<PAGE> 1
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES Two World Trade Center
LETTER TO THE SHAREHOLDERS February 28, 1999 New York, New York 10048
DEAR SHAREHOLDER:
During the six-month period ended February 28, 1999, the domestic fixed-income
markets were subject to highly volatile yield shifts. As the period began,
potential fallout from economic turmoil in Russia and Latin America, as well as
major losses by hedge funds, perpetuated an ongoing flight to quality and a
decoupling of the corporate-bond and Treasury markets. With only those companies
having the best credit ratings able to borrow funds, corporate bond prices were
sharply lower in September, despite lower Treasury yields. In October and
November, evaporating corporate liquidity, among other factors, prompted the
Federal Reserve Board to cut interest rates. This action clearly demonstrated a
shift in focus by the central bank from an anti-inflationary stance toward one
of avoiding recession and helped drive down Treasury yields to some of their
lowest levels in decades.
The central bank's commitment toward preventing recession at home and easing
financial turmoil abroad led to an increase in demand for corporate bonds, which
in turn resulted in higher bond prices. To ensure continued liquidity, the Fed
cut rates two more times, with the federal-funds rate settling in at 4.75
percent by mid-November. As a result, the U.S. economy grew at a startling 6.1
percent rate in the fourth quarter of 1998 and began 1999 on strong footing.
Despite this robust growth and an unemployment rate of only 4.2 percent,
inflation remained dormant throughout the period. Nevertheless, the surge in
production, coupled with renewed acceleration in stock prices, was sufficient to
send fixed-income yields higher in early 1999, although the corporate bond
sector did benefit from improving liquidity and perceptions of continued healthy
economic growth.
PERFORMANCE
For the 6-month period ended February 28, 1999, Morgan Stanley Dean Witter
Intermediate Income Securities' Class B shares posted a return of 1.82 percent,
compared to 1.86 percent for the Lehman Intermediate
<PAGE> 2
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES
LETTER TO THE SHAREHOLDERS February 28, 1999, continued
Government/Corporate Bond Index and 1.15 percent for the Lipper Intermediate
Investment Grade Debt Funds Index. For the same period, the Fund's Class A, C
and D shares returned 1.88 percent, 1.70 percent and 2.25 percent, respectively.
PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE OF DIFFERING
EXPENSES.
The Fund's performance during the period under review was reflective of the
period's rise in interest rates and the strength of the corporate-bond sector,
which represented more than 80 percent of the Fund's holdings. Among its
corporate positions the Fund's commitments to Yankee notes, utilities, cable,
media and technology added the greatest value to the portfolio. Issues such as
Niagara Mohawk Power, United Utilities, Time Warner Entertainment and WorldCom
appreciated in value despite rising interest rates. The largest single
contributor to the Fund's performance was its position in Pohang Iron and Steel,
which appreciated significantly during the period. Hindering its overall
performance were the Fund's holdings in the chemical and forest products
industries, which continued to be battered by overcapacity and limited pricing
power.
PORTFOLIO STRATEGY
In an effort to reduce volatility, the Fund worked toward diversifying its
portfolio among a greater number of smaller positions. To achieve this end, the
Fund gradually reduced the number of its holdings representing more than 2
percent each of its net assets. Yankee notes were sold as yields approached
those of domestic banks, while larger domestic bank positions were pared in
order to add new credits to the portfolio.
Last summer's corporate bond liquidity crisis provided the Fund with an
opportunity to purchase quality issues at extremely attractive yields. During
this period, the Fund added debt securities in the cable, telephone and
oil-drilling sectors. As 1999 began, the Fund continued to add attractively
priced issues to its portfolio, including finance and equipment-leasing bonds
and such names as AT&T Capital and Comdisco.
With the economy growing at a healthy pace and creditworthiness improving among
corporate issuers, the Fund increased its allocation to the corporate bond
sector to nearly 82 percent of net assets from 76 percent. The Fund's cash
reserves were reduced from 7 percent to 3 percent. The largest new commitment
was to the industrial sector, which was increased to 26 percent of net assets.
The Fund also increased its exposure to the utilities sector while decreasing
its positions in banks and Yankee notes marginally. To take further advantage of
improving credit fundamentals as well as to bolster income, the Fund emphasized
BBB-rated corporate bonds versus U.S. Treasury securities.
2
<PAGE> 3
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES
LETTER TO THE SHAREHOLDERS February 28, 1999, continued
On February 28, 1999, approximately 37 percent of the invested portion of the
portfolio was rated Baa or BBB by Moody's and Standard & Poor's, respectively.
The average quality rating was A3. The Fund's duration was slightly more than
4.14 years on that date, up from 3.87 years on August 31, 1998.
LOOKING AHEAD
Corporate America admirably weathered the international economic turmoil that
occurred during the latter half of 1998, largely due to the Federal Reserve
Board's accommodative monetary policy. As the Fund enters the second half of its
fiscal year, we believe that the fundamentally sound U.S. economy and the
relative calm on the international economic front require no further assistance
from lower interest rates. As a result, intermediate- and longer-term interest
rates are returning to a more traditional relationship with overnight rates.
With a strong equity market and the economy at full employment, investors are
once again on an inflation watch. While currently there are no sightings of it
on the horizon, due in large part to improving productivity, the beginnings of a
worldwide recovery could stimulate pricing pressure in raw materials and in turn
to consumer goods. However, for the time being economic uncertainty still
pervades Asia and Latin America, making any reversal of current Federal Reserve
policy unlikely. Given this balance of health at home and the international
uncertainty, we believe that the interest-rate outlook is likely to be
relatively stable in the months ahead.
We appreciate your ongoing support of Morgan Stanley Dean Witter Intermediate
Income Securities and look forward to continuing to serve your investment needs.
Very truly yours,
/S/ CHARLES A. FIUMEFREDDO
CHARLES A. FIUMEFREDDO
Chairman of the Board
3
<PAGE> 4
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES
PORTFOLIO OF INVESTMENTS February 28, 1999 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (81.4%)
Broadcasting (2.6%)
$2,000 British Sky Broadcasting Group, PLC
(United Kingdom).................... 6.875% 02/23/09 $ 1,965,940
2,000 USA Networks, Inc. - 144A*........... 6.75 11/15/05 1,982,380
-----------
3,948,320
-----------
Casino/Gambling (1.9%)
3,000 Mirage Resorts, Inc. ................ 6.75 02/01/08 2,886,960
-----------
Cellular Telephone (0.9%)
1,360 Airtouch Communications, Inc. ....... 7.125 07/15/01 1,396,801
-----------
Clothing/Shoe/Accessory Stores (2.0%)
3,000 TJX Companies, Inc. ................. 6.625 06/15/00 3,029,310
-----------
Computer Software (1.3%)
2,000 Oracle Corp. ........................ 6.91 02/15/07 2,042,480
-----------
Construction/Ag Equipment/Trucks (1.9%)
3,000 Atlas Copco (Sweden) - 144A*......... 6.50 04/01/08 2,983,170
-----------
Electric Utilities (4.7%)
1,000 Niagara Mohawk Power Corp. .......... 7.25 10/01/02 1,015,650
3,000 System Energy Resources, Inc. ....... 7.71 08/01/01 3,075,270
3,000 Western Resources, Inc. ............. 6.875 08/01/04 3,067,470
-----------
7,158,390
-----------
Electronic Production Equipment (2.9%)
4,500 Applied Materials, Inc. ............. 6.75 10/15/07 4,519,350
-----------
Finance - Automotive (3.2%)
1,000 General Motors Acceptance Corp. ..... 8.40 10/15/99 1,017,700
4,000 General Motors Acceptance Corp. ..... 5.75 11/10/03 3,956,480
-----------
4,974,180
-----------
Finance Companies (3.2%)
3,000 AT&T Capital Corp. .................. 6.60 05/15/05 2,913,840
2,000 IKON Capital Inc. ................... 6.73 06/15/01 1,980,320
-----------
4,894,160
-----------
Forest Products (3.2%)
5,049 Noranda Forest, Inc. (Canada)........ 6.875 11/15/05 4,850,625
-----------
Home Building (1.3%)
2,000 Oakwood Homes Corp. ................. 8.125 03/01/09 1,997,980
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE> 5
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES
PORTFOLIO OF INVESTMENTS February 28, 1999 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C>
Integrated Oil Companies (3.3%)
$5,000 Societe Nationale Elf Aquitaine
(France)............................. 7.75 % 05/01/99 $ 5,017,950
-----------
Investment Bankers/Brokers/Services (5.1%)
2,500 Donaldson Lufkin & Jenrette Inc. .... 6.11 05/15/01 2,505,825
2,000 Lehman Brothers Holdings............. 6.125 07/15/03 1,930,020
3,300 Salomon, Inc. ....................... 6.50 03/01/00 3,323,661
-----------
7,759,506
-----------
Major Banks (10.6%)
2,000 Bank One Texas N.A. ................. 6.25 02/15/08 1,988,840
3,000 BankBoston N.A. ..................... 6.50 12/19/07 2,955,930
2,600 Bankers Trust Corp. ................. 6.70 10/01/07 2,611,232
3,000 Citicorp............................. 6.375 11/15/08 2,987,370
5,145 Shawmut Bank Connecticut, N.A. ...... 8.625 02/15/05 5,755,917
-----------
16,299,289
-----------
Major U.S. Telecommunications (4.1%)
3,000 Sprint Capital Corp. ................ 6.125 11/15/08 2,950,890
3,000 WorldCom, Inc. ...................... 7.75 04/01/07 3,281,400
-----------
6,232,290
-----------
Media Conglomerates (1.4%)
2,000 Time Warner Entertainment............ 7.25 09/01/08 2,122,180
-----------
Mid-Sized Banks (3.2%)
3,000 Capital One Bank..................... 6.375 02/15/03 2,925,330
2,000 Star Bank N.A. ...................... 6.375 03/01/04 2,017,180
-----------
4,942,510
-----------
Military/Gov't/Technical (1.9%)
2,850 Raytheon Co. ........................ 6.30 08/15/00 2,869,551
-----------
Non - U.S. Utilities (4.8%)
5,000 United Utilities Corp. (United
Kingdom)............................. 6.45 04/01/08 4,971,900
2,500 Israel Electric Co., Ltd. - 144A*.... 7.125 07/15/05 2,457,700
-----------
7,429,600
-----------
Oil & Gas Production (1.2%)
2,000 Union Pacific Resource Group Inc..... 6.50 05/15/05 1,880,380
-----------
Oil/Gas Transmission (1.3%)
2,000 Columbia Energy Group (Series A)..... 6.39 11/28/00 2,015,180
-----------
Oilfield Services/Equipment (1.2%)
2,000 Petro Geo - Services ASA (Norway).... 6.625 03/30/08 1,913,720
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES
PORTFOLIO OF INVESTMENTS February 28, 1999 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C>
Other Consumer Services (1.9%)
$3,000 Stewart Enterprises, Inc. ........... 6.70 % 12/01/03 $ 2,971,260
-----------
Property - Casualty Insurers (3.4%)
5,137 Nac Re Corp. ........................ 8.00 06/15/99 5,168,233
-----------
Rental/Leasing Companies (3.4%)
2,000 Comdisco Inc. ....................... 6.00 01/30/02 1,983,900
3,350 Hertz Corp. ......................... 6.00 01/15/03 3,321,190
-----------
5,305,090
-----------
Specialty Chemicals (2.4%)
2,000 Equistar Chemicals LP................ 6.50 02/15/06 1,788,220
2,100 Millennium America, Inc. ............ 7.00 11/15/06 1,982,715
-----------
3,770,935
-----------
Steel/Iron Ore (1.2%)
2,000 Pohang Iron & Steel Co. (South
Korea)............................... 7.125 11/01/06 1,786,920
-----------
Textiles (1.9%)
3,000 Burlington Industries, Inc. ......... 7.25 09/15/05 2,870,370
-----------
TOTAL CORPORATE BONDS
(Identified Cost $126,097,555 )........................... 125,036,690
-----------
FOREIGN GOVERNMENT OBLIGATION (1.4%)
2,000 Republic of Korea (South Korea)
(Identified Cost $2,156,640)......... 8.875 04/15/08 2,120,460
-----------
U.S. GOVERNMENT & AGENCY OBLIGATIONS (14.1%)
3,000 Federal Home Loan Banks.............. 5.80 09/02/08 2,982,270
63 Federal Home Loan Mortgage Corp. .... 8.50 12/01/01 65,136
44 Federal Home Loan Mortgage Corp. .... 8.50 01/01/02 44,944
153 Federal Home Loan Mortgage Corp. .... 8.50 07/01/02 153,836
76 Federal Home Loan Mortgage Corp. .... 9.00 08/01/02 77,146
2,000 Federal National Mortgage Assoc. .... 5.95 03/09/01 2,000,220
1,500 Federal National Mortgage Assoc. .... 5.90 06/18/01 1,502,355
24 Federal National Mortgage Assoc. .... 8.50 12/01/01 25,389
2,000 Federal National Mortgage Assoc. .... 7.55 06/10/04 2,011,700
2,000 Federal National Mortgage Assoc. .... 7.73 08/26/04 2,022,980
1,980 Private Export Funding Corp. ........ 6.86 04/30/04 2,032,173
450 U.S. Treasury Note................... 6.25 01/31/02 462,290
3,000 U.S. Treasury Note................... 5.875 02/15/04 3,077,940
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES
PORTFOLIO OF INVESTMENTS February 28, 1999 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$2,000 U.S. Treasury Note................... 5.875% 11/15/05 $ 2,051,060
3,000 U.S. Treasury Note................... 6.125 08/15/07 3,139,081
-----------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Identified Cost $21,583,138)............................. 21,648,520
-----------
SHORT-TERM INVESTMENTS (3.0%)
U.S. GOVERNMENT & AGENCY (a) (2.9%)
4,500 Federal Home Loan Mortgage Corp.
(Amortized Cost $4,500,000).......... 4.70 03/01/99 4,500,000
-----------
REPURCHASE AGREEMENT (0.1%)
106 The Bank of New York (dated 02/26/99;
proceeds $105,962) (b)
(Identified Cost $105,920)........... 4.75 03/01/99 105,920
-----------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $4,605,920).............................. 4,605,920
-----------
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL INVESTMENTS
(Identified Cost $154,443,253) (c)................. 99.9% 153,411,590
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES...... 0.1 223,038
----- ------------
NET ASSETS........................................ 100.0% $153,634,628
===== ============
</TABLE>
- ---------------------
* Resale is restricted to qualified institutional investors.
(a) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(b) Collateralized by $84,058 U.S. Treasury Bond 8.125% due 08/15/21 valued at
$108,039.
(c) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $1,257,670 and the
aggregate gross unrealized depreciation is $2,289,333, resulting in net
unrealized depreciation of $1,031,663.
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1999 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $154,443,253)............................. $153,411,590
Cash........................................................ 3,808
Receivable for:
Interest................................................ 2,431,336
Shares of beneficial interest sold...................... 109,378
Principal paydowns...................................... 18,230
Prepaid expenses and other assets........................... 52,835
------------
TOTAL ASSETS............................................ 156,027,177
------------
LIABILITIES:
Payable for:
Investments purchased................................... 1,988,700
Plan of distribution fee................................ 100,668
Shares of beneficial interest repurchased............... 87,002
Investment management fee............................... 76,528
Dividends and distributions to shareholders............. 42,403
Accrued expenses and other payables......................... 97,248
------------
TOTAL LIABILITIES....................................... 2,392,549
------------
NET ASSETS.............................................. $153,634,628
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $163,167,115
Net unrealized depreciation................................. (1,031,663)
Accumulated undistributed net investment income............. 42,236
Accumulated net realized loss............................... (8,543,060)
------------
NET ASSETS.............................................. $153,634,628
============
CLASS A SHARES:
Net Assets.................................................. $3,969,429
Shares Outstanding (unlimited authorized, $.01 par value)... 412,284
NET ASSET VALUE PER SHARE............................... $9.63
============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44% of net asset value)........ $10.06
============
CLASS B SHARES:
Net Assets.................................................. $139,958,745
Shares Outstanding (unlimited authorized, $.01 par value)... 14,518,608
NET ASSET VALUE PER SHARE............................... $9.64
============
CLASS C SHARES:
Net Assets.................................................. $1,458,738
Shares Outstanding (unlimited authorized, $.01 par value)... 151,204
NET ASSET VALUE PER SHARE............................... $9.65
============
CLASS D SHARES:
Net Assets.................................................. $8,247,716
Shares Outstanding (unlimited authorized, $.01 par value)... 855,607
NET ASSET VALUE PER SHARE............................... $9.64
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the six months ended February 28, 1999 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $ 5,165,077
-----------
EXPENSES
Plan of distribution fee (Class A shares)................... 2,045
Plan of distribution fee (Class B shares)................... 608,736
Plan of distribution fee (Class C shares)................... 4,533
Investment management fee................................... 468,552
Transfer agent fees and expenses............................ 87,412
Registration fees........................................... 51,668
Professional fees........................................... 33,356
Shareholder reports and notices............................. 25,655
Trustees' fees and expenses................................. 8,645
Custodian fees.............................................. 7,408
Other....................................................... 6,080
-----------
TOTAL EXPENSES.......................................... 1,304,090
-----------
NET INVESTMENT INCOME................................... 3,860,987
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain........................................... 977,452
Net change in unrealized appreciation....................... (1,999,324)
-----------
NET LOSS................................................ (1,021,872)
-----------
NET INCREASE................................................ $ 2,839,115
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
FEBRUARY 28, 1999 AUGUST 31, 1998
- ------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................ $ 3,860,987 $ 8,403,108
Net realized gain.................................... 977,452 1,768,354
Net change in unrealized appreciation................ (1,999,324) 134,510
------------ ------------
NET INCREASE..................................... 2,839,115 10,305,972
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares....................................... (109,491) (100,388)
Class B shares....................................... (3,473,759) (7,980,246)
Class C shares....................................... (25,039) (11,414)
Class D shares....................................... (225,777) (348,107)
------------ ------------
TOTAL DIVIDENDS.................................. (3,834,066) (8,440,155)
------------ ------------
Net decrease from transactions in shares of
beneficial interest................................. (6,525,681) (10,443,102)
------------ ------------
NET DECREASE..................................... (7,520,632) (8,577,285)
NET ASSETS:
Beginning of period.................................. 161,155,260 169,732,545
------------ ------------
END OF PERIOD
(Including undistributed net investment income of
$42,236 and $15,315, respectively)............... $153,634,628 $161,155,260
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES
NOTES TO FINANCIAL STATEMENTS February 28, 1999 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Intermediate Income Securities (the "Fund"), is
registered under the Investment Company Act of 1940, as amended (the "Act"), as
a diversified, open-end management investment company. The Fund's investment
objective is high current income consistent with safety of principal. The Fund
was organized as a Massachusetts business trust on September 1, 1988 and
commenced operations on May 3, 1989. On July 28, 1997, the Fund converted to a
multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price;
(2) all other portfolio securities for which over-the-counter market quotations
are readily available are valued at the latest available bid price; (3) when
market quotations are not readily available, including circumstances under which
it is determined by Morgan Stanley Dean Witter Advisors Inc. (the "Investment
Manager"), that sale and bid prices are not reflective of a security's market
value, portfolio securities are valued at their fair value as determined in good
faith under procedures established by and under the general supervision of the
Trustees (valuation of debt securities for which market quotations are not
readily available may be based upon current market prices of securities which
are comparable in coupon, rating and maturity or an appropriate matrix utilizing
similar factors); (4) certain portfolio securities may be valued by an outside
pricing service approved by the Trustees. The pricing service may utilize a
matrix system incorporating security quality, maturity and coupon as the
evaluation model parameters, and/or research and evaluations by its staff,
including review of
11
<PAGE> 12
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES
NOTES TO FINANCIAL STATEMENTS February 28, 1999 (unaudited) continued
broker-dealer market price quotations, in determining what it believes is the
fair valuation of the portfolio securities valued by such pricing service; and
(5) short-term debt securities having a maturity date of more than sixty days at
time of purchase are valued on a mark-to-market basis until sixty days prior to
maturity and thereafter at amortized cost based on their value on the 61st day.
Short-term debt securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined on the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the 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.
12
<PAGE> 13
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES
NOTES TO FINANCIAL STATEMENTS February 28, 1999 (unaudited) continued
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, calculated daily and payable monthly, by applying the
following annual rates to the net assets of the Fund determined as of the close
of each business day: 0.60% of the portion of daily net assets not exceeding
$500 million; 0.50% of the portion of daily net assets exceeding $500 million
but not exceeding $750 million; 0.40% of the portion of the daily net assets
exceeding $750 million but not exceeding $1 billion; and 0.30% of the portion of
the daily net asset exceeding $1 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 -- 0.85% 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 had been imposed or waived; (b) the average daily net
assets of Class B; and (iii) Class C -- up to 0.85% 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 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
13
<PAGE> 14
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES
NOTES TO FINANCIAL STATEMENTS February 28, 1999 (unaudited) continued
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 $2,013,461 at February 28, 1999.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.85% 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 six months ended February 28, 1999, the distribution fee
was accrued for Class A shares and Class C shares at the annual rate of 0.10%
and 0.85%, respectively.
The Distributor has informed the Fund that for the six months ended February 28,
1999, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $55,702 and $280, respectively
and received $7,315, 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.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended February 28, 1999, aggregated
$74,292,372 and $74,881,842,
14
<PAGE> 15
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES
NOTES TO FINANCIAL STATEMENTS February 28, 1999 (unaudited) continued
respectively. Included in the aforementioned are purchases and sales of U.S.
Government securities of $28,091,793 and $25,904,990, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At February 28, 1999, the Fund had
transfer agent fees and expenses payable of approximately $1,200.
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 six months ended February 28, 1999
included in Trustees' fees and expenses in the Statement of Operations amounted
to $3,059. At February 28, 1999, the Fund had an accrued pension liability of
$52,434 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. FEDERAL INCOME TAX STATUS
At August 31, 1998, the Fund had a net capital loss carryover of approximately
$9,446,000, which may be used to offset future capital gains to the extent
provided by regulations, which is available through August 31 of the following
years:
<TABLE>
<CAPTION>
AMOUNT IN THOUSANDS
- ------------------------------------------------------
2003 2004 2005 2006
- --------------------- -------- -------- --------
<S> <C> <C> <C>
$ 6,656 $ 313 $2,351 $ 126
======= ====== ====== ======
</TABLE>
6. FUND ACQUISITION
As of the close of business on September 11, 1998, the Fund acquired all the net
assets of Dean Witter Retirement Series -- Intermediate Income Securities Series
(" Retirement Intermediate") pursuant to a plan of reorganization approved by
the shareholders of Retirement Intermediate on August 19, 1998. The acquisition
was accomplished by a tax-free exchange of 250,724 Class D shares of the Fund at
a net asset value of $9.74 per share for 247,422 shares of Retirement
Intermediate. The net assets of the Fund and Retirement Intermediate immediately
before the acquisition were $159,153,039, and $2,441,399, respectively,
including unrealized appreciation of $62,584 for Retirement Intermediate.
Immediately after the acquisition, the combined net assets of the Fund amounted
to $161,594,438.
15
<PAGE> 16
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES
NOTES TO FINANCIAL STATEMENTS February 28, 1999 (unaudited) continued
7. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
FEBRUARY 28, 1999 AUGUST 31, 1998
-------------------------- --------------------------
(UNAUDITED)
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold....................................................... 301,525 $2,951,579 432,771 $4,200,291
Reinvestment of dividends.................................. 10,197 99,740 6,280 60,968
Redeemed................................................... (255,453) (2,483,188) (276,388) (2,677,083)
---------- ----------- ---------- -----------
Net increase -- Class A.................................... 56,269 568,131 162,663 1,584,176
---------- ----------- ---------- -----------
CLASS B SHARES
Sold....................................................... 12,633,963 123,685,826 19,728,435 191,353,800
Reinvestment of dividends.................................. 195,512 1,915,551 435,921 4,221,022
Redeemed................................................... (13,924,474) (136,299,070) (21,536,089) (208,796,829)
---------- ----------- ---------- -----------
Net decrease -- Class B.................................... (1,094,999) (10,697,693) (1,371,733) (13,222,007)
---------- ----------- ---------- -----------
CLASS C SHARES
Sold....................................................... 109,621 1,069,322 57,617 558,111
Reinvestment of dividends.................................. 2,131 20,866 842 8,164
Redeemed................................................... (7,635) (75,142) (15,371) (148,714)
---------- ----------- ---------- -----------
Net increase -- Class C.................................... 104,117 1,015,046 43,088 417,561
---------- ----------- ---------- -----------
CLASS D SHARES
Sold....................................................... 137,209 1,343,179 339,652 3,280,027
Reinvestment of dividends.................................. 23,062 225,819 34,184 331,043
Acquisition of Dean Witter Retirement Series - Intermediate
Income Securities Series.................................. 250,724 2,441,399 -- --
Redeemed................................................... (145,601) (1,421,562) (292,464) (2,833,902)
---------- ----------- ---------- -----------
Net increase -- Class D.................................... 265,394 2,588,835 81,372 777,168
---------- ----------- ---------- -----------
Net decrease in Fund....................................... (669,219) $(6,525,681) (1,084,610) $(10,443,102)
========== =========== ========== ===========
</TABLE>
16
<PAGE> 17
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR ENDED AUGUST 31
MONTHS ENDED ----------------------------------------------------------
FEBRUARY 28, 1999++ 1998++ 1997*++ 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period.......... $ 9.70 $ 9.59 $ 9.39 $ 9.69 $ 9.51 $10.26
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income........................ 0.24 0.51 0.53 0.55 0.59 0.58
Net realized and unrealized gain (loss)...... (0.06) 0.11 0.20 (0.30) 0.19 (0.73)
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations................................... 0.18 0.62 0.73 0.25 0.78 (0.15)
------ ------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income........................ (0.24) (0.51) (0.53) (0.55) (0.59) (0.56)
Net realized gain............................ -- -- -- -- (0.01) (0.04)
------ ------ ------ ------ ------ ------
Total dividends and distributions............. (0.24) (0.51) (0.53) (0.55) (0.60) (0.60)
------ ------ ------ ------ ------ ------
Net asset value, end of period................ $ 9.64 $ 9.70 $ 9.59 $ 9.39 $ 9.69 $ 9.51
====== ====== ====== ====== ====== ======
TOTAL RETURN+................................. 1.82%(1) 6.53% 7.93% 2.58% 8.56% (1.50)%
RATIOS TO AVERAGE NET ASSETS:
Expenses...................................... 1.73%(2)(3) 1.71%(3) 1.65% 1.62% 1.63% 1.63%
Net investment income......................... 4.88%(2)(3) 5.19%(3) 5.52% 5.69% 6.23% 5.80%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands....... $139,959 $151,515 $162,959 $208,911 $232,752 $245,750
Portfolio turnover rate....................... 49%(1) 98% 98% 115% 114% 122%
</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 as Class B shares.
Shares held by those employee benefit plans prior to July 28, 1997 have been
designated Class D shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE> 18
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED THROUGH
FEBRUARY 28, 1999 AUGUST 31, 1998 AUGUST 31, 1997
- -------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
CLASS A SHARES ++
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $9.71 $9.59 $9.68
----- ----- -----
Income (loss) from investment operations:
Net investment income...................................... 0.27 0.56 0.06
Net realized and unrealized gain (loss).................... (0.08) 0.13 (0.10)
----- ----- -----
Total income (loss) from investment operations.............. 0.19 0.69 (0.04)
----- ----- -----
Less dividends from net investment income................... (0.27) (0.57) (0.05)
----- ----- -----
Net asset value, end of period.............................. $9.63 $9.71 $9.59
===== ===== =====
TOTAL RETURN+............................................... 1.88%(1) 7.30% (0.46)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 0.98%(2)(3) 1.10%(3) 2.18 %(2)
Net investment income....................................... 5.63%(2)(3) 5.80%(3) 6.10 %(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $3,969 $3,457 $1,855
Portfolio turnover rate..................................... 49%(1) 98% 98 %
CLASS C SHARES ++
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $9.71 $9.61 $9.68
----- ----- -----
Income (loss) from investment operations:
Net investment income...................................... 0.23 0.49 0.04
Net realized and unrealized gain (loss).................... (0.06) 0.11 (0.07)
----- ----- -----
Total income (loss) from investment operations.............. 0.17 0.60 (0.03)
----- ----- -----
Less dividends from net investment income................... (0.23) (0.50) (0.04)
----- ----- -----
Net asset value, end of period.............................. $9.65 $9.71 $9.61
===== ===== =====
TOTAL RETURN+............................................... 1.70%(1) 6.39% (0.31)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 1.73%(2)(3) 1.71%(3) 2.02 %(2)
Net investment income....................................... 4.88%(2)(3) 5.19%(3) 4.22 %(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $1,459 $457 $38
Portfolio turnover rate..................................... 49%(1) 98% 98 %
</TABLE>
- ---------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
18
<PAGE> 19
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED THROUGH
FEBRUARY 28, 1999 AUGUST 31, 1998 AUGUST 31, 1997
- -------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
CLASS D SHARES ++
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $9.70 $9.59 $ 9.68
----- ----- -------
Income (loss) from investment operations:
Net investment income...................................... 0.28 0.59 0.05
Net realized and unrealized gain (loss).................... (0.06) 0.11 (0.09)
----- ----- -------
Total income (loss) from investment operations.............. 0.22 0.70 (0.04)
----- ----- -------
Less dividends from net investment income................... (0.28) (0.59) (0.05)
----- ----- -------
Net asset value, end of period.............................. $9.64 $9.70 $ 9.59
===== ===== =======
TOTAL RETURN+............................................... 2.25%(1) 7.43% (0.44)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 0.88%(2)(3) 0.86%(3) 1.11 %(2)
Net investment income....................................... 5.73%(2)(3) 6.04%(3) 5.91 %(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $8,248 $5,726 $4,880
Portfolio turnover rate..................................... 49%(1) 98% 98 %
</TABLE>
- ---------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
19
<PAGE> 20
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Rochelle G. Siegel
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center -- Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
The financial statements included herein have been taken from the records of the
Fund without examination by the independent accountants and accordingly they do
not express an opinion thereon.
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and trustees,
fees, expenses and other pertinent information, please see the prospectus of the
Fund.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective prospectus.
MORGAN STANLEY
DEAN WITTER
INTERMEDIATE
INCOME
SECURITIES
[MORGAN STANLEY GRAPHIC]
SEMIANNUAL REPORT
FEBRUARY 28, 1999
