<PAGE>
PROSPECTUS
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST (THE "TRUST") IS AN INVESTMENT
COMPANY WHICH SEEKS TO PROVIDE A HIGH LEVEL OF CURRENT INCOME CONSISTENT WITH
THE PRESERVATION OF CAPITAL. THE TRUST SEEKS TO ACHIEVE ITS OBJECTIVE THROUGH
INVESTMENT PRIMARILY IN SENIOR LOANS. SENIOR LOANS ARE LOANS MADE TO
CORPORATIONS, PARTNERSHIPS AND OTHER ENTITIES, THAT HOLD THE MOST SENIOR
POSITIONS IN A BORROWER'S CAPITAL STRUCTURE. THE SENIOR LOANS IN WHICH THE TRUST
INVESTS ARE SECURED BY COLLATERAL THAT THE INVESTMENT ADVISOR BELIEVES TO HAVE A
MARKET VALUE AT THE TIME OF THE LOAN THAT EQUALS OR EXCEEDS THE AMOUNT OF THE
SENIOR LOAN.
THE INTEREST RATE ON SENIOR LOANS GENERALLY WILL FLOAT OR RESET AT A
SPECIFIED LEVEL ABOVE A GENERALLY RECOGNIZED BASE LENDING RATE SUCH AS THE PRIME
RATE OR LIBOR. THE INVESTMENT ADVISOR BELIEVES THAT OVER TIME, THE EFFECTIVE
YIELD OF THE TRUST WILL EXCEED MONEY MARKET RATES AND WILL TRACK THE MOVEMENT OF
THE PUBLISHED PRIME RATE OF MAJOR U.S. BANKS.
SHARES OF THE TRUST ARE CONTINUOUSLY OFFERED AT A PRICE EQUAL TO THE THEN
CURRENT NET ASSET VALUE PER SHARE WITHOUT AN INITIAL SALES CHARGE.
SHARES ARE NOT REDEEMABLE AND THERE IS NO SECONDARY MARKET FOR THE SHARES.
THE BOARD OF TRUSTEES CURRENTLY INTENDS TO CONSIDER THE MAKING OF TENDER OFFERS
ON A QUARTERLY BASIS TO REPURCHASE ALL OR A PORTION OF THE SHARES FROM
SHAREHOLDERS AT THE THEN CURRENT NET ASSET VALUE PER SHARE. SHARES TENDERED THAT
WERE HELD FOR LESS THAN FOUR YEARS ARE GENERALLY SUBJECT TO AN EARLY WITHDRAWAL
CHARGE OF UP TO 3% OF THE ORIGINAL PURCHASE PRICE.
INVESTMENT IN THE TRUST INVOLVES A VARIETY OF RISKS WHICH YOU SHOULD
CONSIDER PRIOR TO INVESTMENT. SEE "RISK FACTORS."
MORGAN STANLEY DEAN WITTER ADVISORS INC. IS THE INVESTMENT ADVISOR TO THE
TRUST. THE ADDRESS OF THE TRUST IS TWO WORLD TRADE CENTER, NEW YORK, NY 10048.
THE TRUST'S TELEPHONE NUMBER IS (212) 392-2550 OR (800) 869-NEWS. YOU SHOULD
READ THIS PROSPECTUS CAREFULLY BEFORE INVESTING.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED
ON THE ADEQUACY OF THIS PROSPECTUS.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRICE TO PROCEEDS TO
PUBLIC (1) SALES LOAD (1) THE TRUST (2)
- ------------------------------------------------------------------------------------------------------
PER SHARE $9.84 NONE $9.84
TOTAL (2) $3,363,055,078 NONE $3,363,055,078
======================================================================================================
</TABLE>
(1) THE SHARES ARE OFFERED ON A BEST EFFORTS BASIS AT A PRICE EQUAL TO THE NET
ASSET VALUE PER SHARE WHICH AS OF THE DATE OF THE PROSPECTUS IS $9.84.
(2) ASSUMING ALL SHARES CURRENTLY REGISTERED ARE SOLD PURSUANT TO THIS
CONTINUOUS OFFERING AT A PRICE OF $9.84 PER SHARE. THE TRUST COMMENCED
OPERATIONS ON NOVEMBER 30, 1989, FOLLOWING COMPLETION OF A FIRM COMMITMENT
UNDERWRITING FOR 10,921,751 SHARES, WITH NET PROCEEDS TO THE TRUST OF
$109,217,510. THE TRUST COMMENCED THE CONTINUOUS OFFERING OF ITS SHARES ON
DECEMBER 4, 1989.
MORGAN STANLEY DEAN WITTER DISTRIBUTORS INC.
DECEMBER 20, 1999
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE TRUST OR THE PRINCIPAL UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of Trust Expenses................................... 3
Prospectus Summary.......................................... 4
Financial Highlights........................................ 6
The Trust and Its Advisor................................... 7
Investment Objective and Policies........................... 9
Risk Factors................................................ 12
Investment Practices........................................ 15
Investment Restrictions..................................... 16
Trustees and Officers....................................... 18
Investment Advisory Agreement............................... 24
Administrator and Administration Agreement.................. 25
Portfolio Transactions...................................... 26
Determination of Net Asset Value............................ 26
Dividends and Distributions................................. 27
Taxation.................................................... 27
Description of Shares....................................... 29
Share Repurchases and Tenders............................... 30
Purchase of Shares.......................................... 31
Yield Information........................................... 32
Custodian, Dividend Disbursing and Transfer Agent........... 33
Reports to Shareholders..................................... 33
Legal Counsel............................................... 33
Experts..................................................... 33
Additional Information...................................... 33
Report of Independent Accountants........................... 34
Portfolio of Investments.................................... 35
Financial Statements--September 30, 1999.................... 44
Appendix A.................................................. 49
</TABLE>
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2
<PAGE>
SUMMARY OF TRUST EXPENSES
- --------------------------------------------------------------------------------
The expenses and fees set forth in the table are for the fiscal year ended
September 30, 1999.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------
<S> <C>
Sales Load Imposed on Purchases............................. None
Sales Load Imposed on Reinvested Dividends.................. None
Early Withdrawal Charge..................................... 3.0%
</TABLE>
An early withdrawal charge is imposed on tenders at the following declining
rates:
<TABLE>
<CAPTION>
EARLY WITHDRAWAL
YEAR AFTER PURCHASE CHARGE
- ------------------- ----------------
<S> <C>
First....................................................... 3.0%
Second...................................................... 2.5%
Third....................................................... 2.0%
Fourth...................................................... 1.0%
Fifth and thereafter........................................ None
</TABLE>
<TABLE>
<S> <C>
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS)
Investment Advisory Fees.................................... 0.85%
Interest Payments on Borrowed Funds......................... None
Sum of Other Expenses....................................... 0.37%
Total Annual Expenses....................................... 1.22%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) tender at the end of
each time period:.......................................... $42 $59 $67 $148
You would pay the following expenses on the same investment,
assuming no tender:........................................ $12 $39 $67 $148
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF THE TRUST MAY BE GREATER OR LESS
THAN THOSE SHOWN.
The purpose of this table is to assist the investor in understanding the various
costs and expenses that an investor in the Trust will bear directly or
indirectly. For a more complete description of these costs and expenses, see the
cover page of this Prospectus and "Investment Advisory Agreement,"
"Administrator and Administration Agreement" and "Share Repurchases and
Tenders--Early Withdrawal Charge" in this Prospectus.
3
<PAGE>
PROSPECTUS SUMMARY
KEY INFORMATION ABOUT THE TRUST IS SUMMARIZED BELOW. YOU SHOULD READ IT IN
LIGHT OF THE MORE DETAILED INFORMATION SET FORTH LATER IN THIS PROSPECTUS.
<TABLE>
<S> <C>
PURCHASE OF SHARES........... Shares of the Trust are continuously offered for sale at the
then net asset value per share without an initial sales
charge. The minimum initial investment in the Trust is
$1,000. Subsequent investments must be at least $100. Shares
may be purchased through Dean Witter Reynolds Inc. and other
selected broker-dealers.
INVESTMENT OBJECTIVE
AND POLICIES................. The investment objective of the Trust is to provide a high
level of current income consistent with the preservation of
capital. The Trust seeks to achieve its objective through
investment primarily in Senior Loans. There is no assurance
that the Trust will achieve this objective.
Senior Loans are loans made to corporations, partnerships
and other entities which hold the most senior position in a
borrower's capital structure. The Senior Loans in which the
Trust invests are secured by collateral that the Investment
Advisor believes to have a market value at the time of the
loan which equals or exceeds the amount of the Senior Loan.
The interest rate on Senior Loans generally will float or
reset at a specified level above a generally recognized base
lending rate such as the prime rate quoted by a major U.S.
bank ("Prime Rate") or the London Inter-Bank Offered Rate
("LIBOR").
The Trust invests, under normal market conditions, at least
80% of its total assets in Senior Loans. The remainder of
its assets are invested in cash or short-term high quality
money market instruments. Senior Loans in which the Trust
may invest typically are originated, negotiated and
structured by a syndicate of lenders ("Lenders") and
administered on behalf of the Lenders by an agent bank
("Agent"). The terms of the loan are set forth in a loan
agreement (the "Loan Agreement"). The Trust may acquire such
syndicated Senior Loans ("Syndicated Loans") in one of three
ways: (i) it may act as a Lender; (ii) it may acquire an
Assignment; or (iii) it may acquire a Participation. Senior
Loans may also take the form of debt obligations of
Borrowers issued directly to investors in the form of debt
securities ("Senior Notes").
An Assignment is a sale by a Lender or other third party of
its rights in a Senior Loan. Generally, when the Trust
purchases an Assignment, it obtains all of the rights of a
Lender. In some cases, however, the Assignment may be of a
more limited nature and the Trust may have no contractual
relationship with the Borrower. In such instances, the Trust
would be required to rely on the Lender or other third party
from which it acquired the Assignment to demand payment and
enforce its rights under the Senior Loan.
A Participation is an interest in a Senior Loan acquired
from a Lender or other third party (the "Selling
Participant"). Payment of principal and interest received by
the Selling Participant are passed through to the holder of
the Participation. When the Trust acquires a Participation
it will have a contractual relationship with the Selling
Participant but not the Borrower. As a result, the Trust
assumes the credit risk of the Borrower, the Selling
Participant and any other prior Selling Participant.
INVESTMENT ADVISOR........... Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors" or
the "Investment Advisor") is the Trust's Investment Advisor.
The Investment Advisor 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.
The Investment Advisor and its wholly-owned subsidiary,
Morgan Stanley Dean Witter Services Company Inc., serve in
various investment management, advisory, management, and
administrative capacities to 97 investment companies, 28 of
which are listed on the New York Stock Exchange, with
combined assets of approximately $140 billion as of
November 30, 1999.
ADVISORY FEE................. The Trust pays the Investment Advisor an advisory fee
calculated at an annual rate of 0.90% of average daily net
assets on assets of the Trust up to $500 million, at an
annual rate of 0.85% of average daily net assets on assets
of the Trust exceeding $500 million up to $1.5 billion, at
an annual rate of 0.825% of average daily net assets on
assets of the Trust exceeding
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
$1.5 billion up to $2.5 billion and at an annual rate of
0.80% of the average daily net assets of the Trust exceeding
$2.5 billion.
ADMINISTRATOR................ Morgan Stanley Dean Witter Services Company Inc. ("MSDW
Services" or the "Administrator"), a wholly-owned subsidiary
of MSDW Advisors, the Investment Advisor of the Trust, is
the Administrator of the Trust. See "Administrator and
Administration Agreement" and "Purchase of Shares."
ADMINISTRATION FEE........... The Trust pays the Administrator a monthly fee at an annual
rate of 0.25% of the Trust's daily net assets. See
"Administrator and Administration Agreement."
DIVIDENDS AND
DISTRIBUTIONS................ Income dividends are declared daily and paid monthly.
Dividends and distributions to holders of Shares cannot be
assured, and the amount of each monthly payment may vary.
Capital gains, if any, will be distributed at least
annually. All dividends and capital gains distributions will
be reinvested automatically in additional Shares, unless you
elect to receive cash distributions. See "Dividends and
Distributions" and "Taxation."
SHARE REPURCHASES AND
TENDERS...................... The Board of Trustees of the Trust currently intends, each
quarter, to consider authorizing the Trust to make tender
offers for all or a portion of its outstanding Shares at the
then current net asset value of the Shares. An early
withdrawal charge payable to the Investment Advisor of up to
3.0% of the original purchase price of such Shares will be
imposed on most Shares accepted for tender that have been
held for four years or less. There is no guarantee that the
Trust will in fact make a tender offer for any of its Shares
or that if a tender offer is made, all or any Shares
tendered will be purchased by the Trust. If a tender offer
is not made or Shares are not purchased pursuant to a tender
offer you may not be able to sell your Shares. The Trust may
borrow to finance tender offers.
CUSTODIAN.................... The Bank of New York serves as Custodian of the Trust's
assets. See "Custodian, Dividend Disbursing and Transfer
Agent."
RISK FACTORS................. An investment in the Trust involves a number of risks. The
Borrower, under a Senior Loan, may fail to make scheduled
payments of principal and interest, which could result in a
decline in net asset value and a reduction of the Trust's
yield. While each Senior Loan will be collateralized, there
is no guarantee that the collateral securing a Senior Loan
will be sufficient to protect the Trust against losses or a
decline in income in the event of a Borrower's non-payment
of principal and/or interest. The Trust may invest in Senior
Loans made in connection with leveraged buyout transactions,
recapitalizations, and other highly leveraged transactions.
These types of Senior Loans are subject to greater risks
than are other Senior Loans in which the Trust may invest.
Senior Loans are not traded on an exchange nor is there any
regular secondary market. Due to the illiquidity of Senior
Loans, the Trust may not be able to dispose of its
investment in Senior Loans in a timely fashion and at a fair
price. The Trust may invest in Senior Loans made to non U.S.
borrowers, provided the Senior Loans are U.S.
dollar-denominated. Loans to non-U.S. borrowers, involve a
variety of risks not present in the case of Senior Loans to
U.S. borrowers.
A substantial portion of the Senior Loans in which the Trust
invests may be rated by a national statistical rating
organization below investment grade.
An investment in the Shares should be considered illiquid.
There is no secondary market for the Shares and none is
expected to develop.
The above risks and others to which the Trust is subject,
are discussed in greater detail under the heading "Risk
Factors."
ANTI-TAKEOVER PROVISIONS..... The Trust's Declaration of Trust includes anti-takeover
provisions. These include the requirement for a 66%
shareholder vote to remove Trustees and for certain mergers,
issuances of Shares and asset acquisitions. These provisions
could have the effect of limiting the ability of other
persons or entities to acquire control of the Trust and of
depriving holders of Shares of an opportunity to sell their
Shares at a premium above prevailing market prices by
discouraging a third party from seeking to obtain control of
the Trust. See "Description of Shares--Anti-Takeover
Provisions."
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by PricewaterhouseCoopers
LLP, independent accountants. This data should be read in conjunction with the
financial statements, and notes thereto, and the unqualified report of
independent accountants which are contained in this Prospectus commencing on
page 34. As noted in the financial statements the Trust invests primarily in
senior collateralized loans which values have been determined in accordance with
the procedures adopted by the Trustees in the absence of readily ascertainable
market values.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992 1991
---------- ---------- ---------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning
of period................ $ 9.91 $ 9.95 $ 9.94 $ 9.99 $ 10.00 $ 9.91 $ 9.99 $ 10.00 $ 10.00
--------- --------- --------- ------- ------- ------- ------- ------- -------
Income (loss) from
investment operations:
Net investment income... 0.70 0.71 0.75 0.74 0.82 0.62 0.55 0.62 0.84
Net realized and
unrealized gain
(loss)................. (0.05) (0.03) -- (0.04) 0.01 0.09 (0.08) (0.01) --
--------- --------- --------- ------- ------- ------- ------- ------- -------
Total income from
investment
operations............. 0.65 0.68 0.75 0.70 0.83 0.71 0.47 0.61 0.84
--------- --------- --------- ------- ------- ------- ------- ------- -------
Less dividends and
distributions from:
Net investment
income............... (0.69) (0.72) (0.74) (0.75) (0.81) (0.62) (0.55) (0.62) (0.84)
Net realized gain..... -- -- -- -- (0.03) -- -- -- --
--------- --------- --------- ------- ------- ------- ------- ------- -------
Total dividends and
distributions............ (0.69) (0.72) (0.74) (0.75) (0.84) (0.62) (0.55) (0.62) (0.84)
--------- --------- --------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period................... $ 9.87 $ 9.91 $ 9.95 $ 9.94 $ 9.99 $ 10.00 $ 9.91 $ 9.99 $ 10.00
========= ========= ========= ======= ======= ======= ======= ======= =======
TOTAL RETURN+............. 6.72% 7.14% 7.78% 7.25% 8.57% 7.32% 4.85% 6.23% 8.77%
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.22% 1.29% 1.40% 1.46% 1.52% 1.60% 1.45% 1.47% 1.52%
Net investment income... 7.02% 7.17% 7.53% 7.50% 8.11% 6.14% 5.53% 6.14% 8.23%
SUPPLEMENTAL DATA:
Net assets, end of
period, in thousands... $2,513,959 $1,996,709 $1,344,603 $939,471 $521,361 $305,034 $311,479 $413,497 $479,941
Portfolio turnover rate... 44% 68% 86% 72% 102% 147% 92% 46% 42%
<CAPTION>
FOR THE PERIOD
NOVEMBER 30, 1989*
THROUGH
SEPTEMBER 30,
1990
-------------------
<S> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning
of period................ $ 10.00
--------
Income (loss) from
investment operations:
Net investment income... 0.74
Net realized and
unrealized gain
(loss)................. (0.01)
--------
Total income from
investment
operations............. 0.73
--------
Less dividends and
distributions from:
Net investment
income............... (0.73)
Net realized gain..... --
--------
Total dividends and
distributions............ (0.73)
--------
Net asset value, end of
period................... $ 10.00
========
TOTAL RETURN+............. 7.57%(1)
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.48%(2)
Net investment income... 8.95%(2)
SUPPLEMENTAL DATA:
Net assets, end of
period, in thousands... $328,189
Portfolio turnover rate... 35%(1)
</TABLE>
- ------------------------------
* COMMENCEMENT OF OPERATIONS.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. DIVIDENDS AND
DISTRIBUTIONS ARE ASSUMED TO BE REINVESTED AT THE PRICES OBTAINED UNDER THE
TRUST'S DIVIDEND REINVESTMENT PLAN.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
6
<PAGE>
THE TRUST AND ITS ADVISOR
- --------------------------------------------------------------------------------
Morgan Stanley Dean Witter Prime Income Trust (the "Trust") is a
non-diversified, closed-end management investment company whose investment
objective is to provide a high level of current income consistent with the
preservation of capital. The Trust will seek to achieve its objective through
investment primarily in senior collateralized loans ("Senior Loans") to
corporations, partnerships and other entities ("Borrowers"). No assurance can be
given that the Trust will achieve its investment objective. The Trust is
designed primarily for long-term investment and not as a trading vehicle.
The Trust is a trust of a type commonly known as a "Massachusetts business
trust" and was organized under the laws of Massachusetts on August 17, 1989
under the name "Allstate Prime Income Trust." Effective March 1, 1993, the Trust
Agreement was amended to change the name of the Trust to "Prime Income Trust."
Such amendment was made upon the approval by the shareholders of an investment
advisory agreement with MSDW Advisors. On June 22, 1998, the Trustees of the
Trust adopted an Amendment to the Trust's Declaration of Trust changing its name
to "Morgan Stanley Dean Witter Prime Income Trust." The Trust commenced
operations on November 30, 1989, following completion of a firm commitment
initial underwriting for 10,921,751 Shares, with net proceeds to the Trust of
$109,217,510. The Trust commenced the continuous offering of its shares on
December 4, 1989. The Trust's principal office is located at Two World Trade
Center, New York, New York 10048 and its telephone number is (212) 392-2550 or
(800) 869-NEWS. The Trust is offering continuously its shares of beneficial
interest, $.01 par value (the "Shares"). See "Purchase of Shares."
An investment in Shares offers several benefits. The Trust offers investors
the opportunity to receive a high level of current income by investing in a
professionally managed portfolio comprised primarily of Senior Loans, a type of
investment typically not available to individual investors. In managing such a
portfolio, the Investment Advisor provides the Trust and its shareholders with
professional credit analysis and portfolio diversification. The Trust also
relieves the investor of burdensome administrative details involved in managing
a portfolio of Senior Loans, even if they were available to individual
investors. Such benefits are at least partially offset by the expenses involved
in operating an investment company, which consist primarily of management and
administrative fees and operational costs. See "Investment Advisory Agreement"
and "Administrator and Administration Agreement."
On February 21, 1997 the Trust's Trustees approved a new investment advisory
agreement (the "Advisory Agreement") with MSDW Advisors in connection with the
merger of Dean Witter, Discover & Co. with Morgan Stanley Group Inc. (the
"Merger"). The Trust's shareholders voted to approve the Advisory Agreement with
MSDW Advisors at a Special Meeting of Shareholders held on May 20, 1997. The
Advisory Agreement took effect on May 31, 1997 upon the consummation of the
Merger. MSDW Advisors is a wholly-owned subsidiary of Morgan Stanley Dean Witter
& Co. ("MSDW"). The Advisory Agreement is substantially identical to a prior
investment advisory agreement which was initially approved by the Trust's
Trustees on December 23, 1992 and by the Trust's shareholders on February 25,
1993, entered into with MSDW Advisors as a consequence of the withdrawal of
Allstate Investment Management Company from its investment company advisory
activities and its concomitant resignation as the Trust's Investment Advisor.
MSDW Advisors and its wholly-owned subsidiary, Morgan Stanley Dean Witter
Services Company Inc., serve in various investment management, advisory,
management and administrative capacities to 97 investment companies, 28 of which
are listed on the New York Stock Exchange, with combined assets of approximately
$140 billion as of November 30, 1999.
The Trust is managed within MSDW Advisors' Taxable Fixed-Income Group.
Rajesh K. Gupta, Senior Vice President of MSDW Advisors and Director of the
Taxable Fixed-Income Group and Chief Administrative Officer of Investments of
MSDW Advisors, Sheila A. Finnerty, Senior Vice President of MSDW Advisors, and
Peter Gewirtz, Vice President of MSDW Advisors, have been the primary portfolio
managers primarily responsible for the management of the Trust's portfolio since
February, 1998.
MSDW Advisors is the investment manager or investment advisor of the
following investment companies, which are collectively referred to as the
"Morgan Stanley Dean Witter Funds":
<TABLE>
<CAPTION>
OPEN-END FUNDS
<C> <S>
1 Active Assets California Tax-Free Trust
2 Active Assets Government Securities Trust
3 Active Assets Money Trust
4 Active Assets Tax-Free Trust
5 Morgan Stanley Dean Witter 21st Century Trend Fund
6 Morgan Stanley Dean Witter American Opportunities Fund
7 Morgan Stanley Dean Witter Aggressive Equity Fund
8 Morgan Stanley Dean Witter Balanced Growth Fund
9 Morgan Stanley Dean Witter Balanced Income Fund
10 Morgan Stanley Dean Witter California Tax-Free Daily Income Trust
11 Morgan Stanley Dean Witter California Tax-Free Income Fund
</TABLE>
7
<PAGE>
<TABLE>
<C> <S>
12 Morgan Stanley Dean Witter Capital Growth Securities
13 Morgan Stanley Dean Witter Competitive Edge Fund, "BEST IDEAS" Portfolio
14 Morgan Stanley Dean Witter Convertible Securities Trust
15 Morgan Stanley Dean Witter Developing Growth Securities Trust
16 Morgan Stanley Dean Witter Diversified Income Trust
17 Morgan Stanley Dean Witter Dividend Growth Securities Inc.
18 Morgan Stanley Dean Witter Equity Fund
19 Morgan Stanley Dean Witter European Growth Fund Inc.
20 Morgan Stanley Dean Witter Federal Securities Trust
21 Morgan Stanley Dean Witter Financial Services Trust
22 Morgan Stanley Dean Witter Fund of Funds
23 Morgan Stanley Dean Witter Global Dividend Growth Securities
24 Morgan Stanley Dean Witter Global Utilities Fund
25 Morgan Stanley Dean Witter Growth Fund
26 Morgan Stanley Dean Witter Hawaii Municipal Trust
27 Morgan Stanley Dean Witter Health Sciences Trust
28 Morgan Stanley Dean Witter High Yield Securities Inc.
29 Morgan Stanley Dean Witter Income Builder Fund
30 Morgan Stanley Dean Witter Information Fund
31 Morgan Stanley Dean Witter Intermediate Income Securities
32 Morgan Stanley Dean Witter International Fund
33 Morgan Stanley Dean Witter International SmallCap Fund
34 Morgan Stanley Dean Witter Japan Fund
35 Morgan Stanley Dean Witter Latin American Growth Fund
36 Morgan Stanley Dean Witter Limited Term Municipal Trust
37 Morgan Stanley Dean Witter Liquid Asset Fund Inc.
38 Morgan Stanley Dean Witter Market Leader Trust
39 Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities
40 Morgan Stanley Dean Witter Mid-Cap Equity Trust
41 Morgan Stanley Dean Witter Multi-State Municipal Series Trust
42 Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
43 Morgan Stanley Dean Witter New York Municipal Money Market Trust
44 Morgan Stanley Dean Witter New York Tax-Free Income Fund
45 Morgan Stanley Dean Witter Next Generation Trust
46 Morgan Stanley Dean Witter North American Government Income Trust
47 Morgan Stanley Dean Witter Pacific Growth Fund Inc.
48 Morgan Stanley Dean Witter Real Estate Fund
49 Morgan Stanley Dean Witter Select Dimensions Investment Series
50 Morgan Stanley Dean Witter Select Municipal Reinvestment Fund
51 Morgan Stanley Dean Witter Short-Term Bond Fund
52 Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
53 Morgan Stanley Dean Witter SmallCap Growth Fund
54 Morgan Stanley Dean Witter Special Value Fund
55 Morgan Stanley Dean Witter Strategist Fund
56 Morgan Stanley Dean Witter S&P 500 Index Fund
57 Morgan Stanley Dean Witter S&P 500 Select Fund
58 Morgan Stanley Dean Witter Tax-Exempt Securities Trust
59 Morgan Stanley Dean Witter Tax-Free Daily Income Trust
60 Morgan Stanley Dean Witter Total Market Index Fund
61 Morgan Stanley Dean Witter Total Return Trust
62 Morgan Stanley Dean Witter U.S. Government Money Market Trust
63 Morgan Stanley Dean Witter U.S. Government Securities Trust
64 Morgan Stanley Dean Witter Utilities Fund
65 Morgan Stanley Dean Witter Value-Added Market Series
66 Morgan Stanley Dean Witter Value Fund
67 Morgan Stanley Dean Witter Variable Investment Series
68 Morgan Stanley Dean Witter World Wide Income Trust
</TABLE>
<TABLE>
<CAPTION>
CLOSED-END FUNDS
<C> <S>
1 Morgan Stanley Dean Witter California Insured Municipal Income Trust
2 Morgan Stanley Dean Witter California Quality Municipal Securities
3 Morgan Stanley Dean Witter Government Income Trust
4 Morgan Stanley Dean Witter High Income Advantage Trust
5 Morgan Stanley Dean Witter High Income Advantage Trust II
</TABLE>
8
<PAGE>
<TABLE>
<C> <S>
6 Morgan Stanley Dean Witter High Income Advantage Trust III
7 Morgan Stanley Dean Witter Income Securities Inc.
8 Morgan Stanley Dean Witter Insured California Municipal Securities
9 Morgan Stanley Dean Witter Insured Municipal Bond Trust
10 Morgan Stanley Dean Witter Insured Municipal Income Trust
11 Morgan Stanley Dean Witter Insured Municipal Securities
12 Morgan Stanley Dean Witter Insured Municipal Trust
13 Morgan Stanley Dean Witter Municipal Income Opportunities Trust
14 Morgan Stanley Dean Witter Municipal Income Opportunities Trust II
15 Morgan Stanley Dean Witter Municipal Income Opportunities Trust III
16 Morgan Stanley Dean Witter Municipal Income Trust
17 Morgan Stanley Dean Witter Municipal Income Trust II
18 Morgan Stanley Dean Witter Municipal Income Trust III
19 Morgan Stanley Dean Witter Municipal Premium Income Trust
20 Morgan Stanley Dean Witter New York Quality Municipal Securities
21 Morgan Stanley Dean Witter Prime Income Trust
22 Morgan Stanley Dean Witter Quality Municipal Income Trust
23 Morgan Stanley Dean Witter Quality Municipal Investment Trust
24 Morgan Stanley Dean Witter Quality Municipal Securities
</TABLE>
In addition, Morgan Stanley Dean Witter Services Company Inc. ("MSDW
Services"), a wholly-owned subsidiary of MSDW Advisors, serves as manager for
the following investment companies for which TCW Funds Management, Inc. is the
investment advisor (the "TCW/DW Term Trusts"):
<TABLE>
<CAPTION>
CLOSED-END FUNDS
<C> <S>
1 TCW/DW Term Trust 2000
2 TCW/DW Term Trust 2002
3 TCW/DW Term Trust 2003
</TABLE>
MSDW Advisors also serves as: (i) administrator of The BlackRock Strategic
Term Trust Inc., a closed-end investment company and; (ii) sub-administrator of
Templeton Global Governments Income Trust, a closed-end investment company.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Trust's investment objective is to provide a high level of current income
consistent with the preservation of capital. The Trust will seek to achieve its
objective through investment primarily in Senior Loans. Senior Loans in which
the Trust will invest generally pay interest at rates which float or are reset
at a margin above a generally recognized base lending rate. These base lending
rates are the Prime Rate, LIBOR, the CD rate or other base lending rates used by
commercial lenders. The Prime Rate quoted by a major U.S. bank is the interest
rate at which such bank is willing to lend U.S. dollars to creditworthy
borrowers. LIBOR is an average of the interest rates quoted by several
designated banks as the rates at which such banks would offer to pay interest to
major financial institutional depositors in the London interbank market on U.S.
dollar-denominated deposits for a specified period of time. The CD rate is the
average rate paid on large certificates of deposit traded in the secondary
market. The Investment Advisor believes that over time the Trust's effective
yield will exceed money market rates and will track the movements in the
published Prime Rate of major U.S. banks, although it may not equal the Prime
Rate. An investment in the Trust may not be appropriate for all investors and is
not intended to be a complete investment program. No assurance can be given that
the Trust will achieve its investment objective.
Under normal market conditions, the Trust will invest at least 80% of its
total assets in Senior Loans. The Trust currently intends to limit its
investments in Senior Notes to no more than 20% of its total assets. The
remainder of the Trust's assets may be invested in cash or in high quality debt
securities with remaining maturities of one year or less, although it is
anticipated that the debt securities in which the Trust invests will have
remaining maturities of 60 days or less. Such securities may include commercial
paper rated at least in the top two rating categories of either Standard &
Poor's Corporation or Moody's Investors Service, Inc., or unrated commercial
paper considered by the Investment Advisor to be of similar quality,
certificates of deposit and bankers' acceptances and securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities. Such
securities may pay interest at rates which are periodically redetermined or may
pay interest at fixed rates. High quality debt securities and cash may comprise
up to 100% of the Trust's total assets during temporary defensive periods when,
in the opinion of the Investment Advisor, suitable Senior Loans are not
available for investment by the Trust or prevailing market or economic
conditions warrant.
The Trust is not subject to any restrictions with respect to the maturity of
Senior Loans held in its portfolio. It is currently anticipated that at least
80% of the Trust's total assets invested in Senior Loans will consist of Senior
Loans with stated maturities of between three and ten years, inclusive, and with
rates of interest which are redetermined either daily,
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<PAGE>
monthly or quarterly. As a result of prepayments and amortization, however, it
is expected that the actual maturities of Syndicated Loans will be approximately
three to four years and of Senior Notes approximately six to seven years. The
Senior Loans in the Trust's portfolio will at all times have a dollar-weighted
average time until the next interest rate redetermination of 90 days or less.
The Senior Loans in which the Trust will invest will consist primarily of
direct obligations of a Borrower undertaken to finance the growth of the
Borrower's business or to finance a capital restructuring. Such loans may
include "leveraged buy-out" loans which are made to a Borrower for the purpose
of acquiring ownership control of another company, whether as a purchase of
equity or of assets or for a leveraged reorganization of the Borrower with no
change in ownership. The Trust may invest in Senior Loans which are made to
non-U.S. Borrowers, provided that the loans are dollar-denominated and any such
Borrower meets the credit standards established by the Investment Advisor for
U.S. Borrowers.
Senior Loans hold the most senior position in a Borrower's capital
structure, although some Senior Loans may hold an equal ranking with other
senior securities of the Borrower (i.e., have equal claims to the Borrower's
assets). In order to borrow money pursuant to Senior Loans, a Borrower will
frequently pledge as collateral its assets, including, but not limited to,
trademarks, accounts receivable, inventory, buildings, real estate, franchises
and common and preferred stock in its subsidiaries. In addition, in the case of
some Senior Loans, there may be additional collateral pledged in the form of
guarantees by and/or securities of affiliates of the Borrowers. A Loan Agreement
may also require the Borrower to pledge additional collateral in the event that
the value of the collateral falls. In certain instances, a Senior Loan may be
secured only by stock in the Borrower or its subsidiaries. Each Senior Loan in
which the Trust will invest will be secured by collateral which the Investment
Advisor believes to have a market value, at the time of acquisition of the
Senior Loan, which equals or exceeds the principal amount of the Senior Loan.
The value of such collateral generally will be determined by an independent
appraisal and/or other information regarding the collateral furnished by the
Agent. Such information will generally include appraisals in the case of assets
such as real estate, buildings and equipment, audits in the case of inventory
and analyses (based upon, among other things, investment bankers' opinions,
fairness opinions and relevant transactions in the marketplace) in the case of
other kinds of collateral. Loan Agreements may also include various restrictive
covenants designed to limit the activities of the Borrower in an effort to
protect the right of the Lenders to receive timely payments of interest on and
repayment of principal of the Senior Loans. Restrictive covenants contained in a
Loan Agreement may include mandatory prepayment provisions arising from excess
cash flow and typically include restrictions on dividend payments, specific
mandatory minimum financial ratios, limits on total debt and other financial
tests. Breach of such covenants, if not waived by the Lenders, is generally an
event of default under the applicable Loan Agreement and may give the Lenders
the right to accelerate principal and interest payments.
Nationally recognized rating agencies have begun assigning ratings to an
increasing number of Senior Loans and a substantial portion of the Fund's
investments in Senior Loans may be rated below investment grade. Debt securities
rated below investment grade are viewed by the rating agencies as having
speculative characteristics and are commonly known as "junk bonds." While the
Investment Advisor may consider such ratings when determining whether to invest
in a Senior Loan, it does not view ratings as a determinative factor in its
investment decisions. Rather, the Investment Advisor will perform its own credit
analysis of the Borrower and will consider, and may rely in part on, the
analyses performed by Lenders other than the Trust. The Trust will invest only
in those Senior Loans with respect to which the Borrower, in the opinion of the
Investment Advisor, demonstrates the ability to meet debt service in a timely
manner (taking into consideration the Borrower's capital structure, liquidity
and historical and projected cash flow) and where the Investment Advisor
believes that the market value of the collateral at the time of investment
equals or exceeds the amount of the Senior Loan. The Investment Advisor will
also consider the following characteristics: the operating history, competitive
position and management of the Borrower; the business outlook of the Borrower's
industry; the terms of the Loan Agreement (e.g., the nature of the covenants,
interest rate and fees and prepayment conditions); whether the Trust will
purchase an Assignment, Participation or act as a lender originating a Senior
Loan; and the creditworthiness of and quality of service provided by the Agent
and any Selling Participant or Intermediate Participants.
Senior Loans typically are arranged through private negotiations between a
Borrower and several financial institutions ("Lenders") represented in each case
by one or more of such Lenders acting as agent ("Agent") of the several Lenders.
On behalf of the several Lenders, the Agent, which is frequently the commercial
bank that originates the Senior Loan and the person that invites other parties
to join the lending syndicate, typically will be primarily responsible for
negotiating the loan agreement or agreements ("Loan Agreement") that establish
the relative terms, conditions and rights of the Borrower and the several
Lenders. In larger transactions it is common to have several Agents; however,
generally only one such Agent has primary responsibility for documentation and
administration of the Senior Loan. Agents are typically paid a fee or fees by
the Borrower for their services.
The Trust may invest in Senior Loans in the following ways: (i) it may
purchase Participations, (ii) it may purchase Assignments of a portion of a
Senior Loan, or (iii) it may act as one of the group of Lenders originating a
Senior Loan.
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<PAGE>
When the Trust is a Lender, or assumes all of the rights of a Lender through
an assignment it will, as a party to the Loan Agreement, have a direct
contractual relationship with the Borrower and may enforce compliance by the
Borrower with the terms of the Loan Agreement. Lenders also have voting and
consent rights under the applicable Loan Agreement. Action subject to Lender
vote or consent generally requires the vote or consent of the holders of some
specified percentage of the outstanding principal amount of the Senior Loan,
which percentage varies depending on the relevant Loan Agreement. Certain
decisions, such as reducing the amount or increasing the time for payment of
interest on or repayment of principal of a Senior Loan, or releasing collateral
therefor, frequently require the unanimous vote or consent of all Lenders
affected.
A Participation may be acquired from an Agent, a Lender or any other holder
of a Participation ("Selling Participant"). Investment by the Trust in a
Participation typically will result in the Trust having a contractual
relationship only with the Selling Participant, not with the Borrower or any
other entities interpositioned between the Trust and the Borrower ("Intermediate
Participants"). The Trust will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the Selling Participant
and only upon receipt by such Selling Participant of such payments from the
Borrower. In connection with purchasing Participations, the Trust generally will
have no right to enforce compliance by the Borrower with the terms of the Loan
Agreement, nor any rights with respect to funds acquired by other Lenders
through set-off against the Borrower and the Trust may not directly benefit from
the collateral supporting the Senior Loan in which it has purchased the
Participation. As a result, the Trust will assume the credit risk of the
Borrower, the Selling Participant and any Intermediate Participants. In the
event of the insolvency of the Selling Participant or any Intermediate
Participant, the Trust may be treated as a general creditor of such entity and
may be adversely affected by any set-off between such entity and the Borrower.
The Trust will acquire Participations only if the Selling Participant and any
Intermediate Participant is a commercial bank or other financial institution
with an investment grade long-term debt rating from either Standard and Poor's
Corporation ("S&P") (rated BBB or higher) or Moody's Investors Service, Inc.
("Moody's") (rated Baa or higher), or with outstanding commercial paper rated at
least in the top two rating categories of either of such rating agencies (at
least A-2 by S&P or at least Prime-2 by Moody's) or, if such long-term debt and
commercial paper are unrated, with long-term debt or commercial paper believed
by the Investment Advisor to be of comparable quality. Long-term debt rated BBB
by S&P is regarded by S&P as having adequate capacity to pay interest and repay
principal and debt rated Baa by Moody's is regarded by Moody's as a medium grade
obligation, i.e., it is neither highly protected nor poorly secured, although
debt rated Baa by Moody's is considered to have speculative characteristics.
Commercial paper rated A-2 by S&P indicates that the degree of safety regarding
timely payment is considered by S&P to be strong, and issues of commercial paper
rated Prime-2 by Moody's are considered by Moody's to have a strong capacity for
repayment of senior short-term debt obligations.
The Trust may also purchase Assignments from Lenders and other third
parties. The purchaser of an Assignment typically succeeds to all the rights of
the Lender or other third party whose interest is being assigned, but it may not
be a party to the Loan Agreement and may be required to rely on such Lender or
other third party to demand payment and enforce its rights against the Borrower.
Assignments are arranged through private negotiations between potential
assignors and potential assignees; consequently, the rights and obligations
acquired by the purchaser of an Assignment may differ from and be more limited
than those held by the assignor.
In determining whether to purchase Participations or Assignments or act as
one of a group of Lenders, the Investment Advisor will consider the availability
of each of these forms of investments in Senior Loans, the terms of the Loan
Agreement, and in the case of Participations, the creditworthiness of the
Selling Participant and any Intermediate Participants.
In connection with the purchase of interests in Senior Loans, the Trust may
also acquire warrants and other equity securities of the Borrower or its
affiliates. The acquisition of such equity securities will only be incidental to
the Trust's purchase of interests in Senior Loans.
The investment objective of the Trust and its policy to invest, under normal
market conditions, at least 80% of its total assets in Senior Loans, are
fundamental policies of the Trust and may not be changed without the approval of
a majority of the outstanding voting securities of the Trust, as defined in the
1940 Act. Such a majority is defined as the lesser of (i) 67% or more of the
Trust's Shares present at a meeting of shareholders, if the holders of more than
50% of the outstanding Shares of the Trust are present or represented by proxy,
or (ii) more than 50% of the outstanding Shares of the Trust. Except as
otherwise specified, all other investment policies of the Trust are not
fundamental and may be changed by the Board of Trustees without shareholder
approval.
The Trust may be required to pay and may receive various fees and
commissions in connection with purchasing, selling and holding interests in
Senior Loans. When the Trust buys an interest in a Senior Loan, it may receive a
facility fee, which is a fee paid to Lenders upon origination of a Senior Loan
and/or a commitment fee which is a fee paid to Lenders on an ongoing basis based
upon the undrawn portion committed by the Lenders of the underlying Senior Loan.
In certain circumstances, the Trust may receive a prepayment penalty on the
prepayment of a Senior Loan by a Borrower. When the Trust sells an interest in a
Senior Loan it may be required to pay fees or commissions to the purchaser of
the interest. The extent to which the Trust will be entitled to receive or be
required to pay such fees will generally be a matter of negotiation between the
Trust and the
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<PAGE>
party selling to or purchasing from the Trust. The Investment Advisor currently
anticipates that the Trust will continue to receive and/or pay fees and
commissions in a majority of the transactions involving Senior Loans.
Lenders commonly have certain obligations pursuant to the Loan Agreement,
which may include the obligation to make additional loans or release collateral
in certain circumstances. The Trust will maintain on its books a segregated
account with its custodian bank in which it will maintain cash or high quality
debt securities equal in value to its commitments to make such additional loans.
In no event will such commitments exceed 20% of the Trust's total assets.
RISK FACTORS
- --------------------------------------------------------------------------------
GENERAL
The Trust invests primarily in Senior Loans on which the interest rate is
periodically adjusted in response to interest rate changes on short-term
investments. This policy should result in a net asset value which fluctuates
less than would a portfolio consisting primarily of fixed rate obligations. A
number of factors may, however, cause a decline in net asset value, including a
default on a Senior Loan, a material deterioration of a Borrower's perceived or
actual credit worthiness, and/or an increase in interest rates not immediately
reflected in the interest rate payable on Senior Loans. A sudden and extreme
increase in interest rates is particularly likely to cause a decline in net
asset value. Also, a change in the manner in which interest rates on Senior
Loans are set (E.G., interest rates are set at a higher or lower margin above
the Prime Rate, LIBOR, or other base lending rate) or other changes in pricing
parameters for Senior Loans, may also cause the Trust's net asset value to
fluctuate.
ILLIQUIDITY OF SHARES
An investment in the Shares should be considered illiquid. There is no secondary
market for the Shares and none is expected to develop.
CREDIT RISK
Senior Loans are subject to credit risks. Credit risk is the risk that the
Borrower will fail to make timely payments of principal and/or interest. The
non-receipt of scheduled payments of principal or interest, either because of a
default, bankruptcy or other reason, could result in a reduction of the Trust's
yield and a decline in net asset value.
The Trust may invest in Senior Loans made in connection with leveraged
buy-out transactions, recapitalizations and other highly leveraged transaction.
These types of Senior Loans are subject to greater risks than are other kinds of
Senior Loans in which the Trust may invest. The value of such loans may also be
subject to a greater degree of volatility in response to interest rate
fluctuations.
The Investment Advisor will invest only in Senior Loans secured by
collateral with a value, in its view, of at least equal to the amount of the
Senior Loan. There is no guarantee, however, that the collateral securing a
Senior Loan will be sufficient to protect the Trust against losses or a decline
in income in the event of the Borrower's non-payment of principal and/or
interest. For example, the value of the collateral could, subsequent to the
Trust's investment in the Senior Loan, decline below the amount of the Senior
Loan. In addition, it may not be possible to liquidate the collateral promptly.
Also, in the event that a Borrower declares bankruptcy, a court could invalidate
the Trust's security interest in the loan collateral, or subordinate the Trust's
rights under the Senior Loan to other creditors of the Borrower.
LOWER-RATED SECURITIES
A substantial portion of the Senior Loans in which the Trust invests may be
rated by a national statistical rating organization below investment grade, or
if unrated, of comparable quality. Debt securities rated below investment grade,
or if unrated, of comparable quality, are commonly referred to as "junk bonds."
Junk bonds are regarded by the rating agencies as having speculative
characteristics. The prices of junk bonds are more sensitive to negative
corporate developments such as a decline in profits or adverse economic
conditions such as a recession than are the prices of higher rated securities.
LIMITED PUBLIC INFORMATION
The amount of public information with respect to Senior Loans will generally be
less extensive than that available for securities registered with the Securities
and Exchange Commission and/or listed on a national securities exchange. As a
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result, the performance of the Trust and its ability to meet its investment
objective is more dependent upon the analytical ability of the Investment
Advisor than would be the case for an investment company that invests primarily
in registered and/ or exchange listed securities.
ILLIQUIDITY OF SENIOR LOANS
Senior Loans may be transferable among financial institutions, however, they do
not, at present, have the liquidity of conventional debt securities and are
often subject to restrictions on resale. For example, bank approval is often
required for the resale of interests in Senior Loans. Due to the illiquidity of
Senior Loans the Trust may not be able to dispose of its investments in Senior
Loans in a timely fashion and at a fair price. The inability to do so could
result in losses to the Trust.
RELIANCE UPON AGENT
An Agent typically administers a Senior Loan and is responsible for the
collection of principal and interest payments from the Borrower. The Trust will
generally rely on the Agent to collect and to transmit to the Trust its portion
of the payments on the Senior Loan. The Trust also generally will rely on the
Agent to monitor compliance by the Borrower with the terms of the Loan Agreement
and to notify the Trust of any adverse change in the Borrower's financial
condition or any declaration of insolvency. In addition, the Trust will rely on
the Agent to use appropriate creditor remedies against the Borrower in the event
of a default. Accordingly, the Trust's success may be dependent in part upon the
skill of Agents in administering the terms of Loan Agreements, monitoring
Borrower compliance, collecting principal, interest and fee payments from
Borrowers, and where necessary, enforcing creditors remedies against Borrowers.
The Agent's appointment may be terminated if the Agent becomes insolvent,
goes into bankruptcy, or has a receiver, conservator, or similar official
appointed for it by the appropriate bank regulatory authority. In such event, a
successor agent would be appointed. Assets held by the Agent under the Loan
Agreement should remain available to holders of Loans. However, if assets held
by the Agent for the benefit of the Trust were determined by an appropriate
regulatory authority or court to be subject to the claims of the Agent's general
or secured creditors, the Trust might incur certain costs and delays in
realizing payment on a Senior Loan or suffer a loss of principal and/or
interest. Furthermore, in the event of the Borrower's bankruptcy or insolvency,
the Borrower's obligation to repay the Loan may be subject to certain defenses
that the Borrower can assert as a result of improper conduct by the Agent.
PARTICIPATIONS
The Trust may invest in Participations. Because the holder of a Participation
generally has no contractual relationship with the Borrower, the Trust will have
to rely upon a Selling Participant and/or Intermediate Participant to pursue
appropriate remedies against a Borrower in the event of a default. As a result,
the Trust may be subject to delays, expenses and risks that are greater than
those that would be involved if the Trust could enforce its rights directly
against the Borrower or through the Agent.
A Participation also involves the risks that the Trust may be regarded as a
creditor of a Selling Participant and/or Intermediate Participant rather than of
the Borrower. If so, the Trust would be subject to the risk that a Selling
Participant may become insolvent.
PREPAYMENTS
The Borrower of a Senior Loan, in some cases, may prepay the Senior Loan.
Prepayments could adversely affect the Trust's yield to the extent that the
Trust is unable to reinvest promptly payments in Senior Loans or if such
prepayments were made during a period of declining interest rates.
LOANS TO FOREIGN BORROWERS
The Trust may invest in U.S. dollar denominated Senior Loans made to non U.S.
Borrowers. These Senior Loans may involve additional risks. Foreign companies
are not generally subject to uniform accounting and financial reporting
standards comparable to those applicable to U.S. borrowers. It may be more
difficult to value and monitor the value of collateral underlying Senior Loans
to non U.S. Borrowers. In addition, there is generally less government
supervision and regulation of financial markets and listed companies in foreign
countries than in the U.S. Investments in Senior Loans to non U.S. borrowers
also involves the risks of adverse political and economic developments. In
addition, such loans involve foreign
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<PAGE>
currency risks to the extent that a decline in a non U.S. Borrower's own
currency relative to the dollar may impair such Borrower's ability to make
timely payments of principal and/or interest on a Senior Loan.
CONCENTRATION
The Trust will treat the Borrower and the Agent Bank, and, with respect to
Participations, each financial institution interposed between the Borrower and
the Trust, as an issuer of a Senior Loan or Participation for the purpose of
determining the Trust's concentration in a particular industry. As a result, 25%
or more of the Trust's assets will be invested in the industry group consisting
of financial institutions and their holding companies. Banking and thrift
institutions are subject to extensive governmental regulations which may limit
both the amounts and types of loans and other financial commitments which such
institutions may make and the interest rates and fees which such institutions
may charge. The profitability of these institutions is largely dependent on the
availability and cost of capital funds, and has shown significant recent
fluctuation as a result of volatile interest rate levels. In addition, general
economic conditions are important to the operations of these institutions, with
exposure to credit losses resulting from possible financial difficulties of
borrowers potentially having an adverse effect. Insurance companies also are
affected by economic and financial conditions and are subject to extensive
government regulation, including rate regulation. The property and casualty
industry is cyclical, being subject to dramatic swings in profitability which
can be affected by natural catastrophes and other disasters. Individual
companies may be exposed to material risks, including reserve inadequacy, latent
health exposure, and inability to collect from their reinsurance carriers. The
financial services area is currently undergoing relatively rapid change as
existing distinctions between financial service segments become less clear. In
this regard, recent business combinations have included insurance, finance and
securities brokerage under single ownership.
NON-DIVERSIFICATION
The Trust may invest up to 10% of its assets in Senior Loans made to any single
Borrower. To the extent that the Trust invests a relatively high percentage of
its assets in the obligations of a limited number of issuers, the value of the
Trust's investments may be more affected by any single adverse economic,
political or regulatory event than will the value of the investments of a more
diversified investment company.
SENIOR NOTES
The Trust is authorized to invest in Senior Notes. It is anticipated that Senior
Notes purchased by the Trust will generally bear a higher rate of interest than
Syndicated Loans. Such securities may, however, involve greater risks than those
associated with Syndicated Loans. The covenants and restrictions to which the
Borrower would be subject in the case of Senior Notes may not be as rigorous in
all respects as those to which the Borrower would be subject in the case of a
Syndicated Loan. Also, the scope of financial information respecting the
Borrower available to investors in Senior Notes may be more limited than that
available to Syndicated Loan Lenders. In addition, a Syndicated Loan typically
requires steady amortization of principal throughout the life of the loan
whereas Senior Notes, typically, are structured to allow Borrowers to repay
principal later in the life of the loan.
YEAR 2000
The investment management services provided to the Trust 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
Trust 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.
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 Trust's investments may be adversely affected.
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<PAGE>
INVESTMENT PRACTICES
- --------------------------------------------------------------------------------
The following investment practices apply to the portfolio investments of the
Trust and may be changed by the Trustees of the Trust without shareholder
approval, following written notice to shareholders.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Trust may purchase and sell interests in Senior Loans and other securities
in which the Trust may invest or dispose of on a when-issued or delayed delivery
basis; i.e., delivery and payment can take place more than 30 days after the
date of the transaction. The interests or securities so purchased or sold are
subject to market fluctuation during this period and no interest accrues to the
purchaser prior to the date of settlement. At the time the Trust makes the
commitment to enter into a when-issued or delayed delivery transaction, it will
record the transaction and thereafter reflect the value, each day, of such
interest or security in determining the net asset value of the Trust. At the
time of delivery, the value of the interest or security may be more or less than
the purchase price. Since the Trust is dependent on the party issuing the
when-issued or delayed delivery security to complete the transaction, failure by
the other party to deliver the interest or security as arranged would result in
the Trust losing an investment opportunity. The Trust will also establish a
segregated account with its custodian bank in which it will maintain cash or
high quality debt securities equal in value to commitments for such when-issued
or delayed delivery interests or other securities; subject to this requirement,
the Trust may enter into transactions on such basis without limit.
REPURCHASE AGREEMENTS
When cash may be available for only a few days, it may be invested by the Trust
in repurchase agreements until such time as it may otherwise be invested or used
for payments of obligations of the Trust. These agreements, which may be viewed
as a type of secured lending by the Trust, typically involve the acquisition by
the Trust of debt securities from a selling financial institution such as a
bank, savings and loan association or broker-dealer. The agreement provides that
the Trust will sell back to the institution, and that the institution will
repurchase, the underlying security ("collateral"), which is held by the Trust's
custodian, at a specified price and at a fixed time in the future, usually not
more than seven days from the date of purchase. The Trust will receive interest
from the institution until the time when the repurchase is to occur. Although
such date is deemed by the Trust to be the maturity date of a repurchase
agreement, the maturities of securities subject to repurchase agreements are not
subject to any limits and may exceed one year. While repurchase agreements
involve certain risks not associated with direct investments in debt securities,
the Trust will follow procedures adopted by the Trustees designed to minimize
such risks. These procedures include effecting repurchase transactions only with
large, well-capitalized and well-established financial institutions, whose
financial condition will be continually monitored by the Investment Advisor. In
addition, the value of the collateral underlying the repurchase agreement will
be maintained at a level at least equal to the repurchase price, including any
accrued interest earned on the repurchase agreement. In the event of a default
or bankruptcy by a selling financial institution, the Trust will seek to
liquidate such collateral. However, the exercising of the Trust's right to
liquidate such collateral could involve certain costs or delays and, to the
extent that proceeds from any sale upon a default of the obligation to
repurchase were less than the repurchase price, the Trust could suffer a loss.
In addition, to the extent that the Trust's security interest in the collateral
may not be properly perfected, the Trust could suffer a loss up to the entire
amount of the collateral. It is the policy of the Trust not to invest in
repurchase agreements that do not mature within seven days if any such
investments amount to more than 10% of its total assets.
REVERSE REPURCHASE AGREEMENTS
The Trust may enter into reverse repurchase agreements with respect to debt
obligations which could otherwise be sold by the Trust. A reverse repurchase
agreement is an instrument under which the Trust may sell an underlying debt
instrument and simultaneously obtain the commitment of the purchaser (a
commercial bank or a broker or dealer) to sell the security back to the Trust at
an agreed upon price on an agreed upon date. The value of the underlying
securities will be at least equal at all times to the total amount of the resale
obligation, including the interest factor. Reverse repurchase agreements could
involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon the Trust's ability to dispose of
the underlying securities. An additional risk is that the market value of
securities sold by the Trust under a reverse repurchase agreement could decline
below the price at which the Trust is obligated to repurchase them. Reverse
repurchase agreements will be considered borrowings by the Trust and as such
would be subject to the restrictions on borrowing described below under
"Investment Restrictions." The Trust will not hold more than 5% of the value of
its total assets in reverse repurchase agreements.
15
<PAGE>
LENDING OF PORTFOLIO SECURITIES
Consistent with applicable regulatory requirements, the Trust may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that such loans are callable at any time by the Trust (subject to notice
provisions described below), and are at all times secured by cash or cash
equivalents, which are maintained in a segregated account pursuant to applicable
regulations and that are equal to at least 102% of the market value, determined
daily, of the loaned securities. The advantage of such loans is that the Trust
continues to receive the income on collateral, which will be invested in
short-term obligations. The Trust will not lend its portfolio securities if such
loans are not permitted by the laws or regulations of any state in which its
shares are qualified for sale and will not lend more than 25% of the value of
its total assets.
A loan may be terminated by the borrower on one business day's notice, or by
the Trust on four business days' notice. If the borrower fails to deliver the
loaned securities within four days after receipt of notice, the Trust could use
the collateral to replace the securities while holding the borrower liable for
any excess of replacement cost over collateral. As with any extensions of
credit, there are risks of delay in recovery and in some cases even loss of
rights in the collateral should the borrower of the securities fail financially.
However, these loans of portfolio securities will be made only to firms deemed
by the Investment Advisor to be creditworthy and when the income which can be
earned from such loans justifies the attendant risks. Upon termination of the
loan, the borrower is required to return the securities to the Trust. Any gain
or loss in the market price during the loan period would inure to the Trust. The
creditworthiness of firms to which the Trust lends its portfolio securities will
be monitored on an ongoing basis by the Investment Advisor pursuant to
procedures adopted and reviewed, on an ongoing basis, by the Trustees of the
Trust.
When voting on consent rights which accompany loaned securities pass to the
borrower, the Trust will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of such rights
if the matters involved would have a material effect on the Trust's investment
in such loaned securities. The Trust will pay reasonable finder's,
administrative and custodial fees in connection with a loan of its securities.
BORROWING
The Trust may borrow money from a bank for temporary or emergency purposes or to
effect a tender offer for its Shares provided that immediately after such
borrowing the amount borrowed does not exceed 33 1/3% of the value of its total
assets (including the amount borrowed) less its liabilities (not including any
borrowings but including the fair market value at the time of computation of any
other senior securities then outstanding). If, due to market fluctuations or
other reasons, the value of the Trust's assets falls below the foregoing
required coverage requirement, the Trust, within three business days, will
reduce its bank debt to the extent necessary to comply with such requirement. To
achieve such reduction, it is possible that the Trust may be required to sell
portfolio securities at a time when it may be disadvantageous to do so.
Borrowings other than for temporary or emergency purposes would involve
additional risk to the Trust, since the interest expense may be greater than the
income from or appreciation of the interests carried by the borrowing. The Trust
may be required to maintain minimum average balances in connection with
borrowings or to pay a commitment or other fee to maintain a line of credit.
Either of these requirements will increase the cost of borrowing over the stated
interest rate. Investment activity will continue while the borrowing is
outstanding. The purchase of additional interests while any borrowing is
outstanding involves the speculative factor known as "leverage," which will
increase the Trust's exposure to capital risk.
HEDGING AND RISK MANAGEMENT TRANSACTIONS
The Trust is authorized to engage in various interest rate hedging transactions
and risk management transactions, including interest rate swaps and the purchase
and sale of interest rate caps and floors. These techniques are described in
Appendix A. The Trust does not, however, presently intend to engage in such
hedging and risk management transactions, and, if the Trust is offering its
Shares, will not do so unless and until the Trust's prospectus is revised to
reflect this change.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The investment restrictions listed below have been adopted by the Trust as
fundamental policies, which may not be changed without the vote of a majority,
as defined in the 1940 Act, of the outstanding voting securities of the Trust.
All other investment policies or practices, other than the Trust's investment
policy with respect to Senior Loans, are considered by the Trust not to be
fundamental and accordingly may be changed without shareholder approval. All
percentage limitations apply immediately after a purchase or initial investment,
and any subsequent change in any applicable percentage resulting from
16
<PAGE>
market fluctuations or other changes in the amount of total or net assets does
not require elimination of any security from the portfolio.
The Trust may not:
1. Invest more than 25% of the Trust's total assets in the securities
of any one issuer or, with respect to 50% of the Trust's total assets,
purchase any securities (other than obligations issued or guaranteed by the
United States Government or by its agencies or instrumentalities), if as a
result more than 5% of the Trust's total assets would then be invested in
securities of a single issuer or if as a result the Trust would hold more
than 10% of the outstanding voting securities of any single issuer. For
purposes of this restriction and restriction number two, the Trust will
consider a Borrower to be the issuer of a Participation and, with respect to
Participations under which the Trust does not have privity with the Borrower
or would not have a direct cause of action against the Borrower in the event
of its failure to pay scheduled principal or interest, the Trust will also
separately meet the requirements contained in this investment restriction
and consider each person interpositioned between the Borrower and the Trust
to be an issuer of the Participation.
2. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry (the electric, gas, water and telephone utility
industries will be treated as separate industries for purposes of this
restriction); provided that this limitation shall not apply with respect to
obligations issued or guaranteed by the U.S. Government or by its agencies
or instrumentalities; and provided further that the Trust will (once at
least 80% of the Trust's assets are invested in Senior Loans) invest more
than 25% and may invest up to 100% of its total assets in securities of
issuers in the industry group consisting of financial institutions and their
holding companies, including commercial banks, thrift institutions,
insurance companies and finance companies. (See restriction number one for
the definition of issuer for purposes of this restriction.)
3. Invest in common stock, except that the Trust may acquire warrants
or other equity securities incidental to the purchase of an interest in a
Senior Loan.
4. Invest in securities of any issuer if, to the knowledge of the
Trust, any officer or trustee of the Trust or any officer or director of the
Investment Advisor or DWR owns more than 1/2 of 1% of the outstanding
securities of such issuer, and such officers, trustees and directors who own
more than 1/2 of 1% own in the aggregate more than 5% of the outstanding
securities of such issuer.
5. Purchase or sell real estate or interests therein, commodities or
commodity contracts except pursuant to the exercise by the Trust of its
rights under Loan Agreements, except to the extent the interest in Senior
Loans the Trust may invest in are considered to be interests in real estate,
commodities or commodities contracts and except to the extent that hedging
instruments the Trust may invest in are considered to be commodities or
commodities contracts.
6. Purchase oil, gas or other mineral leases, rights or royalty
contracts, or exploration or development programs, except pursuant to the
exercise by the Trust of its rights under Loan Agreements. In addition, the
Trust may purchase securities of issuers which deal in, represent interests
in or are secured by interests in such leases, rights or contracts.
7. Write, purchase or sell puts, calls or combinations thereof, except
for options on futures contracts or options on debt securities.
8. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets or, by purchase in the open market of securities of closed-end
investment companies where no underwriter's or dealer's commission or
profit, other than customary broker's commissions, is involved and only if
immediately thereafter not more than: (a) 5% of the Trust's total assets
would be invested in any one such company and (b) 10% of the Trust's total
assets would be invested in such securities. The Trust will rely on
representations of Borrowers in Loan Agreements in determining whether such
Borrowers are investment companies.
9. Borrow money, except that the Trust may borrow from a bank for
temporary or emergency purposes or for the repurchase of Shares, provided
that immediately after such borrowing the amount borrowed does not exceed
33 1/3% of the value of its total assets (including the amount borrowed)
less its liabilities (not including any borrowings but including the fair
market value at the time of computation of any other senior securities which
are outstanding at the time).
10. Pledge, mortgage or hypothecate its assets or assign or otherwise
encumber them, except to secure borrowings effected within the limitations
set forth in Restriction 9 (and then only to the extent of 33 1/3% of the
value of the Trust's total assets) and except pursuant to reverse repurchase
agreements as provided in this Prospectus. However, for the purpose of this
restriction, collateral arrangements with respect to the writing of options
and collateral arrangements with respect to initial margin for futures are
not deemed to be pledges of assets.
17
<PAGE>
11. Issue senior securities, as defined in the 1940 Act, except insofar
as the Trust may be deemed to have issued a senior security by reason of:
(a) entering into any repurchase agreement; (b) purchasing any securities on
a when-issued or delayed delivery basis; (c) entering into the hedging
transactions described in this prospectus, including Appendix A;
(d) borrowing money in accordance with restrictions described above; or
(e) lending portfolio securities.
12. Make loans of money or securities, except: (a) by acquiring
interests in Senior Loans and making other permitted investments in
accordance with its investment objective; (b) by entering into repurchase
agreements (provided that no more than 10% of the Trust's total assets will
be invested in repurchase agreements that do not mature within seven days)
or reverse repurchase agreements; and (c) by lending its portfolio
securities (provided that the Trust may not lend its portfolio securities in
excess of 25% of its total assets).
13. Make short sales of securities.
14. Purchase securities on margin. Neither the deposit of initial or
variation margin in connection with hedging transactions nor short-term
credits as may be necessary for the clearance of such transactions is
considered the purchase of a security on margin.
15. Engage in the underwriting of securities, except to the extent the
Trust may be deemed to be an underwriter in connection with the sale of or
granting of interests in Senior Loans or other securities acquired by the
Trust.
16. Make investments for the purpose of exercising control or management
of any other issuer, except to the extent that exercise by the Trust of its
rights under Loan Agreements would be deemed to constitute such control or
participation.
The Trust generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as it
deems advisable in view of prevailing or anticipated market conditions to
accomplish the Trust's investment objective. For example, the Trust may sell
portfolio securities in anticipation of a movement in interest rates. Frequency
of portfolio turnover will not be a limiting factor if the Trust considers it
advantageous to purchase or sell securities. The Trust anticipates that the
annual portfolio turnover rate of the Trust will be less than 100%. A high rate
of portfolio turnover involves correspondingly greater expenses than a lower
rate, which expenses must be borne by the Trust and its shareholders. High
portfolio turnover also may result in the realization of substantial net
short-term capital gains. In order to continue to qualify as a regulated
investment company for federal income tax purposes, less than 30% of the annual
gross income of the Trust must be derived from the sale of securities held by
the Trust for less than three months. See "Taxation." The Trust's portfolio
turnover rate for the fiscal year ended September 30, 1999 was 44%.
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The Trustees and Executive Officers of the Trust and their principal occupations
for at least the last five years and their affiliations, if any, with MSDW
Advisors and with the 92 Morgan Stanley Dean Witter Funds are shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH THE TRUST
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
---------------------------------- --------------------------------------------
<S> <C>
Michael Bozic (58) ................................ Vice Chairman of Kmart Corporation (Since December
Trustee 1998); Director or Trustee of the Morgan Stanley
c/o Kmart Corporation Dean Witter Funds; formerly Chairman and Chief
3100 West Big Beaver Road Executive Officer of Levitz Furniture Corporation
Troy, Michigan (November 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, Roebuck and Co.;
Director of Weirton Steel Corporation.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH THE TRUST
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
---------------------------------- --------------------------------------------
<S> <C>
Charles A. Fiumefreddo* (66) ...................... Chairman, Director or Trustee and Chief Executive
Chairman of the Board, Officer of the Morgan Stanley Dean Witter Funds;
Chief Executive Officer and Trustee formerly Chairman, Chief Executive Officer and
Two World Trade Center Director of MSDW Advisors, Morgan Stanley Dean
New York, New York Witter Distributors Inc. ("MSDW Distributors") and
MSDW Services, Executive Vice President and
Director of Dean Witter Reynolds Inc. ("DWR"),
Chairman and Director of Morgan Stanley Dean Witter
Trust FSB ("MSDW Trust"), and Director and/or
officer of various MSDW subsidiaries (until
June 1998).
Edwin J. Garn (67) ................................ Director or Trustee of the Morgan Stanley Dean
Trustee Witter Funds; formerly United States Senator
c/o Huntsman Corporation (R-Utah) (1974-1992) and Chairman, Senate Banking
500 Huntsman Way Committee (1980-1986); formerly Mayor of Salt Lake
Salt Lake City, Utah City, Utah (1971-1974); formerly Astronaut, Space
Shuttle Discovery (April 12-19, 1985); Vice
Chairman, Huntsman Corporation (chemical company);
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.
Wayne E. Hedien (65) .............................. Retired; Director or Trustee of the Morgan Stanley
Trustee Dean Witter Funds; Director of the PMI Group, Inc.
c/o Mayer, Brown & Platt (private mortgage insurance); Trustee and Vice
Counsel to the Independent Trustees Chairman of the Field Museum of Natural History;
1675 Broadway formerly associated with the Allstate Companies
New York, New York (1966-1994), most recently as Chairman of the
Allstate Corporation (March 1993-December 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.,
Trustee a consulting firm; Co-Chairman and a founder of the
c/o Johnson Smick International, Inc. Group of Seven Council (G7C), an international
1133 Connecticut Avenue, N.W. economic commission; Chairman of the Audit
Washington, D.C. Committee and Director or Trustee of the Morgan
Stanley Dean Witter Funds; 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
(1982-1986).
Michael E. Nugent (63) ............................ General Partner, Triumph Capital, L.P., a private
Trustee investment partnership; Chairman of the Insurance
c/o Triumph Capital, L.P. Committee and Director or Trustee of the Morgan
237 Park Avenue Stanley Dean Witter Funds; formerly Vice President,
New York, New York Bankers Trust Company and BT Capital Corporation
(1984-1988); director of various business
organizations.
Philip J. Purcell* (56) ........................... Chairman of the Board of Directors and Chief
Trustee Executive Officer of MSDW, DWR and Novus Credit
1585 Broadway Services Inc.; Director of MSDW Distributors;
New York, New York Director or Trustee of the Morgan Stanley Dean
Witter Funds; Director and/or officer of various
MSDW subsidiaries.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH THE TRUST
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
---------------------------------- --------------------------------------------
<S> <C>
John L. Schroeder (69) ............................ Retired; Chairman of the Derivatives Committee and
Trustee Director or Trustee of the Morgan Stanley Dean
c/o Mayer, Brown & Platt Witter Funds; Director of Citizens Utilities
Counsel to the Independent Trustees Company (telecommunications, gas, electric and
1675 Broadway water utility company); formerly, Executive Vice
New York, New York President and Chief Investment Officer of the Home
Insurance Company (August 1991-September 1995).
Mitchell M. Merin (46) ............................ President and Chief Operating Officer of Asset
President Management of MSDW (since December 1998); President
Two World Trade Center and Director (since April 1997) and Chief Executive
New York, New York Officer (since June 1998) of the Investment 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 MSDW Trust; Director of various
MSDW subsidiaries; President of the Morgan Stanley
Dean Witter Funds (since May 1999); Trustee of
various Van Kampen investment companies (since
December 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 (May 1997-April
1999), and Executive Vice President of Dean Witter,
Discover & Co.
Barry Fink (44) ................................... Executive Vice President (since December 1999), and
Vice President, Secretary and General Counsel Secretary and General Counsel (since February 1997)
Two World Trade Center and Director (since July 1998) of MSDW Advisors and
New York, New York MSDW Services; Senior Vice President (since March
1997) and Assistant Secretary and Assistant General
Counsel (since February 1997) of MSDW Distributors;
Assistant Secretary of DWR (since August 1996);
Vice President, Secretary and General Counsel of
the Morgan Stanley Dean Witter Funds (since
February 1997); previously Senior Vice President
(March 1997-December 1999), First Vice President
(June 1993-February 1997), Vice President and
Assistant Secretary and Assistant General Counsel
of MSDW Advisors and MSDW Services and Assistant
Secretary of the Morgan Stanley Dean Witter Funds.
Rajesh K. Gupta (39) .............................. Senior Vice President of MSDW Advisors, Director of
Vice President the Taxable Fixed-Income Group and Chief
Two World Trade Center Administrative Officer of Investments of MSDW
New York, New York Advisors; Vice President of various Morgan Stanley
Dean Witter Funds.
Sheila A. Finnerty (34) ........................... Senior Vice President of MSDW Advisors (since
Assistant Vice President December 1999); previously Vice President (May
Two World Trade Center 1998-December 1999), Assistant Vice President (May
New York, New York 1995-May 1998) and Senior Research Analyst (May
1993-May 1995) with MSDW Advisors.
Peter Gewirtz (34) ................................ Vice President of MSDW Advisors (since December
Assistant Vice President 1999); previously Assistant Vice President (May
Two World Trade Center 1998-December 1999) and Senior Research Analyst
New York, New York (October 1996-May 1998) with MSDW Advisors and
prior thereto Assistant Vice President of
Industrial Bank of Japan (February 1994-October
1996).
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH THE TRUST
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
---------------------------------- --------------------------------------------
<S> <C>
Thomas F. Caloia (52) ............................. First Vice President and Assistant Treasurer of
Treasurer MSDW Advisors, MSDW Distributors and MSDW Services;
Two World Trade Center Treasurer of the Morgan Stanley Dean Witter Funds.
New York, New York
</TABLE>
- ------------------------
* Denotes Trustees who are "interested persons" of the Trust, as defined in
the 1940 Act.
In addition, RONALD E. ROBISON, Executive Vice President, Chief
Administrative Officer and Director of MSDW Advisors and MSDW Services,
ROBERT S. GIAMBRONE, Senior Vice President of MSDW Advisors, MSDW Services, MSDW
Distributors and MSDW Trust and Director of MSDW Trust, and JOSEPH J. MCALINDEN,
Executive Vice President and Chief Investment Officer of MSDW Advisors and
Director of MSDW Trust, are Vice Presidents of the Fund.
In addition, MARILYN K. CRANNEY, TODD LEBO, LOU ANNE D. MCINNIS, CARSTEN
OTTO, AND RUTH ROSSI, First Vice Presidents and Assistant General Counsels of
MSDW Advisors and MSDW Services, and NATASHA KASSIAN, Assistant Vice President
and Assistant General Counsel of MSDW Advisors and MSDW Services, are Assistant
Secretaries of the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees consists of eight (8) trustees. These same individuals
also serve as directors or trustees for all of the Morgan Stanley Dean Witter
Funds, and are referred to in this section as Trustees. As of the date of this
Statement of Additional Information, there are a total of 92 Morgan Stanley Dean
Witter Funds, comprised of 127 portfolios. As of November 30, 1999, the Morgan
Stanley Dean Witter Funds had total net assets of approximately $140 billion and
more than six million shareholders.
Six Trustees (75% of the total number) have no affiliation or business
connection with MSDW Advisors or any of its affiliated persons and do not own
any stock or other securities issued by MSDW Advisors' parent company, MSDW.
These are the "disinterested" or "independent" Trustees.
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. In
addition, three of the Trustees, including two Independent Trustees, serve as
members of the Derivatives Committee and the Insurance Committee. During the
calendar year ended December 31, 1998, the Audit Committee, the Derivatives
Committee, the Insurance Committee and the Independent Trustees held a combined
total of twelve meetings.
The Independent Trustees are charged with recommending to the full Board
approval of management, 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
allocations, as well as other matters that arise from time to time. The
Independent Trustees are required 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 such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Trust's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing 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 such services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; and reviewing the adequacy of the Trust's system of internal
controls.
The Board of each Fund has formed a Derivatives Committee to approve
parameters for and monitor the activities of the Trust with respect to
derivative investments, if any, made by the Trust.
Finally, the Board of each Fund has formed an Insurance Committee to review
and monitor the insurance coverage maintained by the Fund.
21
<PAGE>
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 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.
COMPENSATION OF INDEPENDENT TRUSTEES
The Trust 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 fees 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 Trust. The Trust 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 Trust who are or have been employed by
the Investment Manager or an affiliated company receive no compensation or
expense reimbursement from the Trust for their services as Trustee.
The following table illustrates the compensation paid to the Trust's
Independent Trustees by the Fund for the fiscal year ended September 30, 1999.
TRUST COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- --------------------------- -------------
<S> <C>
Michael Bozic................................................. $1,550
Edwin J. Garn................................................. 1,600
Wayne E. Hedien............................................... 1,650
Dr. Manuel H. Johnson......................................... 2,100
Michael E. Nugent............................................. 1,933
John L. Schroeder............................................. 1,933
</TABLE>
The following table illustrates the compensation paid to the Trust's
Independent Trustees for the calendar year ended December 31, 1998 for services
to the 90 Morgan Stanley Dean Witter Funds that were in operation at
December 31, 1998.
22
<PAGE>
CASH COMPENSATION FROM MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
TOTAL CASH
COMPENSATION FOR
SERVICES TO 90
MORGAN STANLEY
NAME OF DEAN WITTER
INDEPENDENT TRUSTEE FUNDS
- ------------------- ----------------
<S> <C>
Michael Bozic.............. $120,150
Edwin J. Garn.............. 132,450
Wayne E. Hedien............ 132,350
Dr. Manuel H. Johnson...... 155,681
Michael E. Nugent.......... 159,731
John L. Schroeder.......... 160,731
</TABLE>
As of the date of this PROSPECTUS, 55 of the Morgan Stanley Dean Witter
Funds, including the Trust, 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 accrued as expenses on the books of the Adopting Funds. Such benefits are
not secured or funded by the Adopting Funds.
The following table illustrates the retirement benefits accrued to the
Trust's Independent Trustees by the Fund for the fiscal year ended
September 30, 1999 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 Fund's Independent Trustees, to commence upon their retirement,
from the Trust as of September 30, 1999 and from the 55 Morgan Stanley Dean
Witter Funds as of December 31, 1998.
RETIREMENT BENEFITS FROM THE TRUST AND ALL MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS RETIREMENT BENEFITS ESTIMATED ANNUAL
------------------------------ ACCRUED AS BENEFITS
ESTIMATED EXPENSES UPON RETIREMENT(2)
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 TRUST FUNDS TRUST FUNDS
- --------------------------- -------------- ------------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic................................... 10 60.44% $384 $22,377 $ 937 $ 50,850
Edwin J. Garn................................... 10 60.44 567 35,225 937 50,850
Wayne E. Hedien................................. 9 51.37 725 41,979 796 43,225
Dr. Manuel H. Johnson........................... 10 60.44 234 14,047 937 50,850
Michael E. Nugent............................... 10 60.44 400 25,336 937 50,850
John L. Schroeder............................... 8 50.37 761 45,117 801 43,157
</TABLE>
- ------------------------
(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.
As of the date of this PROSPECTUS, the aggregate number of shares of
beneficial interest of the Trust owned by the Trust's officers and Trustees as a
group was less than 1 percent of the Trust's shares of beneficial interest
outstanding.
23
<PAGE>
INVESTMENT ADVISORY AGREEMENT
- --------------------------------------------------------------------------------
The Trust has retained the Investment Advisor to manage the Trust's assets,
including the placing of orders for the purchase and sale of portfolio
securities, pursuant to an Investment Advisory Agreement with MSDW Advisors (the
"Advisory Agreement"). See "The Trust and Its Advisor" for a detailed
description of the Advisory Agreement.
The Investment Advisor obtains and evaluates such information and advice
relating to the economy, securities markets, and specific securities as it
considers necessary or useful to manage continuously the assets of the Trust in
a manner consistent with its investment objective and policies. The Trust's
Board of Trustees reviews the various services provided by the Investment
Advisor to ensure that the Trust's general investment policies and programs are
being properly carried out. Under the terms of the Advisory Agreement, the
Investment Advisor pays the salaries of all personnel, including officers of the
Trust, who are employees of the Investment Advisor.
Expenses not expressly assumed by the Investment Advisor under the Advisory
Agreement will be paid by the Trust. The expenses borne by the Trust include,
but are not limited to: charges and expenses of any registrar, custodian, stock
transfer and dividend disbursing agent; brokerage commissions; taxes; engraving
and printing of share certificates; registration costs of the Trust's Shares in
this continuous offering under federal and state securities laws; all expenses
of shareholders' and Trustees' meetings and of preparing, printing and mailing
proxy statements and reports to shareholders; fees and travel expenses of
Trustees or members of any advisory board or committee who are not employees or
retired employees of the Investment Advisor or any corporate affiliate thereof;
all expenses incident to any dividend or distribution program; charges and
expenses of any outside service used for pricing of the Trust's investments;
fees and expenses of legal counsel, including counsel to the Trustees who are
not interested persons of the Trust or of the Investment Advisor (not including
compensation or expenses of attorneys who are employees of the Investment
Advisor) and independent accountants; membership dues of industry associations;
interest on Trust borrowings; fees and expenses incident to Trust borrowings;
postage; insurance premiums on property or personnel (including officers and
trustees) of the Trust 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
Trust's operation.
As full compensation for the services furnished to the Trust, the Trust pays
MSDW Advisors pursuant to the Advisory Agreement, monthly compensation
calculated daily at an annual rate of 0.90% of average daily net assets on
assets of the Trust up to $500 million, at an annual rate of 0.85% of average
daily net assets on assets of the Trust exceeding $500 million up to
$1.5 billion, at an annual rate of 0.825% of average daily net assets on assets
of the Trust exceeding $1.5 billion up to $2.5 billion and at an annual rate of
0.80% of average daily net assets on assets of the trust exceeding
$2.5 billion. The sum of this fee and the administration fee is higher than that
paid by most other investment companies. See "Administrator and Administration
Agreement." For the fiscal years ended September 30, 1997, 1998 and 1999, the
Trust accrued to MSDW Advisors total compensation of $9,981,012, $14,434,352 and
$19,568,322, respectively.
The Advisory Agreement provides that in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations thereunder,
the Investment Advisor is not liable to the Trust or any of its shareholders for
any act or omission by the Investment Advisor or for any losses sustained by the
Trust or its shareholders. The Advisory Agreement in no way restricts the
Investment Advisor from acting as investment manager or advisor to others.
The Advisory Agreement was initially approved by the Trustees on
February 21, 1997 and by the shareholders of the Trust at a Special Meeting of
Shareholders held on May 20, 1997. The Advisory Agreement is substantially
identical to a prior investment advisory agreement which was initially approved
by the Trustees on December 23, 1992 and by the Trust's shareholders on
February 25, 1993 (the "Prior Advisory Agreement"). The Advisory Agreement took
effect on May 31, 1997 upon the consummation of the merger of Dean Witter,
Discover & Co. with Morgan Stanley Group Inc. The Advisory Agreement may be
terminated at any time, without penalty, on 30 days' notice by the Trustees of
the Trust, by the holders of a majority, as defined in the 1940 Act, of the
outstanding Shares of the Trust, or by the Investment Advisor. The Advisory
Agreement will automatically terminate in the event of its assignment (as
defined in the 1940 Act).
Under its terms, the Advisory Agreement with MSDW Advisors had an initial
term ending April 30, 1999, and will continue from year to year thereafter,
provided continuance of the Advisory Agreement is approved at least annually by
the vote of the holders of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the Trust, or by the Trustees of the Trust;
provided that in either event such continuance is approved annually by the vote
of a majority of the Trustees of the Trust who are not parties to the Advisory
Agreement or "interested persons" (as defined in the 1940 Act) of any such party
(the "Independent Trustees"), which vote must be cast in person at a meeting
called for the purpose of voting on such approval. At their meeting held on
April 22, 1999, the Trust's Board of Trustees, including all of the Independent
Trustees, approved continuation of the Advisory Agreement until April 30, 2000.
24
<PAGE>
ADMINISTRATOR AND ADMINISTRATION AGREEMENT
- --------------------------------------------------------------------------------
On December 31, 1993, MSDW Advisors effected an internal reorganization pursuant
to which certain administrative activities previously performed by MSDW Advisors
would instead be performed by Morgan Stanley Dean Witter Services Company Inc.
(the "Administrator" or "MSDW Services"), a wholly-owned subsidiary of MSDW
Advisors. Accordingly, the Administration Agreement between MSDW Advisors and
the Trust was terminated and a new Administration Agreement between the
Administrator and the Trust was entered into. The foregoing internal
reorganization did not result in any change of the management of the Trust's
Administrator. The nature and scope of the administrative services being
provided to the Trust or any of the fees being paid by the Trust under the new
Administration Agreement are identical to those of the previous Agreement. The
term "Administrator" refers to MSDW Advisors prior to this reorganization and to
MSDW Services after December 31, 1993. Morgan Stanley Dean Witter Distributors
Inc., the Distributor of the Trust's shares, is an affiliate of MSDW Advisors
and MSDW Services and a wholly-owned subsidiary of MSDW.
In an earlier internal reorganization which took place in January, 1993,
DWR's investment company-related operations, pursuant to which the
administration activities that had been performed by DWR's InterCapital Division
were assumed by the then new company, Morgan Stanley Dean Witter Advisors Inc.,
and the share distribution activities that had been performed by DWR were
assumed by a separate new company, Morgan Stanley Dean Witter Distributors Inc.
MSDW Advisors refers to the InterCapital Division of DWR prior to the internal
reorganization and to Morgan Stanley Dean Witter Advisors Inc. after the
reorganization. This internal reorganization did not result in a change of
management of the Administrator or Distributor.
Under the terms of the Administration Agreement, the Administrator maintains
certain of the Trust's books and records and furnishes, at its own expense, such
office space, facilities, equipment, clerical help, and bookkeeping and certain
legal services as the Trust may reasonably require in the conduct of its
business, including the preparation of 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 Administrator, necessary or desirable). In addition, the
Administrator pays the salaries of all personnel, including officers of the
Trust who are employees of the Administrator. The Administrator also bears the
cost of telephone service, heat, light, power and other utilities provided to
the Trust.
As full compensation for the services and facilities furnished to the Trust
and expenses of the Trust assumed by the Administrator, the Trust pays the
Administrator monthly compensation calculated daily by applying the annual rate
of 0.25% to the Trust's average daily net assets. The sum of this fee and the
investment advisory fee is higher than that paid by most other investment
companies. See "Investment Advisory Agreement." For the fiscal years ended
September 30, 1997, 1998 and 1999, the Trust accrued to the Administrator total
compensation of $2,862,062, $4,183,528 and $5,740,526, respectively.
The Administration Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Administrator is not liable to the Trust or any of
its shareholders for any act or omission by the Administrator or for any losses
sustained by the Trust or its shareholders. The Administration Agreement in no
way restricts the Administrator from acting as administrator or investment
manager or advisor to others.
The Administration Agreement was initially approved by the Trustees on
April 17, 1996, in connection with the reincorporation of MSDW Services in the
State of Delaware. The Administration Agreement is substantially identical to
the prior administration agreement, initially approved by the Trustees on
October 10, 1989, by the Investment Advisor as the sole shareholder on
November 20, 1989 and by the Trust's shareholders at a Meeting of Shareholders
on June 19, 1991 (the "Prior Administration Agreement"). At their meeting held
on October 30, 1992, the Trustees of the Trust, including all the Trustees of
the Trust who are not parties to the Administration Agreement or "interested
persons" (as defined in the Act) of any such party (the "Independent Trustees"),
approved the assumption by MSDW Advisors of DWR's rights and duties under the
Prior Administration Agreement, which assumption took place upon the
reorganization described above. The Administration Agreement may be terminated
at any time, without penalty, on thirty days notice by the Trustees of the
Trust, by the holders of a majority, as defined in the 1940 Act, of the
outstanding Shares of the Trust, or by the Administrator. The Administration
Agreement will automatically terminate in the event of its assignment (as
defined in the 1940 Act).
Under its terms, the new Administration Agreement with MSDW Services had an
initial term ending April 30, 1997, and provides that it will continue from year
to year thereafter, provided continuance of the Administration Agreement is
approved at least annually by the vote of the holders of a majority (as defined
in the 1940 Act) of the outstanding voting securities of the Trust, or by the
Trustees of the Trust; provided that in either event such continuance is
approved annually by the vote of a majority of the Independent Trustees, which
vote must be cast in person at a meeting called for the purpose of voting on
such approval. At their meeting held on April 22, 1999, the Trust's Board of
Trustees, including all of the Independent Trustees, approved continuation of
the Administration Agreement until April 30, 2000.
25
<PAGE>
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Subject to the general supervision of the Board of Trustees, the Investment
Advisor is responsible for decisions to buy and sell interests in Senior Loans
and other securities and effect hedging transactions for the Trust, the
selection of brokers and dealers to effect the transactions, and the negotiation
of brokerage commissions, if any. With respect to interests in Senior Loans, the
Trust generally will engage in privately negotiated transactions for their
purchase or sale in which the Investment Advisor will negotiate on behalf of the
Trust. The Trust may be required to pay fees, or forego a portion of interest
and any fees payable to the Trust, to the Selling Participant or the entity
selling an Assignment to the Trust. The Investment Advisor will determine the
Lenders and Selling Participants from whom the Trust will purchase Assignments
and Participations by considering their professional ability, level of service,
relationship with the Borrower, financial condition, credit standards and
quality of management. The secondary market for interests in Senior Loans is
relatively illiquid. Although the Trust intends generally to hold interests in
Senior Loans until maturity or prepayment of the Senior Loan, such illiquidity
may restrict the ability of the Investment Advisor to locate in a timely manner
persons willing to purchase the Trust's interests in Senior Loans at a fair
price should the Trust desire to sell such interests. See "Investment Objective
and Policies."
With respect to portfolio securities other than Senior Loans, the Trust
expects that the primary market for the securities in which it intends to invest
will generally be the over-the-counter market. Such securities are generally
traded in the over-the-counter market on a "net" basis with dealers acting as
principal for their own accounts without charging a stated commission, although
the price of the security usually includes a profit to the dealer. The Trust
also expects that securities will be purchased at times in underwritten
offerings, where the price includes a fixed amount of compensation, generally
referred to as the underwriter's concession or discount. On occasion, the Trust
may also purchase certain money market instruments directly from an issuer, in
which case no commissions or discounts are paid. During the fiscal years ended
September 30, 1997, 1998 and 1999 the Trust did not pay any brokerage
commissions.
The policy of the Trust regarding purchases and sales of Senior Loans and
securities and futures contracts for its portfolio is that primary consideration
will be given to obtaining the most favorable prices and efficient execution of
transactions. In seeking to implement the Trust's policies, the Investment
Advisor will effect transactions with those banks, brokers and dealers which the
Investment Advisor believes provide the most favorable prices and who are
capable of providing efficient executions. If the Investment Advisor believes
such price and execution are obtainable from more than one bank, broker or
dealer, it may give consideration to placing portfolio transactions with those
banks, brokers and dealers who also furnish research and other services to the
Trust or the Investment Advisor. Such 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 Advisor from banks,
brokers and dealers may be of benefit to the Investment Advisor and its
affiliates in the management of other accounts and may not in all cases benefit
the Trust directly. While the receipt of such information and services is useful
in varying degrees and would generally reduce the amount of research or services
otherwise performed by the Investment Advisor and thus reduce its expenses, it
is of indeterminable value and the advisory fee paid to the Investment Advisor
is not reduced by any amount that may be attributable to the value of such
services.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may be
effected through DWR, Morgan Stanley & Co. Incorporated ("MS & Co.") and other
affiliated brokers and dealers. In order for an affiliated broker or dealer to
effect any portfolio transactions 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 transactions 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 Board of Trustees of
the Trust, including a majority of the Trustees who are not "interested" persons
of the Trust, as defined in the Act, 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.
DETERMINATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value per share of the Trust's Shares is determined by calculating
the total value of the Trust's assets, deducting its total liabilities, and
dividing the result by the number of Shares outstanding. The net asset value
will be computed as of 4:00 p.m. New York time on each business day on which the
New York Stock Exchange is open for trading (or, on days when the New York Stock
Exchange closes prior to 4:00 p.m., at such earlier time). The Trust reserves
the right to calculate the net asset value more frequently if deemed desirable.
26
<PAGE>
Interests in Senior Loans held by the Trust are currently valued at their
fair value in accordance with procedures established in good faith by the Board
of Trustees of the Trust. Under the procedures adopted by the Board of Trustees,
interests in Senior Loans will be priced in accordance with a matrix which takes
into account the relationship between the then current interest rate and
interest rates payable on each Senior Loan, as well as the total number of days
in each interest period and the period remaining until next interest rate
determination or maturity of the Senior Loan. Adjustments in the
matrix-determined price of a Senior Loan are made in the event of a default on a
Senior Loan or a significant change in the creditworthiness of the Borrower and
may also be required in the event of changes in pricing parameters for newly
issued Senior Loans (e.g., interest rates are set at a higher or lower margin
above the base lending rate than were Senior Loans in the Trust's portfolio).
Loans purchased at a discount from par for reasons other than credit impairment
are valued at cost and the discount is amortized to maturity. In assessing the
creditworthiness of a Borrower, the primary focus is on the ability and intent
of the Borrower to continue to meet its principal and interest payment
obligations specified under the applicable Loan Agreement. Such factors as the
Borrower's current and projected cash flow relative to its debt service
requirements and liquidity are considered in this regard. S&P and Moody's
ratings of any outstanding commercial paper of a Borrower may also be
considered. The procedures are monitored by the Board of Trustees on an ongoing
basis to insure that the values arrived at continue to represent fair value.
Should the Board of Trustees determine that the market for Senior Loans has
developed to the point where market quotations provided by banks, dealers or
pricing services respecting interests in Senior Loans could reliably serve as a
basis for valuing the Trust's portfolio securities, such quotations would be
used as a basis for valuing interests in Senior Loans held by the Trust. Other
portfolio securities traded in the over-the-counter market will be valued based
upon closing bid prices; provided, however, that short-term securities with
remaining maturities of less than 60 days will be valued at amortized cost.
Other assets are valued at fair value in accordance with procedures established
in good faith by the Board of Trustees of the Trust.
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
It is the Trust's present policy, which may be changed by the Board of Trustees,
to declare daily and pay monthly dividends to shareholders from net investment
income of the Trust. Distributions to holders of Shares cannot be assured, and
the amount of each monthly distribution is expected to vary. The Trust intends
to distribute all of the Trust's net investment income on an annual basis. Net
investment income of the Trust consists of all interest income and fee and other
ordinary income earned by the Trust on its portfolio assets, less all expenses
of the Trust. The Trust will distribute its capital gains (after offset for any
available loss carryovers), if any, at least once per year, but it may make such
distributions on a more frequent basis to comply with the distribution
requirements of the Tax Reform Act of 1986, as amended, but in all events in a
manner consistent with the 1940 Act.
All dividends and capital gains distributions are reinvested automatically
in full and fractional Shares at the net asset value per Share determined on the
payable date of such dividend or distribution. A shareholder may, at any time,
by written notification to the Transfer Agent, elect to have subsequent
dividends or capital gains distributions, or both, paid in cash rather than
reinvested, in which event payment will be mailed on or about the payment date.
TAXATION
- --------------------------------------------------------------------------------
Because the Trust intends to distribute all of its net investment income and
capital gains to shareholders and intends to otherwise comply with all the
provisions of Subchapter M of the Internal Revenue Code of 1986 (the "Code"), it
is not expected that the Trust will be required to pay any federal income tax on
such income and capital gains. If, however, any such capital gains are retained,
the Trust will pay federal income tax thereon. In such a case, the Trust may
make an election pursuant to which shareholders would have to include such
retained gains in their income but would be able to claim their share of the tax
paid by the Trust as a credit against their individual federal income tax.
Shareholders will normally have to pay federal income taxes, and any state
income taxes, on the dividends and distributions they receive from the Trust.
Such dividends and distributions derived from net investment income or short-
term capital gains are taxable to the shareholders as ordinary income regardless
of whether the shareholder receives such distributions in additional Shares or
in cash. It is not expected that any portion of such dividends and distributions
will be eligible for the corporate dividends received deduction.
Long-term or short-term capital gains may be generated by the sale of
portfolio securities and by certain transactions in options and futures
contracts engaged in by the Trust. Distributions of long-term capital gains, if
any, are taxable to shareholders as long-term capital gains regardless of how
long a shareholder has held the Trust's shares and regardless of whether the
distribution is received in additional Shares or in cash. The maximum tax on
long-term capital gains applicable to individuals is 20%. Capital gains
distributions are not eligible for the dividends-received deduction.
27
<PAGE>
Any distribution in excess of the Trust's earnings and profits will first
reduce a shareholder's adjusted basis in his Shares to zero and, after such
basis is reduced to zero, will constitute gain to the shareholder from the sale
of Shares.
A holder of Shares who either sells his Shares or, pursuant to a tender
offer, tenders all Shares owned by such shareholder and any Shares considered
owned by such shareholder under attribution rules contained in the Code will
realize a taxable gain or loss depending upon such shareholder's basis in the
Shares. Such gain or loss will generally be treated as capital gain or loss and
will be long-term capital gain or loss if the Shares are held for more than one
year. However, any loss on a sale or exchange of Shares held for six months or
less will be treated as long-term capital loss to the extent of any long-term
capital gain distribution with respect to such Shares.
If a tendering holder of Shares tenders less than all Shares owned by or
attributed to such shareholder, and if the distribution to such shareholder does
not otherwise qualify as a payment in exchange for stock, the proceeds received
will be treated as a taxable dividend, return of capital or capital gain
depending on the Trust's earnings and profits and the shareholder's basis in the
tendered Shares. Also, if some tendering holders of Shares receive taxable
dividends, there is a risk that non-tendering holders of Shares may be
considered to have received a deemed distribution which may be a taxable
dividend in whole or in part.
The Code requires each regulated investment company to pay a nondeductible
4% excise tax to the extent the company does not distribute, during each
calendar year, 98% of its ordinary income, determined on a calendar year basis,
and 98% of its capital gains, determined, in general, on an October 31 year end,
plus certain undistributed amounts from previous years. The Trust anticipates
that it will make sufficient timely distributions to avoid imposition of the
excise tax. If the Trust pays a dividend in January which was declared in the
previous calendar quarter to shareholders of record on a date in such calendar
quarter, then such dividend or distribution will be treated for tax purposes as
being paid in December and will be taxable to shareholders as if received in
December.
Any dividend or capital gains distribution received by a shareholder from an
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, capital gains distributions and
dividends 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
distribution of realized long-term capital gains, such distribution would be in
part a return of the shareholder's investment to the extent of such reduction
below the shareholder's cost, but nonetheless would be taxable to the
shareholder. Therefore, an investor should consider the tax implications of
purchasing Shares immediately prior to a distribution record date.
The tax treatment of listed put and call options written or purchased by the
Trust on debt securities and of futures contracts entered into by the Trust will
generally be governed by Section 1256 of the Code, pursuant to which each such
position held by the Trust will be marked-to-market (i.e., treated as if it were
sold for fair market value) on the last business day of each taxable year of the
Trust, and all gain or loss associated with transactions in such positions will
be treated as 60% long-term capital gain or loss and 40% short-term capital gain
or loss. Positions of the Trust which consist of at least one debt security and
at least one option or futures contract which substantially diminishes the
Trust's risk of loss with respect to such debt security could be treated as
"mixed straddles" which are subject to the straddle rules of Section 1092 of the
Code, the operation of which may cause deferral of losses, adjustments in the
holding periods of debt securities and conversion of short-term capital losses
into long-term capital losses. Certain tax elections exist for mixed straddles
which reduce or eliminate the operation of the straddle rules. The Trust will
monitor its transactions in options and futures contracts and may make certain
tax elections in order to mitigate the effect of these rules and prevent
disqualification of the Trust as a regulated investment company under
Subchapter M of the Code. Such tax elections may result in an increase in
distributions of ordinary income (relative to long-term capital gain) to
shareholders.
The federal income tax treatment of interest rate swaps is not entirely
clear. The Trust may be required to treat payments received under such
arrangements as ordinary income and to amortize such payments under certain
circumstances. The Trust will limit its activity in this regard in order to
maintain its qualification as a regulated investment company.
The Fund may at times make payments from sources other than income or net
capital gains. Payments from such sources will in effect, represent a return of
a portion of each shareholder's investment. All, or a portion, of such payments
will not be taxable to shareholders.
After the end of each calendar year, shareholders will receive full
information on their dividends and capital gains distributions for tax purposes.
Shareholders who receive distributions of Shares which are automatically
reinvested will generally be viewed as receiving a distribution equal to the
fair market value of such Shares.
To avoid being subject to a 31% federal backup withholding tax on taxable
dividends, capital gains distributions and the proceeds of redemptions and
repurchases, shareholders' taxpayer identification numbers must be furnished and
certified as to their accuracy.
28
<PAGE>
Ordinary income dividends and distributions paid by the Trust to
shareholders who are non-resident aliens will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Non-resident shareholders are
urged to consult their own tax advisors concerning the applicability of the
United States withholding tax.
The above discussion is only a brief summary of some of the significant tax
consequences of investing in the Trust. Shareholders should consult their tax
advisors regarding specific questions as to state or local taxes and as to the
applicability of the foregoing to their current federal tax situation.
DESCRIPTION OF SHARES
- --------------------------------------------------------------------------------
GENERAL
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest, of $.01 par value
("Shares"). Share certificates will be issued to the holder of record of Shares
upon request. Currently, Shares will be required to be held of record by the
investor. The investor's broker may not be reflected as the record holder;
however, arrangements for Shares to be held in "street name" may be implemented
in the future.
Shareholders are entitled to one vote for each Share held and to vote on
matters submitted to meetings of shareholders. No material amendment may be made
to the Trust's Declaration of Trust without the affirmative vote of at least a
majority of its Shares represented in person or by proxy at a meeting at which a
quorum is present or by written consent without a meeting. Under certain
circumstances the Trustees may be removed by action of the Trustees. The
shareholders also have the right under certain circumstances to remove the
Trustees. Shares have no preemptive or conversion rights and when issued are
fully paid and non-assessable.
The Trust's Declaration of Trust permits the Trustees to divide or combine
the Shares into a greater or lesser number of Shares without thereby changing
the proportionate beneficial interests in the Trust. Each Share represents an
equal proportionate interest in the Trust with each other Share.
The Trust may be terminated (i) by the affirmative vote of the holders of
66% of its outstanding Shares or (ii) by an instrument signed by a majority of
the Trustees and consented to by the holders of two-thirds of the Trust's
outstanding Shares. Upon termination of the Trust, the Trustees will wind up the
affairs of the Trust, the Trust's business will be liquidated and the Trust's
net assets will be distributed to the Trust's shareholders on a pro rata basis.
If not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust, requires that Trust
documents include such disclaimer, and provides for indemnification and
reimbursement of expenses out of the Trust's property for any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations. Given the nature of the Trust's assets and operations, the
possibility of the Trust being unable to meet its obligations is remote. Given
the above limitations on shareholders' personal liability and the Trust's
ability to meet its indemnification obligations, in the opinion of Massachusetts
counsel to the Trust, the risk to Trust shareholders of personal liability is
remote.
The Declaration of Trust further provides that obligations of the Trust are
not binding upon the Trustees individually but only upon the property of the
Trust. Accordingly, the Trustees will not be liable for errors of judgment or
mistakes of fact or law, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office.
ANTI-TAKEOVER PROVISIONS
The Trust presently has certain anti-takeover provisions in its Declaration of
Trust which could have the effect of limiting the ability of other entities or
persons to acquire control of the Trust, to cause it to engage in certain
transactions or to modify its structure. A Trustee may be removed from office by
a written instrument signed by at least two-thirds of the remaining trustees or
by a vote of the holders of at least 66% of the Shares. In addition, the
affirmative vote or consent of the holders of 66% of the Shares of the Trust (a
greater vote than that required by the 1940 Act and greater than the required
vote applicable
29
<PAGE>
to business corporations under state law) is required to authorize the
conversion of the Trust from a closed-end to an open-end investment company, or
generally to authorize any of the following transactions:
(i) merger or consolidation of the Trust with or into any other
corporation, association, trust or other organization;
(ii) issuance of any securities of the Trust to any person or entity for
cash;
(iii) sale, lease or exchange of all or any substantial part of the
assets of the Trust, to any entity or person (except assets having an
aggregate fair market value of less than $1,000,000, aggregating similar
transactions over a twelve-month period); or
(iv) sale, lease or exchange to the Trust, in exchange for securities of
the Trust, of any assets of any entity or person (except assets having an
aggregate fair market value of less than $1,000,000, aggregating similar
transactions over a twelve-month period)
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of 5% or more of the outstanding shares of the
Trust. However, such 66% vote or consent will not be required with respect to
the foregoing transactions where the Board of Trustees under certain conditions
approves the transaction, in which case, with respect to (i) and (iii) above, a
majority shareholder vote or consent will be required, and, with respect to (ii)
and (iv) above, a shareholder vote or consent would be required. Furthermore,
any amendment to the provisions in the Declaration of Trust requiring a 66%
shareholder vote or consent for the foregoing transactions similarly requires a
66% shareholder vote or consent.
The foregoing provisions will make more difficult a change in the Trust's
management, or consummation of the foregoing transactions without the Trustee's
approval, and would, in the event a secondary market were to develop in the
Shares, have the effect of depriving shareholders of an opportunity to sell
their shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Trust in a tender offer or similar
transaction. However, the Board of Trustees has considered these anti-takeover
provisions and believes that they are in the shareholders' best interests and
benefit shareholders by providing the advantage of potentially requiring persons
seeking control of the Trust to negotiate with its management regarding the
price to be paid and facilitating the continuity of the Trust's management.
Reference should be made to the Declaration of Trust on file with the SEC for
the full text of these provisions.
SHARE REPURCHASES AND TENDERS
- --------------------------------------------------------------------------------
The Board of Trustees of the Trust currently intends, each quarter, to consider
authorizing the Trust to make tender offers for all or a portion of its then
outstanding Shares at the then current net asset value of the Shares. Although
such tender offers, if undertaken and completed, will provide some liquidity for
holders of the Shares, there can be no assurance that such tender offers will in
fact be undertaken, completed or, if completed, that they will provide
sufficient liquidity for all holders of Shares who may desire to sell such
Shares. As such, investment in the Shares should be considered illiquid.
Although the Board of Trustees believes that tender offers for the Shares
generally would increase the liquidity of the Shares, the acquisition of Shares
by the Trust will decrease the total assets of the Trust, and therefore, have
the effect of increasing the Trust's expense ratio. Because of the nature of the
Trust's investment objective and policies and the Trust's portfolio, the
Investment Advisor anticipates potential difficulty in disposing of portfolio
securities in order to consummate tender offers for the Shares. As a result, the
Trust may be required to borrow money in order to finance repurchases and
tenders. The Trust's Declaration of Trust authorizes the Trust to borrow money
for such purposes.
Even if a tender offer has been made, the Trustees' announced policy, which
may be changed by the Trustees, is that the Trust cannot accept tenders if
(1) such transactions, if consummated, would (a) impair the Trust's status as a
regulated investment company under the Code (which would make the Trust a
taxable entity, causing the Trust's taxable income to be taxed at the Trust
level) or (b) result in a failure to comply with applicable asset coverage
requirements or (2) there is, in the judgment of the Trustees, any (a) material
legal action or proceeding instituted or threatened challenging such
transactions or otherwise materially adversely affecting the Trust,
(b) suspension of or limitation on prices for trading securities generally on
the New York Stock Exchange, (c) declaration of a banking moratorium by federal
or state authorities or any suspension of payment by banks in the United States
or New York State, (d) limitation affecting the Trust or the issuers of its
portfolio securities imposed by federal or state authorities on the extension of
credit by lending institutions, (e) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States or (f) other event or condition which would have a material
adverse effect on the Trust or the holders of its Shares if Shares were
repurchased. The Trustees may modify these conditions in light of experience.
Any tender offer made by the Trust for its Shares will be at a price equal
to the net asset value of the Shares determined at the close of business on the
day the offer ends. During the pendency of any tender offer by the Trust, the
Trust will establish procedures which will be specified in the tender offer
documents to enable holders of Shares to ascertain readily
30
<PAGE>
such net asset value. Each offer will be made and holders of Shares notified in
accordance with the requirements of the 1934 Act and the 1940 Act, either by
publication or mailing or both. Each offering document will contain such
information as is prescribed by such laws and the rules and regulations
promulgated thereunder. If any tender offer, after consideration and approval by
the Trustees, is undertaken by the Trust, the terms of such tender offer will
set forth the maximum number of Shares (if less than all) that the Trust is
willing to purchase pursuant to the tender offer. The Trust will purchase,
subject to such maximum number of Shares tendered in accordance with the terms
of the offer, all Shares tendered unless it determines to accept none of them.
In the event that a number of Shares in excess of such maximum number of
outstanding Shares are tendered in accordance with the Trust's tender offer, the
Trust intends to purchase, on a pro rata basis, an amount of tendered Shares
equal to such maximum number of the outstanding Shares or, alternatively, to
extend the offering period and increase the number of Shares that the Trust is
offering to purchase. The Trust will pay all costs and expenses associated with
the making of any tender offer.
During the fiscal year October 1, 1998 through September 30, 1999, the Trust
completed four tender offers. The first tender offer commenced on November 18,
1998 and resulted in the tender of 3,883,009 Shares. The second tender offer
commenced on February 17, 1999 and resulted in the tender of 4,537,358 Shares.
The third tender offer commenced on May 17, 1999 and resulted in the tender of
5,125,270 Shares. The fourth tender offer commenced on August 18, 1999 and
resulted in the tender of 5,473,419 shares.
If the Trust must liquidate portfolio holdings in order to purchase Shares
tendered, the Trust may realize gains and losses.
EARLY WITHDRAWAL CHARGE
Any early withdrawal charge to defray distribution expenses will be charged in
connection with Shares held for four years or less (calculated from the last day
of the month in which the Shares were purchased) which are accepted by the Trust
for repurchase pursuant to tender offers, except as noted below. The early
withdrawal charge will be imposed on a number of Shares accepted for tender the
value of which exceeds the aggregate value at the time the tender is accepted of
(a) all Shares in the account purchased more than four years prior to such
acceptance, (b) all Shares in the account acquired through reinvestment of
dividends and distributions, and (c) the increase, if any, of value of all other
Shares in the account (namely those purchased within the four years preceding
the acceptance) over the purchase price of such Shares. Accordingly, the early
withdrawal charge is not imposed on Shares acquired through reinvestment of
dividends and distributions or on any increases in the net asset value of Shares
above the initial purchase price. The early withdrawal charge will be paid to
the Investment Advisor. In determining whether an early withdrawal charge is
payable, it is assumed that the acceptance of a repurchase offer would be made
from the earliest purchase of Shares. Any early withdrawal charge which is
required to be imposed will be made in accordance with the following schedule.
<TABLE>
<CAPTION>
YEAR OF REPURCHASE EARLY WITHDRAWAL
AFTER PURCHASE CHARGE
- ------------------ ------
<S> <C>
First................................ 3.0%
Second............................... 2.5%
Third................................ 2.0%
Fourth............................... 1.0%
Fifth and following.................. 0.0%
</TABLE>
The following example will illustrate the operation of the early withdrawal
charge. Assume that an investor purchases $1,000 of the Trust's Shares for cash
and that 21 months later the value of the account has grown through the
reinvestment of dividends and capital appreciation to $1,200. The investor then
may submit for repurchase pursuant to a tender offer up to $200 of Shares
without incurring an early withdrawal charge. If the investor should submit for
repurchase pursuant to a tender offer $500 of Shares, an early withdrawal charge
would be imposed on $300 of the Shares submitted. The charge would be imposed at
the rate of 2.5% because it is in the second year after the purchase was made,
and the charge would be $7.50. For the fiscal years ended September 30, 1997,
1998 and 1999, MSDW Advisors informed the Trust that it received approximately
$1,296,000, $2,085,000 and $2,651,000, respectively, in withdrawal fees.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
The Trust continuously offers Shares through Morgan Stanley Dean Witter
Distributors Inc., which is acting as the distributor of the Shares, through
certain broker-dealers, including Dean Witter Reynolds Inc. ("DWR"), which have
entered into selected dealer agreements with the Distributor ("Selected
Broker-Dealers"). The Trust or the Distributor may suspend the continuous
offering of the Shares to the general public at any time in response to
conditions in the securities markets or otherwise and may thereafter resume such
offering from time to time.
31
<PAGE>
Morgan Stanley Dean Witter Distributors Inc. serves as distributor of the
Trust's shares pursuant to a Distribution Agreement initially approved by the
Trustees on October 30, 1992. The Distribution Agreement had an initial term
ending April 30, 1994, and provides under its terms that it will continue from
year to year thereafter if approved by the Board. At their meeting held on
April 22, 1999, the Trustees, including all of the Independent Trustees,
approved the continuation of the Distribution Agreement until April 30, 2000.
None of the Trust, the Distributor or the Investment Advisor intends to make
a secondary market in the Shares. Accordingly, there is not expected to be any
secondary trading market in the Shares, and an investment in the Shares should
be considered illiquid.
The minimum investment in the Trust is $1,000. Subsequent purchases of $100
or more may be made by sending a check, payable to Morgan Stanley Dean Witter
Prime Income Trust, directly to Morgan Stanley Dean Witter Trust FSB, an
affiliate of the Distributor (the "Transfer Agent") at P.O. Box 1040, Jersey
City, NJ 07303 or by contacting a Financial Advisor of DWR or other Selected
Broker-Dealer representative. Certificates for Shares purchased will not be
issued unless a request is made by the shareholder in writing to the Transfer
Agent.
Shares of the Trust are sold through Morgan Stanley Dean Witter Distributors
Inc. or a Selected Broker-Dealer on a normal three business day settlement
basis; that is, payment generally is due on or before the third business day
(settlement date) after the order is placed with the Distributor. Shares of the
Trust purchased through the Distributor or a Selected Broker-Dealer are entitled
to dividends beginning on the next business day following settlement date. Since
the Distributor or a Selected Broker-Dealer forwards investors' funds on
settlement date, they may benefit from the temporary use of the funds where
payment is made prior thereto.
The Shares are offered by the Trust at the then current net asset value per
share next computed after the Distributor receives an order to purchase from an
investor's dealer or directly from the investor. See "Determination of Net Asset
Value." The Investment Advisor compensates the Distributor at a rate of 2.75% of
the purchase price of Shares purchased from the Trust. The Distributor may
reallow to dealers 2.5% of the purchase price of Shares of the Trust purchased
by such dealers. If such Shares remain outstanding after one year from the date
of their initial purchase, the Investment Advisor currently intends to
compensate the Distributor at an annual rate equal to 0.10% of the net asset
value of the Shares sold and remaining outstanding. Such 0.10% fee will begin
accruing after one year from the date of the initial purchase of the Shares. The
compensation to the Distributor described above is paid by the Investment
Advisor from its own assets, which may include profits from the advisory fee
payable under the Advisory Agreement, as well as borrowed funds. An early
withdrawal charge payable to the Investment Advisor of up to 3.0% of the
original purchase price of the Shares will be imposed on most Shares held for
four years or less that are accepted for repurchase pursuant to a tender offer
by the Trust. See "Share Repurchases and Tenders." The compensation paid to the
Distributor, including compensation paid in connection with the purchase of
Shares from the Trust, the annual payments referred to above and the early
withdrawal charge, if any, described above, will not in the aggregate exceed the
applicable limit (currently 7.25% of shareholders' purchases of Shares of the
Trust) as determined from time to time by the National Association of Securities
Dealers, Inc.
YIELD INFORMATION
- --------------------------------------------------------------------------------
The Trust may, from time to time, publish its yield. The yield on Trust Shares
normally will fluctuate. Therefore, the yield for any given past period is not
an indication or representation by the Trust of future yields or rates of return
on its Shares. The Trust's yield is affected by changes in prevailing interest
rates, average portfolio maturity and operating expenses. Current yield
information may not provide a basis for comparison with bank deposits or other
investments which pay a fixed yield over a stated period of time.
The yield of the Trust is computed by dividing the Trust's net investment
income over a 30-day period by an average value (using the average number of
Shares entitled to receive dividends and the net asset value per Share at the
end of the period), all in accordance with the standardized yield formula
prescribed by the SEC for open-end investment companies. Such amount is
compounded for six months and then annualized for a twelve-month period to
derive the Trust's yield. For the 30-day period ended September 30, 1999, the
Trust's yield, calculated pursuant to this formula, was 7.35%.
On occasion, the Trust may compare its yield to (i) the Prime Rate, quoted
daily in THE WALL STREET JOURNAL as the base rate on corporate loans at large
U.S. money center commercial banks, (ii) one or more averages compiled by
DONOGHUE'S MONEY FUND REPORT, a widely recognized independent publication that
monitors the performance of money market mutual funds, (iii) the average yield
reported by the BANK RATE MONITOR NATIONAL INDEX for money market deposit
accounts offered by the 100 leading banks and thrift institutions in the ten
largest standard metropolitan statistical areas, (iv) yield data published by
Lipper Analytical Services, Inc., or (v) the yield on an investment in 90-day
Treasury bills on a rolling basis, assuming quarterly compounding. In addition,
the Trust may compare the Prime Rate, the DONOGHUE'S averages and the other
yield data described above to each other. As with yield quotations, yield
comparisons should not be considered representative of the Trust's yield or
relative performance for any future period.
32
<PAGE>
CUSTODIAN, DIVIDEND DISBURSING AND TRANSFER AGENT
- --------------------------------------------------------------------------------
The Bank of New York, 100 Church Street, New York, New York 10007, is the
Trust's custodian and has custody of all securities and cash of the Trust. The
custodian, among other things, attends to the collection of principal and income
and payment for collection of proceeds of securities bought and sold by the
Trust. Any of the Trust's cash balances with the Custodian in excess of $100,000
are unprotected by federal deposit insurance. Such balances may, at times, be
substantial.
Morgan Stanley Dean Witter Trust FSB, Harborside Financial Center, Plaza
Two, Jersey City, New Jersey 07311, an affiliate of Morgan Stanley Dean Witter
Advisors Inc., the Trust's Investment Advisor, Morgan Stanley Dean Witter
Services Company Inc., the Trust's Administrator and Morgan Stanley Dean Witter
Distributors Inc., the Trust's Distributor, is the dividend disbursing and
transfer agent of the Trust. Morgan Stanley Dean Witter Trust FSB charges the
Trust an annual per shareholder account fee and is reimbursed for its
out-of-pocket expenses.
REPORTS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
The Trust will send to shareholders semi-annual reports showing the Trust's
portfolio and other information. An annual report, containing financial
statements audited by independent accountants, together with their report
thereon, will be sent to shareholders each year.
LEGAL COUNSEL
- --------------------------------------------------------------------------------
Barry Fink, Esq., who is an officer and the General Counsel of the Investment
Advisor, is an officer and the General Counsel of the Trust.
EXPERTS
- --------------------------------------------------------------------------------
The September 30, 1999 financial statements of the Trust, included herein, have
been so included in reliance upon the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
CODE OF ETHICS
Directors, officers and employees of MSDW Advisors, MSDW Services and MSDW
Distributors are subject to a strict Code of Ethics adopted by those companies.
The Code of Ethics is intended to ensure that the interests of shareholders and
other clients are placed ahead of any personal interest, that no undue personal
benefit is obtained from a person's employment activities and that actual and
potential conflicts of interest are avoided. To achieve these goals and comply
with regulatory requirements, the Code of Ethics requires, among other things,
that personal securities transactions by employees of the companies be subject
to an advance clearance process to monitor that no Morgan Stanley Dean Witter
Fund is engaged at the same time in a purchase or sale of the same security. The
Code of Ethics bans the purchase of securities in an initial public offering,
and also prohibits engaging in futures and options transactions and profiting on
short-term trading (that is, a purchase within sixty days of a sale or a sales
within sixty days of a purchase) of a security. In addition, investment
personnel may not purchase or sell a security for their personal account within
thirty days before or after any transaction in any Morgan Stanley Dean Witter
Fund managed by them. Any violations of the Code of Ethics are subject to
sanctions, including reprimand, demotion or suspension or termination of
employment. The Code of Ethics comports with regulatory requirements and the
recommendations in the 1994 report by the Investment Company Institute Advisory
Group on Personal Investing.
SHAREHOLDER INQUIRIES
All inquiries regarding the Trust should be directed to the Trust at the
telephone number or address set forth on the front cover of this Prospectus.
This Prospectus does not contain all of the information set forth in the
Registration Statement that the Trust has filed with the SEC. The complete
Registration Statement may be obtained from the SEC upon payment of the fee
prescribed by the Rules and Regulations of the SEC.
33
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of Morgan Stanley Dean Witter Prime Income
Trust
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of
operations, of changes in net assets and of cash flows and the financial
highlights (which appear under the heading "Financial Highlights" on page 6 of
this Prospectus) present fairly, in all material respects, the financial
position of Morgan Stanley Dean Witter Prime Income Trust (the "Trust") at
September 30, 1999, the results of its operations and its cash flows 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 nine years in the
period then ended and for the period November 30, 1989 (commencement of
operations) through September 30, 1990, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Trust'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 September 30, 1999 by correspondence with the
custodian and, with respect to senior collateralized loans, the selling
participants and agent banks, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
November 15, 1999
34
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT (IN AND COUPON
THOUSANDS) MATURITY DATE RATE VALUE
- --------------------- ------------- ------------- -----
<C> <S> <C> <C>
SENIOR COLLATERALIZED TERM LOANS (a) (b) (95.0%)
ACCIDENT & HEALTH INSURANCE (0.2%)
$ 2,475 BRW Acquisition, Inc., due 07/10/06......................... 7.25% $ 2,471,634
2,475 BRW Acquisition, Inc., due 07/10/07......................... 7.50 2,471,560
--------------
4,943,194
--------------
AEROSPACE (1.5%)
14,813 Avborne, Inc., due 06/30/05................................. 8.56 to 8.75 14,805,346
6,965 Decrane Aircraft Holdings, Inc., due 04/23/06............... 8.76 6,956,851
17,382 Fairchild Holding Corp., due 04/30/06....................... 8.63 to 8.68 17,380,511
--------------
39,142,708
--------------
AIR FREIGHT/DELIVERY SERVICES (1.6%)
12,882 Atlas Freighter Leasing II, Inc., due 05/29/04.............. 7.50 12,867,858
8,531 Erickson Air-Crane Co., L.L.C., due 12/31/04................ 9.01 8,520,756
3,883 Evergreen International Aviation, Inc., due 05/31/02........ 8.62 3,881,840
6,201 Evergreen International Aviation, Inc., due 05/07/03........ 8.54 6,200,382
8,447 First Security Bank, National Association as Owner Trustee,
due 05/07/03................................................ 8.68 8,445,753
--------------
39,916,589
--------------
APPAREL (2.3%)
14,462 American Marketing Industries, Inc., due 11/29/02........... 9.06 to 9.25 14,458,548
3,900 American Marketing Industries, Inc., due 11/30/03........... 9.06 to 9.25 3,899,086
2,709 American Marketing Industries, Inc., due 11/30/04........... 9.06 to 9.25 2,708,138
4,186 American Marketing Industries, Inc., due 11/30/05........... 9.06 to 9.25 4,185,358
7,039 Arena Brands, Inc., due 06/01/02............................ 8.66 to 9.39 7,027,781
1,038 Arena Brands, Inc. (Revolver), due 06/01/02................. 8.62 to 11.00 1,038,320
18,000 St. John Knits International, Inc., due 07/31/07............ 9.38 17,985,780
5,985 The William Carter Co., due 10/30/03........................ 7.79 to 7.97 5,980,940
--------------
57,283,951
--------------
AUTO PARTS - O.E.M. (2.5%)
9,900 Accuride Corp., due 01/21/06................................ 7.06 9,898,911
7,500 Accuride Corp., due 01/21/07................................ 7.81 7,499,025
11,542 AP Automotive Systems, Inc., due 12/19/05................... 7.56 to 7.69 11,541,601
6,316 J.L. French Automotive Castings, Inc., due 10/21/06......... 8.13 6,315,788
15,000 Meridian Automotive Systems, Inc., due 05/25/06............. 8.25 14,972,400
5,960 Special Devices, Inc., due 12/15/05......................... 8.56 5,959,167
7,940 Stoneridge, Inc., due 12/31/05.............................. 9.01 7,930,710
--------------
64,117,602
--------------
AUTOMOTIVE AFTERMARKET (0.2%)
2,056 Safelite Glass Corp., due 12/23/04.......................... 8.50 2,053,787
2,056 Safelite Glass Corp., due 12/23/05.......................... 8.75 2,053,807
--------------
4,107,594
--------------
BOOKS/MAGAZINE (1.9%)
18,886 Advanstar Communications, Inc., due 04/30/05................ 7.88 18,885,622
4,991 Advanstar Communications, Inc., due 06/30/07................ 8.38 4,990,842
25,000 Ziff-Davis, Inc., due 03/31/06.............................. 8.81 24,996,000
--------------
48,872,464
--------------
</TABLE>
35
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT (IN AND COUPON
THOUSANDS) MATURITY DATE RATE VALUE
- --------------------- ------------- ------------- -----
<C> <S> <C> <C>
BROADCAST/MEDIA (4.8%)
$20,000 Benedek Broadcasting Corp., due 11/20/07.................... 8.69 to 8.70% $ 19,964,741
10,000 Black Entertainment Television, Inc., due 06/30/06.......... 6.94 9,998,800
9,750 Capstar Broadcasting Partners, Inc., due 11/30/04........... 7.31 to 7.38 9,693,758
9,800 Capstar Broadcasting Partners, Inc., due 05/31/05........... 7.69 9,799,496
6,400 Chancellor Media Corp., due 06/30/05........................ 7.56 6,400,103
1,339 Chancellor Media Corp. (Revolver), due 06/30/05............. 7.56 to 9.38 1,338,750
2,850 Cumulus Media, Inc., due 09/30/07........................... 8.38 2,849,971
1,900 Cumulus Media, Inc., due 02/28/08........................... 8.51 1,899,981
15,000 Emmis Communications Corp., due 02/28/07.................... 7.94 14,846,700
6,579 Latin Communications, Inc., due 02/28/04.................... 13.00 6,578,804
19,000 Sinclair Broadcast Group, Inc., due 09/15/05................ 6.56 18,996,580
7,425 Spartan Communications, Inc., due 06/30/05.................. 8.63 7,424,852
10,000 Susquehanna Media Co., due 06/30/08......................... 7.94 10,000,100
--------------
119,792,636
--------------
BUILDING MATERIALS (0.5%)
3,011 Atrium Co., Inc., due 06/30/05.............................. 8.53 3,007,328
4,316 Atrium Co., Inc., due 06/30/06.............................. 8.56 to 8.78 4,314,591
6,000 Dayton Superior Corp., due 09/29/05......................... 8.13 5,999,880
--------------
13,321,799
--------------
CABLE TELEVISION (3.6%)
45,000 Charter Communications Operating, LLC, due 03/18/08......... 7.81 to 7.89 44,996,911
10,750 Classic Cable, Inc., due 01/31/08........................... 8.00 to 8.25 10,749,770
17,500 General Cable Corp., due 05/27/07........................... 8.25 17,481,100
15,000 RCN Corp., due 06/03/07..................................... 8.88 14,996,550
4,000 TWFanch-One Co., due 12/31/07............................... 8.00 3,990,520
--------------
92,214,851
--------------
CASINO/GAMBLING (0.9%)
5,519 Alliance Gaming Corp., due 01/31/05......................... 8.56 to 8.62 5,517,653
2,203 Alliance Gaming Corp., due 07/31/05......................... 8.81 to 8.87 2,202,624
5,000 Harrah's Jazz Co., due 04/30/05............................. 6.06 4,997,450
10,000 Palace Station Hotel & Casino, Inc., due 12/31/05....... 7.87 9,999,900
--------------
22,717,627
--------------
CELLULAR TELEPHONE (1.8%)
7,444 Centenial Cellular Operating Co. LLC, due 05/31/07.......... 8.64 7,408,988
7,444 Centenial Cellular Operating Co. LLC, due 11/30/07.......... 8.89 7,408,839
30,602 Microcell Connexions, Inc., due 03/01/06.................... 8.51 to 8.63 30,594,521
--------------
45,412,348
--------------
COAL MINING (0.6%)
14,813 Quaker Coal Company, Inc., due 06/30/06..................... 11.75 14,812,500
--------------
CONSTRUCTION/AGRICULTURAL EQUIPMENT/TRUCKS (0.4%)
10,000 Terex Corp., due 03/06/06................................... 8.68 10,000,000
--------------
CONSUMER SPECIALTIES (1.0%)
2,375 American Safety Razor Co., due 04/30/07..................... 9.12 to 9.20 2,374,522
8,307 Amscan Holdings, Inc., due 12/31/04......................... 7.75 to 7.91 8,298,994
5,563 Jet Plastica Industries, Inc., due 12/31/02................. 7.69 to 8.00 5,558,935
8,891 Jet Plastica Industries, Inc., due 12/31/04................. 8.19 to 8.50 8,882,738
--------------
25,115,189
--------------
CONSUMER SUNDRIES (0.8%)
324 Corning Consumer Products Co. (Revolver), due 04/09/05...... 7.00 to 7.51 323,527
15,840 Corning Consumer Products Co., due 10/09/06................. 7.38 15,837,624
3,055 The Boyds Collection, Ltd., due 04/21/06.................... 7.00 to 7.56 3,053,528
--------------
19,214,679
--------------
</TABLE>
36
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT (IN AND COUPON
THOUSANDS) MATURITY DATE RATE VALUE
- --------------------- ------------- ------------- -----
<C> <S> <C> <C>
CONSUMER/BUSINESS SERVICES (2.7%)
$16,951 Bridge Information Systems, Inc., due 05/29/03.............. 8.06 to 8.19% $ 16,951,111
2,556 Bridge Information Systems, Inc. (Revolver),
due 05/29/03................................................ 8.19 to 9.50 2,555,572
19,950 Bridge Information Systems, Inc., due 05/29/05.............. 8.06 to 8.31 19,949,202
9,381 InfoUSA, Inc., due 06/30/06................................. 8.94 9,381,102
4,833 Prime Succession, Inc., due 08/01/03........................ 8.94 to 9.25 4,833,602
4,833 Prime Succession, Inc. (Participation: Goldman Sachs
& Co.) (d), due 08/01/03.................................... 8.94 to 9.25 4,833,602
9,601 Rose Hills Co., due 12/01/03................................ 8.31 9,590,387
--------------
68,094,578
--------------
CONTAINERS/PACKAGING (2.0%)
1,778 Graham Packaging Co., due 01/31/06.......................... 8.25 1,774,540
8,172 Graham Packaging Co., due 01/31/07.......................... 8.38 to 8.81 8,162,509
7,500 Impaxx, Inc., due 12/31/05.................................. 8.81 to 9.13 7,494,075
10,000 LLS Corp., due 07/31/06..................................... 8.30 to 8.75 9,994,363
4,987 Mediapak Corp., due 12/31/05................................ 8.77 to 10.25 4,980,708
4,987 Mediapak Corp., due 12/31/06................................ 8.88 to 10.50 4,981,490
4,822 MPC Packaging Corp., due 05/30/04........................... 10.13 4,822,454
9,174 Packaging Corporation of America, due 04/12/07.............. 8.63 to 9.50 9,172,115
--------------
51,382,254
--------------
DISCOUNT CHAINS (0.5%)
11,528 Tuesday Morning Corp., due 12/29/04......................... 7.88 11,527,594
--------------
DIVERSIFIED COMMERCIAL SERVICES (0.4%)
9,950 Building One Services Corp., due 04/30/04................... 8.31 to 8.50 9,931,582
--------------
DIVERSIFIED MANUFACTURING (1.6%)
6,197 Chatham Technologies, Inc., due 08/18/03.................... 8.44 6,196,703
7,914 Chatham Technologies, Inc., due 08/18/05.................... 8.94 7,914,649
3,000 Desa International, Inc., due 11/26/03...................... 8.98 2,999,670
6,755 Desa International, Inc., due 11/26/04...................... 9.00 6,747,772
6,860 Doskocil Manufacturing Co., due 09/30/04.................... 9.38 6,858,559
9,554 Insilco Corp., due 11/24/05................................. 9.13 9,554,029
--------------
40,271,382
--------------
DRUGSTORE CHAINS (0.7%)
9,850 Duane Reade, Inc., due 02/15/05............................. 8.06 9,849,015
6,683 Duane Reade, Inc., due 02/15/06............................. 8.31 to 8.56 6,681,897
--------------
16,530,912
--------------
E.D.P. SERVICES (0.3%)
14,738 DecisionOne Corp., due 08/07/04............................. 10.00 8,105,625
--------------
EDUCATION (0.4%)
9,258 Children's Discovery Centers of America, due 06/30/05....... 7.81 to 7.94 9,235,720
--------------
ELECTRONIC COMPONENTS (1.9%)
7,481 Communications Instruments, Inc., due 03/15/04.............. 8.63 to 8.69 7,480,964
13,944 Dynamic Details, Inc., due 04/22/05......................... 7.88 13,943,721
7,000 Knowles Electronics, Inc., due 06/29/07..................... 8.60 6,987,680
2,968 Viasystems Group, Inc., due 03/31/04........................ 8.75 2,964,622
2,443 Viasystems Group, Inc., due 06/30/04........................ 8.79 2,440,274
14,000 Viasystems Group, Inc., due 06/30/05........................ 9.18 to 9.19 13,997,495
--------------
47,814,756
--------------
ELECTRONIC PRODUCTION EQUIPMENT (0.2%)
5,706 Telex Communications, Inc., due 11/06/04.................... 8.96 to 8.98 5,704,728
--------------
ENERGY (0.6%)
15,000 AES Texas Funding, LLC, due 03/06/00........................ 8.13 14,999,700
--------------
ENTERTAINMENT & LEISURE (1.1%)
7,500 MGM Studios, Inc., due 03/31/06............................. 8.25 7,499,475
5,354 Premier Parks, Inc., due 03/31/06........................... 7.44 to 9.00 5,354,483
16,038 Six Flag Theme Parks, Inc., due 11/30/04.................... 8.19 16,037,256
--------------
28,891,214
--------------
</TABLE>
37
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT (IN AND COUPON
THOUSANDS) MATURITY DATE RATE VALUE
- --------------------- ------------- ------------- -----
<C> <S> <C> <C>
ENVIRONMENTAL SERVICES (2.5%)
$22,727 Allied Waste Industries, Inc., due 07/30/06................. 8.19% $ 22,727,273
27,273 Allied Waste Industries, Inc., due 07/30/07................. 8.44 27,272,763
12,903 Environmental Systems Products Holdings, Inc.,
due 09/30/05................................................ 9.51 12,887,404
--------------
62,887,440
--------------
FINANCE (0.7%)
8,990 Blackstone Capital Company II, L.L.C., due 11/30/00......... 11.75 8,990,066
8,830 Wasserstein/C&A Holdings, L.L.C., due 11/30/00.............. 10.00 8,813,283
--------------
17,803,349
--------------
FLUID CONTROLS (0.4%)
4,988 Mueller Group, Inc., due 08/16/06........................... 8.69 4,979,520
4,988 Mueller Group, Inc., due 08/16/07........................... 8.94 4,979,520
--------------
9,959,040
--------------
FOOD CHAINS (0.5%)
12,438 Big V Supermarkets, Inc., due 08/10/03...................... 8.94 12,437,624
--------------
FOOD & BEVERAGES (2.2%)
9,250 B&G Foods, Inc., due 03/03/06............................... 8.63 9,249,815
7,425 Eagle Family Foods, Inc., due 12/31/05...................... 8.69 to 9.01 7,424,421
8,415 Favorite Brands International, Inc., due 05/19/05........... 8.81 8,404,525
12,375 Leon's Bakery, Inc., due 06/03/05........................... 8.38 12,374,752
6,252 Specialty Food Corp. (Revolver), due 01/31/01............... 8.63 to 8.64 6,251,958
10,725 Specialty Food Corp., due 01/31/01.......................... 9.91 10,723,961
--------------
54,429,432
--------------
HOME FURNISHINGS (0.5%)
3,005 Sealy Mattress Co., due 12/15/04............................ 7.88 3,001,814
2,165 Sealy Mattress Co., due 12/15/05............................ 8.13 2,162,662
2,766 Sealy Mattress Co., due 12/15/06............................ 8.38 2,763,872
1,424 Simmons Co., due 10/29/05................................... 8.69 1,424,533
3,563 Simmons Co., due 10/29/06................................... 8.94 3,562,606
--------------
12,915,487
--------------
HOSPITAL/NURSING MANAGEMENT (3.6%)
5,969 Columbia - HealthONE, LLC, due 06/30/05..................... 8.88 5,968,846
7,014 Community Health Systems, Inc., due 12/31/03................ 8.50 7,005,352
7,014 Community Health Systems, Inc., due 12/31/04................ 9.00 7,005,352
5,232 Community Health Systems, Inc., due 12/31/05................ 9.25 5,226,650
4,410 GEAC/Multicare Co., Inc., due 09/30/04...................... 9.49 to 9.51 4,404,957
1,466 GEAC/Multicare Co., Inc., due 06/01/05...................... 9.74 1,466,089
4,300 Genesis Health Ventures, Inc., due 09/30/04................. 8.73 to 8.81 4,299,431
4,290 Genesis Health Ventures, Inc., due 06/01/05................. 8.98 to 9.06 4,289,289
17,194 Integrated Health Services, Inc., due 09/30/04.............. 8.56 to 8.88 17,181,195
3,684 Magellan Health Services, Inc., due 02/12/05................ 8.00 3,680,985
3,684 Magellan Health Services, Inc., due 02/12/06................ 8.25 3,680,949
5,011 Paracelsus Healthcare Corp., due 03/31/03................... 8.38 5,011,011
7,943 Paracelsus Healthcare Corp., due 03/31/04................... 8.63 7,942,698
14,552 Ventas Realty Limited Partnership, due 10/30/99............. 8.14 14,551,938
--------------
91,714,742
--------------
HOTELS/RESORTS (3.0%)
15,000 Felcor Lodging Trust, Inc., due 03/31/04.................... 7.88 14,999,850
10,395 Meristar Hospitality Operating Partnership, L.P.,
due 01/31/04................................................ 7.38 10,394,896
4,727 Pebble Beach Company, due 07/30/06.......................... 8.63 4,727,226
20,000 Starwood Hotels & Resorts Worldwide, Inc., due 02/23/03..... 9.13 19,999,600
10,000 Wyndham International, Inc., due 06/30/04................... 8.81 9,999,400
15,000 Wyndham International, Inc., due 06/30/06................... 9.06 14,999,250
--------------
75,120,222
--------------
INDUSTRIAL SPECIALTIES (0.8%)
13,301 Advanced Glassfiber Yarns LLC, due 09/30/05................. 9.01 13,285,848
5,955 Panolam Industries International, Inc., due 12/31/05........ 8.88 to 8.98 5,954,395
--------------
19,240,243
--------------
</TABLE>
38
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT (IN AND COUPON
THOUSANDS) MATURITY DATE RATE VALUE
- --------------------- ------------- ------------- -----
<C> <S> <C> <C>
INSURANCE BROKERS/SERVICES (0.5%)
$ 7,271 Acordia, Inc., due 12/31/04................................. 7.69% $ 7,257,849
2,910 Willis Corroon Corp., due 11/19/07.......................... 7.98 2,909,738
2,910 Willis Corroon Corp., due 02/19/08.......................... 8.23 2,909,709
--------------
13,077,296
--------------
MAJOR CHEMICALS (0.6%)
7,500 Huntsman ICI Chemicals LLC, due 06/30/07.................... 8.50 7,491,075
7,500 Huntsman ICI Chemicals LLC, due 06/30/08.................... 8.63 7,499,850
--------------
14,990,925
--------------
MANAGED HEALTH CARE (0.5%)
9,595 Interim Healthcare, Inc., due 02/29/04...................... 8.64 to 9.24 9,590,068
3,559 Interim Healthcare, Inc., due 02/28/05...................... 9.03 to 9.49 3,554,500
--------------
13,144,568
--------------
MEDICAL SPECIALTIES (1.3%)
2,954 Alaris Medical Systems, Inc., due 11/01/03.................. 7.94 2,953,183
2,954 Alaris Medical Systems, Inc., due 11/01/04.................. 7.94 2,953,183
4,641 Alaris Medical Systems, Inc., due 05/01/05.................. 7.94 4,640,275
6,234 Dade Behring, Inc., due 06/30/06............................ 8.24 to 10.13 6,233,813
6,234 Dade Behring, Inc., due 06/30/07............................ 8.44 to 10.38 6,233,532
2,455 Medical Specialties Group, Inc., due 06/30/01............... 8.88 2,454,496
7,136 Medical Specialties Group, Inc., due 06/30/04............... 9.63 7,136,221
--------------
32,604,703
--------------
MEDICAL/NURSING SERVICES (2.5%)
1,965 Alliance Imaging, Inc., due 12/18/03........................ 7.88 to 8.00 1,964,927
4,913 Alliance Imaging, Inc., due 06/18/04........................ 7.88 to 8.44 4,910,574
12,902 Alliance Imaging, Inc., due 12/18/04........................ 7.88 to 8.44 12,901,416
6,983 Alliance Imaging, Inc., due 06/18/05........................ 8.13 to 8.69 6,979,654
8,147 FHC Health Systems, Inc., due 04/30/05...................... 7.81 8,145,572
8,147 FHC Health Systems, Inc., due 04/30/06...................... 8.06 8,145,572
10,400 Quest Diagnostics, Inc., due 08/16/06....................... 8.72 10,398,752
9,600 Quest Diagnostics, Inc., due 08/16/07....................... 9.27 to 9.7 9,592,944
--------------
63,039,411
--------------
MOTOR VEHICLES (0.1%)
3,400 Asbury Automotive Texas Holdings L.L.C., due 03/31/05....... 9.06 3,399,830
MOVIES/ENTERTAINMENT (1.3%)
9,967 Panavision, Inc., due 03/31/05.............................. 8.79 to 8.94 9,947,948
8,904 United Artists Theatre Co., due 04/21/06.................... 9.69 to 11.50 8,903,589
13,355 United Artists Theatre Co., due 04/21/07.................... 9.69 to 11.50 13,341,088
--------------
32,192,625
--------------
MULTI-SECTOR COMPANIES (1.1%)
2,205 Mafco Finance Corp. (Revolver), due 04/28/00................ 9.31 to 9.52 2,202,735
25,442 Mafco Finance Corp., due 04/28/00........................... 9.52 25,413,304
--------------
27,616,039
--------------
NEWSPAPERS (0.2%)
4,925 21st Century Newspapers, Inc., due 09/15/05................. 7.81 4,924,557
--------------
OFFICE EQUIPMENT/SUPPLIES (1.4%)
14,962 Global Imaging Systems, Inc., due 06/30/06.................. 8.63 14,962,201
19,970 US Office Products Co., due 06/09/06........................ 7.89 19,970,170
--------------
34,932,371
--------------
OILFIELD SERVICES/EQUIPMENT (1.8%)
20,000 Plains Scurlock Permian, L.P., due 05/12/04................. 8.47 19,997,600
15,000 Transmontaigne, Inc., due 06/30/06.......................... 8.69 15,000,450
10,000 US Synthetic Corp., due 05/31/05............................ 8.81 to 9.02 9,989,679
--------------
44,987,729
--------------
</TABLE>
39
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT (IN AND COUPON
THOUSANDS) MATURITY DATE RATE VALUE
- --------------------- ------------- ------------- -----
<C> <S> <C> <C>
OTHER CONSUMER SERVICES (0.6%)
$ 7,800 PCA International, Inc., due 08/25/05....................... 8.76% $ 7,791,576
7,882 Volume - Services, Inc., due 12/31/06....................... 9.31 7,872,395
--------------
15,663,971
--------------
OTHER METALS/MINERALS (1.2%)
7,635 CII Carbon, Inc., due 06/25/08.............................. 8.52 7,625,477
1,699 U.S. Silica Corp. (Revolver), due 06/30/04.................. 7.56 to 9.00 1,697,835
14,966 U.S. Silica Corp., due 06/30/06............................. 7.93 14,956,589
5,000 U.S. Silica Corp., due 12/31/06............................. 8.88 4,999,900
--------------
29,279,801
--------------
OTHER PHARMACEUTICALS (0.8%)
19,838 King Pharmaceuticals, Inc., due 12/22/06.................... 9.24 19,815,543
--------------
OTHER SPECIALTY STORES (1.3%)
4,900 Caribbean Petroleum, LP, due 09/30/05....................... 8.81 4,894,855
5,045 Cumberland Farms, Inc. (Participation Merrill Lynch
& Co., Inc.) (c), due 12/31/00.............................. 9.75 5,045,019
7,500 Petro Stopping Centers, L.P., due 07/23/06.................. 8.56 7,492,125
14,924 The Pantry, Inc., due 01/31/06.............................. 8.89 14,924,113
--------------
32,356,112
--------------
PACKAGED FOODS (0.5%)
9,607 Formax, Inc., due 06/30/05.................................. 8.19 to 10.00 9,591,799
2,612 Southern Foods Group, L.P., due 03/04/06.................... 8.44 2,611,925
--------------
12,203,724
--------------
PAINTS/COATINGS (0.3%)
7,500 Metokote Corp., due 11/02/05................................ 9.26 7,490,175
--------------
PAPER (1.6%)
7,149 Alabama Pine Pulp Co., Inc. (d), due 06/30/03............... 9.38 6,791,064
3,325 Alabama Pine Pulp Co., Inc. (d), due 06/30/05............... 9.38 1,866,237
4,429 Alabama Pine Pulp Co., Inc. (d), due 12/31/08............... 10.75 182,934
8,524 Alabama River Newsprint Co. (Participation: Toronto Dominion
Bank) (c), due 12/31/02..................................... 7.38 to 7.63 8,103,527
8,872 Bear Island Paper Company, LLC, due 12/31/05................ 8.38 8,871,846
5,655 Crown Paper Co. (Revolver), due 08/22/02.................... 8.25 to 10.00 5,655,170
8,103 Crown Paper Co., due 08/22/03............................... 8.81 to 10.50 8,102,432
--------------
39,573,210
--------------
PRECISION INSTRUMENTS(0.6%)
4,892 Dynatech Corp., due 03/31/05................................ 7.75 4,886,293
4,892 Dynatech Corp., due 03/31/06................................ 8.00 4,886,293
4,892 Dynatech Corp., due 03/31/07................................ 8.25 4,886,293
--------------
14,658,879
--------------
PRINTING/PUBLISHING (2.3%)
5,000 American Media Operations, Inc., due 04/01/07............... 8.63 to 8.88 4,998,050
10,656 Cygnus Publishing, Inc., due 06/05/05....................... 8.24 10,655,504
17,500 Hollinger International Publishing, Inc., due 12/31/04...... 10.25 17,500,000
10,879 The Sheridan Group, Inc., due 01/30/05...................... 8.31 10,878,036
3,292 Von Hoffman Press, Inc., due 05/30/04....................... 7.76 3,287,221
10,690 Von Hoffman Press, Inc., due 05/30/05....................... 7.76 10,677,671
--------------
57,996,482
--------------
RECREATIONAL PRODUCTS/TOYS (0.9%)
7,205 Ritvik Toys, Inc., due 02/08/03............................. 8.75 7,203,419
7,205 Ritvik Toys, Inc., due 02/08/04............................. 9.38 7,203,346
913 Spalding Holdings Corp., due 09/30/03....................... 7.79 912,607
3,494 Spalding Holdings Corp. (Revolver), due 09/30/03............ 7.79 to 9.75 3,493,695
1,828 Spalding Holdings Corp., due 09/30/04....................... 8.23 1,827,458
1,828 Spalding Holdings Corp., due 09/30/05....................... 8.79 1,827,440
1,052 Spalding Holdings Corp., due 03/30/06....................... 9.29 1,052,092
--------------
23,520,057
--------------
</TABLE>
40
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT (IN AND COUPON
THOUSANDS) MATURITY DATE RATE VALUE
- --------------------- ------------- ------------- -----
<C> <S> <C> <C>
RENTAL/LEASING COMPANIES (2.7%)
$12,500 Avis Rent A Car, Inc., due 06/30/06......................... 8.56% $ 12,496,750
12,500 Avis Rent A Car, Inc., due 06/30/07......................... 8.81 12,496,750
15,000 NationsRent, Inc., due 07/20/06............................. 8.38 14,999,700
5,573 Rent-A-Center, Inc., due 01/31/06........................... 7.63 to 7.64 5,572,900
6,816 Rent-A-Center, Inc., due 01/31/07........................... 7.88 to 7.89 6,815,912
14,963 United Rentals, Inc., due 06/30/05.......................... 7.72 14,961,004
--------------
67,343,016
--------------
RESTAURANTS (0.3%)
6,825 Shoney's, Inc., due 04/30/02................................ 8.08 to 10.50 6,824,041
RETAIL-SPECIALTY (1.1%)
12,492 CSK Auto, Inc., due 10/31/03................................ 7.38 12,489,876
8,791 HMV Media Group PLC, due 02/25/06........................... 8.26 8,787,684
6,059 HMV Media Group PLC, due 08/25/06........................... 8.58 6,053,044
--------------
27,330,604
--------------
SEMICONDUCTORS (1.5%)
9,043 Fairchild Semiconductor Corp., due 12/15/04................. 8.63 9,043,070
10,000 Intersil Corp., due 06/30/05................................ 9.53 9,988,400
3,925 Mitel Corp., due 12/26/03................................... 7.81 3,920,220
7,222 Semiconductor Components Industries, LLC, due 08/04/06...... 9.31 7,214,928
7,778 Semiconductor Components Industries, LLC, due 08/04/07...... 9.56 7,769,688
--------------
37,936,306
--------------
SPECIALTY CHEMICALS (1.9%)
10,000 Lyondell Petrochemical Co., due 06/30/03.................... 8.67 to 8.69 9,888,815
14,925 Lyondell Petrochemical Co., due 05/17/06.................... 9.36 14,923,060
6,842 Pioneer America Acqusitions Corp., due 12/05/06............. 7.86 to 8.54 6,836,940
8,100 Pioneer Americas, Inc., due 12/05/06........................ 7.88 to 8.66 8,092,032
8,080 Vining Industries, Inc., due 03/31/05....................... 8.57 8,071,352
--------------
47,812,199
--------------
SPECIALTY STEELS (0.8%)
9,875 ISPAT Inland, L.P., due 07/16/05............................ 7.69 to 7.76 9,859,211
9,875 ISPAT Inland, L.P., due 07/16/06............................ 8.19 to 8.26 9,859,211
--------------
19,718,422
--------------
TELECOMMUNICATION EQUIPMENT (1.6%)
4,466 Channel Master, Inc., due 10/10/05.......................... 9.06 to 9.34 4,461,233
13,000 Pinnacle Towers, Inc., due 06/30/07......................... 8.52 12,982,840
22,063 Superior Telecom, Inc., due 11/27/05........................ 9.06 to 9.13 21,943,619
--------------
39,387,692
--------------
TELECOMMUNICATIONS (5.2%)
10,526 Alaska Communications Systems Holdings, Inc.,
due 11/14/07................................................ 8.50 10,525,579
9,474 Alaska Communications Systems Holdings, Inc.,
due 05/14/08................................................ 8.75 9,472,926
7,450 Davel Financing Co., LLC, due 06/23/05...................... 9.72 to 9.76 7,435,959
25,000 Global Crossing Holdings, Ltd., due 07/02/07................ 8.26 25,000,000
15,000 IDT Corp., due 05/10/04..................................... 8.75 14,971,200
9,975 Infonet Sevice Corp., due 06/30/06.......................... 8.26 9,962,033
25,000 KMC Telecom, Inc., due 07/01/07............................. 9.31 24,995,250
10,000 Level 3 Communications, Inc., due 01/15/08.................. 10.75 10,000,000
7,528 MJD Communications, Inc., due 03/31/06...................... 8.13 to 8.25 7,522,909
9,850 MJD Communications, Inc., due 03/31/07...................... 8.50 to 10.25 9,838,155
--------------
129,724,011
--------------
TEXTILES (1.0%)
8,000 Globe Manufacturing, Inc., due 07/31/06..................... 8.57 to 9.32 7,993,389
4,532 Joan Fabrics Corp., due 06/30/05............................ 8.16 4,532,055
2,351 Joan Fabrics Corp., due 06/30/06............................ 8.66 2,350,715
10,897 Polymer Group, Inc., due 12/20/05........................... 7.88 to 7.94 10,889,226
--------------
25,765,385
--------------
</TABLE>
41
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL DESCRIPTION
AMOUNT (IN AND COUPON
THOUSANDS) MATURITY DATE RATE VALUE
- --------------------- ------------- ------------- -----
<C> <S> <C> <C>
TRANSPORTATION (1.4%)
$ 6,310 American Commercial Lines, LLC, due 06/30/06................ 7.56% $ 6,307,547
8,604 American Commercial Lines, LLC, due 06/30/07................ 7.81 8,600,853
5,284 MTL, Inc., due 02/28/05..................................... 7.63 5,284,222
4,528 MTL, Inc., due 02/28/06..................................... 7.88 4,529,333
7,368 North American Van Lines, Inc., due 03/31/06................ 8.27 7,360,497
3,591 Transportacion Ferroviaria Mexicana, S.A. de C.V.,
due 12/23/02................................................ 9.72 3,591,036
--------------
35,673,488
--------------
WIRELESS COMMUNICATIONS (4.9%)
13,684 Arch Paging, Inc., due 06/30/06............................. 12.19 13,682,707
10,000 Nextel Communications, Inc., due 03/31/07................... 9.06 9,874,400
20,000 Nextel Finance Co., due 09/30/06............................ 8.31 19,977,600
15,000 Nextel Partners Operating Corp., due 01/29/08............... 10.19 14,836,350
10,000 Nextel Partners Operating Corp., due 07/29/08............... 9.77 9,988,200
19,938 Omnipoint Communications, Inc., due 02/17/06................ 8.69 to 8.72 19,871,863
11,000 Powertel PCS, Inc., due 12/31/08............................ 8.56 10,988,560
14,000 Powertel PCS, Inc. (Participation: Goldman Sachs & Co.)
(c), due 12/31/08........................................... 8.38 to 8.56 13,985,300
10,000 Teligent, Inc., due 06/30/06................................ 8.45 9,992,100
--------------
123,197,080
--------------
TOTAL SENIOR COLLATERALIZED TERM LOANS (IDENTIFIED COST $2,397,386,167)........ $2,388,163,607
--------------
SENIOR NOTES (0.4%)
1,613 London Fog Industries, Inc. (e), due 02/27/03............... 10.00 629,121
9,563 Supercanal Holdings S.A. (Argentina), due 10/12/02.......... 9.81 9,561,459
--------------
TOTAL SENIOR NOTES (IDENTIFIED COST $11,452,484)............................... $ 10,190,580
--------------
<CAPTION>
NUMBER OF
SHARES VALUE
- --------------------- -----
<C> <S> <C> <C>
COMMON STOCK (a)(f) (0.0%)
APPAREL
129,050 London Fog Industries, Inc. (Restricted) (Identified Cost $2,258,908).......... --
--------------
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE
- --------------------- -------------
<C> <S> <C> <C>
WARRANT (a)(f) (0.0%)
7,931 London Fog Industries, Inc. (Restricted) (Identified Cost
$1,722,237), due ........................................... 02/27/05 --
--------------
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON
THOUSANDS) MATURITY DATE RATE
- --------------------- ------------------------------------------------------------ -------------
<C> <S> <C> <C>
SHORT-TERM INVESTMENTS (4.0%)
COMMERCIAL PAPER (g) (3.6%)
FINANCE - CONSUMER
$22,000 American Express Credit Corp., due 10/01/99................. 5.44 22,000,000
27,000 American Express Credit Corp. (h), due 10/04/99............. 5.40 26,987,850
40,000 American Express Credit Corp. (h), due 10/08/99............. 5.28 39,958,933
TOTAL COMMERCIAL PAPER (AMORTIZED COST $88,946,783)......... 88,946,783
--------------
</TABLE>
42
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN MATURITY COUPON
THOUSANDS) DATE RATE VALUE
- --------------------- ------------------------------------------------------------ ------------- -----
<C> <S> <C> <C>
REPURCHASE AGREEMENT (0.4%)
11,004 The Bank of New York (dated 09/30/99; proceeds
$11,005,055) (i)
(IDENTIFIED COST $11,003,527), due 10/01/99................. 5.00 11,003,527
--------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL SHORT-TERM INVESTMENTS (IDENTIFIED COST $99,950,310)........... 99,950,310
------------
TOTAL INVESTMENTS (IDENTIFIED COST $2,512,770,106) (j)...... 99.4% 2,498,304,497
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES.............. 0.6 15,654,526
----- ------------
NET ASSETS.................................................. 100.0% $2,513,959,023
===== ============
</TABLE>
- ----------------------------------
<TABLE>
<C> <S>
(a) VALUED USING FAIR VALUE PROCEDURES - TOTAL AGGREGATE VALUE
IS $2,398,354,187.
(b) FLOATING RATE SECURITIES. INTEREST RATES SHOWN ARE THOSE IN
EFFECT AT SEPTEMBER 30, 1999.
(c) PARTICIPATION INTERESTS WERE ACQUIRED THROUGH THE FINANCIAL
INSTITUTIONS INDICATED PARENTHETICALLY.
(d) PAYMENT IN KIND SECURITY.
(e) NON-INCOME PRODUCING SECURITY; NOTE IN DEFAULT.
(f) NON-INCOME PRODUCING SECURITIES.
(g) SECURITIES WERE PURCHASED ON A DISCOUNT BASIS. THE INTEREST
RATES SHOWN HAVE BEEN ADJUSTED TO REFLECT A MONEY MARKET
EQUIVALENT YIELD.
(h) ALL OR A PORTION OF THESE SECURITIES ARE SEGREGATED IN
CONNECTION WITH UNFUNDED LOAN COMMITMENTS.
(i) COLLATERALIZED BY $11,247,330 U.S. TREASURY NOTE 5.375% DUE
06/30/03 VALUED AT $11,227,999.
(j) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES
APPROXIMATES IDENTIFIED COST. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $2,632,462 AND THE AGGREGATE GROSS
UNREALIZED DEPRECIATION IS $17,098,071, RESULTING IN NET
UNREALIZED DEPRECIATION OF $14,465,609.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
43
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $2,512,770,106)... $ 2,498,304,497
Cash................................. 3,735,088
Receivable for:......................
Interest........................... 17,078,683
Shares of beneficial interest
sold.............................. 5,126,064
Investments sold................... 435,434
Prepaid expenses and other assets.... 1,011,737
--------------------
TOTAL ASSETS................... 2,525,691,503
--------------------
LIABILITIES:
Payable for:
Investment advisory fee............ 1,757,262
Dividends to shareholders.......... 1,220,374
Administration fee................. 517,047
Accrued expenses and other
payables........................... 304,585
Deferred loan fees................... 7,933,212
Commitments and contingencies
(Note 7)........................... --
--------------------
TOTAL LIABILITIES.............. 11,732,480
--------------------
NET ASSETS..................... $ 2,513,959,023
====================
COMPOSITION OF NET ASSETS:
Paid-in-capital...................... $ 2,536,180,951
Net unrealized depreciation.......... (14,465,609)
Accumulated undistributed net
investment income.................. 704,520
Accumulated net realized loss........ (8,460,839)
--------------------
NET ASSETS..................... $ 2,513,959,023
====================
NET ASSET VALUE PER SHARE,
254,813,996 shares outstanding
(unlimited shares authorized of
$.01 par value).................... $9.87
====================
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INCOME
Interest........................... $183,155,103
Facility, amendment and other loan
fees.............................. 5,258,883
Other income....................... 823,457
------------
TOTAL INCOME..................... 189,237,443
------------
EXPENSES
Investment advisory fee............ 19,568,322
Administration fee................. 5,740,526
Transfer agent fees and expenses... 1,008,446
Professional fees.................. 616,632
Registration fees.................. 407,360
Shareholder reports and notices.... 353,753
Facility fees...................... 144,412
Custodian fees..................... 115,375
Trustees' fees and expenses........ 16,145
Other.............................. 151,925
------------
TOTAL EXPENSES................... 28,122,896
LESS: EXPENSE OFFSET............... (33,238)
------------
NET EXPENSES................... 28,089,658
------------
NET INVESTMENT INCOME.......... 161,147,785
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain.................... 1,067,708
Net change in unrealized
depreciation........................ (13,449,451)
------------
NET LOSS......................... (12,381,743)
------------
NET INCREASE................... $148,766,042
============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
INCREASE (DECREASE) IN NET ASSETS: ------------------ ------------------
<S> <C> <C>
Operations:
Net investment income................................... $ 161,147,785 $ 119,953,468
Net realized gain (loss)................................ 1,067,708 (10,227,863)
Net change in unrealized depreciation................... (13,449,451) 2,829,220
-------------- --------------
Net Increase.......................................... 148,766,042 112,554,825
-------------- --------------
Dividends from net investment income...................... (159,065,743) (120,722,134)
Net increase from transactions in shares of beneficial
interest.................................................. 527,549,296 660,273,515
-------------- --------------
Net Increase.......................................... 517,249,595 652,106,206
NET ASSETS:
Beginning of period....................................... 1,996,709,428 1,344,603,222
-------------- --------------
END OF PERIOD (Including undistributed net investment
income of $704,520 and dividends in excess of net
investment income of $552,409, respectively)............. $2,513,959,023 $1,996,709,428
============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
44
<PAGE>
PRIME INCOME TRUST
FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH:
Cash Flows Provided by Operating Activities:
Net investment income..................................... $ 161,147,785
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Increase in receivables and other assets related to
operations............................................. (4,819,335)
Increase in payables related to operations.............. 239,476
Net loan fees received.................................. 8,407,380
Amortization of loan fees............................... (5,258,883)
Accretion of discounts.................................. (399,778)
---------------
Net cash provided by operating activities............. 159,316,645
---------------
Cash Flows Used for Investing Activities:
Purchases of investments.................................. (1,547,470,530)
Principal repayments/sales of investments................. 904,621,846
Net sales/maturities of short-term investments............ 113,054,438
---------------
Net cash used for investing activities................ (529,794,246)
---------------
Cash Flows Provided by Financing Activities:
Shares of beneficial interest sold........................ 649,548,611
Shares tendered........................................... (188,124,450)
Dividends from net investment income (net of reinvested
dividends of $69,946,361)................................ (88,658,423)
---------------
Net cash provided by financing activities............. 372,765,738
---------------
Net increase in cash........................................ 2,288,137
Cash balance at beginning of year........................... 1,446,951
---------------
CASH BALANCE AT END OF YEAR................................. $ 3,735,088
===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
45
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND ACCOUNTING POLICIES--Morgan Stanley Dean Witter Prime
Income Trust (the "Trust") is registered under the Investment Company Act of
1940, as amended, as a non-diversified, closed-end management investment
company. The Trust's investment objective is to provide a high level of current
income consistent with the preservation of capital. The Trust was organized as a
Massachusetts business trust on August 17, 1989 and commenced operations on
November 30, 1989.
The Trust offers and sells its shares to the public on a continuous basis.
The Trustees intend, each quarter, to consider authorizing the Trust to make
tender offers for all or a portion of its outstanding shares of beneficial
interest at the then current net asset value of such shares.
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) The Trustees believe that, at present,
there are not sufficient market quotations provided by banks, dealers or
pricing services respecting interests in senior collateralized loans
("Senior Loans") to corporations, partnerships and other entities
("Borrower") to enable the Trust to properly value Senior Loans based on
available market quotations. Accordingly, until the market for Senior Loans
develops, interests in Senior Loans held by the Trust are valued at their
fair value in accordance with procedures established in good faith by the
Trustees. Under the procedures adopted by the Trustees, interests in Senior
Loans are priced using a matrix which takes into account the relationship
between current interest rates and interest rates payable on each Senior
Loan, as well as the total number of days in each interest period and the
period remaining until the next interest rate determination or maturity of
the Senior Loan. Adjustments in the matrix-determined price of a Senior Loan
will be made in the event of a default on a Senior Loan or a significant
change in the creditworthiness of the Borrower. The fair values determined
in accordance with these procedures may differ significantly from the market
values that would have been used had a ready market for the Senior Loans
existed; (2) portfolio securities for which over-the-counter market
quotations are readily available are valued at the latest bid price;
(3) all other securities and other assets are valued at their fair value as
determined in good faith under procedures established by and under the
general supervision of the Trustees; and (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. Interest income is accrued daily except where collection is not
expected. When the Trust buys an interest in a Senior Loan, it may receive a
facility fee, which is a fee paid to lenders upon origination of a Senior
Loan and/or a commitment fee which is paid to lenders on an ongoing basis
based upon the undrawn portion committed by the lenders of the underlying
Senior Loan. The Trust amortizes the facility fee and accrues the commitment
fee over the expected term of the loan. When the Trust sells an interest in
a Senior Loan, it may be required to pay fees or commissions to the
purchaser of the interest. Fees received in connection with loan amendments
are amortized over the expected term of the loan.
C. SENIOR LOANS--The Trust invests primarily in Senior Loans to Borrowers.
Senior Loans are typically structured by a syndicate of lenders ("Lenders"),
one or more of which administers the Senior Loan on behalf of the Lenders
("Agent"). Lenders may sell interests in Senior Loans to third parties
("Participations") or may assign all or a portion of their interest in a
Senior Loan to third parties ("Assignments"). Senior Loans are exempt from
registration under the Securities Act of 1933. Presently, Senior Loans are
not readily marketable and are often subject to restrictions on resale.
Some of the Trust's Senior Loans are "Revolver Loans." For these loans, the
Trust commits to provide funding up to the face amount of the loan. The
amount drawn down by the borrower may vary during the term of the loan.
D. FEDERAL INCOME TAX STATUS--It is the Trust'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 Trust 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-
46
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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.
2. INVESTMENT ADVISORY AGREEMENT--Pursuant to an Investment Advisory Agreement
with Morgan Stanley Dean Witter Advisors Inc. (the "Investment Advisor"),
the Trust pays an advisory fee, accrued daily and payable monthly, by applying
the following annual rates to the net assets of the Trust determined as of the
close of each business day: 0.90% to the portion of the daily net assets not
exceeding $500 million; 0.85% to the portion of the daily net assets exceeding
$500 million but not exceeding $1.5 billion; and 0.825% to the portion of daily
net assets exceeding $1.5 billion. Effective May 1, 1999 the Agreement was
amended to reduce the annual rate to 0.80% of the portion of daily net assets in
excess of $2.5 billion.
Under the terms of the Agreement, in addition to managing the Trust's
investments, the Investment Advisor pays the salaries of all personnel,
including officers of the Trust, who are employees of the Investment Advisor.
3. ADMINISTRATION AGREEMENT--Pursuant to an Administration Agreement with
Morgan Stanley Dean Witter Services Company Inc. (the "Administrator"), an
affiliate of the Investment Advisor, the Trust pays an administration fee,
calculated daily and payable monthly, by applying the annual rate of 0.25% to
the Trust's daily net assets.
Under the terms of the Administration Agreement, the Administrator maintains
certain of the Trust'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 Trust
who are employees of the Administrator. The Administrator also bears the cost of
telephone services, heat, light, power and other utilities provided to the
Trust.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES--The cost of
purchases and proceeds from sales/principal repayments of portfolio
securities, excluding short-term investments, for the year ended September 30,
1999 aggregated $1,547,470,530 and $905,057,280, respectively.
Shares of the Trust are distributed by Morgan Stanley Dean Witter
Distributors Inc. (the "Distributor"), an affiliate of the Investment Advisor
and Administrator. Pursuant to a Distribution Agreement between the Trust, the
Investment Advisor and the Distributor, the Investment Advisor compensates the
Distributor at an annual rate of 2.75% of the purchase price of shares purchased
from the Trust. The Investment Advisor will compensate the Distributor at an
annual rate of 0.10% of the value of shares sold for any shares that remain
outstanding after one year from the date of their initial purchase. Any early
withdrawal charge to defray distribution expenses will be charged to the
shareholder in connection with shares held for four years or less which are
accepted by the Trust for repurchase pursuant to tender offers. For the year
ended September 30, 1999, the Investment Advisor has informed the Trust that it
received approximately $2,651,000 in early withdrawal charges.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Advisor
and Administrator, is the Trust's transfer agent. At September 30, 1999, the
Trust had transfer agent fees and expenses payable of approximately $8,300.
The Trust has an unfunded noncontributory defined benefit pension plan
covering all independent Trustees of the Trust 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 September 30,
1999 included in Trustees' fees and expenses in the Statement of Operations
amounted to $5,742. At September 30, 1999, the Trust had an accrued pension
liability of $52,116 which is included in accrued expenses in the Statement of
Assets and Liabilities.
5. FEDERAL INCOME TAX STATUS--At September 30, 1999, the Trust had a net
capital loss carryover of approximately $7,723,000 of which $62,000 will be
available through September 30, 2004 and $7,661,000 will be available through
September 30, 2007 to offset future capital gains to the extent provided by
regulations.
As of September 30, 1999, the Trust had temporary book/tax differences
primarily attributable to dividends payable and tax adjustments on revolver
loans held by the Trust and permanent book/tax differences attributable to
revolver loans sold by the Trust. To reflect reclassifications arising from the
permanent differences, accumulated undistributed net investment income was
charged $825,113 and accumulated net realized loss was credited $825,113.
47
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
6. SHARES OF BENEFICIAL INTEREST--Transactions in shares of beneficial interest
were as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
----------- --------------
<S> <C> <C>
Balance, September 30, 1997................................. 135,154,983 $1,348,358,142
Shares sold................................................. 73,974,045 735,805,027
Shares issued to shareholders for reinvestment of
dividends.................................................. 5,468,432 54,381,913
Shares tendered (four quarterly tender offers).............. (13,071,383) (129,913,425)
----------- --------------
Balance, September 30, 1998................................. 201,526,077 2,008,631,657
Shares sold................................................. 65,236,515 645,727,385
Shares issued to shareholders for reinvestment of
dividends.................................................. 7,070,460 69,946,361
Shares tendered (four quarterly tender offers).............. (19,019,056) (188,124,450)
----------- --------------
Balance, September 30, 1999................................. 254,813,996 $2,536,180,953
=========== ==============
</TABLE>
On October 20, 1999, the Trustees approved a tender offer to purchase up to
12 million shares of beneficial interest to commence on November 17, 1999.
7. COMMITMENTS AND CONTINGENCIES--As of September 30, 1999, the Trust had
unfunded loan commitments pursuant to the following loan agreements:
<TABLE>
<CAPTION>
UNFUNDED
BORROWER COMMITMENT
-------- -----------
<S> <C>
Arena Brands, Inc........................................... $ 1,045,000
Bridge Information Systems, Inc............................. 222,222
Chancellor Media Corp....................................... 4,261,250
Corning Consumer Products Co................................ 676,364
Crown Paper Co.............................................. 2,056,500
Jet Plastica Industries, Inc................................ 2,702,703
Mafco Finance Corp.......................................... 3,246,923
Spalding Holdings Corp...................................... 2,388,235
Spectrasite Communications, Inc. (Revolver)................. 714,286
Spectrasite Communications, Inc. (Term Loan)................ 4,285,714
Teligent, Inc. (Multi-Draw)................................. 6,666,667
Teligent, Inc. (Revolver)................................... 3,333,333
Tenneco Automotive.......................................... 10,000,000
U.S. Silica Co. (Working Capital)........................... 1,302,000
-----------
$42,901,197
===========
</TABLE>
The total value of securities segregated for unfunded loan commitments was
$49,954,433.
48
<PAGE>
APPENDIX A
HEDGING TRANSACTIONS
- --------------------------------------------------------------------------------
INTEREST RATE AND OTHER HEDGING TRANSACTIONS. The Trust may in the future enter
into various interest rate hedging and risk management transactions; however, it
does not presently intend to engage in such transactions and will do so only
after providing 30 days' written notice to shareholders. If in the future the
Trust were to engage in such transactions, it expects to do so primarily to seek
to preserve a return on a particular investment or portion of its portfolio, and
may also enter into such transactions to seek to protect against decreases in
the anticipated rate of return on floating or variable rate financial
instruments the Trust owns or anticipates purchasing at a later date, or for
other risk management strategies such as managing the effective dollar-weighted
average duration of the Trust's portfolio. In addition, with respect to
fixed-income securities in the Trust's portfolio or to the extent an active
secondary market develops in interests in Senior Loans in which the Trust may
invest, the Trust may also engage in hedging transactions to seek to protect the
value of its portfolio against declines in net asset value resulting from
changes in interest rates or other market changes. The Trust will not engage in
any of the transactions for speculative purposes and will use them only as a
means to hedge or manage the risks associated with assets held in, or
anticipated to be purchased for, the Trust's portfolio or obligations incurred
by the Trust. The successful utilization of hedging and risk management
transactions requires skills different from those needed in the selection of the
Trust's portfolio securities. The Investment Advisor currently actively utilizes
various hedging techniques in connection with its management of other fixed
income portfolios and the Trust believes that the Investment Advisor possesses
the skills necessary for the successful utilization of hedging and risk
management transactions. The Trust will incur brokerage and other costs in
connection with its hedging transactions.
The types of hedging transactions in which the Trust is most likely to
engage are interest rate swaps and the purchase or sale of interest rate caps or
floors. The Trust will not sell interest rate caps or floors that it does not
own. Interest rate swaps involve the exchange by the Trust with another party of
their respective obligations to pay or receive interest, e.g., an exchange of an
obligation to make floating rate payments for an obligation to make fixed rate
payments. The purchase of an interest rate cap entitles the Purchaser, to the
extent that a specified index exceeds a predetermined interest rate, to receive
payments of interest at the difference of the index and the predetermined rate
on a notional principal amount (the reference amount with respect to which
payment obligations are determined, although no actual exchange of principal
occurs) from the party selling such interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent that a specified index
falls below a predetermined interest rate, to receive payments of interest at
the difference of the index and the predetermined rate on a notional principal
amount from the party selling such interest rate floor.
In circumstances in which the Investment Advisor anticipates that interest
rates will decline, the Trust might, for example, enter into an interest rate
swap as the floating rate payor. In the case where the Trust purchases such an
interest rate swap, if the floating rate payments fell below the level of the
fixed rate payment set in the swap agreement, the Trust's counterparty would pay
the Trust amounts equal to interest computed at the difference between the fixed
and floating rates over the notional principal amount. Such payments would
offset or partially offset the decrease in the payments the Trust would receive
in respect of floating rate assets being hedged. In the case of purchasing an
interest rate floor, if interest rates declined below the floor rate, the Trust
would receive payments from its counterparty which would wholly or partially
offset the decrease in the payments it would receive in respect of the financial
instruments being hedged.
The successful use of swaps, caps and floors to preserve the rate of return
on a portfolio of financial instruments depends on the Investment Advisor's
ability to predict correctly the direction and degree of movements in interest
rates. Although the Trust believes that use of the hedging and risk management
techniques described above will benefit the Trust, if the Investment Advisor's
judgment about the direction or extent of the movement in interest rates is
incorrect, the Trust's overall performance would be worse than if it had not
entered into any such transactions. For example, if the Trust had purchased an
interest rate swap or an interest rate floor to hedge against its expectation
that interest rates would decline but instead interest rates rose, the Trust
would lose part or all of the benefit of the increased payments it would receive
as a result of the rising interest rates because it would have to pay amounts to
its counterparty under the swap agreement or would have paid the purchase price
of the interest rate floor.
Any interest rate swaps entered into by the Trust would usually be done on a
net basis, i.e., where the two parties make net payments with the Trust
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as any such hedging transactions entered into by the Trust
will be for good-faith risk management purposes, the Investment Advisor and the
Trust believe such obligations do not constitute senior securities and,
accordingly, will not treat them as being subject to its investment restrictions
on borrowing. The net amount of the excess, if any, of the Trust's obligations
over its entitlements with respect to each interest rate swap will be accrued
and an amount of cash or liquid portfolio securities having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account by the Trust's custodian.
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The Trust will not enter into interest rate swaps, caps or floors if on a
net basis the aggregate notional principal amount with respect to such agreement
exceeds the net assets of the Trust. Thus, the Trust may enter into interest
rate swaps, caps or floors with respect to its entire portfolio.
There is no limit on the amount of interest rate swap transactions that may
be entered into by the Trust. These transactions do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate swaps is limited to the net amount of
interest payments that the Trust is contractually obligated to make. If the
other party to an interest rate swap defaults, the Trust's risk of loss consists
of the net amount of interest payments that the Trust contractually is entitled
to receive. The creditworthiness of firms with which the Trust enters into
interest rate swaps, caps or floors will be monitored on an ongoing basis by the
Investment Advisor pursuant to procedures adopted and reviewed, on an ongoing
basis, by the Board of Trustees of the Trust. If a default occurs by the other
party to such transaction, the Trust will have contractual remedies pursuant to
the agreements related to the transaction but such remedies may be subject to
bankruptcy and insolvency laws which could affect the Trust's rights as a
creditor. The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. As a result, the swap market
has become relatively liquid. Caps and floors are more recent innovations and
they are less liquid than swaps.
The Trust is also authorized to enter into hedging transactions involving
financial futures and options, but presently believes it is unlikely that it
would enter into such transactions. The Trust may also invest in any new
financial products which may be developed to the extent determined by the Board
of Trustees to be consistent with its investment objective and otherwise in the
best interests of the Trust and its shareholders. The Trust will engage in such
transactions only to the extent permitted under applicable law and after
providing 30 days' written notice to shareholders.
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Morgan Stanley Dean Witter Prime Income Trust
Two World Trade Center
New York, New York 10048
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
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
Rajesh K. Gupta
Vice President
Sheila A. Finnerty
Assistant Vice President
Peter Gewirtz
Assistant Vice President
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
100 Church Street
New York, New York 10007
TRANSFER AGENT AND
DIVIDEND DISBURSING 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 ADVISOR
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
ADMINISTRATOR
Morgan Stanley Dean Witter Services Company Inc.
Two World Trade Center
New York, New York 10048
DISTRIBUTOR
Morgan Stanley Dean Witter Distributors Inc.
Two World Trade Center
New York, New York 10048
