 0.00 51,969,680
1,550 04/15/07............................................................................ 0.00 1,025,046
18,000 07/15/07............................................................................ 0.00 11,777,580
56,000 10/15/07............................................................................ 0.00 36,279,600
30,000 10/15/08............................................................................ 0.00 18,498,000
--------------
TOTAL U.S. GOVERNMENT AGENCIES
(IDENTIFIED COST $414,273,083).............................................................. 474,998,435
--------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $4,816,826,788) (a).................................................... 100.8 % 5,132,755,149
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS.......................................... (0.8) (40,551,430)
------ ---------------
NET ASSETS.............................................................................. 100.0 % $ 5,092,203,719
------ ---------------
------ ---------------
</TABLE>
- ---------------------
GPM Graduated Payment Mortgage.
* Securities purchased on a forward commitment with an approximate principal
amount and no definite maturity date; the actual principal amount and
maturity date will be determined upon settlement.
** Some of these securities are segregated in connection with securities
purchased on a forward commitment basis.
(a) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $317,533,345 and the
aggregate gross unrealized depreciation is $1,604,984, resulting in net
unrealized appreciation of $315,928,361.
SEE NOTES TO FINANCIAL STATEMENTS
29
<PAGE>
MORGAN STANLEY DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $4,816,826,788)......................................................... $ 5,132,755,149
Cash....................................................................................... 157,341
Receivable for:
Interest............................................................................... 29,778,621
Shares of beneficial interest sold..................................................... 4,578,185
Prepaid expenses and other assets.......................................................... 80,247
---------------
TOTAL ASSETS.......................................................................... 5,167,349,543
---------------
LIABILITIES:
Payable for:
Investments purchased.................................................................. 49,253,125
Dividends to shareholders.............................................................. 13,553,786
Shares of beneficial interest repurchased.............................................. 6,857,566
Plan of distribution fee............................................................... 3,210,499
Investment management fee.............................................................. 1,878,762
Accrued expenses and other payables........................................................ 392,086
---------------
TOTAL LIABILITIES..................................................................... 75,145,824
---------------
NET ASSETS............................................................................ $ 5,092,203,719
---------------
---------------
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................ $ 5,694,016,539
Net unrealized appreciation................................................................ 315,928,361
Accumulated net realized loss.............................................................. (917,741,181)
---------------
NET ASSETS............................................................................ $ 5,092,203,719
---------------
---------------
CLASS A SHARES:
Net Assets................................................................................. $58,537,905
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE).................................. 6,376,543
NET ASSET VALUE PER SHARE............................................................. $9.18
---------------
---------------
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE)..................................... $9.59
---------------
---------------
CLASS B SHARES:
Net Assets................................................................................. $4,996,187,325
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE).................................. 543,307,518
NET ASSET VALUE PER SHARE............................................................. $9.20
---------------
---------------
CLASS C SHARES:
Net Assets................................................................................. $17,086,723
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE).................................. 1,846,174
NET ASSET VALUE PER SHARE............................................................. $9.26
---------------
---------------
CLASS D SHARES:
Net Assets................................................................................. $20,391,766
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE).................................. 2,221,111
NET ASSET VALUE PER SHARE............................................................. $9.18
---------------
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
30
<PAGE>
MORGAN STANLEY DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME............................................................................... $376,887,864
------------
EXPENSES
Plan of distribution fee (Class A shares)..................................................... 91,004
Plan of distribution fee (Class B shares)..................................................... 38,748,945
Plan of distribution fee (Class C shares)..................................................... 77,373
Investment management fee..................................................................... 22,607,800
Transfer agent fees and expenses.............................................................. 3,542,838
Custodian fees................................................................................ 845,103
Shareholder reports and notices............................................................... 185,084
Professional fees............................................................................. 67,077
Registration fees............................................................................. 61,315
Trustees' fees and expenses................................................................... 19,706
Other......................................................................................... 65,053
------------
TOTAL EXPENSES........................................................................... 66,311,298
------------
NET INVESTMENT INCOME.................................................................... 310,576,566
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss............................................................................. (2,384,102)
Net change in unrealized appreciation......................................................... 54,569,658
------------
NET GAIN................................................................................. 52,185,556
------------
NET INCREASE.................................................................................. $362,762,122
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
31
<PAGE>
MORGAN STANLEY DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997*
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................................................ $ 310,576,566 $ 363,800,467
Net realized loss.................................................................... (2,384,102) (3,836,410)
Net change in unrealized appreciation................................................ 54,569,658 118,550,225
-------------------- ---------------------
NET INCREASE.................................................................... 362,762,122 478,514,282
-------------------- ---------------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares....................................................................... (2,396,071) (342,413)
Class B shares....................................................................... (306,635,357) (363,065,315)
Class C shares....................................................................... (600,619) (61,336)
Class D shares....................................................................... (944,519) (326,681)
-------------------- ---------------------
TOTAL DIVIDENDS................................................................. (310,576,566) (363,795,745)
-------------------- ---------------------
Net decrease from transactions in shares of beneficial interest...................... (425,398,131) (1,098,840,399)
-------------------- ---------------------
NET DECREASE.................................................................... (373,212,575) (984,121,862)
NET ASSETS:
Beginning of period.................................................................. 5,465,416,294 6,449,538,156
-------------------- ---------------------
END OF PERIOD................................................................... $ 5,092,203,719 $ 5,465,416,294
-------------------- ---------------------
-------------------- ---------------------
</TABLE>
- ---------------------
* Class A, Class C and Class D shares were issued July, 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
32
<PAGE>
MORGAN STANLEY DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter U.S. Government Securities Trust (the "Fund"),
formerly Dean Witter U.S. Government Securities Trust, 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 high
current income consistent with safety of principal. The Fund seeks to achieve
its objective by investing in obligations issued or guaranteed by the U.S.
Government or its instrumentalities. The Fund was organized as a Massachusetts
business trust on September 29, 1983 and commenced operations on June 29, 1984.
On July 28, 1997, the Fund commenced offering three additional classes of
shares, with the then current shares, other then shares held by certain employee
benefit plans established by Dean Witter Reynolds Inc. and its affiliate, SPS
Transaction Services, Inc., designated as Class B shares. Shares held by those
employee benefit plans prior to July 28, 1997 have been designated Class D
shares.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) all 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; (2) when market
quotations are not readily available, including circumstances under which it is
determined by Morgan Stanley Dean Witter Advisors Inc. (the "Investment
Manager"), formerly Dean Witter InterCapital Inc., 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); and (3) certain portfolio
securities may be valued by an outside pricing service approved by the Trustees.
The pricing service may utilize a
33
<PAGE>
MORGAN STANLEY DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998, CONTINUED
matrix system incorporating security quality, maturity and coupon as the
evaluation model parameters, and/or research and evaluations by its staff,
including review of broker-dealer market price quotations, if available, in
determining what it believes is the fair valuation of the securities valued by
such pricing service; (4) 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.
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 record date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
34
<PAGE>
MORGAN STANLEY DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998, CONTINUED
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with the Investment Manager, the
Fund pays the Investment Manager a management fee, accrued daily and payable
monthly, by applying the following annual rates to the Fund's net assets
determined at the close of each business day: 0.50% to the portion of daily net
assets not exceeding $1 billion; 0.475% to the portion of daily net assets
exceeding $1 billion but not exceeding $1.5 billion; 0.45% to the portion of
daily net assets exceeding $1.5 billion but not exceeding $2 billion; 0.425% to
the portion of daily net assets exceeding $2 billion but not exceeding $2.5
billion; 0.40% to the portion of daily net assets exceeding $2.5 billion but not
exceeding $5 billion; 0.375% to the portion of daily net assets exceeding $5
billion but not exceeding $7.5 billion; 0.35% to the portion of daily net assets
exceeding $7.5 billion but not exceeding $10 billion; 0.325% to the portion of
daily net assets exceeding $10 billion but not exceeding $12.5 billion; and
0.30% to the portion of daily net assets exceeding $12.5 billion.
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 - 0.75% (0.65%
on amounts over $10 billion) of the lesser of: (a) the average daily aggregate
gross sales of the Class B shares since the inception of the Fund (not including
reinvestment of dividend or capital gain distributions) less the average daily
aggregate net asset value of the Class B shares redeemed since the Fund's
inception upon which a contingent deferred sales charge has been imposed or
waived; or (b) the average daily net assets of Class B; and (iii) Class C - up
to 0.75% of the average daily net assets of Class C. In the case of Class A
shares, amounts paid under the Plan are paid to the Distributor for services
provided. In the case of Class B and Class C shares, amounts paid under the Plan
are paid to the Distributor for (1) 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
35
<PAGE>
MORGAN STANLEY DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998, CONTINUED
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
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 $8,899,443 at December 31, 1998.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.75% 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 December 31, 1998, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.24% and
0.75%, respectively.
The Distributor has informed the Fund that for the year ended December 31, 1998
it received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $9,698, $3,058,326
and $19,701, respectively and received $64,425 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.
36
<PAGE>
MORGAN STANLEY DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998, CONTINUED
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The costs of purchases and proceeds from sales/prepayments of portfolio
securities, excluding short-term investments, for the year ended December 31,
1998 were $717,875,107 and $1,347,282,631, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At December 31, 1998, the Fund had
transfer agent fees and expenses payable of approximately $96,000.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended December 31, 1998
included in Trustees' fees and expenses in the Statement of Operations amounted
to $6,216. At December 31, 1998, the Fund had an accrued pension liability of
$52,503 included in accrued expenses in the Statement of Assets and Liabilities.
5. ACQUISITION OF DEAN WITTER RETIREMENT SERIES -- U.S. GOVERNMENT SECURITIES
SERIES
As of the close of business on September 11, 1998, the Fund acquired all the net
assets of Dean Witter Retirement Series - U.S. Government Securities Series
("Retirement U.S. Government") pursuant to a plan of reorganization (the "Plan")
approved by the shareholders of Retirement U.S. Government on August 19, 1998.
The acquisition was accomplished by a tax-free exchange of 986,985 Class D
shares of the Fund at a net asset value of $9.21 per share for 899,123 shares of
Retirement U.S. Government. The net assets of the Fund and Retirement U.S.
Government immediately before the acquisition were $5,193,431,112 and
$9,087,435, respectively, including unrealized appreciation of $322,808 for
Retirement U.S. Government. Immediately after the acquisition, the combined net
assets of the Fund amounted to $5,202,518,547.
37
<PAGE>
MORGAN STANLEY DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998, 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
DECEMBER 31, 1998 DECEMBER 31, 1997+*
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold............................................................. 4,837,972 $ 44,356,004 2,724,542 $ 24,540,441
Reinvestment of dividends........................................ 145,211 1,330,450 7,949 72,059
Redeemed......................................................... (898,895) (8,228,417) (440,236) (3,982,964)
----------- -------------- ----------- ------------
Net increase - Class A........................................... 4,084,288 37,458,037 2,292,255 20,629,536
----------- -------------- ----------- ------------
CLASS B SHARES
Sold............................................................. 103,474,883 948,990,970 67,708,563 606,120,050
Reinvestment of dividends........................................ 17,451,085 159,732,499 20,782,743 185,683,576
Redeemed......................................................... (173,896,303) (1,593,120,481) (214,633,493) (1,917,929,811)
----------- -------------- ----------- ------------
Net decrease - Class B........................................... (52,970,335) (484,397,012) (126,142,187) (1,126,126,185)
----------- -------------- ----------- ------------
CLASS C SHARES
Sold............................................................. 4,818,849 44,609,503 552,334 5,029,381
Reinvestment of dividends........................................ 41,862 386,582 4,930 45,056
Redeemed......................................................... (3,492,672) (32,338,148) (79,129) (724,422)
----------- -------------- ----------- ------------
Net increase - Class C........................................... 1,368,039 12,657,937 478,135 4,350,015
----------- -------------- ----------- ------------
CLASS D SHARES
Sold............................................................. 1,554,909 14,290,193 324,174 2,938,529
Reinvestment of dividends........................................ 97,395 892,667 34,780 314,925
Acquisition of Dean Witter Retirement Series - U.S. Government
Securities Trust Series 986,985 9,087,435 -- --
Redeemed......................................................... (1,666,314) (15,387,388) (104,962) (947,219)
----------- -------------- ----------- ------------
Net increase - Class D........................................... 972,975 8,882,907 253,992 2,306,235
----------- -------------- ----------- ------------
Net decrease in Fund............................................. (46,545,033) $ (425,398,131) (123,117,805) $(1,098,840,399)
----------- -------------- ----------- ------------
----------- -------------- ----------- ------------
</TABLE>
- ---------------------
+ On July 28, 1997, 994,144 shares representing $8,977,118 were transferred
to Class D.
* For Class A, C and D shares, for the period July 28, 1997 (issue date)
through December 31, 1997.
38
<PAGE>
MORGAN STANLEY DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998, CONTINUED
7. FEDERAL INCOME TAX STATUS
At December 31, 1998, the Fund had a net capital loss carryover of approximately
$916,574,000, which may be used to offset future capital gains to the extent
provided by regulations which is available through December 31 of the following
years:
<TABLE>
<CAPTION>
AMOUNT IN THOUSANDS
- --------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 2004 2005 2006
- ------------- ------------- ------------- ------------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 261,525 $ 154,964 $ 263,492 $ 118,056 $ 63,667 $ 49,153 $ 3,006 $ 2,711
- ------------- ------------- ------------- ------------- ------------- ----------- ----------- ---------
- ------------- ------------- ------------- ------------- ------------- ----------- ----------- ---------
</TABLE>
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 $1,048,000 during fiscal 1998.
At December 31, 1998, the Fund had temporary book/tax differences primarily
attributable to post-October losses and permanent book/tax differences
attributable to an expired capital loss carryover. To reflect reclassifications
arising from the permanent differences, paid-in-capital was charged and
accumulated net realized loss was credited $108,730,990.
39
<PAGE>
MORGAN STANLEY DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
----------------------------------------------------
1998 1997* 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period.............. $ 9.10 $ 8.92 $ 9.21 $ 8.41 $ 9.31
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income.......................... 0.54 0.56 0.56 0.57 0.58
Net realized and unrealized gain (loss)........ 0.10 0.18 (0.29) 0.80 (0.90)
-------- -------- -------- -------- --------
Total income (loss) from investment operations.... 0.64 0.74 0.27 1.37 (0.32)
-------- -------- -------- -------- --------
Less dividends from net investment income......... (0.54) (0.56) (0.56) (0.57) (0.58)
-------- -------- -------- -------- --------
Net asset value, end of period.................... $ 9.20 $ 9.10 $ 8.92 $ 9.21 $ 8.41
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN+..................................... 7.27% 8.56% 3.16% 16.74% (3.51)%
RATIOS TO AVERAGE NET ASSETS:
Expenses.......................................... 1.27%(1) 1.26% 1.25% 1.24% 1.22%
Net investment income............................. 5.94%(1) 6.22% 6.28% 6.44% 6.57%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions............ $4,996 $5,429 $6,450 $7,955 $8,211
Portfolio turnover rate........................... 14% %4 %8 14% 26%
</TABLE>
- ---------------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date, other than shares held by certain
employee benefit plans established by Dean Witter Reynolds Inc. and its
affiliate, SPS Transaction Services, Inc., have been designated Class B
shares. Shares held by those employee benefit plans prior to July 28, 1997
have been designated Class D shares.
+ 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) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
40
<PAGE>
MORGAN STANLEY DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period.............. $ 9.09 $ 9.03
------ ------
Income from investment operations:
Net investment income.......................... 0.59 0.25
Net realized and unrealized gain............... 0.09 0.06
------ ------
Total income from investment operations........... 0.68 0.31
------ ------
Less dividends from net investment income......... (0.59) (0.25)
------ ------
Net asset value, end of period.................... $ 9.18 $ 9.09
------ ------
------ ------
TOTAL RETURN+..................................... 7.70% 3.50%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.......................................... 0.76%(3) 0.77%(2)
Net investment income............................. 6.45%(3) 6.57%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands........... $58,538 $20,841
Portfolio turnover rate........................... 14% 4%
</TABLE>
<TABLE>
<S> <C> <C>
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period.............. $ 9.17 $ 9.03
------ ------
Income from investment operations:
Net investment income.......................... 0.55 0.23
Net realized and unrealized gain............... 0.09 0.14
------ ------
Total income from investment operations........... 0.64 0.37
------ ------
Less dividends from net investment income......... (0.55) (0.23)
------ ------
Net asset value, end of period.................... $ 9.26 $ 9.17
------ ------
------ ------
TOTAL RETURN+..................................... 7.14% 4.14%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.......................................... 1.27%(3) 1.25%(2)
Net investment income............................. 5.94%(3) 5.81%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands........... $17,087 $4,385
Portfolio turnover rate........................... 14% 4%
</TABLE>
- ---------------------
* The date shares were first issued.
+ 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
41
<PAGE>
MORGAN STANLEY DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period.............. $ 9.11 $ 9.03
------ ------
Income from investment operations:
Net investment income.......................... 0.61 0.27
Net realized and unrealized gain............... 0.07 0.08
------ ------
Total income from investment operations........... 0.68 0.35
------ ------
Less dividends from net investment income......... (0.61) (0.27)
------ ------
Net asset value, end of period.................... $ 9.18 $ 9.11
------ ------
------ ------
TOTAL RETURN+..................................... 7.72% 3.87%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.......................................... 0.52%(3) 0.52%(2)
Net investment income............................. 6.69%(3) 6.91%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands........... $20,392 $11,367
Portfolio turnover rate........................... 14% 4%
</TABLE>
- ---------------------
* The date shares were first issued. Shareholders who held shares of the Fund
prior to July 28, 1997 (the date the Fund converted to a multiple class
share structure) should refer to the Financial Highlights of Class B to
obtain the historical per share data and ratio information of their shares.
+ 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
42
<PAGE>
MORGAN STANLEY DEAN WITTER U.S. GOVERNMENT
SECURITIES TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Morgan Stanley Dean Witter U.S.
Government Securities Trust (the "Fund"), formerly Dean Witter U.S. Government
Securities Trust, at December 31, 1998, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
FEBRUARY 8, 1999
43
