<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 18, 2001
REGISTRATION NO. 333-49570
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
---------------------
PRE-EFFECTIVE AMENDMENT NO. 1 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
---------------------
MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST
A Massachusetts business trust
(Exact Name of Registrant as Specified in Charter)
TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
(Address of Principal Executive Offices)
212-392-1600
(Registrant's Telephone Number)
BARRY FINK, ESQ.
Two World Trade Center
New York, New York 10048
(Name and Address of Agent for Service)
---------------------
COPY TO:
STUART M. STRAUSS, ESQ.
Mayer, Brown & Platt
1675 Broadway
New York, New York 10019
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
The Exhibit Index is located on page [ ]
PURSUANT TO RULE 429, THIS REGISTRATION STATEMENT RELATES TO SHARES
PREVIOUSLY REGISTERED BY THE REGISTRANT ON FORM N-1A (REGISTRATION NOS.
33-44782; 811-6515).
================================================================================
<PAGE>
FORM N-14
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
PART A OF FORM N-14 ITEM NO. PROXY STATEMENT AND PROSPECTUS HEADING
------------------------------ ---------------------------------------------------------
<S> <C>
1 (a) ........................ Cross Reference Sheet
(b) ........................ Front Cover Page
(c) ........................ *
2 (a) ........................ *
(b) ........................ Table of Contents
3 (a) ........................ Fee Table
(b) ........................ Synopsis
(c) ........................ Principal Risk Factors
4 (a) ........................ The Reorganization
(b) ........................ The Reorganization -- Capitalization Table (Unaudited)
5 (a) ........................ Registrant's Prospectus
(b) ........................ *
(c) ........................ *
(d) ........................ *
(e) ........................ Available Information
(f) ........................ Available Information
6 (a) ........................ Prospectus of Morgan Stanley Dean Witter World Wide
Income Trust
(b) ........................ Available Information
(c) ........................ *
(d) ........................ *
7 (a) ........................ Introduction -- General, Record Date; Share Information,
Expenses of Solicitation, Proxies, Vote Required
(b) ........................ *
(c) ........................ Introduction; The Reorganization -- Appraisal Rights
8 (a) ........................ The Reorganization
(b) ........................ *
9 .......................... *
<CAPTION>
PART B OF FORM N-14 ITEM NO. STATEMENT OF ADDITIONAL INFORMATION HEADING
------------------------------ --------------------------------------------------------
<S> <C>
10(a) ........................ Cover Page
(b) ........................ *
11 .......................... Table of Contents
12(a) ........................ Additional Information about Morgan Stanley Dean Witter
Diversified Income Trust
(b) ........................ *
(c) ........................
13(a) ........................ Additional Information about Morgan Stanley Dean Witter
World Wide Income Trust
(b) ........................ *
(c) ........................ *
14 ........................ Registrant's Annual Report for the fiscal year ended
October 31, 2000. Morgan Stanley Dean Witter World
Wide Income Trust's Annual Report for the fiscal year
ended October 31, 2000
<CAPTION>
PART C OF FORM N-14 ITEM NO. OTHER INFORMATION HEADING
------------------------------ --------------------------------------------------------
<S> <C>
15 .......................... Indemnification
16 .......................... Exhibits
17 .......................... Undertakings
</TABLE>
----------
* Not Applicable or negative answer
<PAGE>
MORGAN STANLEY DEAN WITTER
WORLD WIDE INCOME TRUST
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(800) 869-NEWS
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 27, 2001
TO THE SHAREHOLDERS OF MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
Notice is hereby given of a Special Meeting of the Shareholders of Morgan
Stanley Dean Witter World Wide Income Trust ("World Wide Income") to be held in
the Career Development Room, 61st Floor, Two World Trade Center, New York, New
York 10048, at 9:00 a.m., New York time, on March 27, 2001, and any adjournments
thereof (the "Meeting"), for the following purposes:
1. To consider and vote upon an Agreement and Plan of Reorganization, dated
October 26, 2000 (the "Reorganization Agreement"), between World Wide
Income and Morgan Stanley Dean Witter Diversified Income Trust
("Diversified Income"), pursuant to which substantially all of the assets
of World Wide Income would be combined with those of Diversified Income and
shareholders of World Wide Income would become shareholders of Diversified
Income receiving shares of Diversified Income with a value equal to the
value of their holdings in World Wide Income (the "Reorganization"); and
2. To act upon such other matters as may properly come before the Meeting.
The Reorganization is more fully described in the accompanying Proxy
Statement and Prospectus and a copy of the Reorganization Agreement is attached
as Exhibit A thereto. Shareholders of record at the close of business on
December 20, 2000 are entitled to notice of, and to vote at, the Meeting. Please
read the Proxy Statement and Prospectus carefully before telling us, through
your proxy or in person, how you wish your shares to be voted. Alternatively, if
you are eligible to vote telephonically by touchtone telephone or electronically
on the Internet (as discussed in the enclosed Proxy Statement) you may do so in
lieu of attending the Meeting in person. THE BOARD OF TRUSTEES OF WORLD WIDE
INCOME RECOMMENDS YOU VOTE IN FAVOR OF THE REORGANIZATION. WE URGE YOU TO SIGN,
DATE AND MAIL THE ENCLOSED PROXY PROMPTLY.
By Order of the Board of Trustees,
BARRY FINK,
Secretary
January 17, 2001
--------------------------------------------------------------------------------
YOU CAN HELP AVOID THE NECESSITY AND EXPENSE OF SENDING FOLLOW-UP LETTERS TO
ENSURE A QUORUM BY PROMPTLY RETURNING THE ENCLOSED PROXY. IF YOU ARE UNABLE
TO BE PRESENT IN PERSON, PLEASE FILL IN, SIGN AND RETURN THE ENCLOSED PROXY
IN ORDER THAT THE NECESSARY QUORUM BE REPRESENTED AT THE MEETING. THE
ENCLOSED ENVELOPE REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. AS
DISCUSSED IN THE ENCLOSED PROXY STATEMENT, CERTAIN SHAREHOLDERS WILL BE ABLE
TO VOTE TELEPHONICALLY BY TOUCHTONE TELEPHONE OR ELECTRONICALLY ON THE
INTERNET BY FOLLOWING INSTRUCTIONS ON THEIR PROXY CARDS OR ON THE ENCLOSED
VOTING INFORMATION CARD.
--------------------------------------------------------------------------------
<PAGE>
MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST
TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
(800) 869-NEWS
ACQUISITION OF THE ASSETS OF
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
BY AND IN EXCHANGE FOR SHARES OF
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
This Proxy Statement and Prospectus is being furnished to shareholders of
Morgan Stanley Dean Witter World Wide Income Trust ("World Wide Income") in
connection with an Agreement and Plan of Reorganization, dated October 26, 2000
(the "Reorganization Agreement"), pursuant to which substantially all the assets
of World Wide Income will be combined with those of Morgan Stanley Dean Witter
Diversified Income Trust ("Diversified Income") in exchange for shares of
Diversified Income (the "Reorganization"). As a result of this transaction,
shareholders of World Wide Income will become shareholders of Diversified Income
and will receive shares of Diversified Income with a value equal to the value of
their holdings in World Wide Income. The terms and conditions of this
transaction are more fully described in this Proxy Statement and Prospectus and
in the Reorganization Agreement between World Wide Income and Diversified
Income, attached hereto as Exhibit A. The address of World Wide Income is that
of Diversified Income set forth above. This Proxy Statement also constitutes a
Prospectus of Diversified Income, which is dated January 8, 2001, filed by
Diversified Income with the Securities and Exchange Commission (the
"Commission") as part of its Registration Statement on Form N-14 (the
"Registration Statement").
Diversified Income is an open-end diversified management investment company
whose primary investment objective is to seek a high level of current income. As
a secondary objective, the fund seeks to maximize total return, but only to the
extent consistent with its primary objective. The Fund normally invests at least
65% of its total assets in a diversified portfolio of fixed-income securities.
The Investment Manager diversifies investments among the groups in an effort to
reduce overall portfolio risk -- a general downturn in one group may be offset
by a rise in another. The three groups of Fund investments include: (1) global
securities; (2) mortgage-backed securities and U.S. Government securities; and
(3) high yield securities.
This Proxy Statement and Prospectus set forth concisely information about
Diversified Income that shareholders of World Wide Income should know before
voting on the Reorganization Agreement. A copy of the Prospectus for Diversified
Income dated January 8, 2001, is attached as Exhibit B and incorporated herein
by reference. Also enclosed and incorporated herein by reference is Diversified
Income's Annual Report for the fiscal year ended October 31, 2000. A Statement
of Additional Information relating to the Reorganization, described in this
Proxy Statement and Prospectus (the "Additional Statement"), dated January 8,
2001, has been filed with the Commission and is also incorporated herein by
reference. Also incorporated herein by reference are World Wide Income's
Prospectus, dated January 8, 2001, and Annual Report for its fiscal year ended
October 31, 2000. Such documents are available without charge by calling (800)
869-NEWS (TOLL FREE).
Investors are advised to read and retain this Proxy Statement and Prospectus
for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THIS PROXY STATEMENT AND PROSPECTUS IS DATED JANUARY 8, 2001.
<PAGE>
TABLE OF CONTENTS
PROXY STATEMENT AND PROSPECTUS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INTRODUCTION ............................................................................. 1
General ................................................................................ 1
Record Date; Share Information ......................................................... 1
Proxies ................................................................................ 2
Expenses of Solicitation ............................................................... 3
Vote Required .......................................................................... 3
SYNOPSIS ................................................................................. 3
The Reorganization ..................................................................... 4
Fee Table .............................................................................. 4
Tax Consequences of the Reorganization ................................................. 8
Comparison of World Wide Income and Diversified Income ................................. 8
PRINCIPAL RISK FACTORS ................................................................... 11
THE REORGANIZATION ....................................................................... 13
The Proposal ........................................................................... 13
The Board's Consideration .............................................................. 13
The Reorganization Agreement ........................................................... 14
Tax Aspects of the Reorganization ...................................................... 16
Description of Shares .................................................................. 17
Capitalization Table (unaudited) ....................................................... 18
Appraisal Rights ....................................................................... 18
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS ........................... 18
Investment Objectives and Policies ..................................................... 18
Investment Restrictions ................................................................ 19
ADDITIONAL INFORMATION ABOUT WORLD WIDE INCOME AND DIVERSIFIED
INCOME .................................................................................. 20
General ................................................................................ 20
Financial Information .................................................................. 20
Management ............................................................................. 20
Description of Securities and Shareholder Inquiries .................................... 21
Dividends, Distributions and Taxes ..................................................... 21
Purchases, Repurchases and Redemptions ................................................. 21
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE .............................................. 21
FINANCIAL STATEMENTS AND EXPERTS ......................................................... 21
LEGAL MATTERS ............................................................................ 21
AVAILABLE INFORMATION .................................................................... 21
OTHER BUSINESS ........................................................................... 22
Exhibit A - Agreement and Plan of Reorganization, dated October 26, 2000, by and between
World Wide Income and Diversified Income ................................................ A-1
Exhibit B - Prospectus of Diversified Income dated January 8, 2001 ....................... B-1
</TABLE>
<PAGE>
MORGAN STANLEY DEAN WITTER
WORLD WIDE INCOME TRUST
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(800) 869-NEWS
--------------------
PROXY STATEMENT AND PROSPECTUS
--------------------
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 27, 2001
INTRODUCTION
GENERAL
This Proxy Statement and Prospectus is being furnished to the shareholders
of Morgan Stanley Dean Witter World Wide Income Trust ("World Wide Income"), an
open-end non-diversified management investment company, in connection with the
solicitation by the Board of Trustees of World Wide Income (the "Board") of
proxies to be used at the Special Meeting of Shareholders of World Wide Income
to be held in the Career Development Room, 61st Floor, Two World Trade Center,
New York, New York 10048 at 9:00 A.M., New York time, on March 27, 2001 and any
adjournments thereof (the "Meeting"). It is expected that the mailing of this
Proxy Statement and Prospectus will be made on or about January 22, 2001.
At the Meeting, World Wide Income shareholders ("Shareholders") will
consider and vote upon an Agreement and Plan of Reorganization, dated October
26, 2000 (the "Reorganization Agreement"), between World Wide Income and Morgan
Stanley Dean Witter Diversified Income Trust ("Diversified Income") pursuant to
which substantially all of the assets of World Wide Income will be combined with
those of Diversified Income in exchange for shares of Diversified Income. As a
result of this transaction, Shareholders will become shareholders of Diversified
Income and will receive shares of Diversified Income equal to the value of their
holdings in World Wide Income on the date of such transaction (the
"Reorganization"). Pursuant to the Reorganization, each Shareholder will receive
the class of shares of Diversified Income that corresponds to the class of
shares of World Wide Income currently held by that Shareholder. Accordingly, as
a result of the Reorganization, each Class A, Class B, Class C and Class D
Shareholder of World Wide Income will receive Class A, Class B, Class C or Class
D shares of Diversified Income, respectively. The shares to be issued by
Diversified Income pursuant to the Reorganization (the "Diversified Income
Shares") will be issued at net asset value without an initial sales charge.
Further information relating to Diversified Income is set forth herein and in
Diversified Income's current Prospectus, dated January 8, 2001 ("Diversified
Income's Prospectus"), attached to this Proxy Statement and Prospectus and
incorporated herein by reference.
The information concerning World Wide Income contained herein has been
supplied by World Wide Income and the information concerning Diversified Income
contained herein has been supplied by Diversified Income.
RECORD DATE; SHARE INFORMATION
The Board has fixed the close of business on December 20, 2000 as the
record date (the "Record Date") for the determination of the Shareholders
entitled to notice of, and to vote at, the Meeting. As of the Record
1
<PAGE>
Date, there were 10,911,949.981 shares of World Wide Income issued and
outstanding. Shareholders on the Record Date are entitled to one vote per share
on each matter submitted to a vote at the Meeting. A majority of the
outstanding shares entitled to vote, represented in person or by proxy, will
constitute a quorum at the Meeting.
The following persons were known to own of record or beneficially 5% or
more of the outstanding shares of a Class of World Wide Income as of the Record
Date: Class A Shares: Morgan Stanley Dean Witter Trust FSB TTEE K & S,
Harborside Financial Center, Plaza 2, 7th Floor, Jersey City, NJ 07311 - 8.816%.
Class C Shares -- Janet D. Herterick, 6 Sheepmeadow Lane, Sandwich, MA
02563-2247 - 8.780%; Jennifer A. Katz Trustee, Jennifer A. Katz Trust dated
7/12/00, 100 Forest Ave., Rockville, MD 20850-1817 - 7.137%; Dean Witter
Reynolds CUST for Janice Janes IRA Standard dated 08/05/93, 205 N. Clay,
Hinsdale, IL 60521-3210 - 6.468% and H. Franklin Miller DDS PL Pension Plan U/A
DTD 04/29/81, 843 Mt. Moriah, Memphis, TN 38117-5704 - 5.668%. As of the Record
Date, the trustees and officers of World Wide Income, as a group, owned less
than 1% of the outstanding shares of World Wide Income.
The following persons were known to own of record or beneficially 5% or
more of the outstanding shares of a Class of Diversified Income as of the Record
Date: Class A Shares - Dr. David Hirsch, 11215 Whisper Meadow, San Antonio, TX
78230-3547 - 10.075%. Class D Shares: Lorraine Burton Marran SUCC Trustee FBO
Florence Eckel Burton REV TR dated 12-10-85, 505 Kubin Court, Califon, NJ
07830-4116 - 6.488% and Paul L. Lang, 8 Wild Laurel Lane, Hilton Head, SC
29926-2649 - 5.878%. As of the Record Date, the trustees and officers of
Diversified Income, as a group, owned less than 1% of the outstanding shares of
Diversified Income.
PROXIES
The enclosed form of proxy, if properly executed and returned, will be
voted in accordance with the choice specified thereon. The proxy will be voted
in favor of the Reorganization Agreement unless a choice is indicated to vote
against or to abstain from voting on the Reorganization Agreement. The Board
knows of no business, other than that set forth in the Notice of Special Meeting
of Shareholders, to be presented for consideration at the Meeting. However, the
proxy confers discretionary authority upon the persons named therein to vote as
they determine on other business, not currently contemplated, which may come
before the Meeting. Abstentions and, if applicable, broker "non-votes" will not
count as votes in favor of the Reorganization Agreement, and broker "non-votes"
will not be deemed to be present at the meeting for purposes of determining
whether the Reorganization Agreement has been approved. Broker "non-votes" are
shares held in street name for which the broker indicates that instructions have
not been received from the beneficial owners or other persons entitled to vote
and for which the broker does not have discretionary voting authority. If a
Shareholder executes and returns a proxy but fails to indicate how the votes
should be cast, the proxy will be voted in favor of the Reorganization
Agreement. The proxy may be revoked at any time prior to the voting thereof by:
(i) delivering written notice of revocation to the Secretary of World Wide
Income at Two World Trade Center, New York, New York 10048; (ii) attending the
Meeting and voting in person; or (iii) completing and returning a new proxy
(whether by mail or, as discussed below, by touchtone telephone or the Internet)
(if returned and received in time to be voted). Attendance at the Meeting will
not in and of itself revoke a proxy.
In the event that the necessary quorum to transact business or the vote
required to approve or reject the Reorganization Agreement is not obtained at
the Meeting, the persons named as proxies may propose one or more adjournments
of the Meeting to permit further solicitation of proxies. Any such adjournment
will require the affirmative vote of the holders of a majority of shares of
World Wide Income present in person or by proxy at the Meeting. The persons
named as proxies will vote in favor of such adjournment those proxies which they
2
<PAGE>
are entitled to vote in favor of the Reorganization Agreement and will vote
against any such adjournment those proxies required to be voted against the
Reorganization Agreement.
EXPENSES OF SOLICITATION
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement and Prospectus, will be borne by World Wide Income
which expenses are expected to approximate $137,062. World Wide Income and
Diversified Income will bear all of their respective other expenses associated
with the Reorganization. In addition to the solicitation of proxies by mail,
proxies may be solicited by officers of World Wide Income, and officers and
regular employees of Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors"
or the "Investment Manager") and Morgan Stanley Dean Witter Trust FSB ("MSDW
Trust"), an affiliate of MSDW Advisors, personally or by mail, telephone,
telegraph or otherwise, without compensation therefor. Brokerage houses, banks
and other fiduciaries may be requested to forward soliciting material to the
beneficial owners of shares and to obtain authorization for the execution of
proxies.
Shareholders whose shares are registered with MSDW Trust will be able to
vote their shares by touchtone telephone or by Internet by following the
instructions on the proxy card or on the Voting Information Card accompanying
this Proxy Statement. To vote by touchtone telephone, Shareholders can call the
toll-free number 1-800-690-6903. To vote by Internet, Shareholders can access
the websites www.msdwt.com or www.proxyvote.com. Telephonic and Internet voting
with MSDW Trust presently are not available to Shareholders whose shares are
held in street name.
In certain instances, MSDW Trust, an affiliate of MSDW Advisors, may call
Shareholders to ask if they would be willing to have their votes recorded by
telephone. The telephone voting procedure is designed to authenticate
Shareholders' identities, to allow Shareholders to authorize the voting of their
shares in accordance with their instructions and to confirm that their
instructions have been recorded properly. No recommendation will be made as to
how a Shareholder should vote on the Reorganization Agreement other than to
refer to the recommendation of the Board. World Wide Income has been advised by
counsel that these procedures are consistent with the requirements of applicable
law. Shareholders voting by telephone in this manner will be asked for their
social security number or other identifying information and will be given an
opportunity to authorize proxies to vote their shares in accordance with their
instructions. To ensure that the Shareholders' instructions have been recorded
correctly, they will receive a confirmation of their instructions in the mail. A
special toll-free number set forth in the confirmation will be available in case
the information contained in the confirmation is incorrect. Although a
Shareholder's vote may be taken by telephone, each Shareholder will receive a
copy of this Proxy Statement and Prospectus and may vote by mail using the
enclosed proxy card or by touchtone telephone or the Internet as set forth
above. The last proxy vote received in time to be voted, whether by proxy card,
touchtone telephone or Internet, will be the vote that is counted and will
revoke all previous votes by the Shareholder.
VOTE REQUIRED
Approval of the Reorganization Agreement by the Shareholders requires the
affirmative vote of a majority (i.e., more than 50%) of the shares of World Wide
Income represented in person or by proxy and entitled to vote at the Meeting,
provided a quorum is present at the Meeting. If the Reorganization Agreement is
not approved by Shareholders, World Wide Income will continue in existence and
the Board will consider alternative actions.
3
<PAGE>
SYNOPSIS
The following is a synopsis of certain information contained in or
incorporated by reference in this Proxy Statement and Prospectus. This synopsis
is only a summary and is qualified in its entirety by the more detailed
information contained or incorporated by reference in this Proxy Statement and
Prospectus and the Reorganization Agreement. Shareholders should carefully
review this Proxy Statement and Prospectus and Reorganization Agreement in their
entirety and, in particular, Diversified Income's Prospectus, which is attached
to this Proxy Statement and incorporated herein by reference.
THE REORGANIZATION
The Reorganization Agreement provides for the transfer of substantially
all the assets of World Wide Income, subject to stated liabilities, to
Diversified Income in exchange for the Diversified Income Shares. The aggregate
net asset value of the Diversified Income Shares issued in the exchange will
equal the aggregate value of the net assets of World Wide Income received by
Diversified Income. On or after the closing date scheduled for the
Reorganization (the "Closing Date"), World Wide Income will distribute the
Diversified Income Shares received by World Wide Income to Shareholders as of
the Valuation Date (as defined below under "The Reorganization Agreement") in
complete liquidation of World Wide Income and World Wide Income will thereafter
be dissolved and deregistered under the Investment Company Act of 1940, as
amended (the "1940 Act"). As a result of the Reorganization, each Shareholder
will receive that number of full and fractional Diversified Income Shares equal
in value to such Shareholder's pro rata interest in the net assets of World
Wide Income transferred to Diversified Income. Pursuant to the Reorganization,
each Shareholder will receive the class of shares of Diversified Income that
corresponds to the class of shares of World Wide Income currently held by that
Shareholder. Accordingly, as a result of the Reorganization, each Class A,
Class B, Class C and Class D Shareholder of World Wide Income will become a
holder of Class A, Class B, Class C or Class D shares of Diversified Income,
respectively. Shareholders holding their shares of World Wide Income in
certificate form will be asked to surrender their certificates in connection
with the Reorganization. Shareholders who do not surrender their certificates
prior to the Closing Date will still receive their shares of Diversified
Income; however, such Shareholders will not be able to redeem, transfer or
exchange the Diversified Income Shares received until the old certificates have
been surrendered. The Board has determined that the interests of Shareholders
will not be diluted as a result of the Reorganization.
FOR THE REASONS SET FORTH BELOW UNDER "THE REORGANIZATION -- THE BOARD'S
CONSIDERATION," THE BOARD, INCLUDING THE TRUSTEES WHO ARE NOT "INTERESTED
PERSONS" OF WORLD WIDE INCOME ("INDEPENDENT TRUSTEES"), AS THAT TERM IS DEFINED
IN THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE "1940 ACT"), HAS
CONCLUDED THAT THE REORGANIZATION IS IN THE BEST INTERESTS OF WORLD WIDE INCOME
AND ITS SHAREHOLDERS AND RECOMMENDS APPROVAL OF THE REORGANIZATION AGREEMENT.
FEE TABLE
The following table briefly describes the fees and expenses that a
shareholder of World Wide Income and Diversified Income may pay if they buy and
hold shares of each respective fund. These expenses are deducted from each
respective fund's assets and are based on expenses paid by World Wide Income for
its fiscal year ended October 31, 2000, and by Diversified Income for its fiscal
year ended October 31, 2000. World Wide Income and Diversified Income each pay
expenses for management of their assets, distribution of their shares and other
services, and those expenses are reflected in the net asset value per share of
each fund. The table also sets forth pro forma fees for the surviving combined
fund (Diversified Income) reflecting what the fee schedule would have been on
October 31, 2000, if the Reorganization had been consummated twelve (12) months
prior to that date.
4
<PAGE>
Shareholder Fees
----------------
<TABLE>
<CAPTION>
WORLD PRO FORMA
WIDE DIVERSIFIED COMBINED
INCOME INCOME (DIVERSIFIED INCOME)
------ ------ --------------------
<S> <C> <C> <C>
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON PURCHASES
(AS A PERCENTAGE OF OFFERING PRICE)
Class A ............................................... 4.25%(1) 4.25%(1) 4.25%(1)
Class B ............................................... none none none
Class C ............................................... none none none
Class D ............................................... none none none
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON REINVESTED
DIVIDENDS
Class A ............................................... none none none
Class B ............................................... none none none
Class C ............................................... none none none
Class D ............................................... none none none
MAXIMUM CONTINGENT DEFERRED SALES CHARGE (LOAD) (AS A
PERCENTAGE OF THE LESSER OF ORIGINAL PURCHASE PRICE OR
REDEMPTION PROCEEDS)
Class A ............................................... none(2) none(2) none(2)
Class B ............................................... 5.00%(3) 5.00%(3) 5.00%(3)
Class C ............................................... 1.00%(4) 1.00%(4) 1.00%(4)
Class D ............................................... none none none
REDEMPTION FEES
Class A ............................................... none none none
Class B ............................................... none none none
Class C ............................................... none none none
Class D ............................................... none none none
EXCHANGE FEE
Class A ............................................... none none none
Class B ............................................... none none none
Class C ............................................... none none none
Class D ............................................... none none none
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
WORLD PRO FORMA
WIDE DIVERSIFIED COMBINED
INCOME INCOME (DIVERSIFIED INCOME)
----------- ------------- ---------------------
<S> <C> <C> <C>
MANAGEMENT FEES(5)
Class A ............................. 0.75% 0.40% 0.40%
Class B ............................. 0.75% 0.40% 0.40%
Class C ............................. 0.75% 0.40% 0.40%
Class D ............................. 0.75% 0.40% 0.40%
DISTRIBUTION AND SERVICE (12B-1) FEES
Class A ............................. 0.20% 0.20% 0.20%
Class B ............................. 0.85% 0.85% 0.85%
Class C ............................. 0.85% 0.85% 0.85%
Class D ............................. none none none
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
WORLD PRO FORMA
WIDE DIVERSIFIED COMBINED
INCOME INCOME (DIVERSIFIED INCOME)
---------- ------------- ---------------------
<S> <C> <C> <C>
OTHER EXPENSES (6)
Class A ............................ 0.46% 0.13% 0.14%
Class B ............................ 0.46% 0.13% 0.14%
Class C ............................ 0.46% 0.13% 0.14%
Class D ............................ 0.46% 0.13% 0.14%
TOTAL ANNUAL FUND OPERATING EXPENSES
Class A ............................ 1.41% 0.73% 0.74%
Class B ............................ 2.06% 1.38% 1.39%
Class C ............................ 2.06% 1.38% 1.39%
Class D ............................ 1.21% 0.53% 0.54%
</TABLE>
----------
(1) Reduced for purchases of $25,000 and over (see "Share Class Arrangements --
Class A Shares" in each fund's Prospectus).
(2) Investments that are not subject to any sales charge at the time of
purchase are subject to a Contingent Deferred Sales Charge ("CDSC") of
1.00% that will be imposed on redemptions made within one year after
purchase, except for certain specific circumstances (see "Purchases,
Exchanges and Redemptions" below and "Share Class Arrangements -- Class A
Shares" in each fund's Prospectus).
(3) The CDSC is scaled down to 1.00% during the sixth year, reaching zero
thereafter.
(4) Only applicable to redemptions made within one year after purchase (see
"Purchases, Exchanges and Redemptions" below and "Share Class Arrangements
-- Class C Shares" in each fund's Prospectus).
(5) The combined pro forma rate reflects the current aggregate fee payable by
Diversified Income for management and advisory services, effective as of
October 31, 2000.
(6) The Investment Manager has agreed to reimburse or waive $90,000 in expenses
of the Combined Fund for the first year of combined operations.
EXAMPLE
To attempt to show the effect of these expenses on an investment over time,
the hypotheticals shown below have been created. The Example assumes that an
investor invests $10,000 in either World Wide Income or Diversified Income or
the new combined fund (Diversified Income), that the investment has a 5% return
each year and that the operating expenses for each fund remain the same (as set
forth in the chart above). Although a shareholder's actual costs may be higher
or lower, the tables below show a shareholder's costs at the end of each period
based on these assumptions depending upon whether or not a shareholder sold his
shares at the end of each period.
6
<PAGE>
If a Shareholder SOLD His Shares:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
World Wide Income
Class A ......... $562 $852 $1,163 $2,044
Class B ......... 709 946 1,308 2,390
Class C ......... 309 646 1,108 2,390
Class D ......... 123 384 665 1,466
Diversified Income
Class A ......... 496 648 814 1,293
Class B ......... 640 737 955 1,657
Class C ......... 240 437 755 1,657
Class D ......... 54 170 296 665
Pro Forma Combined
Class A ......... 497 651 819 1,304
Class B ......... 642 740 961 1,669
Class C ......... 242 440 761 1,669
Class D ......... 55 173 302 677
</TABLE>
If a Shareholder HELD His Shares:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
World Wide Income
Class A ......... $562 $852 $1,163 $2,044
Class B ......... 209 646 1,108 2,390
Class C ......... 209 646 1,108 2,390
Class D ......... 123 384 665 1,466
Diversified Income
Class A ......... 496 648 814 1,293
Class B ......... 140 437 755 1,657
Class C ......... 140 437 755 1,657
Class D ......... 54 170 296 665
Pro Forma Combined
Class A ......... 497 651 819 1,304
Class B ......... 142 440 761 1,669
Class C ......... 142 440 761 1,669
Class D ......... 55 173 302 677
</TABLE>
LONG-TERM SHAREHOLDERS OF CLASS B AND CLASS C SHARES OF WORLD WIDE INCOME
AND DIVERSIFIED INCOME MAY PAY MORE IN SALES CHARGES INCLUDING DISTRIBUTION FEES
THAN THE ECONOMIC EQUIVALENT OF THE MAXIMUM FRONT-END SALES CHARGES PERMITTED BY
THE NASD.
The purpose of the foregoing fee table is to assist the investor or
shareholder in understanding the various costs and expenses that an investor or
shareholder in the fund will bear directly or indirectly. For a more complete
description of these costs and expenses, see "Comparison of World Wide Income
and Diversified Income -- Investment Management and Distribution Plan Fees,
Other Significant Fees, and Purchases, Exchanges and Redemptions" below.
7
<PAGE>
TAX CONSEQUENCES OF THE REORGANIZATION
As a condition to the Reorganization, World Wide Income will receive an
opinion of Mayer, Brown & Platt to the effect that the Reorganization will
constitute a tax-free reorganization for federal income tax purposes, and that
no gain or loss will be recognized by World Wide Income or the shareholders of
World Wide Income for federal income tax purposes as a result of the
transactions included in the Reorganization. For further information about the
tax consequences of the Reorganization, see "The Reorganization -- Tax Aspects
of the Reorganization" below.
COMPARISON OF WORLD WIDE INCOME AND DIVERSIFIED INCOME
INVESTMENT OBJECTIVES AND POLICIES. The primary investment objective of
World Wide Income is to provide a high level of current income. As a secondary
objective, the fund seeks appreciation in the value of its assets. The primary
investment objective of Diversified Income is to seek a high level of current
income. As a secondary objective, the fund seeks to maximize total return but
only to the extent consistent with its primary objective.
World Wide Income seeks to achieve its investment objective by normally
investing at least 65% of its total assets in a portfolio of global fixed-income
securities. The securities may be issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, or investment grade securities issued by U.S.
corporations, foreign governments or foreign corporations, or by organizations
designated or supported by a government or government entity, such as the
European Economic Community and the World Bank. Diversified Income seeks to
achieve its investment objective by normally investing at least 65% of its total
assets in a diversified portfolio of fixed income securities. Morgan Stanley
Dean Witter Advisors Inc., Diversified Income's "Investment Manager," attempts
to equally allocate approximately one-third of the of the fund's assets among
three separate groups or market segments of fixed income securities: global
securities, mortgage-backed and U.S. Government securities, and high yield
securities. Morgan Stanley Dean Witter Advisors Inc., World Wide Income's
"Investment Manager," actively allocates assets of the fund among various
geographical regions, nations, currencies, corporations, and governmental
entities in an attempt to optimize income and, if possible, capital
appreciation. World Wide Income may also invest in zero coupon securities,
forward currency contracts, options and futures, mortgaged-backed securities,
convertible securities and warrants. Diversified Income's global securities
group of investments include fixed-income securities issued by the U.S.
Government, its agencies or instrumentalities, or fixed-income securities issued
by or guaranteed by a foreign government or supranational organization or any of
their instrumentalities or fixed-income securities issued by a corporation, all
of which are rated BBB or above by Standard & Poor's ("S&P") or Baa or above by
Moody's Investors Service ("Moody's") or if unrated, are determined by the
Investment Manager to be of equivalent quality. The global group of investments
also includes certificates of deposit and banker's acceptances issued or
guaranteed by, or time deposits maintained at banks and rated within the two
highest rating categories by S&P, Moody's or Duff & Phelps or if unrated, are
determined by the Investment Manager to be of equivalent quality and commercial
paper rated within the two highest rating categories by S&P, Moody's or Duff &
Phelps or, if unrated, issued by U.S. or foreign companies having outstanding
debt securities rated A or higher by S&P or Moody's. Diversified Income's
mortgage-backed securities and U.S. Government securities group will invest in
fixed-rate and adjustable rate mortgaged-backed securities that are issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or by
private issuers that are rated in the highest bond rating category by S&P or
Moody's, or if not rated, are determined to be of comparable quality by the
Investment Manager. The mortgage-backed and U.S. Government securities group may
also invest in U.S. Treasury securities and U.S. Government agency securities.
Diversified Income's high yield securities group of investments may include high
yield, high risk fixed-income securities rated Baa or lower by Moody's or BBB or
lower by S&P or if not rated, are determined to be of comparable quality by the
Investment Manager.
8
<PAGE>
Fixed-income securities rated Ba or lower by Moody's or BB or lower by S&P are
considered speculative investments, commonly known as "junk bonds." The
securities in the high yield group may include convertible and non-convertible
debt and Rule 144A securities. The processes by which each fund selects common
stocks and other investments may differ and are more fully described under
"Comparison of Investment Objectives, Policies and Restrictions" below.
The principal differences between the funds' investment policies, as well
as certain similarities, are more fully described under "Comparison of
Investment Objectives, Policies and Restrictions" below.
The investment policies of both World Wide Income and Diversified Income
are not fundamental and may be changed by their respective Boards of Trustees.
INVESTMENT MANAGEMENT AND DISTRIBUTION PLAN FEES. World Wide Income and
Diversified Income obtain management services from MSDW Advisors. World Wide
Income pays MSDW Advisors monthly compensation calculated daily at an annual
rate of 0.75% of the fund's average daily net assets. With respect to
Diversified Income, the fund pays MSDW Advisors monthly compensation calculated
daily by applying the annual rate of 0.40% to the portion of the fund's average
daily net assets. Each class of both funds' shares is subject to the same
management fee rates applicable to the respective fund.
Both World Wide Income and Diversified Income have adopted similar
distribution plans ("Plans") pursuant to Rule 12b-1 under the 1940 Act. In the
case of Class A and Class C shares, each fund's Plan provides that the fund
will reimburse the Distributor and others for the expenses of certain
activities and services incurred by them in connection with the distribution of
the Class A and Class C Shares of the fund. Reimbursement for these expenses is
made in monthly payments by each fund to the Distributor which will in no event
exceed amounts equal to payments at the annual rates of 0.25% and 0.85% of the
average daily net assets of Class A and Class C shares, respectively. In the
case of Class B shares, each fund's Plan provides that the fund will pay the
Distributor a fee, which is accrued daily and paid monthly, at the annual rate
of 0.85% of the lesser of (a) the average daily aggregate gross sales of the
fund's Class B shares since the inception of the fund (not including
reinvestment of dividends or capital gains distributions), less the average
daily aggregate net asset value of the fund's Class B shares redeemed since the
fund's inception upon which a contingent deferred sales charge ("CDSC") has
been imposed or upon which such charge has been waived; or (b) the average
daily net assets of Class B shares. The 12b-1 fee is paid for the services
provided and the expenses borne by the Distributor and others in connection
with the distribution of each fund's Class B shares. There are no 12b-1 fees
applicable to each fund's Class D shares. For further information relating to
the 12b-1 fees applicable to each class of Diversified Income's shares, see the
section entitled "Share Class Arrangements" in Diversified Income's Prospectus,
attached hereto. The Distributor also receives the proceeds of any contingent
deferred sales charge ("CDSC") paid by the funds' shareholders at the time of
redemption. The CDSC schedules applicable to each of World Wide Income and
Diversified Income are set forth below under "Purchases, Exchanges and
Redemptions."
OTHER SIGNIFICANT FEES. Both World Wide Income and Diversified Income pay
additional fees in connection with their operations, including legal, auditing,
transfer agent, trustees fees and custodial fees. See "Synopsis -- Fee Table"
above for the percentage of average net assets represented by such "Other
Expenses."
PURCHASES, EXCHANGES AND REDEMPTIONS. Class A shares of each fund are sold
at net asset value plus an initial sales charge of up to 4.25%. The initial
sales charge is reduced for certain purchases. Investments of $1 million or
more (and investment by certain other limited categories of investors) are not
subject to any sales charges at the time of purchase, but are subject to a CDSC
of 1.0% on redemptions made within one year after purchase (except for certain
specific circumstances fully described in each fund's Prospectus).
9
<PAGE>
Class B shares of each fund are offered at net asset value with no initial
sales charge, but are subject to the same CDSC schedule set forth below:
<TABLE>
<CAPTION>
CLASS B SHARES OF WORLD WIDE INCOME AND
YEAR SINCE PURCHASE PAYMENT MADE DIVERSIFIED INCOME
------------------------------------- ----------------------------------------
<S> <C>
First .......................... 5.0%
Second ......................... 4.0%
Third .......................... 3.0%
Fourth ......................... 2.0%
Fifth .......................... 2.0%
Sixth .......................... 1.0%
Seventh and thereafter ......... none
</TABLE>
Class C shares of each fund are sold at net asset value with no initial
sales charge, but are subject to a CDSC of 1.0% on redemptions made within one
year after purchase. The CDSC may be waived for certain redemptions (which are
fully described under the section "Share Class Arrangements" in each fund's
Prospectus).
Class D shares of each fund are available only to limited categories of
investors and are sold at net asset value with no initial sales charge or CDSC.
The CDSC charge is paid to the Distributor. Shares of Diversified Income
and World Wide Income are distributed by the Distributor and offered by Dean
Witter Reynolds Inc. and other dealers who have entered into selected dealer
agreements with the Distributor. For further information relating to the CDSC
schedules applicable to each of the classes of shares of World Wide Income and
Diversified Income, see the section entitled "Share Class Arrangements" in each
fund's Prospectus.
Shares of each class of World Wide Income and Diversified Income may be
exchanged for shares of the same class of any other Morgan Stanley Dean Witter
Fund that offers its shares in more than one class, without the imposition of an
exchange fee. Additionally, shares of each class of World Wide Income and
Diversified Income may be exchanged for shares of Morgan Stanley Dean Witter
Short-Term U.S. Treasury Trust, Morgan Stanley Dean Witter North American
Government Income Trust, Morgan Stanley Dean Witter Limited Term Municipal
Trust, Morgan Stanley Dean Witter Short-Term Bond Fund and the five Morgan
Stanley Dean Witter Funds that are money market funds (the foregoing nine funds
are collectively referred to as the "Exchange Funds"), without the imposition of
an exchange fee. Class A shares of World Wide Income and Diversified Income may
also be exchanged for shares of Morgan Stanley Dean Witter Hawaii Municipal
Trust. Upon consummation of the Reorganization, the foregoing exchange
privileges will still be applicable to shareholders of the combined fund
(Diversified Income).
Diversified Income shares distributed to shareholders as a result of the
merger will not be subject to an initial sales charge.
With respect to both funds, no CDSC is imposed at the time of any exchange,
although any applicable CDSC will be imposed upon ultimate redemption. For
purposes of calculating the holding period in determining any applicable CDSC
upon redemption of shares received as a result of the Reorganization, any period
during which the shareholder held shares of a fund that charged a CDSC (e.g.,
World Wide Income) will be counted. During the period of time a Diversified
Income or World Wide Income shareholder remains in an Exchange Fund, the holding
period (for purposes of determining the CDSC rate) is frozen. Both World Wide
Income and Diversified Income provide telephone exchange privileges to their
shareholders. For greater details relating to exchange privileges applicable to
Diversified Income, see the section entitled "How to Exchange Shares" in
Diversified Income's Prospectus.
10
<PAGE>
Shareholders of World Wide Income and Diversified Income may redeem their
shares for cash at any time at the net asset value per share next determined;
however, such redemption proceeds may be reduced by the amount of any applicable
CDSC. Both World Wide Income and Diversified Income offer a reinstatement
privilege whereby a shareholder who has not previously exercised such privilege
whose shares have been redeemed or repurchased may, within thirty-five days
after the date of redemption or repurchase, reinstate any portion or all of the
proceeds thereof in shares of the same class from which such shares were
redeemed or repurchased and receive a pro rata credit for any CDSC paid in
connection with such redemption or repurchase. World Wide Income and Diversified
Income may redeem involuntarily, at net asset value, most accounts valued at
less than $100.
DIVIDENDS. Each fund declares dividends separately for each of its classes.
World Wide Income and Diversified Income each pay dividends from net investment
income monthly. Both funds distribute net capital gains, if any, at least
annually. Each fund, however, may determine either to distribute or to retain
all or part of any net long-term capital gains in any year for reinvestment.
With respect to each fund, dividends and capital gains distributions are
automatically reinvested in additional shares of the same class of shares of the
fund at net asset value unless the shareholder elects to receive cash.
PRINCIPAL RISK FACTORS
The share price or net asset value of Diversified Income and World Wide
Income will fluctuate with changes in the market value of their respective
portfolio securities. The market value of the funds' portfolio securities will
increase or decrease due to a variety of economic, market and political factors,
including movements in interest rates, which cannot be predicted.
Both funds invest in fixed-income securities. Fixed-income securities are
subject to two types of risks: credit risk and interest rate risk. Credit risk
refers to the possibility that an issuer of a security will be unable to make
payments and/or repay the principal on its debt. Interest rate risk refers to
fluctuations in the value of a fixed-income security resulting from changes in
the general level of interest rates. When the general level of interest rates
goes up, the price of most fixed-income securities goes down. When the general
level of interest rates goes down, the price of most fixed-income securities
goes up.
Both funds may invest in foreign securities. With respect to World Wide
Income, the fund normally invests at least 65% of its total assets in a
portfolio of global fixed-income securities. With respect to Diversified Income,
the fund's global securities group, which constitutes approximately one-third of
the fund's assets, will invest in global fixed-income securities. Investments in
foreign securities (including depository receipts) may involve risks in addition
to the risks associated with domestic securities. One additional risk is
currency risk. While the price of fund shares is quoted in U.S. dollars, the
fund generally converts U.S. dollars to a foreign market's local currency to
purchase a security in that market. If the value of that local currency falls
relative to the U.S. dollar, the U.S. dollar value of the foreign security will
decrease. This is true even if the foreign security's local price remains
unchanged. Foreign securities also have risks related to economic and political
developments abroad, including expropriations, confiscatory taxation, exchange
control regulation, limitations on the use or transfer of fund assets and any
effects of foreign social, economic or political instability. Foreign companies,
in general, are not subject to the regulatory requirements of U.S. companies
and, as such, there may be less publicly available information about these
companies. Moreover, foreign accounting, auditing and financial reporting
standards generally are different from those applicable to U.S. companies.
Finally, in the event of a default of any foreign debt obligations, it may be
more difficult for the fund to obtain or enforce a judgment against the issuers
of the securities. Securities of foreign issuers may be less liquid than
comparable securities of U.S. issuers and, as such, their price changes may be
more volatile. Furthermore, foreign exchanges and broker-dealers are generally
subject to less government and exchange scrutiny and regulation than their U.S.
counterparts.
11
<PAGE>
Each fund may also invest in mortgage-backed securities. With respect to
Diversified Income, the fund's mortgage-backed securities and U.S. Government
securities group, which constitutes approximately one-third of the fund's
portfolio, may include fixed-rate or adjustable-rate mortgaged-backed securities
that are issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or by private issuers that are rated in the highest bond
rating category by Moody's or S&P, or if not rated, are determined to be of
comparable quality by the Investment Manager. World Wide Income may invest up to
35% of its assets, without any credit quality limitations, which may include
"junk bonds", in U.S. and foreign mortgage-backed securities, including mortgage
pass-through securities. Mortgage-backed securities have different risk
characteristics than traditional debt securities. Although generally the value
of fixed-income securities increases during periods of falling interest rates
and decreases during periods of rising interest rates, this is not always the
case with mortgage-backed securities. This is due to the fact that principal on
underlying mortgages may be prepaid at any time as well as other factors.
Generally, prepayments will increase during a period of falling interest rates
and decrease during a period of rising interest rates. The rate of prepayments
also may be influenced by economic and other factors. Prepayment risk includes
the possibility that, as interest rates fall, securities with stated interest
rates may have the principal prepaid earlier than expected, requiring the fund
to invest the proceeds at generally lower interest rates. Investments in
mortgage-backed securities are made based upon, among other things, expectations
regarding the rate of prepayments on underlying mortgage pools. Rates of
prepayment, faster or slower than expected by the Investment Manager, could
reduce the fund's yield, increase the volatility of the fund and/or cause a
decline in net asset value. Certain mortgage-backed securities may be more
volatile and less liquid than other traditional types of debt securities. The
markets for foreign mortgage-backed securities may not be as well developed as
U.S. markets. Those markets may be less liquid than the U.S. market and the
prices for foreign mortgage-backed securities may be more volatile than U.S.
mortgage-backed securities.
Each fund may participate in forward currency contracts, which involves
risks. If the Investment Manager of a fund employs a strategy that does not
correlate well with the fund's investments or the currencies in which the
investments are denominated, currency contracts could result in a loss. The
contracts may also increase the fund's volatility and may involve a significant
risk.
Each fund may invest in options and futures, which involves additional
risks. World Wide Income may invest in put and call options and futures with
respect to interest rate indexes, and options on foreign currencies. Diversified
Income may invest in put and call options with respect to foreign currencies and
futures on interest rate indexes. With respect to each fund, the Investment
Manager's predictions of movements in the direction of the bond, currency or
interest rates markets may be inaccurate, and have adverse consequences to the
fund (e.g. a reduction in the fund's net asset value or a reduction in the
amount of income available for distribution) may leave the fund in worse
position than if these strategies were not used. Other risks inherent in the use
of options and futures include, for example, the possible imperfect correlation
between the price of options and futures contracts and movements in the prices
of securities being hedged, and the possible absence of a liquid secondary
market for any particular instrument. Certain options may be over-the-counter
options, which are negotiated with dealers: there is no secondary market for
these instruments.
Each fund may invest in convertible stocks and warrants, which may carry
risks associated with both common stock and fixed-income securities. Diversified
Income may also invest in common stock, the value of which generally fluctuates
in response to activities specific to the company as well as to general market,
economic and political conditions.
Diversified Income will invest approximately one-third of its assets in
high yield, high risk, securities, and World Wide Income may not invest in high
yield, high risk, securities. High yield, high risk, securities are commonly
known as "junk bonds" and pose significant risks. The prices of high yield
securities are likely to be
12
<PAGE>
more sensitive to adverse economic changes or individual corporate developments
than higher rated securities. During an economic downturn or substantial period
of rising interest rates, junk bond issuers and, in particular, highly
leveraged issuers may experience financial stress that would adversely affect
their ability to service their principal and interest payment obligations, to
meet their projected business goals or to obtain additional financing. In the
event of a default, the Fund may incur additional expenses to seek recovery.
The Rule 144A securities could have the effect of increasing the level of Fund
illiquidity to the extent the Fund may be unable to find qualified
institutional buyers interested in purchasing the securities. In addition,
periods of economic uncertainty and change probably would result in an
increased volatility of market prices of high yield securities and a
corresponding volatility in the Fund's net asset value.
Diversified Income is classified as a diversified mutual fund, whereas
World Wide Income is classified as a non-diversified mutual fund. As a
non-diversified mutual fund, World Wide Income's investments are not required
to meet certain diversification requirements under federal law. Compared with
"diversified" funds, World Wide Income may invest a greater percentage of its
assets in the securities of an individual corporation or governmental entity.
Thus, World Wide Income's assets may be concentrated in fewer securities than
other funds. A decline in the value of those investments would cause World Wide
Income's overall value to decline to a greater degree.
The foregoing discussion is a summary of the principal risk factors. For a
more complete discussion of the risks of each fund, see "Principal Risks" and
"Additional Risk Information" in the Prospectus of World Wide Income and in
Diversified Income's Prospectus attached hereto and incorporated herein by
reference.
THE REORGANIZATION
THE PROPOSAL
The Board of Trustees of World Wide Income, including the Independent
Trustees, having reviewed the financial position of World Wide Income and the
prospects for achieving economies of scale through the Reorganization and having
determined that the Reorganization is in the best interests of World Wide Income
and its Shareholders and that the interests of Shareholders will not be diluted
as a result thereof, recommends approval of the Reorganization by Shareholders
of World Wide Income.
THE BOARD'S CONSIDERATION
At a meeting held on October 26, 2000, the Board, including the Independent
Trustees, unanimously approved the Reorganization Agreement and determined to
recommend that Shareholders approve the Reorganization Agreement. In reaching
this decision, the Board made an extensive inquiry into a number of factors,
particularly the comparative expenses currently incurred in the operations of
World Wide Income and Diversified Income. The Board also considered other
factors, including, but not limited to: the general compatibility of the
investment objectives, policies and restrictions of World Wide Income and
Diversified Income; the terms and conditions of the Reorganization which would
affect the price of shares to be issued in the Reorganization; the tax-free
nature of the Reorganization; and any direct or indirect costs to be incurred by
World Wide Income and Diversified Income in connection with the Reorganization.
In recommending the Reorganization to Shareholders, the Board of World Wide
Income considered that the Reorganization would have the following benefits to
Shareholders:
1. Once the Reorganization is consummated, the expenses which would be
borne by shareholders of each class of the "combined fund" (Diversified Income)
will be appreciably lower on a percentage basis than the expenses per share of
each corresponding class of World Wide Income. This is primarily attributable to
the fact
13
<PAGE>
that the investment management fee rate paid by Diversified Income for its last
fiscal year (0.40%) is substantially lower than the investment management fee
rate paid by World Wide Income for its last fiscal year (0.75%). The Board also
noted that Diversified Income's "Other Expenses" for its last fiscal year
(0.13%) were significantly lower than World Wide Income's "Other Expenses" for
its last fiscal year (0.46%). Furthermore, to the extent that the
Reorganization would result in Shareholders becoming shareholders of a combined
larger fund, further economies of scale could be achieved since various fixed
expenses (e.g., auditing and legal) can be spread over a larger number of
shares. The Board noted that the expense ratio for each class of World Wide
Income was significantly higher (for its fiscal year ended October 31, 2000)
than the expense ratio for each corresponding class of Diversified Income (for
its fiscal year ended October 31, 2000).
2. Shareholders would have continued participation in a fund whose primary
objective is to provide a high level of income. The Board recognized, however,
that Diversified Income has a smaller portion of its assets invested in global
fixed-income securities than World Wide Income. Nevertheless, the Board also
noted that the portfolios are sufficiently compatible that World Wide Income
would not need to sell a material amount of its holdings to accommodate the
Reorganization.
3. The Reorganization is intended to qualify as a tax-free reorganization
for Federal income tax purposes, pursuant to which no gain or loss will be
recognized by World Wide Income or its Shareholders for Federal income tax
purposes as a result of transactions included in the Reorganization.
The Board of Trustees of Diversified Income, including a majority of the
Independent Trustees of Diversified Income, also have determined that the
Reorganization is in the best interests of Diversified Income and its
shareholders and that the interests of existing shareholders of Diversified
Income will not be diluted as a result thereof. The transaction will enable
Diversified Income to acquire investment securities which are consistent with
Diversified Income's investment objective, without the brokerage costs attendant
to the purchase of such securities in the market. Finally, the Board considered
that even if the benefits enumerated above are not realized, the costs to the
Fund are sufficiently minor to warrant taking the opportunity to realize those
benefits.
THE REORGANIZATION AGREEMENT
The terms and conditions under which the Reorganization would be
consummated, as summarized below, are set forth in the Reorganization Agreement.
This summary is qualified in its entirety by reference to the Reorganization
Agreement, a copy of which is attached as Exhibit A to this Proxy Statement and
Prospectus.
The Reorganization Agreement provides that (i) World Wide Income will
transfer all of its assets, including portfolio securities, cash (other than
cash amounts retained by World Wide Income as a "Cash Reserve" in the amount
sufficient to discharge its liabilities not discharged prior to the Valuation
Date (as defined below) and for expenses of the dissolution), cash equivalents
and receivables to Diversified Income on the Closing Date in exchange for the
assumption by Diversified Income of stated liabilities of World Wide Income,
including all expenses, costs, charges and reserves, as reflected on an
unaudited statement of assets and liabilities of World Wide Income prepared by
the Treasurer of World Wide Income as of the Valuation Date (as defined below)
in accordance with generally accepted accounting principles consistently applied
from the prior audited period, and the delivery of the Diversified Income
Shares; (ii) such Diversified Income Shares would be distributed to Shareholders
on the Closing Date or as soon as practicable thereafter; (iii) World Wide
Income would be dissolved; and (iv) the outstanding shares of World Wide Income
would be canceled.
The number of Diversified Income Shares to be delivered to World Wide
Income will be determined by dividing the aggregate net asset value of each
class of shares of World Wide Income acquired by Diversified Income by the net
asset value per share of the corresponding class of shares of Diversified
Income; these values
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will be calculated as of the close of business of the New York Stock Exchange
on the third business day following the receipt of the requisite approval by
Shareholders of the Reorganization Agreement or at such other time as World
Wide Income and Diversified Income may agree (the "Valuation Date"). As an
illustration, assume that on the Valuation Date, Class B shares of World Wide
Income had an aggregate net asset value (not including any Cash Reserve of
World Wide Income) of $100,000. If the net asset value per Class B share of
Diversified Income were $10 per share at the close of business on the Valuation
Date, the number of Class B shares of Diversified Income to be issued would be
10,000 ($100,000 (divided by) $10). These 10,000 Class B shares of
Diversified Income would be distributed to the former Class B shareholders of
World Wide Income. This example is given for illustration purposes only and
does not bear any relationship to the dollar amounts or shares expected to be
involved in the Reorganization.
On the Closing Date or as soon as practicable thereafter, World Wide Income
will distribute pro rata to its Shareholders of record as of the close of
business on the Valuation Date, the Diversified Income Shares it receives. Each
Shareholder will receive the class of shares of Diversified Income that
corresponds to the class of shares of World Wide Income currently held by that
Shareholder. Accordingly, the Diversified Income Shares will be distributed as
follows: each of the Class A, Class B, Class C and Class D shares of Diversified
Income will be distributed to holders of Class A, Class B, Class C and Class D
shares of World Wide Income, respectively. Diversified Income will cause its
transfer agent to credit and confirm an appropriate number of Diversified Income
Shares to each Shareholder. Certificates for Diversified Income Shares will be
issued only upon written request of a Shareholder and only for whole shares,
with fractional shares credited to the name of the Shareholder on the books of
Diversified Income. Shareholders who wish to receive certificates representing
their Diversified Income Shares must, after receipt of their confirmations, make
a written request to Diversified Income's transfer agent Morgan Stanley Dean
Witter Trust FSB, Harborside Financial Center, Jersey City, New Jersey 07311.
Shareholders of World Wide Income holding their shares in certificate form will
be asked to surrender such certificates in connection with the Reorganization.
Shareholders who do not surrender their certificates prior to the Closing Date
will still receive their shares of Diversified Income; however, such
Shareholders will not be able to redeem, transfer or exchange the Diversified
Income Shares received until the old certificates have been surrendered.
The Closing Date will be the next business day following the Valuation
Date. The consummation of the Reorganization is contingent upon the approval of
the Reorganization by the Shareholders and the receipt of the other opinions and
certificates set forth in Sections 6, 7 and 8 of the Reorganization Agreement
and the occurrence of the events described in those Sections, certain of which
may be waived by World Wide Income or Diversified Income. The Reorganization
Agreement may be amended in any mutually agreeable manner. All expenses of this
solicitation, including the cost of preparing and mailing this Proxy Statement
and Prospectus, will be borne by World Wide Income, which expenses are expected
to approximate $137,062. World Wide Income and Diversified Income will bear all
of their respective other expenses associated with the Reorganization.
The Reorganization Agreement may be terminated and the Reorganization
abandoned at any time, before or after approval by Shareholders or by mutual
consent of World Wide Income and Diversified Income. In addition, either party
may terminate the Reorganization Agreement upon the occurrence of a material
breach of the Reorganization Agreement by the other party or if, by September
30, 2001, any condition set forth in the Reorganization Agreement has not been
fulfilled or waived by the party entitled to its benefits.
Under the Reorganization Agreement, within one year after the Closing Date,
World Wide Income shall: either pay or make provision for all of its liabilities
and distribute any remaining amount of the Cash Reserve (after paying or making
provision for such liabilities and the estimated cost of making the
distribution) to
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former Shareholders of World Wide Income that received Diversified Income
Shares. World Wide Income shall be dissolved and deregistered as an investment
company promptly following the distributions of shares of Diversified Income to
Shareholders of record of World Wide Income.
The effect of the Reorganization is that Shareholders who vote their
shares in favor of the Reorganization Agreement are electing to sell their
shares of World Wide Income (at net asset value on the Valuation Date
calculated after subtracting any Cash Reserve) and reinvest the proceeds in
Diversified Income Shares at net asset value and without recognition of taxable
gain or loss for Federal income tax purposes. See "Tax Aspects of the
Reorganization" below. As noted in "Tax Aspects of the Reorganization" below,
if World Wide Income recognizes net gain from the sale of securities prior to
the Closing Date, such gain, to the extent not offset by capital loss
carryforwards, will be distributed to Shareholders prior to the Closing Date
and will be taxable to Shareholders as capital gain.
Shareholders will continue to be able to redeem their shares of World Wide
Income at net asset value next determined after receipt of the redemption
request (subject to any applicable CDSC) until the close of business on the
business day next preceding the Closing Date. Redemption requests received by
World Wide Income thereafter will be treated as requests for redemption of
shares of Diversified Income.
TAX ASPECTS OF THE REORGANIZATION
At least one but not more than 20 business days prior to the Valuation
Date, World Wide Income will declare and pay a dividend or dividends which,
together with all previous such dividends, will have the effect of distributing
to Shareholders all of World Wide Income's investment company taxable income
for all periods since the inception of World Wide Income through and including
the Valuation Date (computed without regard to any dividends paid deduction),
and all of World Wide Income's net capital gain, if any, realized in such
periods (after reduction for any capital loss carryforward).
The Reorganization is intended to qualify for Federal income tax purposes
as a tax-free reorganization under Section 368(a)(1)(C) of the Internal Revenue
Code of 1986, as amended (the "Code").
As a condition to the Reorganization, World Wide Income and Diversified
Income will receive an opinion of Mayer, Brown & Platt to the effect that,
based on certain assumptions, facts, the terms of the Reorganization Agreement
and representations set forth in the Reorganization Agreement or otherwise
provided by World Wide Income and Diversified Income (including a
representation to the effect that Diversified Income has no plan or intention
to sell or otherwise dispose of more than fifty percent of the assets of World
Wide Income acquired in the Reorganization except for dispositions made in the
ordinary course of business):
1. The transfer of World Wide Income's assets in exchange for the
Diversified Income Shares and the assumption by Diversified Income of certain
stated liabilities of World Wide Income followed by the distribution by World
Wide Income of the Diversified Income Shares to Shareholders in exchange for
their World Wide Income shares pursuant to and in accordance with the terms of
the Reorganization Agreement will constitute a "reorganization" within the
meaning of Section 368(a)(1)(C) of the Code, and World Wide Income and
Diversified Income will each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code;
2. No gain or loss will be recognized by Diversified Income upon the
receipt of the assets of World Wide Income solely in exchange for the
Diversified Income Shares and the assumption by Diversified Income of the
stated liabilities of World Wide Income;
3. No gain or loss will be recognized by World Wide Income upon the
transfer of the assets of World Wide Income to Diversified Income in exchange
for the Diversified Income Shares and the assumption by Diversified Income of
the stated liabilities or upon the distribution of Diversified Income Shares to
Shareholders in exchange for their World Wide Income shares;
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4. No gain or loss will be recognized by Shareholders upon the exchange of
the shares of World Wide Income for the Diversified Income Shares;
5. The aggregate tax basis for the Diversified Income Shares received by
each of the Shareholders pursuant to the Reorganization will be the same as the
aggregate tax basis of the shares in World Wide Income held by each such
Shareholder immediately prior to the Reorganization;
6. The holding period of the Diversified Income Shares to be received by
each Shareholder will include the period during which the shares in World Wide
Income surrendered in exchange therefor were held (provided such shares in
World Wide Income were held as capital assets on the date of the
Reorganization);
7. The tax basis of the assets of World Wide Income acquired by
Diversified Income will be the same as the tax basis of such assets of World
Wide Income immediately prior to the Reorganization; and
8. The holding period of the assets of World Wide Income in the hands of
Diversified Income will include the period during which those assets were held
by World Wide Income.
The advice of Counsel is not binding on the Internal Revenue Service or
the courts and neither World Wide Income nor Diversified Income has sought a
ruling with respect to the tax treatment of the Reorganization.
SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE EFFECT, IF
ANY, OF THE PROPOSED TRANSACTION IN LIGHT OF THEIR INDIVIDUAL CIRCUMSTANCES.
BECAUSE THE FOREGOING DISCUSSION ONLY RELATES TO THE FEDERAL INCOME TAX
CONSEQUENCES OF THE PROPOSED TRANSACTION, SHAREHOLDERS SHOULD ALSO CONSULT
THEIR TAX ADVISORS AS TO STATE AND LOCAL TAX CONSEQUENCES, IF ANY, OF THE
PROPOSED TRANSACTION.
DESCRIPTION OF SHARES
Diversified Income shares to be issued pursuant to the Reorganization
Agreement will, when issued, be fully paid and non-assessable by Diversified
Income and transferable without restrictions and will have no preemptive
rights. Class B shares of Diversified Income, like Class B shares of World Wide
Income, have a conversion feature pursuant to which approximately ten (10)
years after the date of the original purchase of such shares, the shares will
convert automatically to Class A shares, based on the relative net asset values
of the two classes. For greater details regarding the conversion feature,
including the method by which the 10 year period is calculated and the
treatment of reinvested dividends, see "Purchase of Fund Shares" in each fund's
Prospectus.
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CAPITALIZATION TABLE (UNAUDITED)
The following table sets forth the capitalization of Diversified Income
and World Wide Income as of October 31, 2000 and on a pro forma combined basis
as if the Reorganization had occurred on that date:
<TABLE>
<CAPTION>
NET ASSET
SHARES VALUE
NET ASSETS OUTSTANDING PER SHARE
-------------- ------------- ----------
<S> <C> <C> <C>
CLASS A
-----------------------------------
World Wide Income ................. $ 24,286,697 3,406,039 $7.13
Diversified Income ................ $ 13,041,554 1,938,281 $6.73
Combined Fund (pro forma) ......... $ 37,328,251 5,547,003 $6.73
CLASS B
------------------------------------
World Wide Income ................. $ 44,593,113 6,237,401 $7.15
Diversified Income ................ $537,149,459 79,744,727 $6.74
Combined Fund (pro forma) ......... $581,742,572 86,360,916 $6.74
CLASS C
------------------------------------
World Wide Income ................. $ 762,392 106,794 $7.14
Diversified Income ................ $ 15,228,952 2,264,288 $6.73
Combined Fund (pro forma) ......... $ 15,991,344 2,377,571 $6.73
CLASS D
------------------------------------
World Wide Income ................. $ 6,647,595 929,407 $7.15
Diversified Income ................ $ 1,390,348 206,129 $6.75
Combined Fund (pro forma) ......... $ 8,037,943 1,190,958 $6.75
TOTAL CLASS A, B, C, D
------------------------------------
World Wide Income ................. $ 76,289,797 -- --
Diversified Income ................ $566,810,313 -- --
Combined Fund (pro forma) ......... $643,100,110 -- --
</TABLE>
APPRAISAL RIGHTS
Shareholders will have no appraisal rights in connection with the
Reorganization.
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of Diversified Income is to seek a high
level of current income. As a secondary objective, the fund seeks to maximize
total return but only to the extent consistent with its primary objective. The
primary investment objective of World Wide Income is to provide a high level of
current income. As a secondary objective, the fund seeks capital appreciation on
its assets. Both funds seek to achieve their objectives by investing principally
in fixed-income securities, including global fixed-income securities in
accordance with their respective investment strategies set forth below.
Diversified Income seeks to achieve its investment objective by normally
investing at least 65% of its total assets in a diversified portfolio of
fixed-income securities. Morgan Stanley Dean Witter Advisors Inc., Diversified
Income's "Investment Manager," attempts to equally allocate approximately
one-third of the Fund's
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assets among three separate groups or market segments of fixed income
securities: global securities, mortgage-backed and U.S. Government securities,
and high yield securities. Diversified Income's global securities group of
investments include investment grade fixed-income securities issued by the U.S.
Government, its agencies or instrumentalities, or investment grade fixed-income
securities issued by or guaranteed by a foreign government or supranational
organization or any of their instrumentalities or fixed-income securities
issued by a corporation, all of which are rated BBB or above by Standard &
Poor's ("S&P") or Baa or above Moody's Investors Service ("Moody's") or if
unrated, are determined by the Investment Manager to be of equivalent quality.
The global group of investments also includes certificates of deposit and
banker's acceptances issued or guaranteed by, or time deposits maintained at
banks and rated within the two highest rating categories by S&P, Moody's or
Duff & Phelps or if unrated, are determined by the Investment Manager to be of
equivalent quality and commercial paper rated within the two highest rating
categories by S&P, Moody's or Duff & Phelps or if unrated, issued by U.S. or
foreign companies having outstanding debt securities rated A or higher by S&P
or Moody's. Diversified Income's mortgage-backed securities and U.S. Government
securities group will invest in fixed-rate and adjustable rate mortgaged-backed
securities that are issued or guaranteed by the U.S. Government, its agencies
or instrumentalities or by private issuers that are rated in the highest bond
rating category by S&P or Moody's, or if not rated, are determined to be of
comparable quality by the Investment Manager. The mortgage-backed and U.S.
Government securities group may also invest in U.S. Treasury securities and
U.S. Government agency securities. Diversified Income's high yield securities
group of investment may include high yield, high risk, fixed-income securities
rated Baa or lower by Moody's or BBB or lower by S&P or if not rated, are
determined to be of comparable quality by the Investment Manager. Fixed-income
securities rated Ba or lower by Moody's or BB or lower by S&P are considered
speculative investments, commonly known as "junk bonds." The securities in the
high yield group may include convertible and non-convertible debt and Rule 144A
securities.
World Wide Income seeks to achieve its investment objective by normally
investing at least 65% of its total assets in a portfolio of global fixed-income
securities. The securities may be issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, or investment grade securities issued by U.S.
corporations, foreign governments or foreign corporations, or by organizations
designated or supported by a government or government entity, such as the
European Economic Community and the World Bank. World Wide Income actively
allocates assets of the Fund among various geographical regions, nations,
currencies, corporations, and governmental entities in an attempt to optimize
income and, if possible, capital appreciation. World Wide Income may also invest
in zero coupon securities, forward currency contracts, options and futures,
mortgage-backed securities, convertible securities and warrants. World Wide
Income is classified as a non-diversified mutual fund and therefore is not
subject to certain diversification requirements under federal law.
During periods in which, in the opinion of each fund's Investment Manager,
market conditions warrant a reduction of some or all of the respective funds'
securities holdings, the funds may take temporary "defensive" positions that are
inconsistent with each fund's principal investment strategies in which the funds
may invest any amount of their total assets in cash or money market instruments.
The investment policies of both World Wide Income and Diversified Income
are not fundamental and may be changed by their respective Boards. The foregoing
discussion is a summary of the principal differences and similarities between
the investment policies of the funds. For a more complete discussion of each
fund's policies, see "Principal Investment Strategies" and "Additional
Investment Strategy Information" in each fund's Prospectus and "Description of
the Fund and Its Investments and Risks" in each fund's Statement of Additional
Information.
INVESTMENT RESTRICTIONS
The investment restrictions adopted by World Wide Income and Diversified
Income as fundamental policies are substantially similar and are summarized
under the caption "Description of the Fund and Its
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Investments and Risks -- Fund Policies/Investment Restrictions" in their
respective Statements of Additional Information. A fundamental investment
restriction cannot be changed without the vote of the majority of the
outstanding voting securities of a fund, as defined in the 1940 Act. The
material differences are as follows: (a) Diversified Income may not (i) invest
more than 5% of the value of its total assets in securities of any one issuer
(other than obligations issued, or guaranteed by, the United States Government,
its agencies or instrumentalities) and (ii) purchase more than 10% of all
outstanding voting securities or any class of voting securities of any one
issuer. World Wide Income does not have these restrictions; (b) both funds may
not invest more than 5% of its total assets in securities of issuers having a
record, together with predecessors, of less than 3 years of continuous
operation. This restriction does not apply to any obligations of the United
States Government, its agencies or instrumentalities and, with respect to
Diversified Income, mortgage-backed securities; (c) both funds have fundamental
restrictions that they may not: (i) purchase securities of other investment
companies, except in connection with a merger, consolidation, reorganization or
acquisition of assets, but World Wide Income may invest up to 10% of the value
of its total assets in the securities of foreign investment companies, but only
under circumstances where purchase of the securities of foreign investment
companies would secure entry to national markets which are otherwise not open
to the fund for investment or where the security is issued by a foreign bank
which is deemed to be an investment company under U.S. securities laws and/or
regulations; (d) both funds are prohibited from purchasing or selling
commodities, except that Diversified Income may purchase or sell (write)
futures contracts and related options thereon whereas World Wide Income may
purchase or sell (write) interest rate, currency and stock and bond index
futures contracts and related options thereon; (e) Diversified Income may not
purchase warrants if, as a result, the fund would then have either more than 5%
of its net assets invested in warrants or more than 2% of its net assets
invested in warrants not listed on the New York or American Stock Exchange;
World Wide Income has no such restriction; (f) Diversified Income may not
borrow money in excess of 331/3% of the fund's total assets (including the
proceeds of the borrowing), whereas World Wide Income may not borrow money
(except insofar as the fund may be deemed to have borrowed by entrance into a
reverse repurchase agreement up to an amount not exceeding 10% of the fund's
total assets), except that the fund may borrow from a bank for temporary or
emergency purposes, in amounts not exceeding 5% of its total assets (not
including the amount borrowed); (g) World Wide Income may not invest more than
10% of its total assets in "illiquid securities" (securities for which market
quotations are not readily available) and repurchase agreements which have
maturities longer than seven days whereas Diversified Income is restricted by
the securities laws from investing more than 15% of its net assets in
restricted securities.
ADDITIONAL INFORMATION ABOUT WORLD WIDE INCOME
AND DIVERSIFIED INCOME
GENERAL
For a discussion of the organization and operation of Diversified Income
and World Wide Income, see "The Fund and its Management," "Investment Objective
and Policies," "Investment Restrictions" and "Prospectus Summary" in, and the
cover page of, their respective Prospectuses.
FINANCIAL INFORMATION
For certain financial information about Diversified Income and World Wide
Income, see "Financial Highlights" and "Past Performance" in their respective
Prospectuses.
MANAGEMENT
For information about the respective Board of Trustees, Investment Manager,
and the Distributor of Diversified Income and World Wide Income, see "Fund
Management" in their respective Prospectuses.
20
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DESCRIPTION OF SECURITIES AND SHAREHOLDER INQUIRIES
For a description of the nature and most significant attributes of shares
of World Wide Income and Diversified Income, and information regarding
shareholder inquiries, see "Capital Stock and Other Securities" in their
respective Statements of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
For a discussion of Diversified Income's and World Wide Income's policies
with respect to dividends, distributions and taxes, see "Distributions" and "Tax
Consequences" in their respective Prospectuses as well as the discussion herein
under "Synopsis -- Purchases, Exchanges and Redemptions."
PURCHASES, REPURCHASES AND REDEMPTIONS
For a discussion of how Diversified Income's and World Wide Income's shares
may be purchased, repurchased and redeemed, see "How to Buy Shares," "How to
Exchange Shares" and "How to Sell Shares" in their respective Prospectuses.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
For a discussion of Diversified Income's performance, see management's
letter to shareholders in its Annual Report for its fiscal year ended October
31, 2000 accompanying this Proxy Statement and Prospectus. For a discussion of
the performance of World Wide Income, see its Annual Report for its fiscal year
ended October 31, 2000.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of Diversified Income, for the fiscal year ended
October 31, 2000, and World Wide Income, for the fiscal year ended October 31,
2000 that are incorporated by reference in the Statement of Additional
Information relating to the Registration Statement on Form N-14 of which this
Proxy Statement and Prospectus forms a part, have been audited by Deloitte &
Touche LLP, independent auditors. The financial statements have been
incorporated by reference in reliance upon such reports given upon the authority
of said firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Diversified
Income will be passed upon by Mayer, Brown & Platt, New York, New York. Such
firm will rely on Massachusetts counsel as to matters of Massachusetts law.
AVAILABLE INFORMATION
Additional information about World Wide Income and Diversified Income is
available, as applicable, in the following documents which are incorporated
herein by reference: (i) Diversified Income's Prospectus dated January 8, 2001
attached to this Proxy Statement and Prospectus, which Prospectus forms a part
of Post-Effective Amendment No. 11 to Diversified Income's Registration
Statement on Form N-1A (File Nos. 33-44782; 811-6515); (ii) Diversified Income's
Annual Report for its fiscal year ended October 31, 2000, accompanying this
Proxy Statement and Prospectus; (iii) World Wide Income's Prospectus dated
January 8,
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<PAGE>
2001 which Prospectus forms a part of Post-Effective Amendment No. 14 to World
Wide Income's Registration Statement on Form N-1A (File Nos. 33-26375;
811-5744); and (iv) World Wide Income's Annual Report for its fiscal year ended
October 31, 2000. The foregoing documents may be obtained without charge by
calling (800) 869-NEWS (toll-free).
World Wide Income and Diversified Income are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and in
accordance therewith, file reports and other information with the Commission.
Proxy material, reports and other information about World Wide Income and
Diversified Income which are of public record can be viewed and copied at the
Securities and Exchange Commission's Public Reference Room in Washington, D.C.
Information about the Reference Room's operations may be obtained by calling
the SEC at (202) 942-8090. Reports and other information about the Fund are
available on the EDGAR Database on the SEC's Internet site (www.sec.gov) and
copies of this information may be obtained, after paying a duplicating fee, by
electronic request at the following E-mail address: [email protected], or by
writing the Public Reference Section of the SEC, Washington, D.C. 20549-0102.
OTHER BUSINESS
Management of World Wide Income knows of no business other than the
matters specified above which will be presented at the Meeting. Since matters
not known at the time of the solicitation may come before the Meeting, the
proxy as solicited confers discretionary authority with respect to such matters
as properly come before the Meeting, including any adjournment or adjournments
thereof, and it is the intention of the persons named as attorneys-in-fact in
the proxy to vote this proxy in accordance with their judgment on such matters.
By Order of the Board of Trustees
Barry Fink,
Secretary
January 17, 2001
22
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made as of this
26th day of October, 2000, by and between MORGAN STANLEY DEAN WITTER DIVERSIFIED
INCOME TRUST, a Massachusetts business trust ("Diversified Income") and MORGAN
STANLEY DEAN WITTER WORLD WIDE INCOME TRUST, a Massachusetts business trust
("World Wide Income").
This Agreement is intended to be and is adopted as a "plan of
reorganization" within the meaning of Treas. Reg. 1.368-2(g), for a
reorganization under Section 368(a)(1) of the Internal Revenue Code of 1986, as
amended (the "Code"). The reorganization ("Reorganization") will consist of the
transfer to Diversified Income of substantially all of the assets of World Wide
Income in exchange for the assumption by Diversified Income of all stated
liabilities of World Wide Income and the issuance by Diversified Income of
shares of common stock, par value $0.01 per share (the "Diversified Income
Shares"), to be distributed, after the Closing Date hereinafter referred to, to
the shareholders of World Wide Income in liquidation of World Wide Income as
provided herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
In consideration of the premises and of the covenants and agreements
hereinafter set forth, the parties hereto covenant and agree as follows:
1. THE REORGANIZATION AND LIQUIDATION OF WORLD WIDE INCOME
1.1 Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, World Wide Income agrees
to assign, deliver and otherwise transfer the World Wide Income Assets (as
defined in paragraph 1.2) to Diversified Income and Diversified Income agrees in
exchange therefor to assume all of World Wide Income's stated liabilities on the
Closing Date as set forth in paragraph 1.3(a) and to deliver to World Wide
Income the number of Diversified Income Shares, including fractional Diversified
Income Shares, determined in the manner set forth in paragraph 2.3. Such
transactions shall take place at the closing provided for in paragraph 3.1
("Closing").
1.2 (a) The "World Wide Income Assets" shall consist of all property,
including without limitation, all cash (other than the "Cash Reserve" (as
defined in paragraph 1.3(b)), cash equivalents, securities and dividend and
interest receivables owned by World Wide Income, and any deferred or prepaid
expenses shown as an asset on World Wide Income's books on the Valuation Date.
(b) On or prior to the Valuation Date, World Wide Income will provide
Diversified Income with a list of all of World Wide Income's assets to be
assigned, delivered and otherwise transferred to Diversified Income and of the
stated liabilities to be assumed by Diversified Income pursuant to this
Agreement. World Wide Income reserves the right to sell any of the securities on
such list but will not, without the prior approval of Diversified Income,
acquire any additional securities other than securities of the type in which
Diversified Income is permitted to invest and in amounts agreed to in writing by
Diversified Income. Diversified Income will, within a reasonable time prior to
the Valuation Date, furnish World Wide Income with a statement of Diversified
Income's investment objectives, policies and restrictions and a list of the
securities, if any, on the list referred to in the first sentence of this
paragraph that do not conform to Diversified Income's investment objective,
policies and restrictions. In the event that World Wide Income holds any
investments that Diversified Income is not permitted to hold, World Wide Income
will dispose of such securities on or prior to the Valuation Date. In addition,
if it is determined that the portfolios of World Wide Income and Diversified
Income, when aggregated, would contain investments exceeding certain percentage
limitations imposed upon Diversified Income with respect to such investments,
World Wide Income if requested by Diversified Income will, on or
A-1
<PAGE>
prior to the Valuation Date, dispose of and/or reinvest a sufficient amount of
such investments as may be necessary to avoid violating such limitations as of
the Closing Date (as defined in paragraph 3.1).
1.3 (a) World Wide Income will endeavor to discharge all of its liabilities
and obligations on or prior to the Valuation Date. Diversified Income will
assume all stated liabilities, which includes, without limitation, all expenses,
costs, charges and reserves reflected on an unaudited Statement of Assets and
Liabilities of World Wide Income prepared by the Treasurer of World Wide Income
as of the Valuation Date in accordance with generally accepted accounting
principles consistently applied from the prior audited period.
(b) On the Valuation Date, World Wide Income may establish a cash reserve,
which shall not exceed 5% of World Wide Income's net assets as of the close of
business on the Valuation Date ("Cash Reserve") to be retained by World Wide
Income and used for the payment of its liabilities not discharged prior to the
Valuation Date and for the expenses of dissolution.
1.4 In order for World Wide Income to comply with Section 852(a)(1) of the
Code and to avoid having any investment company taxable income or net capital
gain (as defined in Sections 852(b)(2) and 1222(11) of the Code, respectively)
in the short taxable year ending with its dissolution, World Wide Income will on
or before the Valuation Date (a) declare a dividend in an amount large enough so
that it will have declared dividends of all of its investment company taxable
income and net capital gain, if any, for such taxable year (determined without
regard to any deduction for dividends paid) and (b) distribute such dividend.
1.5 On the Closing Date or as soon as practicable thereafter, World Wide
Income will distribute Diversified Income Shares received by World Wide Income
pursuant to paragraph 1.1 pro rata to its shareholders of record determined as
of the close of business on the Valuation Date ("World Wide Income
Shareholders"). Each World Wide Income Shareholder will receive the class of
shares of Diversified Income that corresponds to the class of shares of World
Wide Income currently held by that World Wide Income Shareholder. Accordingly,
the Diversified Income Shares will be distributed as follows: each of the Class
A, Class B, Class C and Class D shares of Diversified Income will be distributed
to holders of Class A, Class B, Class C and Class D shares of World Wide Income,
respectively. Such distribution will be accomplished by an instruction, signed
by World Wide Income's Secretary, to transfer Diversified Income Shares then
credited to World Wide Income's account on the books of Diversified Income to
open accounts on the books of Diversified Income in the names of the World Wide
Income Shareholders and representing the respective pro rata number of
Diversified Income Shares due such World Wide Income Shareholders. All issued
and outstanding shares of World Wide Income simultaneously will be canceled on
World Wide Income's books; however, share certificates representing interests in
World Wide Income will represent a number of Diversified Income Shares after the
Closing Date as determined in accordance with paragraph 2.3. Diversified Income
will issue certificates representing Diversified Income Shares in connection
with such exchange only upon the written request of a World Wide Income
Shareholder.
1.6 Ownership of Diversified Income Shares will be shown on the books of
Diversified Income's transfer agent. Diversified Income Shares will be issued in
the manner described in Diversified Income's current Prospectus and Statement of
Additional Information.
1.7 Any transfer taxes payable upon issuance of Diversified Income Shares
in a name other than the registered holder of Diversified Income Shares on World
Wide Income's books as of the close of business on the Valuation Date shall, as
a condition of such issuance and transfer, be paid by the person to whom
Diversified Income Shares are to be issued and transferred.
1.8 Any reporting responsibility of World Wide Income is and shall remain
the responsibility of World Wide Income up to and including the date on which
World Wide Income is dissolved and deregistered pursuant to paragraph 1.9.
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1.9 Within one year after the Closing Date, World Wide Income shall pay or
make provision for the payment of all its liabilities and taxes, and distribute
to the shareholders of World Wide Income as of the close of business on the
Valuation Date any remaining amount of the Cash Reserve (as reduced by the
estimated cost of distributing it to shareholders). If and to the extent that
any trust, escrow account, or other similar entity continues after the close of
such one-year period in connection either with making provision for payment of
liabilities or taxes or with distributions to shareholders of World Wide Income,
such entity shall either (i) qualify as a liquidating trust under Section 7701
of the Code (and applicable Treasury Regulations thereunder) or other entity
which does not constitute a continuation of World Wide Income for federal income
tax purposes, or (ii) be subject to a waiver under Section 368(a)(2)(G)(ii) of
the complete distribution requirement of Section 368(a)(2)(G)(i) of the Code.
World Wide Income shall be dissolved as a Massachusetts business trust and
deregistered as an investment company under the Investment Company Act of 1940,
as amended ("1940 Act"), promptly following the making of all distributions
pursuant to paragraph 1.5 (and, in any event, within one year after the Closing
Date).
1.10 Copies of all books and records maintained on behalf of World Wide
Income in connection with its obligations under the 1940 Act, the Code, state
blue sky laws or otherwise in connection with this Agreement will promptly after
the Closing be delivered to officers of Diversified Income or their designee and
Diversified Income or its designee shall comply with applicable record retention
requirements to which World Wide Income is subject under the 1940 Act.
2. VALUATION
2.1 The value of the World Wide Income Assets shall be the value of such
assets computed as of 4:00 p.m. on the New York Stock Exchange on the third
business day following the receipt of the requisite approval by shareholders of
World Wide Income of this Agreement or at such time on such earlier or later
date after such approval as may be mutually agreed upon in writing (such time
and date being hereinafter called the "Valuation Date"), using the valuation
procedures set forth in Diversified Income's then current Prospectus and
Statement of Additional Information.
2.2 The net asset value of a Diversified Income Share shall be the net
asset value per share computed on the Valuation Date, using the valuation
procedures set forth in Diversified Income's then current Prospectus and
Statement of Additional Information.
2.3 The number of Diversified Income Shares (including fractional shares,
if any) to be issued hereunder shall be determined, with respect to each class,
by dividing the aggregate net asset value of each class of World Wide Income
shares (determined in accordance with paragraph 2.1) by the net asset value per
share of the corresponding class of shares of Diversified Income (determined in
accordance with paragraph 2.2). For purposes of this paragraph, the aggregate
net asset value of each class of shares of World Wide Income shall not include
the amount of the Cash Reserve.
2.4 All computations of value shall be made by Morgan Stanley Dean Witter
Services Company Inc. ("MSDW Services") in accordance with its regular practice
in pricing Diversified Income. Diversified Income shall cause MSDW Services to
deliver a copy of its valuation report at the Closing.
3. CLOSING AND CLOSING DATE
3.1 The Closing shall take place on the next business day following the
Valuation Date (the "Closing Date"). The Closing shall be held as of 9:00 a.m.
Eastern time, or at such other time as the parties may agree. The Closing shall
be held in a location mutually agreeable to the parties hereto. All acts taking
place at the Closing shall be deemed to take place simultaneously as of 9:00
a.m. Eastern time on the Closing Date unless otherwise provided.
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3.2 Portfolio securities held by World Wide Income and represented by a
certificate or other written instrument shall be presented by it or on its
behalf to The Bank of New York (the "Custodian"), as custodian for Diversified
Income, for examination no later than five business days preceding the Valuation
Date. Such portfolio securities (together with any cash or other assets) shall
be delivered by World Wide Income to the Custodian for the account of
Diversified Income on or before the Closing Date in conformity with applicable
custody provisions under the 1940 Act and duly endorsed in proper form for
transfer in such condition as to constitute good delivery thereof in accordance
with the custom of brokers. The portfolio securities shall be accompanied by all
necessary Federal and state stock transfer stamps or a check for the appropriate
purchase price of such stamps. Portfolio securities and instruments deposited
with a securities depository (as defined in Rule 17f-4 under the 1940 Act) shall
be delivered on or before the Closing Date by book-entry in accordance with
customary practices of such depository and the Custodian. The cash delivered
shall be in the form of a Federal Funds wire, payable to the order of "The Bank
of New York, Custodian for Morgan Stanley Dean Witter Diversified Income Trust."
3.3 In the event that on the Valuation Date, (a) the New York Stock
Exchange shall be closed to trading or trading thereon shall be restricted or
(b) trading or the reporting of trading on such Exchange or elsewhere shall be
disrupted so that, in the judgment of both Diversified Income and World Wide
Income, accurate appraisal of the value of the net assets of Diversified Income
or the World Wide Income Assets is impracticable, the Valuation Date shall be
postponed until the first business day after the day when trading shall have
been fully resumed without restriction or disruption and reporting shall have
been restored.
3.4 If requested, World Wide Income shall deliver to Diversified Income or
its designee (a) at the Closing, a list, certified by its Secretary, of the
names, addresses and taxpayer identification numbers of the World Wide Income
Shareholders and the number and percentage ownership of outstanding World Wide
Income shares owned by each such World Wide Income Shareholder, all as of the
Valuation Date, and (b) as soon as practicable after the Closing, all original
documentation (including Internal Revenue Service forms, certificates,
certifications and correspondence) relating to the World Wide Income
Shareholders' taxpayer identification numbers and their liability for or
exemption from back-up withholding. Diversified Income shall issue and deliver
to such Secretary a confirmation evidencing delivery of Diversified Income
Shares to be credited on the Closing Date to World Wide Income or provide
evidence satisfactory to World Wide Income that such Diversified Income Shares
have been credited to World Wide Income's account on the books of Diversified
Income. At the Closing, each party shall deliver to the other such bills of
sale, checks, assignments, share certificates, if any, receipts or other
documents as such other party or its counsel may reasonably request.
4. COVENANTS OF DIVERSIFIED INCOME AND WORLD WIDE INCOME
4.1 Except as otherwise expressly provided herein with respect to World
Wide Income, Diversified Income and World Wide Income each will operate its
business in the ordinary course between the date hereof and the Closing Date, it
being understood that such ordinary course of business will include customary
dividends and other distributions.
4.2 Diversified Income will prepare and file with the Securities and
Exchange Commission ("Commission") a registration statement on Form N-14 under
the Securities Act of 1933, as amended ("1933 Act"), relating to Diversified
Income Shares ("Registration Statement"). World Wide Income will provide
Diversified Income with the Proxy Materials as described in paragraph 4.3 below,
for inclusion in the Registration Statement. World Wide Income will further
provide Diversified Income with such other information and documents relating to
World Wide Income as are reasonably necessary for the preparation of the
Registration Statement.
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4.3 World Wide Income will call a meeting of its shareholders to consider
and act upon this Agreement and to take all other action necessary to obtain
approval of the transactions contemplated herein. World Wide Income will prepare
the notice of meeting, form of proxy and proxy statement (collectively, "Proxy
Materials") to be used in connection with such meeting; provided that
Diversified Income will furnish World Wide Income with its currently effective
prospectus for inclusion in the Proxy Materials and with such other information
relating to Diversified Income as is reasonably necessary for the preparation of
the Proxy Materials.
4.4 World Wide Income will assist Diversified Income in obtaining such
information as Diversified Income reasonably requests concerning the beneficial
ownership of World Wide Income shares.
4.5 Subject to the provisions of this Agreement, Diversified Income and
World Wide Income will each take, or cause to be taken, all action, and do or
cause to be done, all things reasonably necessary, proper or advisable to
consummate and make effective the transactions contemplated by this Agreement.
4.6 World Wide Income shall furnish or cause to be furnished to Diversified
Income within 30 days after the Closing Date a statement of World Wide Income's
assets and liabilities as of the Closing Date, which statement shall be
certified by World Wide Income's Treasurer and shall be in accordance with
generally accepted accounting principles consistently applied. As promptly as
practicable, but in any case within 60 days after the Closing Date, World Wide
Income shall furnish Diversified Income, in such form as is reasonably
satisfactory to Diversified Income, a statement certified by World Wide Income's
Treasurer of World Wide Income's earnings and profits for Federal income tax
purposes that will be carried over to Diversified Income pursuant to Section 381
of the Code.
4.7 As soon after the Closing Date as is reasonably practicable, World Wide
Income (a) shall prepare and file all Federal and other tax returns and reports
of World Wide Income required by law to be filed with respect to all periods
ending on or before the Closing Date but not theretofore filed and (b) shall pay
all Federal and other taxes shown as due thereon and/or all Federal and other
taxes that were unpaid as of the Closing Date, including without limitation, all
taxes for which the provision for payment was made as of the Closing Date (as
represented in paragraph 5.2(k)).
4.8 Diversified Income agrees to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act and the 1940 Act and to
make such filings required by the state Blue Sky and securities laws as it may
deem appropriate in order to continue its operations after the Closing Date.
5. REPRESENTATIONS AND WARRANTIES
5.1 Diversified Income represents and warrants to World Wide Income as
follows:
(a) Diversified Income is a validly existing Massachusetts Business
Trust with full power to carry on its business as presently conducted;
(b) Diversified Income is a duly registered, open-end, management
investment company, and its registration with the Commission as an
investment company under the 1940 Act and the registration of its shares
under the 1933 Act are in full force and effect;
(c) All of the issued and outstanding shares of Diversified Income have
been offered and sold in compliance in all material respects with
applicable registration requirements of the 1933 Act and state securities
laws. Shares of Diversified Income are registered in all jurisdictions in
which they are required to be registered under state securities laws and
other laws, and said registrations, including any periodic reports or
supplemental filings, are complete and current, all fees required to be
paid have been paid, and Diversified Income is not subject to any stop
order and is fully qualified to sell its shares in each state in which its
shares have been registered;
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(d) The current Prospectus and Statement of Additional Information of
Diversified Income conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the regulations
thereunder and do not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading;
(e) Diversified Income is not in, and the execution, delivery and
performance of this Agreement will not result in a, material violation of
any provision of Diversified Income's Declaration of Trust or By-Laws or of
any agreement, indenture, instrument, contract, lease or other undertaking
to which Diversified Income is a party or by which it is bound;
(f) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or, to its
knowledge, threatened against Diversified Income or any of its properties
or assets which, if adversely determined, would materially and adversely
affect its financial condition or the conduct of its business; and
Diversified Income knows of no facts that might form the basis for the
institution of such proceedings and is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body which materially and adversely affects, or is reasonably likely to
materially and adversely effect, its business or its ability to consummate
the transactions herein contemplated;
(g) The Statement of Assets and Liabilities, Statement of Operations,
Statement of Changes in Net Assets and Financial Highlights for the year
ended October 31, 2000, of Diversified Income certified by Deloitte &
Touche LLP (copies of which have been furnished to World Wide Income),
fairly present, in all material respects, Diversified Income's financial
condition as of such date in accordance with generally accepted accounting
principles, and its results of such operations, changes in its net assets
and financial highlights for such period, and as of such date there were no
known liabilities of Diversified Income (contingent or otherwise) not
disclosed therein that would be required in accordance with generally
accepted accounting principles to be disclosed therein;
(h) All issued and outstanding Diversified Income Shares are, and at
the Closing Date will be, duly and validly issued and outstanding, fully
paid and nonassessable with no personal liability attaching to the
ownership thereof, except as set forth under the caption "Additional
Information" in Diversified Income's current Prospectus incorporated by
reference in the Registration Statement. Diversified Income does not have
outstanding any options, warrants or other rights to subscribe for or
purchase any of its shares;
(i) The execution, delivery and performance of this Agreement have been
duly authorized by all necessary action on the part of Diversified Income,
and this Agreement constitutes a valid and binding obligation of
Diversified Income enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors rights and to general equity
principles. No other consents, authorizations or approvals are necessary in
connection with Diversified Income's performance of this Agreement;
(j) Diversified Income Shares to be issued and delivered to World Wide
Income, for the account of the World Wide Income Shareholders, pursuant to
the terms of this Agreement will at the Closing Date have been duly
authorized and, when so issued and delivered, will be duly and validly
issued Diversified Income Shares, and will be fully paid and non-assessable
with no personal liability attaching to the ownership thereof, except as
set forth under the caption "Capital Stock and Other Securities" in
Diversified Income's current Statement of Additional Information
incorporated by reference in the Statement of Additional Information to
this Registration Statement;
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(k) All material Federal and other tax returns and reports of
Diversified Income required by law to be filed on or before the Closing
Date have been filed and are correct, and all Federal and other taxes shown
as due or required to be shown as due on said returns and reports have been
paid or provision has been made for the payment thereof, and to the best of
Diversified Income's knowledge, no such return is currently under audit and
no assessment has been asserted with respect to any such return;
(l) For each taxable year since its inception, Diversified Income has
met the requirements of Subchapter M of the Code for qualification and
treatment as a "regulated investment company" and neither the execution or
delivery of nor the performance of its obligations under this Agreement
will adversely affect, and no other events are reasonably likely to occur
which will adversely affect the ability of Diversified Income to continue
to meet the requirements of Subchapter M of the Code;
(m) Since October 31, 2000 there has been no change by Diversified
Income in accounting methods, principles, or practices, including those
required by generally accepted accounting principles;
(n) The information furnished or to be furnished by Diversified Income
for use in registration statements, proxy materials and other documents
which may be necessary in connection with the transactions contemplated
hereby shall be accurate and complete in all material respects and shall
comply in all material respects with Federal securities and other laws and
regulations applicable thereto; and
(o) The Proxy Materials to be included in the Registration Statement
(only insofar as they relate to Diversified Income) will, on the effective
date of the Registration Statement and on the Closing Date, not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
materially misleading.
5.2 World Wide Income represents and warrants to Diversified Income as
follows:
(a) World Wide Income is a validly existing Massachusetts business
trust with full power to carry on its business as presently conducted;
(b) World Wide Income is a duly registered, open-end, management
investment company, and its registration with the Commission as an
investment company under the 1940 Act and the registration of its shares
under the 1933 Act are in full force and effect;
(c) All of the issued and outstanding shares of beneficial interest of
World Wide Income have been offered and sold in compliance in all material
respects with applicable requirements of the 1933 Act and state securities
laws. Shares of World Wide Income are registered in all jurisdictions in
which they are required to be registered and said registrations, including
any periodic reports or supplemental filings, are complete and current, all
fees required to be paid have been paid, and World Wide Income is not
subject to any stop order and is fully qualified to sell its shares in each
state in which its shares have been registered;
(d) The current Prospectus and Statement of Additional Information of
World Wide Income conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the regulations
thereunder and do not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading;
(e) World Wide Income is not, and the execution, delivery and
performance of this Agreement will not result, in a material violation of
any provision of World Wide Income's Declaration of Trust or By-Laws or of
any agreement, indenture, instrument, contract, lease or other undertaking
to which World Wide Income is a party or by which it is bound;
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(f) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or, to its
knowledge, threatened against World Wide Income or any of its properties or
assets which, if adversely determined, would materially and adversely
affect its financial condition or the conduct of its business; and World
Wide Income knows of no facts that might form the basis for the institution
of such proceedings and is not a party to or subject to the provisions of
any order, decree or judgment of any court or governmental body which
materially and adversely affects, or is reasonably likely to materially and
adversely effect, its business or its ability to consummate the
transactions herein contemplated;
(g) The Statement of Assets and Liabilities, Statement of Operations,
Statement of Changes in Net Assets and Financial Highlights of World Wide
Income for the year ended October 31, 2000, certified by Deloitte & Touche
LLP (copies of which have been or will be furnished to Diversified Income)
fairly present, in all material respects, World Wide Income's financial
condition as of such date, and its results of operations, changes in its
net assets and financial highlights for such period in accordance with
generally accepted accounting principles, and as of such date there were no
known liabilities of World Wide Income (contingent or otherwise) not
disclosed therein that would be required in accordance with generally
accepted accounting principles to be disclosed therein;
(h) World Wide Income has no material contracts or other commitments
(other than this Agreement) that will be terminated with liability to it
prior to the Closing Date;
(i) All issued and outstanding shares of World Wide Income are, and at
the Closing Date will be, duly and validly issued and outstanding, fully
paid and nonassessable with no personal liability attaching to the
ownership thereof, except as set forth under the caption "Capital Stock and
Other Securities" in World Wide Income's current Statement of Additional
Information incorporated by reference in the Statement of Additional
Information to this Registration Statement. World Wide Income does not have
outstanding any options, warrants or other rights to subscribe for or
purchase any of its shares, nor is there outstanding any security
convertible to any of its shares. All such shares will, at the time of
Closing, be held by the persons and in the amounts set forth in the list of
shareholders submitted to Diversified Income pursuant to paragraph 3.4;
(j) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action on
the part of World Wide Income, and subject to the approval of World Wide
Income's shareholders, this Agreement constitutes a valid and binding
obligation of World Wide Income, enforceable in accordance with its terms,
subject as to enforcement to bankruptcy, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors rights and to
general equity principles. No other consents, authorizations or approvals
are necessary in connection with World Wide Income's performance of this
Agreement;
(k) All material Federal and other tax returns and reports of World
Wide Income required by law to be filed on or before the Closing Date shall
have been filed and are correct and all Federal and other taxes shown as
due or required to be shown as due on said returns and reports have been
paid or provision has been made for the payment thereof, and to the best of
World Wide Income's knowledge, no such return is currently under audit and
no assessment has been asserted with respect to any such return;
(l) For each taxable year since its inception, World Wide Income has
met all the requirements of Subchapter M of the Code for qualification and
treatment as a "regulated investment company" and neither the execution or
delivery of nor the performance of its obligations under this Agreement
will adversely affect, and no other events are reasonably likely to occur
which will adversely affect the ability of World Wide Income to continue to
meet the requirements of Subchapter M of the Code;
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(m) At the Closing Date, World Wide Income will have good and valid
title to the World Wide Income Assets, subject to no liens (other than the
obligation, if any, to pay the purchase price of portfolio securities
purchased by World Wide Income which have not settled prior to the Closing
Date), security interests or other encumbrances, and full right, power and
authority to assign, deliver and otherwise transfer such assets hereunder,
and upon delivery and payment for such assets, Diversified Income will
acquire good and marketable title thereto, subject to no restrictions on
the full transfer thereof, including any restrictions as might arise under
the 1933 Act;
(n) On the effective date of the Registration Statement, at the time of
the meeting of World Wide Income's shareholders and on the Closing Date,
the Proxy Materials (exclusive of the currently effective Diversified
Income Prospectus contained therein) will (i) comply in all material
respects with the provisions of the 1933 Act, the Securities Exchange Act
of 1934, as amended ("1934 Act") and the 1940 Act and the regulations
thereunder and (ii) not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading. Any other information furnished
by World Wide Income for use in the Registration Statement or in any other
manner that may be necessary in connection with the transactions
contemplated hereby shall be accurate and complete and shall comply in all
material respects with applicable Federal securities and other laws and
regulations thereunder;
(o) World Wide Income will, on or prior to the Valuation Date, declare
one or more dividends or other distributions to shareholders that, together
with all previous dividends and other distributions to shareholders, shall
have the effect of distributing to the shareholders all of its investment
company taxable income and net capital gain, if any, through the Valuation
Date (computed without regard to any deduction for dividends paid);
(p) World Wide Income has maintained or has caused to be maintained on
its behalf all books and accounts as required of a registered investment
company in compliance with the requirements of Section 31 of the 1940 Act
and the Rules thereunder; and
(q) World Wide Income is not acquiring Diversified Income Shares to be
issued hereunder for the purpose of making any distribution thereof other
than in accordance with the terms of this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF WORLD WIDE INCOME
The obligations of World Wide Income to consummate the transactions
provided for herein shall be subject, at its election, to the performance by
Diversified Income of all the obligations to be performed by it hereunder on or
before the Closing Date and, in addition thereto, the following conditions:
6.1 All representations and warranties of Diversified Income contained in
this Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date;
6.2 Diversified Income shall have delivered to World Wide Income a
certificate of its President and Treasurer, in a form reasonably satisfactory to
World Wide Income and dated as of the Closing Date, to the effect that the
representations and warranties of Diversified Income made in this Agreement are
true and correct at and as of the Closing Date, except as they may be affected
by the transactions contemplated by this Agreement, and as to such other matters
as World Wide Income shall reasonably request;
6.3 World Wide Income shall have received a favorable opinion from Mayer,
Brown & Platt, counsel to Diversified Income, dated as of the Closing Date, to
the effect that:
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(a) Diversified Income is a validly existing Massachusetts Business
Trust, and has the power to own all of its properties and assets and to
carry on its business as presently conducted (Massachusetts counsel may be
relied upon in delivering such opinion); (b) Diversified Income is a duly
registered, open-end, management investment company, and its registration
with the Commission as an investment company under the 1940 Act is in full
force and effect; (c) this Agreement has been duly authorized, executed and
delivered by Diversified Income and, assuming that the Registration
Statement complies with the 1933 Act, the 1934 Act and the 1940 Act and
regulations thereunder and assuming due authorization, execution and
delivery of this Agreement by World Wide Income, is a valid and binding
obligation of Diversified Income enforceable against Diversified Income in
accordance with its terms, subject as to enforcement, to bankruptcy,
insolvency, reorganization, moratorium and other laws relating to or
affecting creditors rights and to general equity principles; (d)
Diversified Income Shares to be issued to World Wide Income Shareholders as
provided by this Agreement are duly authorized and upon such delivery will
be validly issued, fully paid and non-assessable (except as set forth under
the caption "Capital Stock and Other Securities" in Diversified Income's
Statement of Additional Information), and no shareholder of Diversified
Income has any preemptive rights to subscription or purchase in respect
thereof (Massachusetts counsel may be relied upon in delivering such
opinion); (e) the execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, violate
Diversified Income's Declaration of Trust or By-Laws; and (f) to the
knowledge of such counsel, no consent, approval, authorization or order of
any court or governmental authority of the United States or any state is
required for the consummation by Diversified Income of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act and the 1940 Act and such as may be required under state
securities laws; and
6.4 As of the Closing Date, there shall have been no material change in the
investment objective, policies and restrictions nor any increase in the
investment management fees or annual fees pursuant to Diversified Income's 12b-1
plan of distribution from those described in Diversified Income's Prospectus
dated January 8, 2001 and Statement of Additional Information dated January 8,
2001.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF DIVERSIFIED INCOME
The obligations of Diversified Income to complete the transactions provided
for herein shall be subject, at its election, to the performance by World Wide
Income of all the obligations to be performed by it hereunder on or before the
Closing Date and, in addition thereto, the following conditions:
7.1 All representations and warranties of World Wide Income contained in
this Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date;
7.2 World Wide Income shall have delivered to Diversified Income at the
Closing a certificate of its President and its Treasurer, in form and substance
satisfactory to Diversified Income and dated as of the Closing Date, to the
effect that the representations and warranties of World Wide Income made in this
Agreement are true and correct at and as of the Closing Date, except as they may
be affected by the transactions contemplated by this Agreement, and as to such
other matters as Diversified Income shall reasonably request;
7.3 World Wide Income shall have delivered to Diversified Income a
statement of the World Wide Income Assets and its liabilities, together with a
list of World Wide Income's portfolio securities and other assets showing the
respective adjusted bases and holding periods thereof for income tax purposes,
as of the Closing Date, certified by the Treasurer of World Wide Income;
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<PAGE>
7.4 World Wide Income shall have delivered to Diversified Income within
three business days after the Closing a letter from PricewaterhouseCoopers LLP
with respect to the taxable years ended October 31, 1998 and 1999, and a letter
from Deloitte & Touche LLP for the taxable year ended October 31, 2000, each
dated as of the Closing Date stating that (a) such respective firm has performed
a limited review of the Federal and state income tax returns of World Wide
Income for each of the respective taxable years and, based on such limited
review, nothing came to their attention that caused them to believe that such
returns did not properly reflect, in all material respects, the Federal and
state income tax liabilities of World Wide Income for the periods covered
thereby, (b) for the period from October 31, 2000 to and including the Closing
Date, Deloitte & Touche LLP has performed a limited review (based on unaudited
financial data) to ascertain the amount of applicable Federal, state and local
taxes and has determined that same either have been paid or reserves have been
established for payment of such taxes, and, based on such limited review,
nothing came to their attention that caused them to believe that the taxes paid
or reserves set aside for payment of such taxes were not adequate in all
material respects for the satisfaction of all Federal, state and local tax
liabilities for the period from October 31, 2000 to and including the Closing
Date and (c) based on such limited reviews, nothing came to their attention that
caused them to believe that World Wide Income would not qualify as a regulated
investment company for Federal income tax purposes for any such year or period;
7.5 Diversified Income shall have received at the Closing a favorable
opinion from Mayer, Brown & Platt, counsel to World Wide Income, dated as of the
Closing Date to the effect that:
(a) World Wide Income is a validly existing Massachusetts business
trust and has the power to own all of its properties and assets and to
carry on its business as presently conducted (Massachusetts counsel may be
relied upon in delivering such opinion); (b) World Wide Income is a duly
registered, open-end, management investment company under the 1940 Act, and
its registration with the Commission as an investment company under the
1940 Act is in full force and effect; (c) this Agreement has been duly
authorized, executed and delivered by World Wide Income and, assuming that
the Registration Statement complies with the 1933 Act, the 1934 Act and the
1940 Act and the regulations thereunder and assuming due authorization,
execution and delivery of this Agreement by Diversified Income, is a valid
and binding obligation of World Wide Income enforceable against World Wide
Income in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating
to or affecting creditors rights and to general equity principles; (d) the
execution and delivery of this Agreement did not, and the consummation of
the transactions contemplated hereby will not, violate World Wide Income's
Declaration of Trust or By-Laws; and (e) to the knowledge of such counsel,
no consent, approval, authorization or order of any court or governmental
authority of the United States or any state is required for the
consummation by World Wide Income of the transactions contemplated herein,
except such as have been obtained under the 1933 Act, the 1934 Act and the
1940 Act and such as may be required under state securities laws; and
7.6 On the Closing Date, the World Wide Income Assets shall include no
assets that Diversified Income, by reason of limitations of the fund's
Declaration of Trust or otherwise, may not properly acquire.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF DIVERSIFIED INCOME AND WORLD
WIDE INCOME
The obligations of World Wide Income and Diversified Income hereunder are
each subject to the further conditions that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of World
Wide Income in accordance with the provisions of World Wide Income's Declaration
of Trust, and certified copies of the resolutions evidencing such approval shall
have been delivered to Diversified Income;
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<PAGE>
8.2 On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with, this
Agreement or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and
permits of Federal, state and local regulatory authorities (including those of
the Commission and of state Blue Sky and securities authorities, including
"no-action" positions of and exemptive orders from such Federal and state
authorities) deemed necessary by Diversified Income or World Wide Income to
permit consummation, in all material respects, of the transactions contemplated
herein shall have been obtained, except where failure to obtain any such
consent, order or permit would not involve risk of a material adverse effect on
the assets or properties of Diversified Income or World Wide Income;
8.4 The Registration Statement shall have become effective under the 1933
Act, no stop orders suspending the effectiveness thereof shall have been issued
and, to the best knowledge of the parties hereto, no investigation or proceeding
for that purpose shall have been instituted or be pending, threatened or
contemplated under the 1933 Act;
8.5 World Wide Income shall have declared and paid a dividend or dividends
and/or other distribution or distributions that, together with all previous such
dividends or distributions, shall have the effect of distributing to the World
Wide Income Shareholders all of World Wide Income's investment company taxable
income (computed without regard to any deduction for dividends paid) and all of
its net capital gain (after reduction for any capital loss carry-forward and
computed without regard to any deduction for dividends paid) for all taxable
years ending on or before the Closing Date; and
8.6 The parties shall have received the opinion of the law firm of Mayer,
Brown & Platt (based on such representations as such law firm shall reasonably
request), addressed to Diversified Income and World Wide Income, which opinion
may be relied upon by the shareholders of World Wide Income, substantially to
the effect that, for Federal income tax purposes:
(a) The transfer of World Wide Income's assets in exchange for
Diversified Income Shares and the assumption by Diversified Income of
certain stated liabilities of World Wide Income followed by the
distribution by World Wide Income of Diversified Income Shares to the World
Wide Income Shareholders in exchange for their World Wide Income shares
pursuant to and in accordance with the terms of the Reorganization
Agreement will constitute a "reorganization" within the meaning of Section
368(a)(1)(C) of the Code, and World Wide Income and Diversified Income will
each be a "party to a reorganization" within the meaning of Section 368(b)
of the Code;
(b) No gain or loss will be recognized by Diversified Income upon the
receipt of the assets of World Wide Income solely in exchange for
Diversified Income Shares and the assumption by Diversified Income of the
stated liabilities of World Wide Income;
(c) No gain or loss will be recognized by World Wide Income upon the
transfer of the assets of World Wide Income to Diversified Income in
exchange for Diversified Income Shares and the assumption by Diversified
Income of the stated liabilities or upon the distribution of Diversified
Income Shares to the World Wide Income Shareholders in exchange for their
World Wide Income shares;
(d) No gain or loss will be recognized by the World Wide Income
Shareholders upon the exchange of the World Wide Income shares for
Diversified Income Shares;
(e) The aggregate tax basis for Diversified Income Shares received by
each World Wide Income Shareholder pursuant to the reorganization will be
the same as the aggregate tax basis of the World Wide Income Shares held by
each such World Wide Income Shareholder immediately prior to the
Reorganization;
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<PAGE>
(f) The holding period of Diversified Income Shares to be received by
each World Wide Income Shareholder will include the period during which the
World Wide Income Shares surrendered in exchange therefor were held
(provided such World Wide Income Shares were held as capital assets on the
date of the Reorganization);
(g) The tax basis of the assets of World Wide Income acquired by
Diversified Income will be the same as the tax basis of such assets to
World Wide Income immediately prior to the Reorganization; and
(h) The holding period of the assets of World Wide Income in the hands
of Diversified Income will include the period during which those assets
were held by World Wide Income.
Notwithstanding anything herein to the contrary, neither Diversified
Income nor World Wide Income may waive the conditions set forth in this
paragraph 8.6.
9. FEES AND EXPENSES
9.1 (a) Diversified Income shall bear its expenses incurred in connection
with the entering into, and carrying out of, the provisions of this Agreement,
including legal, accounting, Commission registration fees and Blue Sky
expenses. World Wide Income shall bear its expenses incurred in connection with
the entering into and carrying out of the provisions of this Agreement,
including legal and accounting fees, printing, filing and proxy solicitation
expenses and portfolio transfer taxes (if any) incurred in connection with the
consummation of the transactions contemplated herein.
(b) In the event the transactions contemplated herein are not
consummated by reason of World Wide Income being either unwilling or unable
to go forward (other than by reason of the nonfulfillment or failure of any
condition to World Wide Income's obligations specified in this Agreement),
World Wide Income's only obligation hereunder shall be to reimburse
Diversified Income for all reasonable out-of-pocket fees and expenses
incurred by Diversified Income in connection with those transactions.
(c) In the event the transactions contemplated herein are not
consummated by reason of Diversified Income being either unwilling or
unable to go forward (other than by reason of the nonfulfillment or failure
of any condition to Diversified Income's obligations specified in this
Agreement), Diversified Income's only obligation hereunder shall be to
reimburse World Wide Income for all reasonable out-of-pocket fees and
expenses incurred by World Wide Income in connection with those
transactions.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
herein, except that the representations, warranties and covenants of World Wide
Income hereunder shall not survive the dissolution and complete liquidation of
World Wide Income in accordance with Section 1.9.
11. TERMINATION
11.1 This Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time prior to the Closing:
(a) by the mutual written consent of World Wide Income and Diversified
Income;
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<PAGE>
(b) by either Diversified Income or World Wide Income by notice to the
other, without liability to the terminating party on account of such
termination (providing the terminating party is not otherwise in material
default or breach of this Agreement) if the Closing shall not have occurred
on or before September 30, 2001; or
(c) by either Diversified Income or World Wide Income, in writing
without liability to the terminating party on account of such termination
(provided the terminating party is not otherwise in material default or
breach of this Agreement), if (i) the other party shall fail to perform in
any material respect its agreements contained herein required to be
performed on or prior to the Closing Date, (ii) the other party materially
breaches any of its representations, warranties or covenants contained
herein, (iii) the World Wide Income shareholders fail to approve this
Agreement at any meeting called for such purpose at which a quorum was
present or (iv) any other condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably
appears that it will not or cannot be met.
11.2 (a) Termination of this Agreement pursuant to paragraphs 11.1 (a)
or (b) shall terminate all obligations of the parties hereunder and there
shall be no liability for damages on the part of Diversified Income or
World Wide Income, or the trustees or officers of Diversified Income or
World Wide Income, to any other party or its trustees or officers.
(b) Termination of this Agreement pursuant to paragraph 11.1 (c) shall
terminate all obligations of the parties hereunder and there shall be no
liability for damages on the part of Diversified Income or World Wide
Income, or the trustees or officers of Diversified Income or World Wide
Income, except that any party in breach of this Agreement shall, upon
demand, reimburse the non-breaching party for all reasonable out-of-pocket
fees and expenses incurred in connection with the transactions contemplated
by this Agreement, including legal, accounting and filing fees.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the parties.
13. MISCELLANEOUS
13.1 The article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
13.5 The obligations and liabilities of Diversified Income hereunder are
solely those of Diversified Income. It is expressly agreed that no shareholder,
nominee, trustee, officer, agent, or employee of Diversified
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<PAGE>
Income shall be personally liable hereunder. The execution and delivery of this
Agreement have been authorized by the trustees of Diversified Income and signed
by authorized officers of Diversified Income acting as such, and neither such
authorization by such trustees nor such execution and delivery by such officers
shall be deemed to have been made by any of them individually or to impose any
liability on any of them personally.
13.6 The obligations and liabilities of World Wide Income hereunder are
solely those of World Wide Income. It is expressly agreed that no shareholder,
nominee, trustee, officer, agent, or employee of World Wide Income shall be
personally liable hereunder. The execution and delivery of this Agreement have
been authorized by the trustees of World Wide Income and signed by authorized
officers of World Wide Income acting as such, and neither such authorization by
such trustees nor such execution and delivery by such officers shall be deemed
to have been made by any of them individually or to impose any liability on any
of them personally.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed by a duly authorized officer.
MORGAN STANLEY DEAN WITTER WORLD WIDE
INCOME TRUST
By: /s/ CHARLES A. FIUMEFREDDO
-------------------------------------------
Name: Charles A. Fiumefreddo
Title: Chairman
MORGAN STANLEY DEAN WITTER DIVERSIFIED
INCOME TRUST
By: /s/ BARRY FINK
-------------------------------------------
Name: Barry Fink
Title: Vice President
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<PAGE>
EXHIBIT B
PROSPECTUS o JANUARY 8, 2001
MORGAN STANLEY DEAN WITTER
[GRAPHIC OMITTED]
DIVERSIFIED INCOME TRUST
A MUTUAL FUND WHOSE PRIMARY INVESTMENT OBJECTIVE IS A
HIGH LEVEL OF CURRENT INCOME; AS A SECONDARY OBJECTIVE,
THE FUND SEEKS TO MAXIMIZE TOTAL RETURN BUT ONLY TO THE
EXTENT CONSISTENT WITH ITS PRIMARY OBJECTIVE
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
CONTENTS
<TABLE>
<S> <C>
The Fund Investment Objectives .................................... 1
Principal Investment Strategies .......................... 1
Principal Risks .......................................... 3
Past Performance ......................................... 6
Fees and Expenses ........................................ 7
Additional Investment Strategy Information ............... 8
Additional Risk Information .............................. 10
Fund Management .......................................... 11
Shareholder Information Pricing Fund Shares ...................................... 12
How to Buy Shares ........................................ 12
How to Exchange Shares ................................... 14
How to Sell Shares ....................................... 16
Distributions ........................................... 18
Tax Consequences ......................................... 18
Share Class Arrangements ................................. 19
Financial Highlights .......................................................... 28
Our Family of Funds ........................................... Inside Back Cover
This Prospectus contains important information about the Fund.
Please read it carefully and keep it for future reference.
</TABLE>
<PAGE>
THE FUND
[GRAPHIC OMITTED]
INVESTMENT OBJECTIVES
---------------------------------
Morgan Stanley Dean Witter Diversified Income Trust seeks a high
level of current income as its primary investment objective. As a
secondary objective, the Fund seeks to maximize total return but only
to the extent consistent with its primary objective.
[GRAPHIC OMITTED]
PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------
The Fund will normally invest at least 65% of its assets in a
diversified portfolio of fixed-income securities. The Fund's
"Investment Manager," Morgan Stanley Dean Witter Advisors Inc.,
attempts to equally allocate approximately one-third of the Fund's
assets among three separate groups or market segments of fixed-income
securities. The Investment Manager will adjust the Fund's assets not
less than quarterly to reflect any changes in the relative values of
the securities in each group so that following the adjustment the
value of the investments in each group will be equal to the extent
practicable. The Investment Manager diversifies investments among the
groups in an effort to reduce overall portfolio risk -- a general
downturn in one group may be offset by a rise in another.
(sidebar)
INCOME
An investment objective having the goal of selecting securities to pay out
income rather than rise in price.
(end sidebar)
The three groups of Fund investments include: (1) global securities;
(2) mortgage- backed securities and U.S. Government securities; and
(3) high yield securities.
(1) Global Securities. The securities in the first group include:
o Fixed-income securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities or fixed-income
securities issued or guaranteed by a foreign government or
supranational organization or any of their instrumentalities or
fixed-income securities issued by a corporation, all of which are
rated in one of the four highest bond rating categories by either
Standard & Poor's ("S&P") or Moody's Investors Service
("Moody's") or, if unrated, are determined by the Investment
Manager to be of equivalent quality;
o Certificates of deposit and bankers' acceptances (a) issued or
guaranteed by, or time deposits maintained at, banks and (b)
rated in the two highest short-term rating categories by either
S&P, Moody's or Duff & Phelps or, if unrated, are determined by
the Investment Manager to be of high creditworthiness; and
o Commercial paper rated in the two highest short-term rating
categories by either S&P, Moody's or Duff & Phelps or, if
unrated, issued by U.S. or foreign companies having outstanding
debt securities rated A or higher by S&P or Moody's.
The Investment Manager will actively manage the Fund's assets in this
group in accordance with a global market strategy which may also
include entering into forward
1
<PAGE>
foreign currency exchange contracts. Consistent with this strategy,
the Investment Manager intends to allocate the Fund's investments
among securities denominated in the currencies of a number of foreign
countries and, within each such country, among different types of
debt securities.
(2) Mortgage-Backed Securities and U.S. Government Securities. The
securities in the second group include:
o Fixed-rate and adjustable rate mortgage-backed securities that
are issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or by private issuers that are rated in the
highest bond rating category by Moody's or S&P or, if not rated,
are determined to be of comparable quality by the Investment
Manager;
o U.S. Treasury securities, such as bills, notes, bonds and zero
coupon securities (without restrictions as to remaining maturity
at time of purchase); and
o U.S. Government agency securities, such as discount notes,
medium-term notes, debentures and zero coupon securities which
are purchased at a discount and either (i) pay no interest, or
(ii) accrue interest, but make no payments until maturity
(without restrictions as to remaining maturity at time of
purchase).
(3) High Yield Securities. The securities in the third group include
high yield, high risk fixed-income securities rated Baa or lower by
Moody's or BBB or lower by S&P or, if not rated, are determined by
the Investment Manager to be of comparable quality. Fixed-income
securities rated Ba or lower by Moody's or BB or lower by S&P are
considered speculative investments, commonly known as "junk bonds."
The securities in this group may include both convertible and
non-convertible debt securities and preferred stock. They also may
include "Rule 144A" securities, which are subject to resale
restrictions. The Fund does not have any minimum quality rating
standard for this group of investments. Thus, the Fund may invest in
fixed-income securities that may already be in default on payment of
interest or principal.
* * *
Fixed-income securities are debt securities and can take the form of
bonds, notes or commercial paper. The issuer of the debt security
borrows money from the investor who buys the security. Most debt
securities pay either fixed or adjustable rates of interest at regular
intervals until they mature, at which point investors get their
principal back.
In addition to the three groups of fixed-income securities, the Fund
may also invest in options and futures, forward currency contracts,
and common stock and warrants.
In pursuing the Fund's investment objectives, the Investment Manager
has considerable leeway in deciding which investments it buys, holds
or sells on a day-to-day basis -- and which trading strategies it
uses. For example, the Investment Manager in its discretion may
determine to use some permitted trading strategies while not using
others.
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<PAGE>
[GRAPHIC OMITTED]
PRINCIPAL RISKS
--------------------------
There is no assurance that the Fund will achieve its investment
objectives. The Fund's share price and yield will fluctuate with
changes in the market value of the Fund's portfolio securities. The
Fund's yield also will vary based on the yield of the Fund's
portfolio securities. Neither the value nor the yield of the U.S.
Government securities that the Fund invests in (or the value or yield
of the Fund's shares) is guaranteed by the U.S. Government. When you
sell Fund shares, they may be worth less than what you paid for them
and, accordingly, you can lose money investing in this Fund.
Fixed-Income Securities. Principal risks of investing in the Fund are
associated with its fixed-income investments. All fixed-income
securities are subject to two types of risk: credit risk and interest
rate risk. Credit risk refers to the possibility that the issuer of a
security will be unable to make interest payments and/or repay the
principal on its debt.
Interest rate risk refers to fluctuations in the value of a
fixed-income security resulting from changes in the general level of
interest rates. When the general level of interest rates goes up, the
prices of most fixed-income securities go down. When the general
level of interest rates goes down, the prices of most fixed-income
securities go up. (Zero coupon securities are typically subject to
greater price fluctuations than comparable securities that pay
current interest.) As merely illustrative of the relationship between
fixed-income securities and interest rates, the following table shows
how interest rates affect bond prices.
HOW INTEREST RATES AFFECT BOND PRICES
--------------------------------------------------------------------------------
PRICE PER $1,000 OF A BOND IF INTEREST RATES:
---------------------------------------------
INCREASE DECREASE
--------------------- ---------------------
BOND MATURITY COUPON 1% 2% 1% 2%
--------------------------------------------------------------------------------
1 Year N/A $1,000 $1,000 $1,000 $1,000
--------------------------------------------------------------------------------
5 Years 5.75% $ 992 $ 959 $1,063 $1,101
--------------------------------------------------------------------------------
10 Years 5.75% $ 976 $ 913 $1,118 $1,120
--------------------------------------------------------------------------------
30 Years 6.25% $ 973 $ 858 $1,287 $1,502
--------------------------------------------------------------------------------
Coupons reflect yields on Treasury securities as of December 31,
2000. The table is not representative of price changes for
mortgage-backed or asset-backed securities principally because of
prepayment risk, and it is not representative of high yield
securities. In addition, the table is an illustration and does not
represent expected yields or share price changes of any Morgan
Stanley Dean Witter mutual fund.
The Fund is not limited as to the maturities of the securities in
which it may invest. Thus, a rise in the general level of interest
rates may cause the price of the Fund's portfolio securities to fall
substantially.
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<PAGE>
Foreign Securities. The Fund's investments in foreign securities
involve risks in addition to the risks associated with domestic
securities. One additional risk is currency risk. While the price of
Fund shares is quoted and redemption proceeds are paid in U.S.
dollars, the Fund generally converts U.S. dollars to a foreign
market's local currency to purchase a security in that market. If the
value of that local currency falls relative to the U.S. dollar, the
U.S. dollar value of the foreign security will decrease. This is true
even if the foreign security's local price remains unchanged.
Foreign securities (including depository receipts) also have risks
related to political and economic developments abroad, including
expropriations, confiscatory taxation, exchange control regulation,
limitations on the use or transfer of Fund assets, and any effects of
foreign social, economic or political instability. Foreign companies,
in general, are not subject to the regulatory requirements of U.S.
companies and, as such, there may be less publicly available
information about these companies. Moreover, foreign accounting,
auditing and financial reporting standards generally are different
from those applicable to U.S. companies. Finally, in the event of a
default of any foreign debt obligations, it may be more difficult for
the Fund to obtain or enforce a judgment against the issuers of the
securities.
Securities of foreign issuers may be less liquid than comparable
securities of U.S. issuers and, as such, their price changes may be
more volatile. Furthermore, foreign exchanges and broker-dealers are
generally subject to less government and exchange scrutiny and
regulation than their U.S. counterparts. In addition, differences in
clearance and settlement procedures in foreign markets may occasion
delays in settlement of the Fund's trades effected in those markets
and could result in losses to the Fund due to subsequent declines in
the value of the securities subject to the trades.
Mortgage-Backed Securities. Mortgage-backed securities in which the
Fund may invest have different risk characteristics than traditional
debt securities. Although generally the value of fixed-income
securities increases during periods of falling interest rates and
decreases during periods of rising interest rates, this is not always
the case with mortgage-backed securities. This is due to the fact
that principal on underlying mortgages may be prepaid at any time as
well as other factors. Generally, prepayments will increase during a
period of falling interest rates and decrease during a period of
rising interest rates. The rate of prepayments also may be influenced
by economic and other factors. Prepayment risk includes the
possibility that, as interest rates fall, securities with stated
interest rates may have the principal prepaid earlier than expected,
requiring the Fund to invest the proceeds at generally lower interest
rates.
Investments in mortgage-backed securities are made based upon, among
other things, expectations regarding the rate of prepayments on
underlying mortgage pools. Rates of prepayment, faster or slower than
expected by the Investment Manager, could reduce
4
<PAGE>
the Fund's yield, increase the volatility of the Fund and/or cause a
decline in net asset value. Certain mortgage-backed securities may be
more volatile and less liquid than other traditional types of debt
securities.
High Yield Securities. The Fund's investments in high yield
securities, commonly known as "junk bonds," pose significant risks.
The prices of high yield securities are likely to be more sensitive
to adverse economic changes or individual corporate developments than
higher rated securities. During an economic downturn or substantial
period of rising interest rates, junk bond issuers and, in
particular, highly leveraged issuers may experience financial stress
that would adversely affect their ability to service their principal
and interest payment obligations, to meet their projected business
goals or to obtain additional financing. In the event of a default,
the Fund may incur additional expenses to seek recovery. The Rule
144A securities could have the effect of increasing the level of Fund
illiquidity to the extent the Fund may be unable to find qualified
institutional buyers interested in purchasing the securities. In
addition, periods of economic uncertainty and change probably would
result in an increased volatility of market prices of high yield
securities and a corresponding volatility in the Fund's net asset
value.
Other Risks. The performance of the Fund also will depend on whether
the Investment Manager is successful in pursuing the Fund's
investment strategy. The Fund is also subject to other risks from its
permissible investments including the risks associated with its
options and futures, forward currency contracts, common stock and
warrants and convertible securities investments. For more information
about these risks, see the "Additional Risk Information" section.
Shares of the Fund are not bank deposits and are not guaranteed or
insured by the FDIC or any other government agency.
5
<PAGE>
[GRAPHIC OMITTED]
PAST PERFORMANCE
----------------------------
The bar chart and table below provide some indication of the risks of
investing in the Fund. The Fund's past performance does not indicate
how the Fund will perform in the future.
(sidebar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Fund's Class B shares has varied
from year to year over the past 8 calendar years.
(end sidebar)
ANNUAL TOTAL RETURNS -- CALENDAR YEARS
9.63% -1.31% 12.71% 8.36% 6.04% 2.48% -2.78% -8.68%
1993 '94 '95 '96 '97 '98 '99 '00
The bar chart reflects the performance of Class B shares; the
performance of the other Classes will differ because the Classes
have different ongoing fees. The performance information in the
bar chart does not reflect the deduction of sales charges; if
these amounts were reflected, returns would be less than shown.
During the periods shown in the bar chart, the highest return for a
calendar quarter was 4.34% (quarter ended March 31, 1993) and the
lowest return for a calendar quarter was --4.02% (quarter ended
December 31, 2000).
(sidebar)
AVERAGE ANNUAL TOTAL RETURNS
This table compares the Fund's average annual total returns with those of a
broad measure of market performance over time. The Fund's returns include the
maximum applicable sales charge for each Class and assume you sold your shares
at the end of each period.
(end sidebar)
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2000)
--------------------------------------------------------------------------------
LIFE OF THE FUND
PAST 1 YEAR PAST 5 YEARS (SINCE 4/9/92)
--------------------------------------------------------------------------------
Class A(1) -12.15% -- --
--------------------------------------------------------------------------------
Class B -12.88% 0.62% 3.39%
--------------------------------------------------------------------------------
Class C(1) -9.51% -- --
--------------------------------------------------------------------------------
Class D(1) -7.89% -- --
--------------------------------------------------------------------------------
Lehman Brothers U.S.
--------------------------------------------------------------------------------
Government/Credit Index(2) 10.12% 6.11% 6.84%(3)
--------------------------------------------------------------------------------
(1) Classes A, C and D commenced operations on July 28, 1997.
(2) The Lehman Brothers U.S. Government/Credit Index (formerly Lehman Brothers
Intermediate Government/Corporate Index) tracks the performance of
government and corporate obligations, including U.S. Government agency and
Treasury securities, and corporate and Y ankee bonds with maturities of 1
to 10 years. The performance of the Index does not include any expenses,
fees or charges. The Index is unmanaged and should not be considered an
investment.
(3) For the period April 30, 1992 to December 31, 2000.
6
<PAGE>
[GRAPHIC OMITTED]
FEES AND EXPENSES
-----------------------------
The table below briefly describes the fees and expenses that you may
pay if you buy and hold shares of the Fund. The Fund offers four
Classes of shares: Classes A, B, C and D. Each Class has a different
combination of fees, expenses and other features. The Fund does not
charge account or exchange fees. See the "Share Class Arrangements"
section for further fee and expense information.
(sidebar)
SHAREHOLDER FEES
These fees are paid directly from your investment.
ANNUAL FUND
OPERATING EXPENSES
These expenses are deducted from the Fund's assets and are based on expenses
paid for the fiscal year ended October 31, 2000.
(end sidebar)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES
------------------------------------------------------------------------------------------------------
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 4.25%(1) None None None
------------------------------------------------------------------------------------------------------
Maximum deferred sales charge (load) (as a
percentage based on the lesser of the offering
price or net asset value at redemption) None(2) 5.00%(3) 1.00%(4) None
------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
------------------------------------------------------------------------------------------------------
Management fee 0.40% 0.40% 0.40% 0.40%
------------------------------------------------------------------------------------------------------
Distribution and service (12b-1) fees 0.20% 0.85% 0.85% None
------------------------------------------------------------------------------------------------------
Other expenses 0.13% 0.13% 0.13% 0.13%
------------------------------------------------------------------------------------------------------
Total annual Fund operating expenses 0.73% 1.38% 1.38% 0.53%
------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reduced for purchases of $25,000 and over.
(2) Investments that are not subject to any sales charge at the time of
purchase are subject to a contingent deferred sales charge ("CDSC") of
1.00% that will be imposed if you sell your shares within one year after
purchase, except for certain specific circumstances.
(3) The CDSC is scaled down to 1.00% during the sixth year, reaching zero
thereafter. See "Share Class Arrangements" for a complete discussion of the
CDSC.
(4) Only applicable if you sell your shares within one year after purchase.
7
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund, your
investment has a 5% return each year, and the Fund's operating
expenses remain the same. Although your actual costs may be higher or
lower, the tables below show your costs at the end of each period
based on these assumptions depending upon whether or not you sell
(redeem) your shares at the end of each period.
<TABLE>
<CAPTION>
IF YOU SOLD YOUR SHARES IF YOU HELD YOUR SHARES
--------------------------------------- ---------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A $496 $648 $814 $1,293 $ 496 $648 $814 $1,293
----------- ---- ---- ---- ------ ------ ---- ---- ------
CLASS B $640 $737 $955 $1,657 $ 140 $437 $755 $1,657
----------- ---- ---- ---- ------ ------ ---- ---- ------
CLASS C $240 $437 $755 $1,657 $ 140 $437 $755 $1,657
----------- ---- ---- ---- ------ ------ ---- ---- ------
CLASS D $ 54 $170 $296 $ 665 $ 54 $170 $296 $ 665
----------- ---- ---- ---- ------ ------ ---- ---- ------
</TABLE>
Long-term shareholders of Class B and Class C may pay more in sales
charges, including distribution fees, than the economic equivalent of
the maximum front-end sales charges permitted by the NASD.
[GRAPHIC OMITTED]
ADDITIONAL INVESTMENT STRATEGY INFORMATION
---------------------------------------------------------
This section provides additional information relating to the Fund's
principal investment strategies.
Mortgage-Backed Securities. One type of mortgage-backed security, in
which the Fund may invest, is a mortgage pass-through security. These
securities represent a participation interest in a pool of
residential mortgage loans originated by U.S. governmental or private
lenders such as banks. They differ from conventional debt securities,
which provide for periodic payment of interest in fixed amounts and
principal payments at maturity or on specified call dates. Mortgage
pass-through securities provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments made by
the individual borrowers on the pooled mortgage loans.
The Fund may invest in mortgage pass-through securities that are
issued or guaranteed by the Government National Mortgage Association,
the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation. These securities are either direct obligations
of the U.S. Government, or the issuing agency/instrumentality
8
<PAGE>
has the right to borrow from the U.S. Treasury to meet its
obligations, although the Treasury is not legally required to extend
credit to the agency/instrumentality.
Private mortgage pass-through securities also can be Fund
investments. They are issued by private originators of and investors
in mortgage loans, including savings and loan associations and
mortgage banks. Since private mortgage pass-through securities
typically are not guaranteed by an entity having the credit status of
a U.S. Government agency, the securities generally are structured
with one or more type of credit enhancement.
Options and Futures. The Fund may invest in put and call options with
respect to foreign currencies and futures on interest rate indexes.
Options and futures may be used to seek to protect against a decline
in securities or currency prices or an increase in prices of
securities or currencies that may be purchased.
Forward Currency Contracts. The Fund's investments also may include
forward currency contracts, which involve the purchase or sale of a
specific amount of foreign currency at the current price with
delivery at a specified future date. The Fund may use these contracts
to hedge against adverse price movements in its portfolio securities
and the currencies in which they are denominated. The Fund also may
enter into "cross-currency" hedging transactions involving currencies
other than those in which securities are held or proposed to be
purchased are denominated. The Fund may engage in "anticipatory"
hedging transactions in which it purchases a specific amount of a
foreign currency in order to lock in the current exchange rate of a
currency in which a security that the Fund intends to purchase in the
future is denominated. The Fund may close out the anticipatory hedge
without purchasing the security.
Common Stock and Warrants. The Fund may invest up to 20% of its
assets in common stocks. The Fund may acquire stock, among other
ways, directly or upon exercise of warrants attached to other
securities or included in a unit with fixed-income securities or
acquired upon conversions of fixed-income securities.
Convertible Securities. The Fund may invest in convertible securities
which are securities that generally pay dividends or interest and may
be converted into common stock. These securities may carry risks
associated with both fixed-income securities and common stocks. To
the extent that a convertible security's investment value is greater
than its conversion value, its price will be likely to increase when
interest rates fall and decrease when interest rates rise, as with a
fixed-income security. If the conversion value exceeds the investment
value, the price of the convertible security will tend to fluctuate
directly with the price of the underlying equity security.
Defensive Investing. The Fund may take temporary "defensive"
positions that are inconsistent with the Fund's principal investment
strategies in attempting to respond to adverse market conditions. The
Fund may invest any amount of its assets in cash or money market
instruments in a defensive posture when the Investment Manager
9
<PAGE>
believes it is advisable to do so. Although taking a defensive
posture is designed to protect the Fund from an anticipated market
downturn, it could have the effect of reducing the benefit from any
upswing in the market. When the Fund takes a defensive position, it
may not achieve its investment objectives.
The percentage limitations relating to the composition of the Fund's
portfolio apply at the time the Fund acquires an investment. Other
than percentage limits relating to illiquid securities, subsequent
percentage changes that result from market fluctuations will not
require the Fund to sell any portfolio security. The Fund may change
its principal investment strategies without shareholder approval;
however, you would be notified of any changes.
[GRAPHIC OMITTED]
ADDITIONAL RISK INFORMATION
----------------------------------------
This section provides additional information relating to the
principal risks of investing in the Fund.
Options and Futures. If the Fund invests in options and/or futures,
its participation in these markets would subject the Fund's portfolio
to certain risks. The Investment Manager's predictions of movements
in the direction of the bond, currency or interest rate markets may
be inaccurate, and the adverse consequences to the Fund (e.g., a
reduction in the Fund's net asset value or a reduction in the amount
of income available for distribution) may leave the Fund in a worse
position than if these strategies were not used. Other risks inherent
in the use of options and futures include, for example, the possible
imperfect correlation between the price of options and futures
contracts and movements in the prices of the securities being hedged,
and the possible absence of a liquid secondary market for any
particular instrument. Certain options may be over-the-counter
options, which are options negotiated with dealers; there is no
secondary market for these investments.
Forward Currency Contracts. Participation in forward currency
contracts also involves risks. If the Investment Manager employs a
strategy that does not correlate well with the Fund's investments or
the currencies in which the investments are denominated, currency
contracts could result in a loss. The contracts also may increase the
Fund's volatility and may involve a significant risk.
Common Stocks and Warrants. The Fund's investment in common stocks
and warrants involve risks. In general, stock values fluctuate in
response to activities specific to the company as well as general
market, economic and political conditions. Stock prices can fluctuate
widely in response to these factors.
Convertible Securities. The Fund's investments in convertible
securities subject the Fund to the risks associated with both
fixed-income securities and common stocks. To the extent that a
convertible security's investment value is greater than its
conversion
10
<PAGE>
value, its price will be likely to increase when interest rates fall
and decrease when interest rates rise, as with a fixed-income
security. If the conversion value exceeds the investment value, the
price of the convertible security will tend to fluctuate directly
with the price of the underlying equity security. Because there are
no credit quality restrictions concerning the Fund's convertible
securities investments, these investments may be speculative in
nature.
[GRAPHIC OMITTED]
FUND MANAGEMENT
----------------------------
The Fund has retained the Investment Manager -- Morgan Stanley Dean
Witter Advisors Inc. -- to provide administrative services, manage its
business affairs and invest its assets, including the placing of
orders for the purchase and sale of portfolio securities. The
Investment Manager is a wholly-owned subsidiary of Morgan Stanley Dean
Witter & Co., a preeminent global financial services firm that
maintains leading market positions in each of its three primary
businesses: securities, asset management and credit services. Its main
business office is located at Two World Trade Center, New York, NY
10048.
(sidebar)
MORGAN STANLEY DEAN
WITTER ADVISORS INC.
The Investment Manager is widely recognized as a leader in the mutual fund
industry and together with Morgan Stanley Dean Witter Services Company Inc.,
its wholly-owned subsidiary, had approximately $150 billion in assets under
management as of November 30, 2000.
(end sidebar)
W. David Armstrong, Stephen F. Esser and Paul F. O'Brien are the
Fund's primary portfolio managers. Mr. Armstrong is a Managing
Director of the Investment Manager as well as a Managing Director and
member of the Interest Rate Research Team of Miller Anderson &
Sherrerd, LLP ("MAS"), an affiliate of the Investment Manager (since
1998), and prior thereto was a Senior Vice President of Lehman
Brothers (1995-1998). Mr. Esser is a Managing Director of the
Investment Manager as well as a Managing Director of MAS. Mr. Esser
has been managing portfolios for MAS and investment advisory
affiliates of MAS for over five years. Mr. O'Brien is a Principal of
the Investment Manager as well as a Principal and member of the
Interest Rate Research Team of MAS (since 1996) and prior thereto was
an Economist at JP Morgan (1994-1996).
The Fund pays the Investment Manager a monthly management fee as full
compensation for the services and facilities furnished to the Fund,
and for Fund expenses assumed by the Investment Manager. The fee is
based on the Fund's average daily net assets. For the fiscal year
ended October 31, 2000, the Fund accrued total compensation to the
Investment Manager amounting to 0.40% of the Fund's average daily net
assets.
11
<PAGE>
SHAREHOLDER INFORMATION
[GRAPHIC OMITTED]
PRICING FUND SHARES
-------------------------------
The price of Fund shares (excluding sales charges), called "net asset
value," is based on the value of the Fund's portfolio securities.
While the assets of each Class are invested in a single portfolio of
securities, the net asset value of each Class will differ because the
Classes have different ongoing distribution fees.
The net asset value is determined once daily at 4:00 p.m. Eastern
time on each day that the New York Stock Exchange is open (or, on
days when the New York Stock Exchange closes prior to 4:00 p.m., at
such earlier time). Shares will not be priced on days that the New
York Stock Exchange is closed.
The value of the Fund's portfolio securities is based on the
securities' market price when available. When a market price is not
readily available, including circumstances under which the Investment
Manager determines that a security's market price is not accurate, a
portfolio security is valued at its fair value, as determined under
procedures established by the Fund's Board of Trustees. In these
cases, the Fund's net asset value will reflect certain portfolio
securities' fair value rather than their market price. With respect
to securities that are primarily listed on foreign exchanges, the
value of the Fund's portfolio securities may change on days when you
will not be able to purchase or sell your shares.
An exception to the Fund's general policy of using market prices
concerns its short-term debt portfolio securities. Debt securities
with remaining maturities of sixty days or less at the time of
purchase may be valued at amortized cost. However, if the cost does
not reflect the securities' market value, these securities will be
valued at their fair value.
[GRAPHIC OMITTED]
HOW TO BUY SHARES
------------------------------
You may open a new account to buy Fund shares or buy additional Fund
shares for an existing account by contacting your Morgan Stanley Dean
Witter Financial Advisor. Your Financial Advisor or other authorized
financial representative will assist you, step-by-step, with the
procedures to invest in the Fund. You may also purchase shares
directly by calling the Fund's transfer agent and requesting an
application.
(sidebar)
CONTACTING A FINANCIAL ADVISOR
If you are new to the Morgan Stanley Dean Witter Family of Funds and would like
to contact a Financial Advisor, call (877) 937-MSDW (toll-free) for the
telephone number of the Morgan Stanley Dean Witter office nearest you. You may
also access our office locator on our Internet site at:
www.msdwadvice.com/funds
(end sidebar)
Because every investor has different immediate financial needs and
long-term investment goals, the Fund offers investors four Classes of
shares: Classes A, B, C and D. Class D shares are only offered to a
limited group of investors. Each Class of shares offers a distinct
structure of sales charges, distribution and service fees, and other
features that are designed to address a variety of needs. Your
12
<PAGE>
Financial Advisor or other authorized financial representative can
help you decide which Class may be most appropriate for you. When
purchasing Fund shares, you must specify which Class of shares you
wish to purchase.
When you buy Fund shares, the shares are purchased at the next share
price calculated (less any applicable front-end sales charge for
Class A shares) after we receive your purchase order. Your payment is
due on the third business day after you place your purchase order. We
reserve the right to reject any order for the purchase of Fund
shares.
(sidebar)
EASYINVEST(SM)
A purchase plan that allows you to transfer money automatically from your
checking or savings account or from a Money Market Fund on a semi-monthly,
monthly or quarterly basis. Contact your Morgan Stanley Dean Witter Financial
Advisor for further information about this service.
(end sidebar)
MINIMUM INVESTMENT AMOUNTS
--------------------------------------------------------------------------------
MINIMUM INVESTMENT
-------------------------
INVESTMENT OPTIONS INITIAL ADDITIONAL
--------------------------------------------------------------------------------
Regular Accounts $1,000 $100
--------------------------------------------------------------------------------
Individual Retirement Accounts: Regular IRAs $1,000 $100
Education IRAs $500 $100
--------------------------------------------------------------------------------
EasyInvest(SM)
(Automatically from your
checking or savings account
or Money Market Fund) $100* $100*
--------------------------------------------------------------------------------
* Provided your schedule of investments totals $1,000 in twelve months.
There is no minimum investment amount if you purchase Fund shares
through: (1) the Investment Manager's mutual fund asset allocation
plan, or (2) a program, approved by the Fund's distributor, in which
you pay an asset-based fee for advisory, administrative and/or
brokerage services, (3) the following programs approved by the Fund's
distributor: (i) qualified state tuition plans described in Section
529 of the Internal Revenue Code and (ii) certain other investment
programs that do not charge an asset-based fee, or (4)
employer-sponsored employee benefit plan accounts.
Investment Options for Certain Institutional and Other Investors/Class
D Shares. To be eligible to purchase Class D shares, you must qualify
under one of the investor categories specified in the "Share Class
Arrangements" section of this Prospectus.
Subsequent Investments Sent Directly to the Fund. In addition to
buying additional Fund shares for an existing account by contacting
your Morgan Stanley Dean Witter Financial Advisor, you may send a
check directly to the Fund. To buy additional shares in this manner:
o Write a "letter of instruction" to the Fund specifying the
name(s) on the account, the account number, the social security
or tax identification number, the Class of shares you wish to
purchase and the investment amount (which would include any
applicable front-end sales charge). The letter must be signed by
the account owner(s).
13
<PAGE>
o Make out a check for the total amount payable to: Morgan Stanley
Dean Witter Diversified Income Trust.
o Mail the letter and check to Morgan Stanley Dean Witter Trust FSB
at P.O. Box 1040, Jersey City, NJ 07303.
[GRAPHIC OMITTED]
HOW TO EXCHANGE SHARES
------------------------------------
Permissible Fund Exchanges. You may exchange shares of any Class of
the Fund for the same Class of any other continuously offered
Multi-Class Fund, or for shares of a No-Load Fund, a Money Market
Fund, North American Government Income Trust or Short-Term U.S.
Treasury Trust, without the imposition of an exchange fee. In
addition, Class A shares of the Fund may be exchanged for shares of
an FSC Fund (funds subject to a front-end sales charge). See the
inside back cover of this Prospectus for each Morgan Stanley Dean
Witter Fund's designation as a Multi-Class Fund, No-Load Fund, Money
Market Fund or FSC Fund. If a Morgan Stanley Dean Witter Fund is not
listed, consult the inside back cover of that fund's prospectus for
its designation.
Exchanges may be made after shares of the fund acquired by purchase
have been held for thirty days. There is no waiting period for
exchanges of shares acquired by exchange or dividend reinvestment.
The current prospectus for each fund describes its investment
objective(s), policies and investment minimums, and should be read
before investment. Since exchanges are available only into
continuously offered Morgan Stanley Dean Witter Funds, exchanges are
not available into any new Morgan Stanley Dean Witter Fund during its
initial offering period, or when shares of a particular Morgan
Stanley Dean Witter Fund are not being offered for purchase.
Exchange Procedures. You can process an exchange by contacting your
Morgan Stanley Dean Witter Financial Advisor or other authorized
financial representative. Otherwise, you must forward an exchange
privilege authorization form to the Fund's transfer agent -- Morgan
Stanley Dean Witter Trust FSB -- and then write the transfer agent or
call (800) 869-NEWS to place an exchange order. You can obtain an
exchange privilege authorization form by contacting your Financial
Advisor or other authorized financial representative, or by calling
(800) 869-NEWS. If you hold share certificates, no exchanges may be
processed until we have received all applicable share certificates.
An exchange to any Morgan Stanley Dean Witter Fund (except a Money
Market Fund) is made on the basis of the next calculated net asset
values of the funds involved after the exchange instructions are
accepted. When exchanging into a Money Market Fund, the Fund's shares
are sold at their next calculated net asset value and the Money
Market Fund's shares are purchased at their net asset value on the
following business day.
14
<PAGE>
The Fund may terminate or revise the exchange privilege upon required
notice. The check writing privilege is not available for Money Market
Fund shares you acquire in an exchange.
Telephone Exchanges. For your protection when calling Morgan Stanley
Dean Witter Trust FSB, we will employ reasonable procedures to
confirm that exchange instructions communicated over the telephone
are genuine. These procedures may include requiring various forms of
personal identification such as name, mailing address, social
security or other tax identification number. Telephone instructions
also may be recorded.
Telephone instructions will be accepted if received by the Fund's
transfer agent between 9:00 a.m. and 4:00 p.m. Eastern time on any
day the New York Stock Exchange is open for business. During periods
of drastic economic or market changes, it is possible that the
telephone exchange procedures may be difficult to implement, although
this has not been the case with the Fund in the past.
Margin Accounts. If you have pledged your Fund shares in a margin
account, contact your Morgan Stanley Dean Witter Financial Advisor or
other authorized financial representative regarding restrictions on
the exchange of such shares.
Tax Considerations of Exchanges. If you exchange shares of the Fund
for shares of another Morgan Stanley Dean Witter Fund, there are
important tax considerations. For tax purposes, the exchange out of
the Fund is considered a sale of Fund shares -- and the exchange into
the other fund is considered a purchase. As a result, you may realize
a capital gain or loss.
You should review the "Tax Consequences" section and consult your own
tax professional about the tax consequences of an exchange.
Limitations on Exchanges. Certain patterns of past exchanges and/or
purchase or sale transactions involving the Fund or other Morgan
Stanley Dean Witter Funds may result in the Fund limiting or
prohibiting, at its discretion, additional purchases and/or
exchanges. Determinations in this regard may be made based on the
frequency or dollar amount of the previous exchanges or purchase or
sale transactions. You will be notified in advance of limitations on
your exchange privileges.
CDSC Calculations on Exchanges. See the "Share Class Arrangements"
section of this Prospectus for a further discussion of how applicable
contingent deferred sales charges (CDSCs) are calculated for shares
of one Morgan Stanley Dean Witter Fund that are exchanged for shares
of another.
For further information regarding exchange privileges, you should
contact your Morgan Stanley Dean Witter Financial Advisor or call
(800) 869-NEWS.
15
<PAGE>
[GRAPHIC OMITTED]
HOW TO SELL SHARES
-------------------------------
You can sell some or all of your Fund shares at any time. If you sell
Class A, Class B or Class C shares, your net sale proceeds are
reduced by the amount of any applicable CDSC. Your shares will be
sold at the next price calculated after we receive your order to sell
as described below.
<TABLE>
<CAPTION>
OPTIONS PROCEDURES
--------------------- --------------------------------------------------------------------------------------------------
<S> <C>
Contact Your To sell your shares, simply call your Morgan Stanley Dean Witter Financial Advisor or other
Financial Advisor authorized financial representative.
--------------------------------------------------------------------------------------------------
[GRAPHIC OMITTED] Payment will be sent to the address to which the account is registered or deposited in your
brokerage account.
--------------------- --------------------------------------------------------------------------------------------------
By Letter You can also sell your shares by writing a "letter of instruction" that includes:
o your account number;
[GRAPHIC OMITTED] o the dollar amount or the number of shares you wish to sell;
o the Class of shares you wish to sell; and
o the signature of each owner as it appears on the account.
--------------------------------------------------------------------------------------------------
If you are requesting payment to anyone other than the registered owner(s) or that payment
be sent to any address other than the address of the registered owner(s) or pre-designated
bank account, you will need a signature guarantee. You can obtain a signature guarantee from
an eligible guarantor acceptable to Morgan Stanley Dean Witter Trust FSB. (You should
contact Morgan Stanley Dean Witter Trust FSB at (800) 869-NEWS for a determination as to
whether a particular institution is an eligible guarantor.) A notary public cannot provide a
signature guarantee. Additional documentation may be required for shares held by a
corporation, partnership, trustee or executor.
--------------------------------------------------------------------------------------------------
Mail the letter to Morgan Stanley Dean Witter Trust FSB at P.O. Box 983, Jersey City,
NJ 07303. If you hold share certificates, you must return the certificates, along with the letter
and any required additional documentation.
--------------------------------------------------------------------------------------------------
A check will be mailed to the name(s) and address in which the account is registered, or
otherwise according to your instructions.
--------------------- --------------------------------------------------------------------------------------------------
Systematic If your investment in all of the Morgan Stanley Dean Witter Family of Funds has a total
Withdrawal Plan market value of at least $10,000, you may elect to withdraw amounts of $25 or more, or in
any whole percentage of a fund's balance (provided the amount is at least $25), on a monthly,
[GRAPHIC OMITTED] quarterly, semi-annual or annual basis, from any fund with a balance of at least $1,000. Each
time you add a fund to the plan, you must meet the plan requirements.
--------------------------------------------------------------------------------------------------
Amounts withdrawn are subject to any applicable CDSC. A CDSC may be waived under
certain circumstances. See the Class B waiver categories listed in the "Share Class
Arrangements" section of this Prospectus.
--------------------------------------------------------------------------------------------------
To sign up for the Systematic Withdrawal Plan, contact your Morgan Stanley Dean Witter
Financial Advisor or call (800) 869-NEWS. You may terminate or suspend your plan at any
time. Please remember that withdrawals from the plan are sales of shares, not Fund
"distributions," and ultimately may exhaust your account balance. The Fund may terminate or
revise the plan at any time.
--------------------- --------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
Payment for Sold Shares. After we receive your complete instructions
to sell as described above, a check will be mailed to you within
seven days, although we will attempt to make payment within one
business day. Payment may also be sent to your brokerage account.
Payment may be postponed or the right to sell your shares suspended
under unusual circumstances. If you request to sell shares that were
recently purchased by check, your sale will not be effected until it
has been verified that the check has been honored.
Tax Considerations. Normally, your sale of Fund shares is subject to
federal and state income tax. You should review the "Tax
Consequences" section of this Prospectus and consult your own tax
professional about the tax consequences of a sale.
Reinstatement Privilege. If you sell Fund shares and have not
previously exercised the reinstatement privilege, you may, within 35
days after the date of sale, invest any portion of the proceeds in
the same Class of Fund shares at their net asset value and receive a
pro rata credit for any CDSC paid in connection with the sale.
Involuntary Sales. The Fund reserves the right, on sixty days'
notice, to sell the shares of any shareholder (other than shares held
in an IRA or 403(b) Custodial Account) whose shares, due to sales by
the shareholder, have a value below $100, or in the case of an
account opened through EasyInvest(SM), if after 12 months the
shareholder has invested less than $1,000 in the account.
However, before the Fund sells your shares in this manner, we will
notify you and allow you sixty days to make an additional investment
in an amount that will increase the value of your account to at least
the required amount before the sale is processed. No CDSC will be
imposed on any involuntary sale.
Margin Accounts. If you have pledged your Fund shares in a margin
account, contact your Morgan Stanley Dean Witter Financial Advisor or
other authorized financial representative regarding restrictions on
the sale of such shares.
17
<PAGE>
[GRAPHIC OMITTED]
DISTRIBUTIONS
------------------------
The Fund passes substantially all of its earnings from income and
capital gains along to its investors as "distributions." The Fund
earns interest from fixed-income investments and income from stocks.
These amounts are passed along to Fund shareholders as "income
dividend distributions." The Fund realizes capital gains whenever it
sells securities for a higher price than it paid for them. These
amounts may be passed along as "capital gain distributions."
(sidebar)
TARGETED DIVIDENDS(SM)
You may select to have your Fund distributions automatically invested in other
Classes of Fund shares or Classes of another Morgan Stanley Dean Witter Fund
that you own. Contact your Morgan Stanley Dean Witter Financial Advisor for
further information about this service.
(end sidebar)
The Fund declares income dividends separately for each Class.
Distributions paid on Class A and Class D shares usually will be
higher than for Class B and Class C because distribution fees that
Class B and Class C pay are higher. Normally, income dividends are
distributed to shareholders monthly. Capital gains, if any, are
usually distributed in December. The Fund, however, may retain and
reinvest any long-term capital gains. The Fund may at times make
payments from sources other than income or capital gains that
represent a return of a portion of your investment.
Distributions are reinvested automatically in additional shares of
the same Class and automatically credited to your account, unless you
request in writing that all distributions be paid in cash. If you
elect the cash option, the Fund will mail a check to you no later
than seven business days after the distribution is declared. However,
if you purchase Fund shares through a Financial Advisor within three
business days prior to the record date for the distribution, the
distribution will automatically be paid to you in cash, even if you
did not request to receive all distributions in cash. No interest
will accrue on uncashed checks. If you wish to change how your
distributions are paid, your request should be received by the Fund's
transfer agent, Morgan Stanley Dean Witter Trust FSB, at least five
business days prior to the record date of the distributions.
[GRAPHIC OMITTED]
TAX CONSEQUENCES
----------------------------
As with any investment, you should consider how your Fund investment
will be taxed. The tax information in this Prospectus is provided as
general information. You should consult your own tax professional
about the tax consequences of an investment in the Fund.
Unless your investment in the Fund is through a tax-deferred
retirement account, such as a 401(k) plan or IRA, you need to be
aware of the possible tax consequences when:
o The Fund makes distributions; and
o You sell Fund shares, including an exchange to another Morgan
Stanley Dean Witter Fund.
18
<PAGE>
Taxes on Distributions. Your distributions are normally subject to
federal and state income tax when they are paid, whether you take
them in cash or reinvest them in Fund shares. A distribution also may
be subject to local income tax. Any income dividend distributions and
any short-term capital gain distributions are taxable to you as
ordinary income. Any long-term capital gain distributions are taxable
as long-term capital gains no matter how long you have owned shares
in the Fund.
Every January, you will be sent a statement (IRS Form 1099-DIV)
showing the taxable distributions paid to you in the previous year.
The statement provides information on your dividends and capital
gains for tax purposes.
Taxes on Sales. Your sale of Fund shares normally is subject to
federal and state income tax and may result in a taxable gain or loss
to you. A sale also may be subject to local income tax. Your exchange
of Fund shares for shares of another Morgan Stanley Dean Witter Fund
is treated for tax purposes like a sale of your original shares and a
purchase of your new shares. Thus, the exchange may, like a sale,
result in a taxable gain or loss to you and will give you a new tax
basis for your new shares.
When you open your Fund account, you should provide your social
security or tax identification number on your investment application.
By providing this information, you will avoid being subject to a
federal backup withholding tax of 31% on taxable distributions and
redemption proceeds. Any withheld amount would be sent to the IRS as
an advance tax payment.
[GRAPHIC OMITTED]
SHARE CLASS ARRANGEMENTS
-------------------------------------
The Fund offers several Classes of shares having different
distribution arrangements designed to provide you with different
purchase options according to your investment needs. Your Morgan
Stanley Dean Witter Financial Advisor or other authorized financial
representative can help you decide which Class may be appropriate for
you.
The general public is offered three Classes: Class A shares, Class B
shares and Class C shares, which differ principally in terms of sales
charges and ongoing expenses. A fourth Class, Class D shares, is
offered only to a limited category of investors. Shares that you
acquire through reinvested distributions will not be subject to any
front-end sales charge or CDSC -- contingent deferred sales charge.
Sales personnel may receive different compensation for selling each
Class of shares. The sales charges applicable to each Class provide
for the distribution financing of shares of that Class.
19
<PAGE>
The chart below compares the sales charge and annual 12b-1 fee
applicable to each Class:
<TABLE>
<CAPTION>
MAXIMUM
CLASS SALES CHARGE ANNUAL 12B-1FEE
<S> <C> <C>
------------------------------------------------------------------------------------------------------------
A Maximum 4.25% initial sales charge reduced for purchase of $25,000 or more;
shares sold without an initial sales charge are generally subject to a 1.0% CDSC
during the first year 0.25%
------------------------------------------------------------------------------------------------------------
B Maximum 5.0% CDSC during the first year decreasing to 0% after six years 0.85%
------------------------------------------------------------------------------------------------------------
C 1.0% CDSC during the first year 0.85%
------------------------------------------------------------------------------------------------------------
D None None
------------------------------------------------------------------------------------------------------------
</TABLE>
CLASS A SHARES Class A shares are sold at net asset value plus an
initial sales charge of up to 4.25%. The initial sales charge is
reduced for purchases of $25,000 or more according to the schedule
below. Investments of $1 million or more are not subject to an initial
sales charge, but are generally subject to a contingent deferred sales
charge, or CDSC, of 1.0% on sales made within one year after the last
day of the month of purchase. The CDSC will be assessed in the same
manner and with the same CDSC waivers as with Class B shares. Class A
shares are also subject to a distribution (12b-1) fee of up to 0.25%
of the average daily net assets of the Class.
The offering price of Class A shares includes a sales charge
(expressed as a percentage of the offering price) on a single
transaction as shown in the following table:
(sidebar)
FRONT-END SALES CHARGE OR FSC
An initial sales charge you pay when purchasing Class A shares that is based on
a percentage of the offering price. The percentage declines based upon the
dollar value of Class A shares you purchase. We offer three ways to reduce your
Class A sales charges -- the Combined Purchase Privilege, Right of Accumulation
and Letter of Intent.
(end sidebar)
<TABLE>
<CAPTION>
FRONT-END SALES CHARGE
---------------------------------------------
AMOUNT OF PERCENTAGE OF PUBLIC APPROXIMATE PERCENTAGE
SINGLE TRANSACTION OFFERING PRICE OF NET AMOUNT INVESTED
<S> <C> <C>
------------------------------------------------------------------------------------
Less than $25,000 4.25% 4.44%
------------------------------------------------------------------------------------
$25,000 but less than $50,000 4.00% 4.17%
------------------------------------------------------------------------------------
$50,000 but less than $100,000 3.50% 3.63%
------------------------------------------------------------------------------------
$100,000 but less than $250,000 2.75% 2.83%
------------------------------------------------------------------------------------
$250,000 but less than $1 million 1.75% 1.78%
------------------------------------------------------------------------------------
$1 million and over 0 0
------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
The reduced sales charge schedule is applicable to purchases of Class
A shares in a single transaction by:
o A single account (including an individual, trust or fiduciary
account).
o Family member accounts (limited to husband, wife and children
under the age of 21).
o Pension, profit sharing or other employee benefit plans of
companies and their affiliates.
o Tax-exempt organizations.
o Groups organized for a purpose other than to buy mutual fund
shares.
Combined Purchase Privilege. You also will have the benefit of
reduced sales charges by combining purchases of Class A shares of the
Fund in a single transaction with purchases of Class A shares of
other Multi-Class Funds and shares of FSC Funds.
Right of Accumulation. You also may benefit from a reduction of sales
charges if the cumulative net asset value of Class A shares of the
Fund purchased in a single transaction, together with shares of other
funds you currently own which were previously purchased at a price
including a front-end sales charge (including shares acquired through
reinvestment of distributions), amounts to $25,000 or more. Also, if
you have a cumulative net asset value of all your Class A and Class D
shares equal to at least $5 million (or $25 million for certain
employee benefit plans), you are eligible to purchase Class D shares
of any fund subject to the Fund's minimum initial investment
requirement.
You must notify your Morgan Stanley Dean Witter Financial Advisor or
other authorized financial representative (or Morgan Stanley Dean
Witter Trust FSB if you purchase directly through the Fund), at the
time a purchase order is placed, that the purchase qualifies for the
reduced sales charge under the Right of Accumulation. Similar
notification must be made in writing when an order is placed by mail.
The reduced sales charge will not be granted if: (i) notification is
not furnished at the time of the order; or (ii) a review of the
records of Dean Witter Reynolds or other authorized dealer of Fund
shares or the Fund's transfer agent does not confirm your represented
holdings.
Letter of Intent. The schedule of reduced sales charges for larger
purchases also will be available to you if you enter into a written
"Letter of Intent." A Letter of Intent provides for the purchase of
Class A shares of the Fund or other Multi-Class Funds or shares of
FSC Funds within a thirteen-month period. The initial purchase under
a Letter of Intent must be at least 5% of the stated investment goal.
To determine the applicable sales charge reduction, you may also
include: (1) the cost of shares of other Morgan Stanley Dean Witter
Funds which were previously purchased at a price including a
front-end sales charge during the 90-day period prior to the
distributor receiving the Letter of Intent, and (2) the cost of
shares of other funds you currently own acquired in exchange for
shares of funds purchased during that period at a price including a
21
<PAGE>
front-end sales charge. You can obtain a letter of intent by
contacting your Morgan Stanley Dean Witter Financial Advisor or other
authorized financial representative, or by calling (800) 869-NEWS. If
you do not achieve the stated investment goal within the
thirteen-month period, you are required to pay the difference between
the sales charges otherwise applicable and sales charges actually
paid, which may be deducted from your investment.
Other Sales Charge Waivers. In addition to investments of $1 million
or more, your purchase of Class A shares is not subject to a
front-end sales charge (or a CDSC upon sale) if your account
qualifies under one of the following categories:
o A trust for which Morgan Stanley Dean Witter Trust FSB provides
discretionary trustee services.
o Persons participating in a fee-based investment program (subject
to all of its terms and conditions, including termination fees,
mandatory sale or transfer restrictions on termination) approved
by the Fund's distributor pursuant to which they pay an
asset-based fee for investment advisory, administrative and/or
brokerage services.
o Qualified state tuition plans described in Section 529 of the
Internal Revenue Code (subject to all applicable terms and
conditions) and certain other investment programs that do not
charge an asset-based fee and have been approved by the Fund's
distributor.
o Employer-sponsored employee benefit plans, whether or not
qualified under the Internal Revenue Code, for which Morgan
Stanley Dean Witter Trust FSB serves as trustee or Morgan Stanley
Dean Witter's Retirement Plan Services serves as recordkeeper
under a written Recordkeeping Services Agreement (MSDW Eligible
Plans) which have at least 200 eligible employees.
o An MSDW Eligible Plan whose Class B shares have converted to
Class A shares, regardless of the plan's asset size or number of
eligible employees.
o A client of a Morgan Stanley Dean Witter Financial Advisor who
joined us from another investment firm within six months prior to
the date of purchase of Fund shares, and you used the proceeds
from the sale of shares of a proprietary mutual fund of that
Financial Advisor's previous firm that imposed either a front-end
or deferred sales charge to purchase Class A shares, provided
that: (1) you sold the shares not more than 60 days prior to the
purchase of fund shares, and (2) the sale proceeds were
maintained in the interim in cash or a money market fund.
o Current or retired Directors or Trustees of the Morgan Stanley
Dean Witter Funds, such persons' spouses and children under the
age of 21, and trust accounts for which any of such persons is a
beneficiary.
22
<PAGE>
o Current or retired directors, officers and employees of Morgan
Stanley Dean Witter & Co. and any of its subsidiaries, such
persons' spouses and children under the age of 21, and trust
accounts for which any of such persons is a beneficiary.
CLASS B SHARES Class B shares are offered at net asset value with no
initial sales charge but are subject to a contingent deferred sales
charge, or CDSC, as set forth in the table below. For the purpose of
calculating the CDSC, shares are deemed to have been purchased on the
last day of the month during which they were purchased.
(sidebar)
CONTINGENT DEFERRED
SALES CHARGE OR CDSC
A fee you pay when you sell shares of certain Morgan Stanley Dean Witter Funds
purchased without an initial sales charge. This fee declines the longer you hold
your shares as set forth in the table.
(end sidebar)
CDSC AS A PERCENTAGE
YEAR SINCE PURCHASE PAYMENT MADE OF AMOUNT REDEEMED
--------------------------------------------------------------------------------
First 5.0%
--------------------------------------------------------------------------------
Second 4.0%
--------------------------------------------------------------------------------
Third 3.0%
--------------------------------------------------------------------------------
Fourth 2.0%
--------------------------------------------------------------------------------
Fifth 2.0%
--------------------------------------------------------------------------------
Sixth 1.0%
--------------------------------------------------------------------------------
Seventh and thereafter None
--------------------------------------------------------------------------------
Each time you place an order to sell or exchange shares, shares with
no CDSC will be sold or exchanged first, then shares with the lowest
CDSC will be sold or exchanged next. For any shares subject to a
CDSC, the CDSC will be assessed on an amount equal to the lesser of
the current market value or the cost of the shares being sold.
CDSC Waivers. A CDSC, if otherwise applicable, will be waived in the
case of:
o Sales of shares held at the time you die or become disabled
(within the definition in Section 72(m)(7) of the Internal
Revenue Code which relates to the ability to engage in gainful
employment), if the shares are: (i) registered either in your
name (not a trust) or in the names of you and your spouse as
joint tenants with right of survivorship; or (ii) held in a
qualified corporate or self-employed retirement plan, IRA or
403(b) Custodial Account, provided in either case that the sale
is requested within one year of your death or initial
determination of disability.
o Sales in connection with the following retirement plan
"distributions:" (i) lump-sum or other distributions from a
qualified corporate or self-employed retirement plan following
retirement (or, in the case of a "key employee" of a "top heavy"
plan, following attainment of age 59 1 /2); (ii) distributions
from an IRA or 403(b) Custodial Account following attainment of
age 59 1 /2; or (iii) a tax-free return of an excess IRA
contribution (a "distribution" does not include a direct transfer
of IRA, 403(b) Custodial Account or retirement plan assets to a
successor custodian or trustee).
23
<PAGE>
o Sales of shares held for you as a participant in an MSDW Eligible
Plan.
o Sales of shares in connection with the Systematic Withdrawal Plan
of up to 12% annually of the value of each fund from which plan
sales are made. The percentage is determined on the date you
establish the Systematic Withdrawal Plan and based on the next
calculated share price. You may have this CDSC waiver applied in
amounts up to 1% per month, 3% per quarter, 6% semi-annually or
12% annually. Shares with no CDSC will be sold first, followed by
those with the lowest CDSC. As such, the waiver benefit will be
reduced by the amount of your shares that are not subject to a
CDSC. If you suspend your participation in the plan, you may
later resume plan payments without requiring a new determination
of the account value for the 12% CDSC waiver.
o Sales of shares if you simultaneously invest the proceeds in the
Investment Manager's mutual fund asset allocation program,
pursuant to which investors pay an asset-based fee. Any shares
you acquire in connection with the Investment Manager's mutual
fund asset allocation program are subject to all of the terms and
conditions of that program, including termination fees, mandatory
sale or transfer restrictions on termination.
All waivers will be granted only following the Fund's distributor
receiving confirmation of your entitlement. If you believe you are
eligible for a CDSC waiver, please contact your Financial Advisor or
call (800) 869-NEWS.
Distribution Fee. Class B shares are also subject to an annual 12b-1
fee of 0.85% of the lesser of: (a) the average daily aggregate gross
purchases by all shareholders of the Fund's Class B shares since the
inception of the Fund (not including reinvestments of dividends or
capital gains distributions), less the average daily aggregate net
asset value of the Fund's Class B shares sold by all shareholders
since the Fund's inception upon which a CDSC has been imposed or
waived, or (b) the average daily net assets of Class B.
Conversion Feature. After ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund with no initial sales
charge. The ten year period runs from the last day of the month in
which the shares were purchased, or in the case of Class B shares
acquired through an exchange, from the last day of the month in which
the original Class B shares were purchased; the shares will convert
to Class A shares based on their relative net asset values in the
month following the ten year period. At the same time, an equal
proportion of Class B shares acquired through automatically
reinvested distributions will convert to Class A shares on the same
basis. (Class B shares held before May 1, 1997, however, will convert
to Class A shares in May 2007.)
In the case of Class B shares held in an MSDW Eligible Plan, the plan
is treated as a single investor and all Class B shares will convert
to Class A shares on the conversion date of the Class B shares of a
Morgan Stanley Dean Witter Fund purchased by that plan.
24
<PAGE>
Currently, the Class B share conversion is not a taxable event; the
conversion feature may be cancelled if it is deemed a taxable event
in the future by the Internal Revenue Service.
If you exchange your Class B shares for shares of a Money Market
Fund, a No-Load Fund, North American Government Income Trust or
Short-Term U.S. Treasury Trust, the holding period for conversion is
frozen as of the last day of the month of the exchange and resumes on
the last day of the month you exchange back into Class B shares.
Exchanging Shares Subject to a CDSC. There are special considerations
when you exchange Fund shares that are subject to a CDSC. When
determining the length of time you held the shares and the
corresponding CDSC rate, any period (starting at the end of the
month) during which you held shares of a fund that does not charge a
CDSC will not be counted. Thus, in effect the "holding period" for
purposes of calculating the CDSC is frozen upon exchanging into a
fund that does not charge a CDSC.
For example, if you held Class B shares of the Fund for one year,
exchanged to Class B of another Morgan Stanley Dean Witter
Multi-Class Fund for another year, then sold your shares, a CDSC rate
of 4% would be imposed on the shares based on a two year holding
period -- one year for each fund. However, if you had exchanged the
shares of the Fund for a Money Market Fund (which does not charge a
CDSC) instead of the Multi-Class Fund, then sold your shares, a CDSC
rate of 5% would be imposed on the shares based on a one year holding
period. The one year in the Money Market Fund would not be counted.
Nevertheless, if shares subject to a CDSC are exchanged for a fund
that does not charge a CDSC, you will receive a credit when you sell
the shares equal to the distribution (12b-1) fees, if any, you paid
on those shares while in that fund up to the amount of any applicable
CDSC.
In addition, shares that are exchanged into or from a Morgan Stanley
Dean Witter Fund subject to a higher CDSC rate will be subject to the
higher rate, even if the shares are re-exchanged into a fund with a
lower CDSC rate.
CLASS C SHARES Class C shares are sold at net asset value with no
initial sales charge but are subject to a CDSC of 1.0% on sales made
within one year after the last day of the month of purchase. The CDSC
will be assessed in the same manner and with the same CDSC waivers as
with Class B shares.
Distribution Fee. Class C shares are subject to an annual
distribution (12b-1) fee of 0.85% of the average daily net assets of
that Class. The Class C shares' distribution fee may cause that Class
to have higher expenses and pay lower dividends than Class A or Class
D shares. Unlike Class B shares, Class C shares have no conversion
feature and, accordingly, an investor that purchases Class C shares
may be subject to distribution (12b-1) fees applicable to Class C
shares for an indefinite period.
25
<PAGE>
CLASS D SHARES Class D shares are offered without any sales charge on
purchases or sales and without any distribution (12b-1) fee. Class D
shares are offered only to investors meeting an initial investment
minimum of $5 million ($25 million for certain MSDW Eligible Plans)
and the following investor categories:
o Investors participating in the Investment Manager's mutual fund
asset allocation program (subject to all of its terms and
conditions, including termination fees, mandatory sale or
transfer restrictions on termination) pursuant to which they pay
an asset-based fee.
o Persons participating in a fee-based investment program (subject
to all of its terms and conditions, including termination fees,
mandatory sale or transfer restrictions on termination) approved
by the Fund's distributor pursuant to which they pay an
asset-based fee for investment advisory, administrative and/or
brokerage services. With respect to Class D shares held through
the Morgan Stanley Dean Witter Choice Program, at such time as
those Fund shares are no longer held through the program, the
shares will be automatically converted into Class A shares (which
are subject to higher expenses than Class D shares) based on the
then current relative net asset values of the two classes.
o Certain investment programs that do not charge an asset-based fee
and have been approved by the Fund's distributor. However, Class
D shares are not offered for investments made through Section 529
plans (regardless of the size of the investment).
o Employee benefit plans maintained by Morgan Stanley Dean Witter &
Co. or any of its subsidiaries for the benefit of certain
employees of Morgan Stanley Dean Witter & Co. and its
subsidiaries.
o Certain unit investment trusts sponsored by Dean Witter Reynolds.
o Certain other open-end investment companies whose shares are
distributed by the Fund's distributor.
o Investors who were shareholders of the Dean Witter Retirement
Series on September 11, 1998 for additional purchases for their
former Dean Witter Retirement Series accounts.
Meeting Class D Eligibility Minimums. To meet the $5 million ($25
million for MSDW Eligible Plans) initial investment to qualify to
purchase Class D shares you may combine: (1) purchases in a single
transaction of Class D shares of the Fund and other Morgan Stanley
Dean Witter Multi-Class Funds; and/or (2) previous purchases of Class
A and Class D shares of Multi-Class Funds and shares of FSC Funds you
currently own, along with shares of Morgan Stanley Dean Witter Funds
you currently own that you acquired in exchange for those shares.
26
<PAGE>
NO SALES CHARGES FOR REINVESTED CASH DISTRIBUTIONS If you receive a
cash payment representing an income dividend or capital gain and you
reinvest that amount in the applicable Class of shares by returning
the check within 30 days of the payment date, the purchased shares
would not be subject to an initial sales charge or CDSC.
PLAN OF DISTRIBUTION (RULE 12b-1 FEES) The Fund has adopted a Plan of
Distribution in accordance with Rule 12b-1 under the Investment
Company Act of 1940 with respect to the distribution of Class A, Class
B and Class C shares. The Plan allows the Fund to pay distribution
fees for the sale and distribution of these shares. It also allows the
Fund to pay for services to shareholders of Class A, Class B and Class
C shares. Because these fees are paid out of the Fund's assets on an
ongoing basis, over time these fees will increase the cost of your
investment in these Classes and may cost you more than paying other
types of sales charges.
27
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the periods indicated. Certain information reflects
financial results for a single Fund share throughout each year. The total
returns in the table represent the rate an investor would have earned or lost
on an investment in the Fund (assuming reinvestment of all dividends and
distributions).
The information for the fiscal year ended October 31, 2000 has been audited by
Deloitte & Touche LLP, independent auditors, whose report, along with the
Fund's financial statements, is included in the annual report, which is
available upon request. The financial highlights for prior fiscal periods have
been audited by other independent accountants.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31, JULY 28, 1997*
-------------------------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES++
--------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA:
--------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.16 $9.01 $9.46 $9.40
--------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.72 0.74 0.74 0.22
Net realized and unrealized gain (loss) (1.23) (0.87) (0.46) 0.04
--------- --------- -------- --------
Total income (loss) from investment
operations (0.51) (0.13) 0.28 0.26
--------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.62) (0.63) (0.70) (0.20)
Paid-in-capital (0.06) (0.09) (0.03) --
--------- --------- -------- --------
Total dividends and distributions (0.68) (0.72) (0.73) (0.20)
--------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.97 $8.16 $9.01 $9.46
--------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (6.66)% (1.61)% 2.86% 2.74%(1)
--------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
--------------------------------------------------------------------------------------------------------------------------
Expenses 0.73%(3) 0.72%(3) 0.77%(3) 0.85%(2)
--------------------------------------------------------------------------------------------------------------------------
Net investment income 9.28%(3) 8.56%(3) 7.94%(3) 8.98%(2)
--------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
--------------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $13,318 $21,828 $15,130 $4,933
--------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 40% 71% 130% 104%
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
28
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31, 2000++ 1999++ 1998++ 1997*++ 1996
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS B SHARES
---------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA:
---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.16 $9.01 $9.46 $9.78 $9.62
---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.67 0.68 0.68 0.74 0.78
Net realized and unrealized gain (loss) (1.22) (0.87) (0.46) (0.15) 0.10
--------- --------- ----------- --------- ---------
Total income (loss) from investment
operations (0.55) (0.19) 0.22 0.59 0.88
---------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.58) (0.58) (0.65) (0.91) (0.72)
Paid-in-capital (0.05) (0.08) (0.02) -- --
--------- --------- ----------- --------- ---------
Total dividends and distributions (0.63) (0.66) (0.67) (0.91) (0.72)
---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.98 $8.16 $9.01 $9.46 $9.78
---------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (7.24)% (2.14)% 2.23% 6.46% 9.49%
---------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
---------------------------------------------------------------------------------------------------------------------------
Expenses 1.38%(1) 1.38%(1) 1.38%(1) 1.40% 1.42%
---------------------------------------------------------------------------------------------------------------------------
Net investment income 8.63%(1) 7.90%(1) 7.33%(1) 7.90% 8.38%
---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $565,493 $859,553 $1,024,021 $915,899 $745,581
---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 40% 71% 130% 104% 82%
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Prior to July 28, 1997, the Fund issued one class of shares. All shares
of the Fund held prior to that date have been designated
Class B shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Reflects overall Fund ratios for investment income and non-class specific
expenses.
29
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31, JULY 28, 1997*
-------------------------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C SHARES++
---------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA:
---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.15 $9.00 $9.45 $9.40
---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.67 0.68 0.68 0.20
Net realized and unrealized gain (loss) (1.22) (0.87) (0.46) 0.04
--------- --------- -------- --------
Total income (loss) from investment
operations (0.55) (0.19) 0.22 0.24
---------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.58) (0.58) (0.65) (0.19)
Paid-in-capital (0.05) (0.08) (0.02) --
--------- --------- -------- --------
Total dividends and distributions (0.63) (0.66) (0.67) (0.19)
---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.97 $8.15 $9.00 $9.45
---------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (7.12)% (2.25)% 2.26% 2.52%(1)
---------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
---------------------------------------------------------------------------------------------------------------------------
Net investment income 8.63%(3) 7.90%(3) 7.33%(3) 8.17%(2)
---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $14,313 $19,450 $15,659 $3,773
---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 40% 71% 130% 104%
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
30
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31, JULY 28, 1997*
-------------------------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS D SHARES++
---------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA:
---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.15 $9.00 $9.45 $9.40
---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.33 0.76 0.76 0.23
Net realized and unrealized gain (loss) (0.80) (0.88) (0.46) 0.02
--------- --------- --------- ---------
Total income (loss) from investment
operations (0.47) (0.12) 0.30 0.25
---------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.63) (0.64) (0.72) (0.20)
Paid-in-capital (0.06) (0.09) (0.03) --
--------- --------- --------- ---------
Total dividends and distributions (0.69) (0.73) (0.75) (0.20)
---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.99 $8.15 $9.00 $9.45
---------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (6.20)% (1.42)% 3.21% 2.69%(1)
---------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
---------------------------------------------------------------------------------------------------------------------------
Expenses 0.53%(3) 0.53%(3) 0.53%(3) 0.59%(2)
---------------------------------------------------------------------------------------------------------------------------
Net investment income 9.48%(3) 8.75%(3) 8.18%(3) 9.26%(2)
---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $1,493 $1,046 $ 740 $ 99
---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 40% 71% 130% 104%
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of
the period.
(1) Not annualized
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
31
<PAGE>
NOTES
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32
<PAGE>
MORGAN STANLEY DEAN WITTER
FAMILY OF FUNDS
The Morgan Stanley Dean Witter Family of Funds offers
investors a wide range of investment choices. Come on
in and meet the family!
<TABLE>
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GROWTH FUNDS GROWTH FUNDS THEME FUNDS
Aggressive Equity Fund Financial Services Trust
All Star Growth Fund Health Sciences Trust
American Opportunities Fund Information Fund
Capital Growth Securities Natural Resource Development Securities
Developing Growth Securities Technology Fund
Growth Fund GLOBAL/INTERNATIONAL FUNDS
Market Leader Trust Competitive Edge Fund - "Best Ideas" Portfolio
Mid-Cap Equity Trust European Growth Fund
New Discoveries Fund Fund of Funds - International Portfolio
Next Generation Trust International Fund
Small Cap Growth Fund International SmallCap Fund
Special Value Fund Japan Fund
Tax-Managed Growth Fund Latin American Growth Fund
21st Century Trend Fund Pacific Growth Fund
</TABLE>
<TABLE>
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GROWTH & INCOME FUNDS GROWTH & INCOME FUNDS Total Market Index Fund
Balanced Growth Fund Total Return Trust
Balanced Income Fund Value Fund
Convertible Securities Trust Value-Added Market Series/Equity Portfolio
Dividend Growth Securities THEME FUNDS
Equity Fund Real Estate Fund
Fund of Funds - Domestic Portfolio Utilities Fund
Income Builder Fund GLOBAL FUNDS
S&P 500 Index Fund Global Dividend Growth Securities
S&P 500 Select Fund Global Utilities Fund
Strategist Fund
</TABLE>
<TABLE>
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCOME FUNDS GOVERNMENT INCOME FUNDS GLOBAL INCOME FUNDS
Federal Securities Trust North American Government Income Trust
Short-Term U.S. Treasury Trust World Wide Income Trust
U.S. Government Securities Trust TAX-FREE INCOME FUNDS
DIVERSIFIED INCOME FUNDS California Tax-Free Income Fund
Diversified Income Trust Hawaii Municipal Trust(FSC)
CORPORATE INCOME FUNDS Limited Term Municipal Trust(NL)
High Yield Securities Multi-State Municipal Series Trust(FSC)
Intermediate Income Securities New York Tax-Free Income Fund
Short-Term Bond Fund(NL) Tax-Exempt Securities Trust
</TABLE>
<TABLE>
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MONEY MARKET FUNDS TAXABLE MONEY MARKET FUNDS TAX-FREE MONEY MARKET FUNDS
Liquid Asset Fund(MM) California Tax-Free Daily Income Trust(MM)
U.S. Government Money Market Trust(MM) New York Municipal Money Market Trust(MM)
Tax-Free Daily Income Trust(MM)
</TABLE>
There may be funds created after this Prospectus was published. Please consult
the inside back cover of a new fund's prospectus for its designation, e.g.,
Multi-Class Fund or Money Market Fund.
Unless otherwise noted, each listed Morgan Stanley Dean Witter Fund, except for
North American Government Income Trust and Short-Term U.S. Treasury Trust, is a
Multi-Class Fund. A Multi-Class Fund is a mutual fund offering multiple Classes
of shares. The other types of funds are: NL -- No-Load (Mutual) Fund; MM --
Money Market Fund; FSC -- A mutual fund sold with a front-end sales charge and
a distribution (12b-1) fee.
<PAGE>
PROSPECTUS o JANUARY 8, 2001
Additional information about the Fund's investments is available in the Fund's
Annual and Semi-Annual Reports to Shareholders. In the Fund's Annual Report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. The
Fund's Statement of Additional Information also provides additional information
about the Fund. The Statement of Additional Information is incorporated herein
by reference (legally is part of this Prospectus). For a free copy of any of
these documents, to request other information about the Fund, or to make
shareholder inquiries, please call:
(800) 869-NEWS
You also may obtain information about the Fund by calling your Morgan Stanley
Dean Witter Financial Advisor or by visiting our Internet site at:
WWW.MSDWADVICE.COM/FUNDS
Information about the Fund (including the Statement of Additional Information)
can be viewed and copied at the Securities and Exchange Commission's Public
Reference Room in Washington, DC. Information about the Reference Room's
operations may be obtained by calling the SEC at (202) 942-8090. Reports and
other information about the Fund are available on the EDGAR Database on the
SEC's Internet site (www.sec.gov), and copies of this information may be
obtained, after paying a duplicating fee, by electronic request at the
following E-mail address: [email protected], or by writing the Public
Reference Section of the SEC, Washington, DC 20549-0102.
TICKER SYMBOLS:
Class A: DINAX Class C: DINCX
-------------------------- --------------------------
Class B: DINBX Class D: DINDX
-------------------------- --------------------------
(THE FUND'S INVESTMENT COMPANY ACT FILE NO. IS 811-6515)
MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST
[GRAPHIC OMITTED]
A MUTUAL FUND WHOSE PRIMARY
INVESTMENT OBJECTIVE IS A HIGH
LEVEL OF CURRENT INCOME; AS A
SECONDARY OBJECTIVE, THE FUND
SEEKS TO MAXIMIZE TOTAL RETURN
BUT ONLY TO THE EXTENT CONSISTENT
WITH ITS PRIMARY OBJECTIVE
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST Two World Trade Center,
LETTER TO THE SHAREHOLDERS October 31, 2000 New York, New York 10048
DEAR SHAREHOLDER:
During the fiscal year ended October 31, 2000, the U.S. economy experienced
strong growth with moderate inflation early in the period, although potentially
inflationary pressures loomed throughout much of the year. Attempting to reduce
the inflation threat on a preemptive basis, the Federal Reserve Board raised the
federal funds rate a total of 125 basis points, from 5.25 percent to 6.50
percent. The Fed stopped raising rates as the economy began to slow in early
summer. As measured by the two-year U.S. Treasury note, short-term interest
rates rose, peaking at 6.91 percent in May. The effect of the interest-rate
increases was less pronounced for long-term Treasuries, which benefited from a
federal government program of buying back outstanding debt. The subsequent
reduction in the supply of long-term Treasuries created an inverted yield curve,
meaning that short-term Treasury yields were atypically higher than those of
longer-term Treasuries.
By May, signs of more-moderate economic growth had begun to appear. Higher
interest rates, a stagnated stock market and high energy prices all contributed
to expectations of slower economic growth. The fixed-income market rallied on
hopes that the Fed's restrictive policy might be nearing its end. On October 31,
2000, the thirty-year Treasury note was yielding 5.78 percent, down more than
100 basis points from its highest level in this period of 6.81 percent.
HIGH-YIELD MARKET OVERVIEW
The period under review proved to be an extremely difficult one for high-yield
bond investors as the high-yield market remained mired in one of its worst
slumps in the past 20 years. As a result of the Fed's tightening actions and the
ensuing higher-interest-rate environment, the financial markets became worried
about a potential hard landing for the U.S. economy and the effect that might
have on future corporate earnings. As investors became more risk averse, we
witnessed a severe flight to quality in the fixed-income markets, with the
high-yield sector being hit
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS October 31, 2000, continued
exceptionally hard. Much as in the last major high-yield market correction ten
years ago, significant investor outflows have greatly exaggerated the decline,
creating an extremely oversold market.
Credit spreads within the fixed-income markets widened dramatically over the
past year and a half as investors came to favor higher-quality securities. As a
result of this flight to quality, the yield spread between high-yield bonds and
comparable U.S. government securities is now approaching its widest margin in
history. Spreads have also broadened between the different tiers within the
high-yield sector as investors have gravitated toward the highest-quality end of
the marketplace. As a result of this trend, lower-yielding, higher-quality
BB-rated bonds have held up significantly better than those in the
higher-yielding, lower-quality B-rated sector. Much as we saw in the high-yield
bear market of 1989 and 1990, investors' reactions have resulted in a sharp
decline in the prices of many high-yield bonds, driving market yields
substantially higher in the process so that yield spreads on many B-rated bonds
are approaching their highest levels on record.
GLOBAL BOND MARKET OVERVIEW
Although most of the world's investment-grade bond markets showed notable
improvement during the year ended October 31, 2000, the continued strength of
the U.S. dollar relative to most investment-grade currencies resulted in
currency losses for most non-dollar-denominated investments. The primary factor
underpinning the U.S. dollar has been the unprecedented strength of the domestic
economy. Through January, the strength of the global economy also pressured the
investment-grade bond markets. As the global economy cooled to a more
sustainable growth rate and central banks appeared to be at the end of
tightening cycles, the global bond markets began to rally. Despite the relative
weakening of the U.S. economy as well as declining U.S. interest rates and a
huge U.S. current-account deficit, the U.S. dollar remained extremely strong
compared to most other currency units. Much of this strength appeared to be the
result of strong foreign direct investment and portfolio flows into the United
States.
There were a few bright spots in the investment-grade bond markets during the
period under review. The U.K. government market outperformed relative to the
benchmark German market, and the Norwegian, Swedish and British currencies held
up somewhat better than other European currencies.
PERFORMANCE AND PORTFOLIO STRATEGY
For the 12-month period ended October 31, 2000, Morgan Stanley Dean Witter
Diversified Income Trust's Class B shares posted a total return of -7.24
percent, compared to 6.46 percent for the Lehman Brothers U.S. Government/Credit
Intermediate Bond Index (formerly Lehman Brothers Intermediate
Government/Corporate Index). For the same period, the Fund's Class A, C and D
shares had total returns
2
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS October 31, 2000, continued
of -6.66 percent, -7.12 percent and -6.20 percent, respectively. The performance
of the Fund's four share classes varies because of differing expenses. The total
return figures shown assume the reinvestment of all distributions but do not
reflect the deduction of any applicable sales charges.
The Fund's underperformance relative to its benchmark was due primarily to both
its global short-term securities and high-yield securities components. Within
the high-yield component, the Fund's core holdings in the B-rated sector of the
high-yield market sharply underperformed the higher-quality end of the
fixed-income market.
Global Short-Term Securities Component. Throughout the period under review, the
global short-term securities component continued its strategy of seeking the
best-performing markets within the component's investment-grade mandate while
maintaining attractive income and dividend levels. It also kept its duration
exposure below that of most funds in its fund category while the global markets
were under pressure. Because of the Fund's income objectives, it did not invest
in the Japanese markets, where short-term interest rates were near zero. The
Fund also hedged a portion of its currency exposure to limit the effect of
declining non-U.S. exchange rates.
U.S. Government/Mortgage Component. The U.S. Government/Mortgage Component
decreased its weighting of U.S. Treasury and agency holdings as
intermediate-term interest rates trended higher throughout the fourth quarter of
1999 before peaking in February 2000. Throughout the remaining period, the
component began decreasing its exposure to mortgage-backed securities as a
Treasury rally ensued after interest rates peaked a second time in May 2000. By
the end of the fiscal year, this component was comprised of 79 percent
mortgage-backed securities issued by the Federal National Mortgage Association
(FNMA), Government National Mortgage Association (GNMA) and Federal Home Loan
Mortgage Corp. (FHLMC) and the balance in U.S. agency securities.
Long-Term High-Yield Securities Component. As discussed, the past year and a
half has been one of the most difficult periods for the high-yield market,
particularly the B-rated sector, the market's largest one. As a result of
substantial weakness in the high-yield market, we have seen high-yield bond
prices decline sharply and yields rise dramatically over this period. Although
the high-yield securities component's position in the more defensive,
higher-quality end of the market held up relatively well in this turbulent
market environment, its long-term core position in the B-rated sector was
adversely affected over the past year. With yields on many high-yield issues at
or near 10-year highs and currently trading at significant discounts to their
stated maturity value, we currently view the high-yield sector as extremely
undervalued, although the timing of a recovery is still very uncertain at this
point. As the market outlook improves over time, we would expect to see
investment flows turn positive once again, creating stronger demand for many of
today's depressed high-yield bonds.
3
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
LETTER TO THE SHAREHOLDERS October 31, 2000, continued
In light of the increasingly volatile market environment, however, the
high-yield securities component's portfolio manager has indicated his intention
to gradually reposition the component's portfolio. Over time, we anticipate
balancing the portfolio across high-yield sectors - particularly among B-rated
and BB-rated issues. This strategy should better enable this component to
provide competitive long-term returns with less overall performance volatility.
LOOKING AHEAD
We believe that economic growth will moderate and inflation will remain at
acceptable levels in the months ahead. This situation should create a benign
environment for the U.S. government bond markets. With the high-yield bond
sector and non-dollar investment-grade bond markets being at historically cheap
levels, we currently view these markets as potentially rewarding investment
opportunities.
We appreciate your ongoing support of Morgan Stanley Dean Witter Diversified
Income Trust and look forward to continuing to serve your investment needs.
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO /s/ MITCHELL M. MERIN
-------------------------- ---------------------
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
4
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FUND PERFORMANCE October 31, 2000
Growth of $10,000 - Class B
($ in Thousand)
TOTAL LEHMAN
April 9, 1992 $10,000 $10,000
April 30, 1992 10,050 10,000
July 31, 1992 10,328 10,510
October 31, 1992 10,373 10,620
January 31, 1993 10,739 10,930
April 30, 1993 11,060 11,236
July 31, 1993 11,277 11,415
October 31, 1993 11,410 11,675
January 31, 1994 11,712 11,793
April 30, 1994 11,343 11,349
July 31, 1994 11,378 11,522
October 31, 1994 11,332 11,450
January 31, 1995 11,455 11,631
April 30, 1995 11,952 12,087
July 31, 1995 12,420 12,538
October 31, 1995 12,551 12,886
January 31, 1996 12,932 13,306
April 30, 1996 13,093 13,036
July 31, 1996 13,352 13,203
October 31, 1996 13,742 13,635
January 31, 1997 13,783 13,779
April 30, 1997 13,738 13,871
July 31, 1997 14,322 14,401
October 31, 1997 14,629 14,656
January 31, 1998 14,872 15,000
April 30, 1998 15,007 15,112
July 31, 1998 15,177 15,374
October 31, 1998 14,955 15,992
January 31, 1999 15,114 16,143
April 30, 1999 15,022 16,074
July 31, 1999 14,893 15,947
October 31, 1999 14,635 16,150
January 31, 2000 14,516 16,058
April 30, 2000 14,438 16,322
July 31, 2000 14,306 16,763
October 31, 2000 13,575(3) 17,193
----------------------------------
--- Fund --- Lehman(4)
----------------------------------
Past performance is not predictive of future returns. Investment return and
principal value will fluctuate. When you sell fund shares, they may be worth
less than their original cost. Performance for Class A, Class C, and Class D
shares will vary from the performance of Class B shares shown above due to
differences in sales charges and expenses.
Average Annual Total Returns
--------------------------------------------------------------------------------
Class A Shares*
--------------------------------------------------------------------
Period Ended 10/31/00
---------------------------
1 Year (6.66)%(1) (10.62)%(2)
Since Inception (7/28/97) (0.91)%(1) (2.22)%(2)
Class B Shares**
-------------------------------------------------------------------
Period Ended 10/31/00
---------------------------
1 Year (7.24)%(1) (11.52)%(2)
5 Years 1.58 %(1) 1.31 %(2)
Since Inception (4/9/92) 3.63 %(1) 3.63 %(2)
Class C Shares+
-------------------------------------------------------------------
Period Ended 10/31/00
---------------------------
1 Year (7.12)%(1) (7.97)%(2)
Since Inception (7/28/97) (1.50)%(1) (1.50)%(2)
Class D Shares++
--------------------------------------------------------------------
Period Ended 10/31/00
---------------------------
1 Year (6.20)%(1)
Since Inception (7/28/97) (0.62)%(1)
---------------
(1) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable sales charge. See the Fund's current prospectus for
complete details on fees and sales charges.
(3) Closing value assuming a complete redemption on October 31, 2000.
(4) The Lehman Brothers Intermediate U.S. Government/Credit Index (formerly
Lehman Brothers Intermediate Government/Corporate Index) tracks the
performance of U.S. government and corporate obligations, including U.S.
government agency and Treasury securities, and corporate and Yankee bonds
with maturities of 1 to 10 years. The Index does not include any expenses,
fees or charges. The Index is unmanaged and should not be considered an
investment.
* The maximum front-end sales charge for Class A is 4.25%.
** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%.
The CDSC declines to 0% after six years.
+ The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of purchase.
++ Class D shares have no sales charge.
5
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GOVERNMENT & CORPORATE BONDS (92.4%)
FOREIGN (27.8%)
AUSTRALIA (0.0%)
Cable/Satellite TV
$ 12,468 Australis Holdings Property
Ltd. (a) ................................ 15.00++% 11/01/02 $ 124,680
90 Australis Media Ltd. (a) (c) ............ 15.75 05/15/03 903
4,700 Australis Media Ltd. (Units)# (a) (c)
15.75 05/15/03 47,000
------------
TOTAL AUSTRALIA .................................................... 172,583
------------
CANADA (3.0%)
Beverages - Non-Alcoholic (0.7%)
5,500 Sparkling Spring Water .................. 11.50 11/15/07 4,290,000
------------
Consumer/Business Services (0.2%)
1,300 MDC Communication Corp. ................. 10.50 12/01/06 1,183,000
------------
Electronics/Appliances (0.0%)
12,061 International Semi-Tech
Microelectronics, Inc. (a) (c) ........ 11.50 08/15/03 120,610
------------
Government Obligations (1.9%)
CAD 14,150 Canada Government Bond .................. 5.50 09/01/02 9,230,664
1,141 Ontario (Province of) ................... 11.125 02/14/01 1,672,702
------------
10,903,366
------------
Specialty Telecommunications (0.2%)
$ 1,300 Worldwide Fiber Inc. .................... 12.00 08/01/09 1,027,000
------------
TOTAL CANADA ....................................................... 17,523,976
------------
DENMARK (5.6%)
Government Obligations
DKK 182,000 Denmark (Kingdom of) .................... 9.00 11/15/00 20,791,160
106,000 Denmark (Kingdom of) (b) ................ 8.00 11/15/01 12,375,193
------------
TOTAL DENMARK ...................................................... 33,166,353
------------
FINLAND (2.3%)
Government Obligation
GBP 9,100 Finland (Republic of) ................... 8.00 04/07/03 13,668,506
------------
GERMANY (3.0%)
Government Obligations
EUR 15,500 Deutschland Republic .................... 6.00 09/15/03 13,453,791
5,000 Germany (Republic of) ................... 8.00 07/22/02 4,438,475
------------
TOTAL GERMANY ...................................................... 17,892,266
------------
</TABLE>
See Notes to Financial Statements
6
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NETHERLANDS (6.9%)
Government Obligations (6.7%)
GBP 9,100 BK Nederlandse ......................... 7.00 % 12/20/02 $ 13,367,440
EUR 13,500 Netherlands Government Bond (b)......... 8.50 03/15/01 11,588,941
17,750 Netherlands (Kingdom of) ............... 5.75 09/15/02 15,222,240
------------
40,178,621
------------
Specialty Telecommunications (0.2%)
$ 1,300 Versatel Telecom International NV....... 13.25 05/15/08 994,500
------------
TOTAL NETHERLANDS ................................................. 41,173,121
------------
NORWAY (2.6%)
Government Obligation
NOK 136,570 Norway Government Bond (b) ............. 9.50 10/31/02 15,327,185
------------
SWEDEN (2.7%)
Government Obligation
SEK 160,000 Swedish Government Bond (b) ............ 5.50 04/12/02 16,215,499
------------
UNITED KINGDOM (1.7%)
Cellular Telephone (0.1%)
$ 2,000 Dolphin Telecom PLC .................... 11.50++ 06/01/08 400,000
3,500 Dolphin Telecom PLC .................... 14.00++ 05/15/09 525,000
------------
925,000
------------
Major Banks (1.4%)
GBP 5,600 Abbey National Treasury
Service (b) .......................... 7.125 03/14/01 8,135,251
------------
Specialty Telecommunications (0.2%)
$ 1,200 Esprit Telecom Group PLC ............... 11.50 12/15/07 276,000
3,600 Esprit Telecom Group PLC ............... 10.875 06/15/08 828,000
------------
1,104,000
------------
TOTAL UNITED KINGDOM .............................................. 10,164,251
------------
TOTAL FOREIGN (Cost $210,822,610) ................................. 165,303,740
------------
UNITED STATES (64.6%)
CORPORATE BONDS (28.8%)
Advertising/Marketing Services (0.5%)
3,200 Interep National Radio Sales Inc. ...... 10.00 07/01/08 2,720,000
------------
Aerospace & Defense (0.5%)
1,300 Loral Space & Communications Ltd........ 9.50 01/15/06 936,000
2,700 Sabreliner Corp. - 144A* ............... 11.00 06/15/08 2,234,250
------------
3,170,250
------------
Broadcast/Media (0.5%)
3,800 Tri-State Outdoor Media Group,
Inc. ................................. 11.00 05/15/08 3,230,000
------------
</TABLE>
See Notes to Financial Statements
7
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broadcasting (0.1%)
$ 1,200 XM Satellite Radio Holdings Inc. ........ 14.00% 03/15/10 $ 816,000
------------
Cable/Satellite TV (0.2%)
3,000 Knology Holdings Inc. ................... 11.875++ 10/15/07 1,350,000
------------
Casino/Gambling (1.8%)
12,740 Aladdin Gaming Holdings/Capital
Corp. LLC (Series B) .................. 13.50++ 03/01/10 5,733,000
8,900 Fitzgeralds Gaming Corp.
(Series B) (c) ........................ 12.25 12/15/04 4,717,000
------------
10,450,000
------------
Cellular Telephone (1.5%)
1,400 Dobson/Sygnet Communications ............ 12.25 12/15/08 1,379,000
7,300 McCaw International Ltd. ................ 13.00++ 04/15/07 5,146,500
1,500 Tritel PCS Inc. ......................... 12.75++ 05/15/09 967,500
1,500 Triton Communications LLC ............... 11.00++ 05/01/08 1,136,250
------------
8,629,250
------------
Commercial Printing/Forms (0.0%)
2,700 Premier Graphics Inc. (a) (c) ........... 11.50 12/01/05 189,000
------------
Consumer/Business Services (0.9%)
1,200 Anacomp, Inc. (Series B) (c) ............ 10.875 04/01/04 216,000
1,100 Anacomp, Inc. (Series D) (c) ............ 10.875 04/01/04 198,000
6,750 Comforce Operating, Inc. ................ 12.00 12/01/07 3,510,000
1,500 Muzak LLC ............................... 9.875 03/15/09 1,320,000
------------
5,244,000
------------
Containers/Packaging (1.5%)
1,100 Berry Plastics Corp. .................... 12.25 04/15/04 1,001,000
5,650 Envirodyne Industries, Inc. ............. 10.25 12/01/01 4,463,500
3,500 Packaging Resources, Inc. (c) ........... 11.625 05/01/03 3,430,000
------------
8,894,500
------------
Diversified Manufacturing (0.7%)
1,400 Eagle-Picher Industries, Inc. ........... 9.375 03/01/08 1,169,000
2,588 Jordan Industries, Inc. (Series B) ...... 11.75++ 04/01/09 1,630,440
1,800 Jordan Industries, Inc. ................. 10.375 08/01/07 1,620,000
------------
4,419,440
------------
Drugstore Chains (0.1%)
1,700 Rite Aid Corp. .......................... 7.70 02/15/27 340,000
------------
Electronic Distributors (0.0%)
5,600 CHS Electronics, Inc. (a) (c) ........... 9.875 04/15/05 112,000
------------
Electronic Equipment/Instruments (0.3%)
2,700 High Voltage Engineering, Inc. .......... 10.75 08/15/04 1,755,000
------------
Electronics/Appliances (0.2%)
1,400 Windmere-Durable Holdings, Inc. ......... 10.00 07/31/08 1,260,000
------------
</TABLE>
See Notes to Financial Statements
8
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Environmental Services (0.4%)
$ 2,500 Allied Waste North America, Inc.
(Series B) ............................ 10.00 % 08/01/09 $ 2,162,500
------------
Financial Conglomerates (1.0%)
GBP 4,200 General Electric Capital Corp. (b) ...... 6.625 03/16/01 6,088,373
------------
Food Distributors (0.4%)
$ 1,300 Fleming Companies, Inc. (Series B)....... 10.625 07/31/07 975,000
1,300 Volume Services of America Inc. ......... 11.25 03/01/09 1,176,500
------------
2,151,500
------------
Food Retail (0.5%)
2,250 Big V Supermarkets, Inc.
(Series B) ............................ 11.00 02/15/04 1,530,000
850 Eagle Food Centers, Inc. ................ 11.00 04/15/05 425,000
2,367 Pueblo Xtra International, Inc.
(Series C) ............................ 9.50 08/01/03 1,112,490
------------
3,067,490
------------
Food: Specialty/Candy (0.5%)
44,552 SFAC New Holdings Inc. (d) .............. 13.00++ 06/15/09 2,673,103
------------
Hotels/Resorts (0.1%)
2,700 Epic Resorts LLC (Series B) ............. 13.00 06/15/05 810,000
------------
Household/Personal Care (0.3%)
2,015 J.B. Williams Holdings, Inc. ............ 12.00 03/01/04 1,974,700
------------
Industrial Specialties (0.8%)
1,300 Cabot Safety Corp. ...................... 12.50 07/15/05 1,293,500
1,800 Indesco International Inc. .............. 9.75 04/15/08 450,000
1,000 International Wire Group, Inc.
(Series B) ............................ 11.75 06/01/05 995,000
2,250 Outsourcing Services Group, Inc.
(Series B) ............................ 10.875 03/01/06 1,800,000
------------
4,538,500
------------
International Banks (0.8%)
GBP 3,061 KFW International Finance (b) ........... 10.625 09/03/01 4,582,969
------------
Internet Software/Services (0.4%)
$ 2,600 Globix Corp. - 144A* .................... 12.50 02/01/10 1,430,000
1,700 PSINET, Inc. ............................ 11.00 08/01/09 850,000
------------
2,280,000
------------
Major Banks (0.2%)
GBP 1,000 Morgan Guaranty Trust Corp. ............. 7.375 12/28/01 1,462,748
------------
Medical Specialties (0.7%)
$ 5,100 Mediq Inc./PRN Life Support
Services Inc. (c) ..................... 11.00 06/01/08 153,000
5,400 Universal Hospital Services, Inc. ....... 10.25 03/01/08 3,888,000
------------
4,041,000
------------
</TABLE>
See Notes to Financial Statements
9
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Medical/Nursing Services (0.6%)
$ 5,250 Pediatric Services of America, Inc.
(Series A) .............................. 10.00 % 04/15/08 $ 3,675,000
------------
Office Equipment/Supplies (0.7%)
6,890 Mosler, Inc. .............................. 11.00 04/15/03 4,134,000
------------
Other Consumer Specialties (0.8%)
5,800 Samsonite Corp. ........................... 10.75 06/15/08 4,524,000
------------
Restaurants (1.5%)
48,756 American Restaurant Group
Holdings, Inc. - 144A* (d) .............. 0.00 12/15/05 6,338,267
5,200 FRD Acquisition Corp. (Series B) .......... 12.50 07/15/04 1,872,000
1,300 Friendly Ice Cream Corp. .................. 10.50 12/01/07 871,000
------------
9,081,267
------------
Retail - Specialty (0.4%)
1,300 Pantry, Inc. .............................. 10.25 10/15/07 1,202,500
1,700 Petro Stopping Centers L.P. ............... 10.50 02/01/07 1,445,000
------------
2,647,500
------------
Specialty Telecommunications (3.2%)
6,500 Birch Telecom Inc. ........................ 14.00 06/15/08 3,900,000
3,000 DTI Holdings Inc. (Series B) .............. 12.50++ 03/01/08 1,020,000
16,300 Firstworld Communications, Inc. ........... 13.00++ 04/15/08 3,586,000
1,500 Pac-West Telecommunications
Group, Inc. ............................. 13.50 02/01/09 1,335,000
2,300 Primus Telecommunications Group,
Inc. .................................... 12.75 10/15/09 1,173,000
2,700 Primus Telecommunications Group,
Inc. (Series B) ......................... 9.875 05/15/08 1,377,000
3,800 Viatel, Inc. .............................. 11.25 04/15/08 1,976,000
800 Viatel, Inc. .............................. 11.50 03/15/09 416,000
6,400 World Access, Inc. (d) .................... 13.25 01/15/08 4,480,000
------------
19,263,000
------------
Telecommunications (3.3%)
2,400 CapRock Communications Corp. .............. 11.50 05/01/09 2,310,000
1,400 CapRock Communications Corp.
(Series B) .............................. 12.00 07/15/08 1,368,500
1,500 Covad Communications Group, Inc. 12.50 02/15/09 780,000
5,900 e. Spire Communications, Inc. ............. 13.75 07/15/07 3,186,000
1,500 Focal Communications Corp.
(Series B) .............................. 12.125++ 02/15/08 750,000
1,300 Hyperion Telecommunication, Inc.
(Series B) .............................. 12.25 09/01/04 1,105,000
28,500 In-Flight Phone Corp. (Series B) .......... 14.00 05/15/02 1,425,000
1,300 Level 3 Communications, Inc. .............. 9.125 05/01/08 1,053,000
1,000 MGC Communications, Inc. .................. 13.00 04/01/10 610,000
1,300 NextLink Communications LLC ............... 10.75 06/01/09 1,144,000
5,400 Rhythms Netconnections, Inc. .............. 12.75 04/15/09 2,592,000
</TABLE>
See Notes to Financial Statements
10
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 1,200 Startec Global Communications
Corp. ................................... 12.00 % 05/15/08 $ 720,000
3,000 Talton Holdings, Inc. (Series B) .......... 11.00 06/30/07 2,490,000
------------
19,533,500
------------
Truck/Construction/Farm Machinery (0.4%)
2,800 J.B. Poindexter & Co., Inc. ............... 12.50 05/15/04 2,604,000
------------
Wireless Communications (3.0%)
11,300 Advanced Radio Telecom Corp. .............. 14.00 02/15/07 6,780,000
900 Arch Escrow Corp. ......................... 13.75 04/15/08 540,000
21,800 CellNet Data Systems Inc. (a) ............. 14.00++ 10/01/07 109,000
1,000 Globalstar LP/Capital Corp. ............... 10.75 11/01/04 150,000
1,850 Globalstar LP/Capital Corp. ............... 11.50 06/01/05 277,500
3,500 Orbcomm Global LP/Capital
Corp. (a) (c) ........................... 14.00 08/15/04 525,000
4,600 Paging Network, Inc. (a) (c) .............. 10.125 08/01/07 966,000
8,300 Paging Network, Inc. (a) (c) .............. 10.00 10/15/08 1,743,000
5,850 USA Mobile Communications
Holdings, Inc. .......................... 14.00 11/01/04 4,446,000
1,800 Winstar Communications, Inc. -
144A* ................................... 0.00 04/15/10 567,000
2,400 Winstar Communications, Inc. -
144A* ................................... 12.75 04/15/10 1,728,000
------------
17,831,500
------------
TOTAL CORPORATE BONDS
(Cost $288,431,367).................................................... 171,706,090
------------
MORTGAGE-BACKED SECURITIES (26.0%)
Federal Home Loan Mortgage Corp. (0.4%)
1,646 .......................................... 7.00 04/01/04 1,642,906
689 .......................................... 8.00 10/01/24 697,880
------------
2,340,786
------------
Federal National Mortgage Assoc. (13.1%)
29,437 .......................................... 6.00 02/01/11-
04/01/28 28,126,924
29,085 ......................................... 6.50 11/01/08-
11/01/23 28,140,138
4,609 ......................................... 7.00 10/01/08-
04/01/17 4,534,000
8,638 ......................................... 7.50 11/01/22 8,624,800
2,815 ......................................... 8.00 10/01/01-
06/01/22 2,847,048
5,225 ......................................... 8.50 07/01/17 5,336,053
------------
77,608,963
------------
Government National Mortgage Assoc. (12.5%)
21,399 ......................................... 6.00 10/15/23 20,162,028
21,831 ......................................... 6.50 11/20/23-
02/15/26 21,051,936
</TABLE>
See Notes to Financial Statements
11
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 11,590 ............................... 7.00% 12/15/22-
06/20/29 $ 11,387,165
17,439 ............................... 7.50 05/15/17-
11/15/06 17,493,243
3,348 ............................... 8.00 01/15/22 3,402,357
1,132 ............................... 8.50 10/15/24 1,160,523
------------
74,657,252
------------
TOTAL MORTGAGE-BACKED SECURITIES
(Cost $157,748,277)...................................... 154,607,001
------------
U.S. GOVERNMENT AGENCIES & OBLIGATIONS (9.8%)
Federal Home Loan Banks (b) (2.0%)
5,000 ............................... 6.37 09/25/07 4,894,450
5,000 ............................... 6.385 10/23/07 4,897,800
2,000 ................................ 5.45 01/12/09 1,833,260
------------
11,625,510
------------
Federal Home Loan Mortgage Corp. (2.3%)
3,000 ................................ 5.75 04/15/08 2,837,910
15,000 ................................ 0.00 07/02/12-
08/15/02 10,877,850
------------
13,715,760
------------
Federal National Mortgage Assoc. (b) (3.5%)
GBP 9,000 ................................ 6.875 06/07/02 13,178,201
AUD 6,340 ................................ 6.50 07/10/02 3,293,153
$ 6,000 Principal Strips ................ 0.00 02/12/04-
02/01/05 4,607,560
------------
21,078,914
------------
13,475 Financing Corp. (1.7%) .......... 0.00 03/07/05-
04/06/06 9,885,508
------------
2,320 Tennessee Valley Authority (0.3%) 0.00 01/15/03 2,010,651
------------
TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS
(Cost $88,058,776)....................................... 58,316,343
------------
TOTAL UNITED STATES
(Cost $534,238,420)...................................... 384,629,434
------------
TOTAL GOVERNMENT & CORPORATE BONDS
(Cost $745,061,030)...................................... 549,933,174
------------
NUMBER OF
SHARES
------------
COMMON STOCKS (e) (0.2%)
Apparel/Footwear Retail (0.0%)
1,310,596 County Seat Stores, Inc. (d) .......... 11,795
------------
</TABLE>
See Notes to Financial Statements
12
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Casino/Gambling (0.0%)
10,773 Fitzgerald Gaming Corp. (Class D)* ........................... $ 11
------------
Food Retail (0.0%)
6,435 Eagle Food Centers, Inc. ..................................... 5,430
------------
Food: Specialty/Candy (0.0%)
2,423 SFAC New Holdings Inc. (d)* .................................. 606
198,750 Specialty Foods Acquisition Corp. - 144A* .................... 1,988
------------
2,594
------------
Hotels/Resorts (0.0%)
2,000 Motels of America, Inc. - 144A* .............................. 500
------------
Medical/Nursing Services (0.0%)
512,862 Raintree Healthcare Corp. (d) ................................ 4,616
------------
Restaurants (0.0%)
6,000 American Restaurant Group Holdings, Inc. - 144A* ............. 1,500
------------
Specialty Telecommunications (0.2%)
37,335 Versatel Telecom International NV (Netherlands) (d) .......... 746,700
20,110 World Access, Inc. (d) ....................................... 98,036
------------
844,736
------------
298,462 United States Leather, Inc. (d) .............................. 2,985
------------
Wireless Communications (0.0%)
196,000 FWT, Inc. (Class A) .......................................... 1,960
------------
TOTAL COMMON STOCKS
(Cost $19,171,388)............................................ 876,127
------------
CONVERTIBLE PREFERRED STOCKS (0.3%)
Oil & Gas Production (0.0%)
989 XCL Ltd.+ - 144A* ........................................... 495
5,000 XCL Ltd. (Units)#+ - 144A* ................................... 2,500
------------
2,995
------------
Restaurants (0.1%)
1,886 American Restaurant Group Holdings, Inc. (Series B)
(Non-Conv.) + ................................................ 754,400
------------
Wireless Communications (0.2%)
1,960,000 FWT, Inc. (Series A) (Non-Conv.) ............................. 980,000
------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $11,257,977)............................................ 1,737,395
------------
NUMBER OF EXPIRATION
WARRANTS DATE
---------- -----------
WARRANTS (e) (0.2%)
Aerospace & Defense (0.0%)
1,000 Sabreliner Corp. - 144A* .......... 04/15/03 10,000
------------
</TABLE>
See Notes to Financial Statements
13
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Broadcasting (0.0%)
4,000 UIH Australia/Pacific Inc. ........................ 05/15/06 $ 60,000
1,200 XM Satellite Radio Holdings Inc. .................. 03/15/10 168,000
------------
228,000
------------
Casino/Gambling (0.0%)
68,000 Aladdin Gaming Enterprises, Inc. - 144A* .......... 03/01/10 680
------------
Cellular Telephone (0.0%)
5,300 McCaw International Ltd. - 144A* .................. 04/15/07 106,000
------------
Hotels/Resorts (0.0%)
2,700 Epic Resorts LLC/Capital - 144A* .................. 06/15/05 27
------------
Restaurants (0.0%)
1,500 American Restaurant Group Holdings, Inc. -
144A* ........................................... 08/15/08 15
------------
Specialty Telecommunications (0.2%)
6,500 Birch Telecom Inc. - 144A* ........................ 06/15/08 650,000
15,000 DTI Holdings Inc. - 144A* ......................... 03/01/08 150
16,300 Firstworld Communications, Inc. - 144A* ........... 04/15/08 244,500
------------
894,650
------------
Telecommunications (0.0%)
1,200 Startec Global Communications Corp. -
144A* ........................................... 05/15/08 1,200
------------
TOTAL WARRANTS
(Cost $316,776)................................................. 1,240,572
------------
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
---------------- ----------- ----------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS (3.4%)
UNITED STATES
TIME DEPOSITS (f) (2.1%)
NOK 59,063 Chase Manhattan Bank .......... 6.875% 11/02/00 6,358,411
EUR 7,465 Chase Manhattan Bank .......... 4.70 11/03/00 6,338,570
------------
TOTAL TIME DEPOSITS
(Cost $12,533,121)....................................... 12,696,981
------------
REPURCHASE AGREEMENT (1.3%)
$ 7,555 The Bank of New York (dated
10/31/00; proceeds $7,556,795) (g)
(Cost $7,555,444)............. 6.44 11/01/00 7,555,444
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $20,088,565)....................................... 20,252,425
------------
</TABLE>
See Notes to Financial Statements
14
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
VALUE
---------------
TOTAL INVESTMENTS
(Cost $795,895,736) (h) 96.5% $574,039,693
OTHER ASSETS IN EXCESS OF
LIABILITIES ........... 3.5 20,577,320
----- ------------
NET ASSETS ............ 100.0% $594,617,013
===== ============
---------------------
* Resale is restricted to qualified institutional investors.
# Consists of one or more class of securities traded together as a unit;
stocks or bonds with attached warrants.
+ Payment-in-kind security.
++ Currently a zero coupon bond and will pay interest at the rate shown at a
future date.
(a) Issuer in bankruptcy.
(b) Some or all of these securities are segregated in connection with open
forward foreign currency contracts and securities purchased on a forward
commitment basis.
(c) Non-income producing security; bond in default.
(d) Acquired through exchange offer.
(e) Non-income producing securities.
(f) Subject to withdrawal restrictions until maturity.
(g) Collateralized by $7,562,416 U.S. Treasury Bill 6.25% due 07/31/02 valued
at $7,706,571.
(h) The aggregate cost for federal income tax purposes approximates the
aggregate cost for book purposes. The aggregate gross unrealized
appreciation is $11,396,154 and the aggregate gross unrealized depreciation
is $233,252,197, resulting in net unrealized depreciation of $221,856,043.
See Notes to Financial Statements
15
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT OCTOBER 31, 2000:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS TO IN EXCHANGE DELIVERY APPRECIATION
DELIVER FOR DATE (DEPRECIATION)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 6,307,965 EUR 7,465,047 11/01/2000 $ 30,607
EUR 15,946,000 $ 13,379,013 11/27/2000 (177,957)
GBP 3,300,000 $ 4,797,411 11/13/2000 10,307
GBP 1,615,235 $ 2,348,956 11/30/2000 5,088
NOK 59,085,846 $ 6,307,833 11/02/2000 (53,008)
----------
Net unrealized depreciation ................ $ (184,963)
==========
</TABLE>
Currency Abbreviations:
-----------------------
AUD Australian Dollar.
GBP British Pound.
CAD Canadian Dollar.
DKK Danish Krone.
EUR Euro.
NOK Norwegian Krone.
SEK Swedish Krona.
See Notes to Financial Statements
16
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2000
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities, at value (cost $795,895,736)................... $574,039,693
Unrealized appreciation on open forward foreign currency contracts ....... 46,002
Cash ..................................................................... 10,865,719
Receivable for:
Interest .............................................................. 14,352,856
Investments sold ...................................................... 3,074,411
Shares of beneficial interest sold .................................... 924,731
Prepaid expenses and other assets ........................................ 49,889
------------
TOTAL ASSETS .......................................................... 603,353,301
------------
LIABILITIES:
Unrealized depreciation on open forward foreign currency contracts ....... 230,965
Payable for:
Investments purchased ................................................. 6,338,571
Shares of beneficial interest repurchased ............................. 1,372,626
Plan of distribution fee .............................................. 445,329
Investment management fee ............................................. 214,041
Accrued expenses and other payables ...................................... 134,756
------------
TOTAL LIABILITIES ..................................................... 8,736,288
------------
NET ASSETS ............................................................ $594,617,013
============
COMPOSITION OF NET ASSETS:
Paid-in-capital .......................................................... $868,179,632
Net unrealized depreciation .............................................. 222,546,422)
Dividends in excess of net investment income ............................. (3,126,277)
Accumulated net realized loss ............................................ (47,889,920)
------------
NET ASSETS ............................................................ $594,617,013
============
CLASS A SHARES:
Net Assets ............................................................... $13,318,287
Shares Outstanding (unlimited authorized, $.01 par value)................. 1,911,492
NET ASSET VALUE PER SHARE ............................................. $6.97
=====
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44% of net asset value) ....................... $7.28
=====
CLASS B SHARES:
Net Assets ............................................................... $565,492,583
Shares Outstanding (unlimited authorized, $.01 par value) ................ 81,046,617
NET ASSET VALUE PER SHARE ............................................. $6.98
=====
CLASS C SHARES:
Net Assets ............................................................... $14,312,911
Shares Outstanding (unlimited authorized, $.01 par value) ................ 2,054,667
NET ASSET VALUE PER SHARE ............................................. $6.97
=====
CLASS D SHARES:
Net Assets ............................................................... $1,493,232
Shares Outstanding (unlimited authorized, $.01 par value)................. 213,723
NET ASSET VALUE PER SHARE ............................................. $6.99
=====
</TABLE>
See Notes to Financial Statements
17
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended October 31, 2000
<TABLE>
<CAPTION>
NET INVESTMENT INCOME:
<S> <C>
INTEREST INCOME ...................................................... $ 75,346,208
------------
EXPENSES
Plan of distribution fee (Class A shares) ............................ 35,950
Plan of distribution fee (Class B shares) ............................ 6,043,295
Plan of distribution fee (Class C shares) ............................ 141,669
Investment management fee ............................................ 2,991,996
Transfer agent fees and expenses ..................................... 574,665
Registration fees .................................................... 99,365
Custodian fees ....................................................... 95,416
Shareholder reports and notices ...................................... 94,666
Professional fees .................................................... 77,919
Trustees' fees and expenses .......................................... 17,188
Other ................................................................ 25,491
------------
TOTAL EXPENSES .................................................... 10,197,620
------------
NET INVESTMENT INCOME ............................................. 65,148,588
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain/(loss) on:
Investments ....................................................... (40,481,232)
Foreign exchange transactions ..................................... 9,895,709
------------
NET LOSS .......................................................... (30,585,523)
------------
Net change in unrealized appreciation/depreciation on:
Investments ....................................................... (82,907,458)
Translation of forward foreign currency contracts, other assets and
liabilities denominated in foreign currencies ................... (1,425,031)
------------
NET DEPRECIATION .................................................. (84,332,489)
------------
NET LOSS .......................................................... (114,918,012)
------------
NET DECREASE ......................................................... $(49,769,424)
============
</TABLE>
See Notes to Financial Statements
18
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income .................................... $ 65,148,588 $ 80,184,261
Net realized loss ........................................ (30,585,523) (18,452,394)
Net change in unrealized depreciation .................... (84,332,489) (83,376,343)
-------------- --------------
NET DECREASE .......................................... (49,769,424) (21,644,476)
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A shares ........................................ (1,450,663) (1,474,948)
Class B shares ........................................ (52,380,875) (64,975,880)
Class C shares ........................................ (1,259,557) (1,307,832)
Class D shares ........................................ (194,544) (67,347)
Paid-in-capital:
Class A shares ........................................ (131,489) (204,223)
Class B shares ........................................ (4,747,855) (8,996,654)
Class C shares ........................................ (114,168) (181,085)
Class D shares ........................................ (17,634) (9,325)
-------------- --------------
TOTAL DIVIDENDS AND DISTRIBUTIONS ..................... (60,296,785) (77,217,294)
-------------- --------------
Net decrease from transactions in shares of beneficial
interest ............................................... (197,194,430) (54,811,256)
-------------- --------------
NET DECREASE .......................................... (307,260,639) (153,673,026)
NET ASSETS:
Beginning of period ...................................... 901,877,652 1,055,550,678
-------------- --------------
END OF PERIOD
(Including dividends in excess of net investment
income of $3,126,277 and $2,194,141, respectively)..... $ 594,617,013 $ 901,877,652
============== =============
</TABLE>
See Notes to Financial Statements
19
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 2000
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Diversified Income Trust (the "Fund") is registered
under the Investment Company Act of 1940, as amended (the "Act"), as a
diversified, open-end management investment company. The Fund's primary
investment objective is to provide a high level of current income and, as a
secondary objective, seeks to maximize total return, but only when consistent
with its primary objective. The Fund was organized as a Massachusetts business
trust on December 20, 1991 and commenced operations on April 9, 1992. On July
28, 1997, the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS - (1) an equity portfolio security listed or traded
on the New York or American Stock Exchange, NASDAQ, or other exchange is valued
at its latest sale price prior to the time when assets are valued; if there were
no sales that day, the security is valued at the latest bid price (in cases
where securities are traded on more than one exchange, the securities are valued
on the exchange designated as the primary market by the Trustees); (2) all other
portfolio securities for which over-the-counter market quotations are readily
available are valued at the latest available bid price; (3) when market
quotations are not readily available, including circumstances under which it is
determined by Morgan Stanley Dean Witter Advisors Inc. (the "Investment
Manager") that sale or bid prices are not reflective of a security's market
value, portfolio securities are valued at their fair value as determined in good
faith under procedures established by and under the general supervision of the
Trustees; (4) certain portfolio securities may be valued by an outside pricing
service approved by the Trustees. The pricing service may utilize a matrix
system incorporating security quality, maturity and coupon as the evaluation
model parameters, and/or research and evaluations by its staff, including review
of broker-dealer market price quotations, if available, in determining what it
believes is the fair valuation of the portfolio securities valued by such
pricing service; and (5) short-term debt securities having a maturity date of
20
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 2000, continued
more than sixty days at time of purchase are valued on a mark-to-market basis
until sixty days prior to maturity and thereafter at amortized cost based on
their value on the 61st day. Short-term debt securities having a maturity date
of sixty days or less at the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS - Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS - Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. FOREIGN CURRENCY TRANSLATION - The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, other assets and liabilities and forward foreign currency
contracts ("forward contracts") are translated at the exchange rates prevailing
at the end of the period; and (2) purchases, sales, income and expenses are
translated at the exchange rates prevailing on the respective dates of such
transactions. The resultant exchange gains and losses are included in the
Statement of Operations as realized and unrealized gain/loss on foreign exchange
transactions. Pursuant to U.S. Federal income tax regulations, certain foreign
exchange gains/losses included in realized and unrealized gain/loss are included
in or are a reduction of ordinary income for federal income tax purposes. The
Fund does not isolate that portion of the results of operations arising as a
result of changes in the foreign exchange rates from the changes in the market
prices of the securities.
E. FORWARD FOREIGN CURRENCY CONTRACTS - The Fund may enter into forward
contracts which are valued daily at the appropriate exchange rates. The
resultant unrealized exchange gains and losses are included in the Statement of
Operations as unrealized foreign currency gain or loss. The Fund records
realized gains or losses on delivery of the currency or at the time the forward
contract is extinguished (compensated) by entering into a closing transaction
prior to delivery.
F. FEDERAL INCOME TAX STATUS - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - The Fund records dividends and
distributions to its shareholders on the record date. The amount of dividends
and distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered
21
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 2000, continued
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax-basis treatment; temporary differences do not require
reclassification. Dividends and distributions which exceed net investment income
and net realized capital gains for tax purposes, are reported as distributions
of paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.40% to the net assets of the Fund determined as of the close of
each business day.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan"), pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A - up
to 0.25% of the average daily net assets of Class A; (ii) Class B - 0.85% of the
lesser of: (a) the average daily aggregate gross sales of the Class B shares
since inception of the Fund (not including reinvestment of dividend or capital
gain distributions) less the average net asset value of the Class B shares
redeemed since the Fund's inception upon which a contingent deferred sales
charge has been imposed or waived; or (b) the average daily net assets of Class
B; and (iii) Class C - up to 0.85% of the average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled
$12,579,635 at October 31, 2000.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected
22
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 2000, continued
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the year ended October 31, 2000, the distribution fee was accrued for Class
A shares and Class C shares at the annual rate of 0.20% and 0.85%, respectively.
The Distributor has informed the Fund that for the year ended October 31, 2000,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $985, $1,650,129 and
$10,280, respectively and received $25,418 in front-end sales charges from sales
of the Fund's Class A shares. The respective shareholders pay such charges which
are not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended October 31, 2000 aggregated
$283,039,098 and $502,923,467, respectively. Included in the aforementioned are
purchases and sales of U.S. Government securities of $75,731,778 and
$217,145,403, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At October 31, 2000, the Fund had
transfer agent fees and expenses payable of approximately $1,000.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended October 31, 2000 included
in Trustees' fees and expenses in the Statement of Operations amounted to
$4,824. At October 31, 2000, the Fund had an accrued pension liability of
$40,676 which is included in accrued expenses in the Statement of Assets and
Liabilities.
23
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 2000, continued
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
---------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold ................................................ 16,027,157 $ 121,559,975 2,848,419 $ 24,256,392
Reinvestment of dividends and distributions ......... 78,885 604,053 65,553 563,411
Redeemed ............................................ (16,870,559) (128,128,766) (1,917,929) (16,068,227)
----------- -------------- ---------- --------------
Net increase (decrease) - Class A ................... (764,517) (5,964,738) 996,043 8,751,576
----------- -------------- ---------- --------------
CLASS B SHARES
Sold ................................................ 30,585,618 235,249,712 46,504,109 405,026,436
Reinvestment of dividends and distributions ......... 3,104,016 23,959,224 3,786,566 32,666,180
Redeemed ............................................ (57,995,493) (448,750,812) (58,638,989) (507,410,583)
----------- -------------- ----------- --------------
Net decrease - Class B .............................. (24,305,859) (189,541,876) (8,348,314) (69,717,967)
----------- -------------- ----------- --------------
CLASS C SHARES
Sold ................................................ 1,559,481 11,632,644 1,432,185 12,480,926
Reinvestment of dividends and distributions ......... 92,656 709,891 94,887 815,013
Redeemed ............................................ (1,984,780) (14,956,054) (880,512) (7,540,173)
----------- -------------- ----------- --------------
Net increase (decrease) - Class C ................... (332,643) (2,613,519) 646,560 5,755,766
----------- -------------- ----------- --------------
CLASS D SHARES
Sold ................................................ 6,633,983 53,098,178 82,581 708,190
Reinvestment of dividends and distributions ......... 14,355 111,419 5,374 46,101
Redeemed ............................................ (6,562,867) (52,283,894) (41,881) (354,922)
----------- -------------- ----------- --------------
Net increase - Class D .............................. 85,471 925,703 46,074 399,369
----------- -------------- ----------- --------------
Net decrease in Fund ................................ (25,317,548) $ (197,194,430) (6,659,637) $ (54,811,256)
=========== ============== ========== ==============
</TABLE>
6. FEDERAL INCOME TAX STATUS
At October 31, 2000, the Fund had a net capital loss carryover of $47,738,000,
which may be used to offset future capital gains to the extent provided by
regulations, which is available through October 31 of the following years:
<TABLE>
<CAPTION>
AMOUNT IN THOUSANDS
--------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2007 2008
--------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
$3,024 $3,677 $2,482 $7,131 $3,233 $7,708 $20,483
======== ====== ====== ====== ====== ====== =======
</TABLE>
As of October 31, 2000, the Fund had temporary book/tax differences primarily
attributable to the mark-to-market of open forward foreign currency exchange
contracts, capital loss deferrals on wash sales and interest on bonds in default
and permanent books/tax differences primarily attributable to foreign
24
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 2000, continued
currency losses. To reflect reclassifications arising from the permanent
differences, dividends in excess of net investment income was charged
$10,796,085, paid-in-capital was credited $3,668,879 and accumulated net
realized loss was credited $7,126,206.
7. PURPOSE OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward contracts to facilitate settlement of foreign
currency denominated portfolio transactions or to manage its foreign currency
exposure or to sell, for a fixed amount of U.S. dollars or other currency, the
amount of foreign currency approximating the value of some or all of its
holdings denominated in such foreign currency or an amount of foreign currency
other than the currency in which the securities to be hedged are denominated
approximating the value of some or all of its holdings to be hedged.
Additionally, when the Investment Manager anticipates purchasing securities at
some time in the future, the Fund may enter into a forward contract to purchase
an amount of currency equal to some or all the value of the anticipated purchase
for a fixed amount of U.S. dollars or other currency.
To hedge against adverse interest rate, foreign currency and market risks, the
Fund may enter into written options on interest rate futures and interest rate
futures contracts ("derivative investments").
Forward contracts and derivative instruments involve elements of market risk in
excess of the amount reflected in the Statement of Assets and Liabilities. The
Fund bears the risk of an unfavorable change in the foreign exchange rates
underlying the forward contracts. Risks may also arise upon entering into these
contracts from the potential inability of the counterparties to meet the terms
of their contracts.
At October 31, 2000, there were outstanding forward contracts.
8. FUND MERGER
On October 26, 2000, the Trustees of the Fund and Morgan Stanley Dean Witter
World Wide Income Trust ("World Wide") approved a plan of reorganization ("the
Plan") whereby World Wide would be merged into the Fund. The Plan is subject to
the consent of World Wide's shareholders. If approved, the assets of World Wide
would be combined with the assets of the Fund and shareholders of World Wide
would become shareholders of the Fund, receiving shares of the corresponding
class of the Fund equal to the value of their holdings in World Wide.
25
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31, JULY 28, 1997*
----------------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES#
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $8.16 $9.01 $9.46 $9.40
----- ----- ----- -----
Income (loss) from investment operations:
Net investment income ................................. 0.72 0.74 0.74 0.22
Net realized and unrealized gain (loss) ............... (1.23) (0.87) (0.46) 0.04
----- ----- ----- -----
Total income (loss) from investment operations ......... (0.51) (0.13) 0.28 0.26
----- ----- ----- -----
Less dividends and distributions from:
Net investment income ................................. (0.62) (0.63) (0.70) (0.20)
Paid-in-capital ....................................... (0.06) (0.09) (0.03) -
----- ----- ----- -----
Total dividends and distributions ...................... (0.68) (0.72) (0.73) (0.20)
----- ----- ----- -----
Net asset value, end of period ......................... $6.97 $8.16 $9.01 $9.46
===== ===== ===== =====
TOTAL RETURN+ .......................................... (6.66)% (1.61)% 2.86% 2.74%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 0.73 %(3) 0.72 %(3) 0.77%(3) 0.85%(2)
Net investment income .................................. 9.28 %(3) 8.56 %(3) 7.94%(3) 8.98%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $13,318 $21,828 $15,130 $4,933
Portfolio turnover rate ................................ 40% 71% 130% 104%
</TABLE>
-------------
* The date shares were first issued.
# The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
See Notes to Financial Statements
26
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------
2000# 1999# 1998# 1997*# 1996
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $8.16 $9.01 $9.46 $9.78 $9.62
----- ----- ----- ----- -----
Income (loss) from investment operations:
Net investment income ................................. 0.67 0.68 0.68 0.74 0.78
Net realized and unrealized gain (loss) ............... (1.22) (0.87) (0.46) (0.15) 0.10
----- ----- ----- ----- -----
Total income (loss) from investment operations ......... (0.55) (0.19) 0.22 0.59 0.88
----- ----- ----- ----- -----
Less dividends and distributions from:
Net investment income ................................. (0.58) (0.58) (0.65) (0.91) (0.72)
Paid-in-capital ....................................... (0.05) (0.08) (0.02) - -
----- ----- ----- ----- -----
Total dividends and distributions ...................... (0.63) (0.66) (0.67) (0.91) (0.72)
----- ----- ----- ----- -----
Net asset value, end of period ......................... $6.98 $8.16 $9.01 $9.46 $9.78
===== ===== ===== ===== =====
TOTAL RETURN+ .......................................... (7.24)% (2.14)% 2.23% 6.46% 9.49%
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.38 %(1) 1.38 %(1) 1.38%(1) 1.40% 1.42%
Net investment income .................................. 8.63 %(1) 7.90 %(1) 7.33%(1) 7.90% 8.38%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $565,493 $859,553 $1,024,021 $915,899 $745,581
Portfolio turnover rate ................................ 40% 71% 130% 104% 82%
</TABLE>
--------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date have been designated Class B shares.
# The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Reflects overall Fund ratios for investment income and non-class specific
expenses.
See Notes to Financial Statements
27
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31, JULY 28, 1997*
---------------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C SHARES#
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............... $8.15 $9.00 $9.45 $9.40
----- ----- ----- -----
Income (loss) from investment operations:
Net investment income ............................. 0.67 0.68 0.68 0.20
Net realized and unrealized gain (loss) ........... (1.22) (0.87) (0.46) 0.04
----- ----- ----- -----
Total income (loss) from investment operations ..... (0.55) (0.19) 0.22 0.24
----- ----- ----- -----
Less dividends and distributions from:
Net investment income ............................. (0.58) (0.58) (0.65) (0.19)
Paid-in-capital ................................... (0.05) (0.08) (0.02) -
----- ----- ----- -----
Total dividends and distributions .................. (0.63) (0.66) (0.67) (0.19)
----- ----- ----- -----
Net asset value, end of period ..................... $6.97 $8.15 $9.00 $9.45
===== ===== ===== =====
TOTAL RETURN+ ...................................... (7.12)% (2.25)% 2.26% 2.52%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................... 1.38 %(3) 1.38 %(3) 1.38%(3) 1.44%(2)
Net investment income .............................. 8.63 %(3) 7.90 %(3) 7.33%(3) 8.17%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ............ $14,313 $19,450 $15,659 $3,773
Portfolio turnover rate ............................ 40% 71% 130% 104%
</TABLE>
--------------
* The date shares were first issued.
# The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
See Notes to Financial Statements
28
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31, JULY 28, 1997*
---------------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS D SHARES#
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............... $8.15 $9.00 $9.45 $9.40
----- ----- ----- -----
Income (loss) from investment operations:
Net investment income ............................. 0.33 0.76 0.76 0.23
Net realized and unrealized gain (loss) ........... (0.80) (0.88) (0.46) 0.02
----- ----- ----- -----
Total income (loss) from investment operations ..... (0.47) (0.12) 0.30 0.25
----- ----- ----- -----
Less dividends and distributions from:
Net investment income ............................. (0.63) (0.64) (0.72) (0.20)
Paid-in-capital ................................... (0.06) (0.09) (0.03) -
----- ----- ----- -----
Total dividends and distributions .................. (0.69) (0.73) (0.75) (0.20)
----- ----- ----- -----
Net asset value, end of period ..................... $6.99 $8.15 $9.00 $9.45
===== ===== ===== =====
TOTAL RETURN+....................................... (6.20)% (1.42)% 3.21% 2.69%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................... 0.53 %(3) 0.53 %(3) 0.53%(3) 0.59%(2)
Net investment income .............................. 9.48 %(3) 8.75 %(3) 8.18%(3) 9.26%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ............ $1,493 $1,046 $740 $99
Portfolio turnover rate ............................ 40% 71% 130% 104%
</TABLE>
--------------
* The date shares were first issued.
# The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
See Notes to Financial Statements
29
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Dean Witter Diversified Income Trust (the "Fund"), including the
portfolio of investments, as of October 31, 2000, and the related statements of
operations and changes in net assets, and the financial highlights for the year
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The statement of changes in net assets for the year ended October 31,
1999 and the financial highlights for each of the respective stated periods
ended October 31, 1999 were audited by other independent accountants whose
report, dated December 20, 1999, expressed an unqualified opinion on that
statement and financial highlights.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 2000, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Dean Witter Diversified Income Trust as of October 31, 2000, the results
of its operations, the changes in its net assets, and the financial highlights
for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
December 5, 2000
2000 FEDERAL TAX NOTICE (unaudited)
Of the Fund's ordinary income dividends paid during the fiscal year ended
October 31, 2000, 3.18% was attributable to qualifying Federal
obligations. Please consult your tax advisor to determine if any portion
of the dividends you received is exempt from state income tax.
30
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
CHANGE IN INDEPENDENT ACCOUNTANTS
On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.
The reports of PricewaterhouseCoopers LLP on the financial statements of the
Fund for the past two fiscal years contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle.
In connection with its audits for the two most recent fiscal years and through
July 1, 2000, there have been no disagreements with PricewaterhouseCoopers LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make
reference thereto in their report on the financial statements for such years.
The Fund, with the approval of its Board of Trustees and its Audit Committee,
engaged Deloitte & Touche LLP as its new independent auditors as of July 1,
2000.
31
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Mitchell M. Merin
President
Barry Fink
Vice President, Secretary and General Counsel
Peter M. Avelar
Vice President
Rajesh K. Gupta
Vice President
Peter J. Seeley
Vice President
Sally Sancimino
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
This report is submitted for the general information of shareholders
of the Fund. For more detailed information about the Fund, its officers
and trustees, fees, expenses and other pertinent information, please see
the prospectus of the Fund.
This report is not authorized for distribution to prospective investors
in the Fund unless preceded or accompanied by an effective prospectus.
Read the prospectus carefully before investing.
Morgan Stanley Dean Witter Distributors Inc., member NASD.
MORGAN STANLEY
DEAN WITTER
DIVERSIFIED
INCOME TRUST
[GRAPHIC OMITTED]
ANNUAL REPORT
October 31, 2000
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST TWO WORLD TRADE CENTER,
LETTER TO THE SHAREHOLDERS OCTOBER 31, 2000 NEW YORK, NEW YORK 10048
DEAR SHAREHOLDER:
Most of the world's investment-grade bond markets showed notable improvement
during the year ended October 31, 2000. The 10-year U.S. Treasury note yield
declined from a high of 6.79 percent in January to 5.75 percent at the end of
the period. This compares with a yield of 6.02 percent in October 1999 and a
cyclical low of 4.16 percent in October 1998. Changes in most other government
securities markets were similar, but less pronounced. Benchmark German
government 10-year yields fell to 5.22 percent at the end of October from a high
of 5.64 percent in January after rising from 5.16 percent at the end of the
previous October. Unfortunately, the continued strength of the U.S. dollar
relative to most investment-grade currencies resulted in currency losses for
most non-dollar-denominated investments.
The primary factor underpinning the U.S. dollar has been the unprecedented
strength of the domestic economy. Through January, the strength of the global
economy also pressured investment-grade bond markets. As the global economy
cooled to a more sustainable growth rate and central banks appeared to be at the
end of tightening cycles, the global bond markets began to rally. Despite the
relative weakening of the U.S. economy, declining U.S. interest rates and a huge
U.S. current-account deficit, the U.S. dollar remained extremely strong compared
to most other currency units. Much of this strength appeared to be the result of
strong foreign direct investment and portfolio flows into the United States.
There were a few bright spots in the investment grade-bond markets during the
period under review. The Greek and U.K. government markets outperformed relative
to the benchmark German market, and the Norwegian, Swedish and British
currencies held up somewhat better than other European currencies.
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
LETTER TO THE SHAREHOLDERS OCTOBER 31, 2000, CONTINUED
PERFORMANCE AND PORTFOLIO STRATEGY
For the 12-month period ended October 31, 2000, Morgan Stanley Dean Witter World
Wide Income Trust's Class B shares posted a total return of -7.32 percent,
compared to -6.49 percent for the unmanaged Lehman Brothers Global Intermediate
Treasury Index (formerly known as the Lehman Brothers Global Intermediate Bond
Index). For the same period, the Fund's Class A, C and D shares produced total
returns of -6.73 percent, -7.32 percent and -6.52 percent, respectively. The
performance of the Fund's four share classes varies because each class has
different expenses. The total return figures shown assume the reinvestment of
all distributions but do not reflect the deduction of any applicable sales
charges.
Throughout the period under review, the Fund continued its strategy of seeking
the best-performing markets within its investment-grade mandate while
maintaining attractive income and dividend levels. It also kept its duration
exposure below that of most funds in its fund category while the global markets
were under pressure. Duration was increased as it became clear that the outlook
for bonds was improving. Because of the Fund's income objective, it did not
invest in the Japanese markets, where short-term interest rates were near zero.
The Fund also hedged a portion of its currency exposure to limit the effect of
declining non-U.S. exchange rates.
LOOKING AHEAD
On October 26, 2000, the Board of Trustees of Morgan Stanley Dean Witter World
Wide Income Trust voted to recommend to shareholders a reorganization plan
whereby the Fund would be merged into Morgan Stanley Dean Witter Diversified
Income Trust. If approved, the Fund's assets would be combined with the assets
of Morgan Stanley Dean Witter Diversified Income Trust. Shareholders of Morgan
Stanley Dean Witter World Wide Income Trust would become shareholders of Morgan
Stanley Dean Witter Diversified Income Trust, receiving shares of that fund
equal to the value of their holdings in Morgan Stanley Dean Witter World Wide
Income Trust. Each shareholder of Morgan Stanley Dean Witter World Wide Income
Trust would receive the same class of shares of Morgan Stanley Dean Witter
Diversified Income Trust currently held by that shareholder in the Fund.
2
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
LETTER TO THE SHAREHOLDERS OCTOBER 31, 2000, CONTINUED
We appreciate your ongoing support of Morgan Stanley Dean Witter World Wide
Income Trust and look forward to continuing to serve your investment needs.
Very truly yours,
/s/ Charles A. Fiumefreddo /s/ Mitchell M. Merin
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
CHAIRMAN OF THE BOARD PRESIDENT
3
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
FUND PERFORMANCE OCTOBER 31, 2000
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
GROWTH OF $10,000 -- CLASS B SHARES
($ in Thousands)
<TABLE>
<CAPTION>
FUND LEHMAN(4)
<S> <C> <C>
October 1990 $10,000 $10,000
October 1991 $9,825 $10,948
October 1992 $10,525 $12,339
October 1993 $11,549 $13,454
October 1994 $11,088 $14,108
October 1995 $12,468 $16,149
October 1996 $14,038 $17,240
October 1997 $15,028 $17,479
October 1998 $16,322 $19,509
October 1999 $15,310 $19,327
October 2000 $14,190(3) $18,073
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. PERFORMANCE FOR CLASS A, CLASS C, AND CLASS D
SHARES WILL VARY FROM THE PERFORMANCE OF CLASS B SHARES SHOWN ABOVE DUE TO
DIFFERENCES IN SALES CHARGES AND EXPENSES.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
--------------------------------------------------------------------------------------------------------
CLASS A SHARES* CLASS B SHARES**
--------------------------------------------------- -----------------------------------------------
PERIOD ENDED 10/31/00 PERIOD ENDED 10/31/00
------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
1 Year (6.73)%(1) (10.69)%(2) 1 Year (7.32)%(1) (11.69)%(2)
Since Inception (7/28/97) (0.51)%(1) (1.83)%(2) 5 Years 2.62 %(1) 2.34 %(2)
10 Years 3.56 %(1) 3.56 %(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES+ CLASS D SHARES#
------------------------------------------------- ---------------------------------------------
PERIOD ENDED 10/31/00 PERIOD ENDED 10/31/00
------------------------- -------------------------
<S> <C> <C> <C> <C>
1 Year (7.32)%(1) (8.19)%(2) 1 Year (6.52)%(1)
Since Inception (7/28/97) (1.11)%(1) (1.11)%(2) Since Inception (7/28/97) (0.24)%(1)
</TABLE>
------------------------
(1) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable sales charge. See the Fund's current prospectus for
complete details on fees and sales charges.
(3) Closing value assuming a complete redemption on October 31, 2000.
(4) The Lehman Brothers Intermediate Global Treasury Index (formerly Lehman
Brothers Global Intermediate Bond Index) includes local
currency-denominated sovereign debt of 19 countries with maturities of 1 to
10 years.
The Index does not include any expenses, fees or charges. The Index is
unmanaged and should not be considered an investment.
* The maximum front-end sales charge for Class A is 4.25%.
** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%.
The CDSC declines to 0% after six years.
+ The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of purchase.
# Class D shares have no sales charge.
4
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GOVERNMENT & CORPORATE BONDS (89.9%)
BELGIUM (5.6%)
GOVERNMENT OBLIGATION
EUR 4,250 Belgian Government Bond+.................................................... 8.50% 10/01/07 $ 4,211,323
-----------
CANADA (6.0%)
GOVERNMENT OBLIGATION
CAD 6,350 Government of Canada........................................................ 7.25 06/01/07 4,469,388
-----------
DENMARK (13.1%)
FINANCE/RENTAL/LEASING (7.4%)
DKK 24,306 Realkredit Denmark+......................................................... 6.00 10/01/29 2,603,887
29,357 Unikredit Realkredit+....................................................... 5.00 07/01/29 2,918,920
-----------
5,522,807
-----------
GOVERNMENT OBLIGATIONS (5.7%)
25,000 Kingdom of Denmark.......................................................... 6.00 11/15/09 2,944,347
12,000 Kingdom of Denmark+......................................................... 9.00 11/15/00 1,370,846
-----------
4,315,193
-----------
TOTAL DENMARK................................................................................. 9,838,000
-----------
GERMANY (0.6%)
MAJOR BANKS
GBP 300 Bayerische Hypo-Und Vereinsbank+............................................ 7.50 12/27/00 435,490
-----------
GREECE (14.4%)
GOVERNMENT OBLIGATIONS
GRD 1,000,000 Greece (Republic of)+....................................................... 8.70 04/08/05 2,778,270
1,500,000 Greece (Republic of)+....................................................... 9.70 05/27/01 3,819,651
1,650,000 Greece (Republic of)........................................................ 6.30 01/29/09 4,205,607
-----------
10,803,528
-----------
LUXEMBOURG (2.1%)
MAJOR BANKS
EUR 1,850 European Investment Bank+................................................... 6.00 04/04/01 1,574,110
-----------
NORWAY (17.4%)
GOVERNMENT OBLIGATIONS
NOK 5,000 Norway (Kingdom of)+........................................................ 5.75 11/30/04 520,885
30,000 Norway (Kingdom of)+........................................................ 6.75 01/15/07 3,273,226
82,000 Norway (Kingdom of)+........................................................ 9.50 10/31/02 9,202,821
-----------
12,996,932
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2000, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UNITED KINGDOM (1.0%)
MAJOR BANKS
GBP 500 Union Bank of Switzerland................................................... 8.00% 01/08/07 $ 772,121
-----------
UNITED STATES (29.7%)
FINANCIAL CONGLOMERATES (3.8%)
2,000 General Electric Capital Corp............................................... 6.25 09/01/09 2,880,998
-----------
GOVERNMENT AGENCIES & OBLIGATIONS (9.5%)
AUD 2,400 Federal National Mortgage Assoc............................................. 6.50 07/10/02 1,246,620
$ 1,000 Federal National Mortgage Assoc............................................. 7.25 01/15/10 1,036,750
4,650 U.S. Treasury Bond*+........................................................ 13.125 05/15/01 4,811,402
-----------
7,094,772
-----------
INTERNATIONAL BANKS (5.0%)
GBP 2,500 KFW International Finance Inc............................................... 10.625 09/03/01 3,743,032
-----------
MAJOR BANKS (4.1%)
1,076 Morgan Guaranty Trust Co.................................................... 7.375 12/28/01 1,573,917
1,000 Morgan Guaranty Trust Co.+.................................................. 7.75 12/30/03 1,499,647
-----------
3,073,564
-----------
MORTGAGE-BACKED SECURITIES (7.3%)
$ 1,927 Government National Mortgage Assoc.......................................... 7.00 02/15/29-
08/15/29 1,899,864
3,533 Government National Mortgage Assoc.......................................... 8.00 12/15/29-
05/15/30 3,590,010
-----------
5,489,874
-----------
TOTAL UNITED STATES........................................................................... 22,282,240
-----------
TOTAL GOVERNMENT & CORPORATE BONDS
(COST $81,876,066)............................................................................ 67,383,132
-----------
SHORT-TERM INVESTMENTS (11.3%)
UNITED STATES
TIME DEPOSITS (a) (6.2%)
MAJOR BANKS
GRD 1,538,247 Bank of America............................................................. 7.70 11/21/00 3,843,888
EUR 984 Chase Manhattan Bank........................................................ 4.70 11/03/00 835,690
-----------
TOTAL TIME DEPOSITS
(COST $5,340,835)............................................................................. 4,679,578
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2000, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GOVERNMENT AGENCY (b) (5.1%)
$ 3,800 Student Loan Marketing Assoc.
(COST $3,800,000)......................................................... 6.45% 11/01/00 $ 3,800,000
-----------
TOTAL SHORT-TERM INVESTMENTS
(COST $9,140,835)............................................................................. 8,479,578
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(COST $91,016,901) (C)..................................................................... 101.2% 75,862,710
LIABILITIES IN EXCESS OF OTHER ASSETS...................................................... (1.2) (878,761)
----- ------------
NET ASSETS................................................................................. 100.0% $ 74,983,949
----- ------------
----- ------------
</TABLE>
---------------------
* The market value of securities pledged to cover margin requirements for
open futures contracts is $630,000.
+ Some or all of these securities are segregated in connection with open
forward foreign currency contracts.
(a) Subject to withdrawal restrictions until maturity.
(b) Purchased on a discount basis. The interest rate shown has been adjusted to
reflect a money market equivalent yield.
(c) The aggregate cost for federal income tax purposes approximates the
aggregate cost for book purposes. The aggregate gross unrealized
appreciation is $119,399 and the aggregate gross unrealized depreciation is
$15,273,590, resulting in net unrealized depreciation of $15,154,191.
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2000, CONTINUED
FUTURE CONTRACTS OPEN AT OCTOBER 31, 2000:
<TABLE>
<CAPTION>
UNDERLYING
NUMBER OF DESCRIPTION, DELIVERY MONTH, FACE AMOUNT UNREALIZED
CONTRACTS AND YEAR AT VALUE GAIN
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S Treasury Bond, December/2000
150 $14,976,563 $ 8,203
============ ============
</TABLE>
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT OCTOBER 31, 2000:
<TABLE>
<CAPTION>
IN
CONTRACTS EXCHANGE DELIVERY UNREALIZED
TO DELIVER FOR DATE APPRECIATION
-------------------------------------------------------------------
<S> <C> <C> <C>
$ 831,655 EUR 984,207 11/01/00 $ 4,035
GBP 559,315 $ 813,384 11/30/00 1,762
------------
Net unrealized appreciation.................. $ 5,797
============
</TABLE>
CURRENCY ABBREVIATIONS:
------------------------
<TABLE>
<S> <C>
AUD Australian Dollar.
GBP British Pound.
CAD Canadian Dollar.
DKK Danish Krone.
EUR Euro.
GRD Greek Drachma.
NOK Norwegian Krone.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2000
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (cost $91,016,901)........................................ $ 75,862,710
Unrealized appreciation on open forward foreign currency contracts............................ 5,797
Cash.......................................................................................... 163,003
Receivable for:
Interest.................................................................................. 1,984,337
Shares of beneficial interest sold........................................................ 62,882
Prepaid expenses and other assets............................................................. 21,814
------------
TOTAL ASSETS............................................................................. 78,100,543
------------
LIABILITIES:
Payable for:
Shares of beneficial interest repurchased................................................. 1,974,682
Investments purchased..................................................................... 835,690
Investment management fee................................................................. 50,904
Plan of distribution fee.................................................................. 39,080
Accrued expenses and other payables........................................................... 216,238
------------
TOTAL LIABILITIES........................................................................ 3,116,594
------------
NET ASSETS............................................................................... $ 74,983,949
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $107,003,165
Net unrealized depreciation................................................................... (15,239,395)
Dividends in excess of net investment income.................................................. (79,858)
Accumulated net realized loss................................................................. (16,699,963)
------------
NET ASSETS............................................................................... $ 74,983,949
============
CLASS A SHARES:
Net Assets.................................................................................... $ 24,216,402
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 3,469,748
NET ASSET VALUE PER SHARE................................................................ $6.98
============
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE)........................................ $7.29
============
CLASS B SHARES:
Net Assets.................................................................................... $ 43,537,700
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 6,221,835
NET ASSET VALUE PER SHARE................................................................ $7.00
============
CLASS C SHARES:
Net Assets.................................................................................... $667,516
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 95,529
NET ASSET VALUE PER SHARE................................................................ $6.99
============
CLASS D SHARES:
Net Assets.................................................................................... $6,562,331
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 937,357
NET ASSET VALUE PER SHARE................................................................ $7.00
============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2000
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME............................................................................... $ 6,985,965
------------
EXPENSES
Investment management fee..................................................................... 661,679
Plan of distribution fee (Class A shares)..................................................... 58,120
Plan of distribution fee (Class B shares)..................................................... 455,501
Plan of distribution fee (Class C shares)..................................................... 6,493
Transfer agent fees and expenses.............................................................. 151,017
Professional fees............................................................................. 78,528
Shareholder reports and notices............................................................... 77,732
Registration fees............................................................................. 65,601
Trustees' fees and expenses................................................................... 17,776
Custodian fees................................................................................ 12,324
Other......................................................................................... 7,984
------------
TOTAL EXPENSES........................................................................... 1,592,755
------------
NET INVESTMENT INCOME:................................................................... 5,393,210
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments............................................................................... (6,679,390)
Futures contracts......................................................................... 852,131
Foreign exchange transactions............................................................. 2,719,576
------------
NET LOSS................................................................................. (3,107,683)
------------
Net change in unrealized appreciation/ depreciation on:
Investments............................................................................... (8,557,404)
Futures contracts......................................................................... (200,534)
Translation of forward foreign currency contracts, other assets and liabilities
denominated in foreign currencies....................................................... (233,035)
------------
NET DEPRECIATION......................................................................... (8,990,973)
------------
NET LOSS................................................................................. (12,098,656)
------------
NET DECREASE.................................................................................. $ (6,705,446)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................................................ $ 5,393,210 $ 5,824,612
Net realized loss.................................................................... (3,107,683) (8,285,374)
Net change in unrealized depreciation................................................ (8,990,973) (3,878,832)
------------ ------------
NET DECREASE.................................................................... (6,705,446) (6,339,594)
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A shares................................................................... (1,286,492) (583,059)
Class B shares................................................................... (2,117,644) (1,711,510)
Class C shares................................................................... (30,348) (14,322)
Class D shares................................................................... (199,689) (49,551)
Paid-in-capital
Class A shares................................................................... (576,179) (1,140,000)
Class B shares................................................................... (948,425) (3,346,351)
Class C shares................................................................... (13,592) (28,002)
Class D shares................................................................... (89,435) (96,883)
------------ ------------
TOTAL DIVIDENDS AND DISTRIBUTIONS............................................... (5,261,804) (6,969,678)
------------ ------------
Net increase (decrease) from transactions in shares of beneficial interest........... (17,044,238) 33,226,526
------------ ------------
NET INCREASE (DECREASE)......................................................... (29,011,488) 19,917,254
NET ASSETS:
Beginning of period.................................................................. 103,995,437 84,078,183
------------ ------------
END OF PERIOD
(INCLUDING DIVIDENDS IN EXCESS OF NET INVESTMENT INCOME OF $79,858, AND $186,241
RESPECTIVELY).................................................................... $ 74,983,949 $103,995,437
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter World Wide Income Trust (the "Fund") is registered
under the Investment Company Act of 1940, as amended (the "Act"), as a
non-diversified, open-end management investment company. The Fund's primary
investment objective is to provide a high level of current income and, as a
secondary objective, seeks appreciation in the value of its assets. The Fund was
organized as a Massachusetts business trust on October 14, 1988 and commenced
operations on March 30, 1989. On July 28, 1997, the Fund converted to a multiple
class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
these estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) all portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest available bid price prior to the time of valuation; (2) futures contracts
are valued at the latest sale price on the commodities exchange on which it
trades unless the Trustees determine that such price does not reflect their
market value, in which case they will be valued at fair value as determined by
the Trustees; (3) when market quotations are not readily available, including
circumstances under which it is determined by Morgan Stanley Dean Witter
Advisors Inc. (the "Investment Manager") that sale or bid prices are not
reflective of a security's market value, portfolio securities are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Trustees (valuation of debt securities for
which market quotations are not readily available may be based upon current
market prices of securities which are comparable in coupon, rating and maturity
or an appropriate matrix utilizing similar factors); (4) certain portfolio
securities may be valued by an outside pricing service approved by the Trustees.
The pricing service may utilize a matrix system
11
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, CONTINUED
incorporating security quality, maturity and coupon as the evaluation model
parameters, and/or research and evaluations by its staff, including review of
broker-dealer market price quotations, if available, in determining what it
believes is the fair valuation of the securities valued by such pricing service;
and (5) short-term debt securities having a maturity date of more than sixty
days at time of purchase are valued on a mark-to-market basis until sixty days
prior to maturity and thereafter at amortized cost based on their value on the
61st day. Short-term debt securities having a maturity date of sixty days or
less at the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. FUTURES CONTRACTS -- A futures contract is an agreement between two parties
to buy and sell financial instruments at a set price on a future date. Upon
entering into such a contract, the Fund is required to pledge to the broker
cash, U.S. Government securities or other liquid portfolio securities equal to
the minimum initial margin requirements of the applicable futures exchange.
Pursuant to the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in the value of the contract
which is known as variation margin. Such receipts or payments are recorded by
the Fund as unrealized gains or losses. Upon closing of the contract, the Fund
realizes a gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
E. FOREIGN CURRENCY TRANSLATION -- The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, other assets and liabilities and forward foreign currency
contracts ("forward contracts") are translated at the exchange rates prevailing
at the end of the period; and (2) purchases, sales, income and expenses are
translated at the exchange rates prevailing on the respective dates of such
transactions. The resultant exchange gains and losses are included in the
Statement of Operations as realized and unrealized gain/loss on foreign exchange
transactions. Pursuant to U.S. Federal income tax regulations, certain foreign
12
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, CONTINUED
exchange gains/losses included in realized and unrealized gain/loss are included
in or are a reduction of ordinary income for federal income tax purposes. The
Fund does not isolate that portion of the results of operations arising as a
result of changes in the foreign exchange rates from the changes in the market
prices of the securities.
F. FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may enter into forward
contracts which are valued daily at the appropriate exchange rates. The
resultant unrealized exchange gains and losses are included in the Statement of
Operations as unrealized foreign currency gain or loss. The Fund records
realized gains or losses on delivery of the currency or at the time the forward
contract is extinguished (compensated) by entering into a closing transaction
prior to delivery.
G. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the record date. The amount of dividends
and distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and distributions which
exceed net investment income and net realized capital gains for tax purposes are
reported as distributions of paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays a management fee,
accrued daily and payable monthly, by applying the following annual rates to the
net assets of the Fund determined as of the close of each business day: 0.75% to
the portion of daily net assets not exceeding $250 million; 0.60% to the portion
of daily net assets exceeding $250 million but not exceeding $500 million; 0.50%
to the portion of daily net assets exceeding $500 million but not exceeding
$750 million; 0.40% to the portion of daily net assets exceeding $750 million
but not exceeding $1 billion; and 0.30% to the portion of daily net assets
exceeding $1 billion.
13
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, CONTINUED
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A -- up
to 0.25% of the average daily net assets of Class A; (ii) Class B -- 0.85% of
the lesser of: (a) the average daily aggregate gross sales of the Class B shares
since inception of the Fund (not including reinvestment of dividend or capital
gain distributions) less the average daily aggregate net asset value of the
Class B shares redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or waived; or (b) the average daily net
assets of Class B; and (iii) Class C -- up to 0.85% of the average daily net
assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled $9,092,910
at October 31, 2000.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the year ended October 31, 2000, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.20% and
0.85%, respectively.
The Distributor has informed the Fund that for the year ended October 31, 2000,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C
14
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, CONTINUED
shares of $40,577 and $466, respectively, and received $462 in front-end sales
charges from sales of the Fund's Class A shares. The respective shareholders pay
such charges which are not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended October 31, 2000 aggregated
$54,349,950, and $54,571,083, respectively. Included in the aforementioned are
purchases and sales of U.S. Government securities of $12,564,677 and
$13,161,448, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At October 31, 2000, the Fund had
transfer agent fees and expenses payable of approximately $200.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended October 31, 2000 included
in Trustees' fees and expenses in the Statement of Operations amounted to
$6,632. At October 31, 2000, the Fund had an accrued pension liability of
$78,096 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. FEDERAL INCOME TAX STATUS
At October 31, 2000, the Fund had a net capital loss carryover of approximately
$16,692,000, which may be used to offset future capital gains to the extent
provided by regulations, which will be available through October 31 of the
following years:
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS
-------------------------------------------------------------
2001 2002 2004 2005 2007 2008
------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$4,853 $5,322 $214 $471 $4,300 $1,532
====== ====== ==== ==== ====== ======
</TABLE>
Due to the Fund's acquisition of Morgan Stanley Dean Witter Global Short-Term
Income Fund, utilization of this carryover is subject to limitations imposed by
the Internal Revenue Code and Treasury Regulations, significantly reducing the
total carryover available.
15
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, CONTINUED
As of October 31, 2000, the Fund had permanent book/tax differences primarily
attributable to foreign currency losses and an expired capital loss carryover.
To reflect reclassifications arising from these differences, dividends in excess
of net investment income was charged $1,652,654, paid-in-capital was credited
$659,023 and accumulated net realized loss was credited $993,631.
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
--------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold............................................................. 4,088,315 $ 30,496,900 1,815,359 $ 14,907,629
Reinvestment of dividends........................................ 139,433 1,039,705 126,396 1,038,579
Acquisition of Morgan Stanley Dean Witter Global Short-Term
Income Fund..................................................... -- -- 4,683,780 40,215,931
Redeemed......................................................... (5,299,850) (39,523,297) (2,218,440) (18,155,151)
----------- ------------- ---------- ------------
Net increase (decrease) - Class A................................ (1,072,102) (7,986,692) 4,407,095 38,006,988
----------- ------------- ---------- ------------
CLASS B SHARES
Sold............................................................. 5,767,090 43,845,960 8,073,133 69,770,271
Reinvestment of dividends........................................ 249,379 1,863,870 356,189 3,038,854
Redeemed......................................................... (7,971,906) (60,348,308) (9,201,928) (79,010,074)
----------- ------------- ---------- ------------
Net decrease - Class B........................................... (1,955,437) (14,638,478) (772,606) (6,200,949)
----------- ------------- ---------- ------------
CLASS C SHARES
Sold............................................................. 29,593 221,714 98,810 856,107
Reinvestment of dividends........................................ 5,115 38,063 4,130 34,529
Redeemed......................................................... (39,889) (298,005) (27,927) (229,069)
----------- ------------- ---------- ------------
Net increase (decrease) - Class C................................ (5,181) (38,228) 75,013 661,567
----------- ------------- ---------- ------------
CLASS D SHARES
Sold............................................................. 2,349,533 17,644,185 2,794,192 22,574,638
Reinvestment of dividends........................................ 22,216 163,189 13,041 106,851
Redeemed......................................................... (1,624,579) (12,188,214) (2,727,393) (21,922,569)
----------- ------------- ---------- ------------
Net increase - Class D........................................... 747,170 5,619,160 79,840 758,920
----------- ------------- ---------- ------------
Net increase (decrease) in Fund.................................. (2,285,550) $ (17,044,238) 3,789,342 $ 33,226,526
=========== ============= ========== ============
</TABLE>
7. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward contracts to facilitate settlement of foreign
currency denominated portfolio transactions or to manage its foreign currency
exposure or to sell, for a fixed amount of U.S. dollars or other currency, the
amount of foreign currency approximating the value of some or all of its
holdings denominated in such foreign currency or an amount of foreign currency
other than the
16
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, CONTINUED
currency in which the securities to be hedged are denominated approximating the
value of some or all of its holdings to be hedged. Additionally, when the
Investment Manager anticipates purchasing securities at some time in the future,
the Fund may enter into a forward contract to purchase an amount of currency
equal to some or all the value of the anticipated purchase for a fixed amount of
U.S. dollars or other currency.
To hedge against adverse interest rate, foreign currency and market risks, the
Fund may enter into written options on interest rate futures and interest rate
futures contracts ("derivative investments").
Forward contracts and derivative instruments involve elements of market risk in
excess of the amount reflected in the Statement of Assets and Liabilities. The
Fund bears the risk of an unfavorable change in the foreign exchange rates
underlying the forward contracts. Risks may also arise upon entering into these
contracts from the potential inability of the counterparties to meet the terms
of their contracts.
At October 31, 2000, there were outstanding forward contracts and futures
contracts.
8. ACQUISITION OF MORGAN STANLEY DEAN WITTER GLOBAL SHORT-TERM INCOME FUND
INC.
As of the close of business on March 12, 1999, the Fund acquired all the net
assets of Morgan Stanley Dean Witter Global Short-Term Income Fund Inc. ("Global
Short-Term") pursuant to a plan of reorganization approved by the shareholders
of Global Short-Term on February 24, 1999. The acquisition was accomplished by a
tax-free exchange of 4,683,780 Class A shares of the Fund at a net asset value
of $8.59 per share for 4,700,195 shares of Global Short-Term. The net assets of
the Fund and Global Short-Term immediately before the acquisition were
$80,419,774 and $40,215,931, respectively, including unrealized depreciation of
$893,307 for Global Short-Term. Immediately after the acquisition, the combined
net assets of the Fund amounted to $120,635,705.
9. FUND MERGER
On October 26, 2000, the Trustees of the Fund and Morgan Stanley Dean Witter
Diversified Income Trust ("Diversified") approved a plan of reorganization ("the
Plan") whereby the Fund would be merged into Diversified. The Plan is subject to
the consent of the Fund's shareholders. If approved, the assets of the Fund
would be combined with the assets of Diversified and shareholders of the Fund
would become shareholders of Diversified, receiving shares of the corresponding
class of Diversified equal to the value of their holdings in the Fund.
17
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31 JULY 28, 1997*
----------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 7.98 $ 9.11 $ 9.02 $ 8.97
------- ------- ------- -------
Income (loss) from investment operations:
Net investment income.................................... 0.53 0.52 0.59 0.15
Net realized and unrealized gain (loss).................. (1.05) (1.02) 0.20 0.05
------- ------- ------- -------
Total income (loss) from investment operations.............. (0.52) (0.50) 0.79 0.20
------- ------- ------- -------
Less dividends and distributions from:
Net investment income.................................... (0.33) (0.21) (0.70) (0.15)
Paid-in-capital.......................................... (0.15) (0.42) -- --
------- ------- ------- -------
Total dividends and distributions........................... (0.48) (0.63) (0.70) (0.15)
------- ------- ------- -------
Net asset value, end of period.............................. $ 6.98 $ 7.98 $ 9.11 $ 9.02
======= ======= ======= =======
TOTAL RETURN+............................................... (6.73)% (5.56)% 9.16% 2.27%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 1.41 %(3) 1.48 %(3) 1.45%(3) 1.46%(2)
Net investment income....................................... 6.49 %(3) 6.14 %(3) 6.63%(3) 6.69%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $24,216 $36,253 $1,227 $682
Portfolio turnover rate..................................... 73 % 144 % 309% 345%
</TABLE>
---------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
18
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31
-----------------------------------------------------------------------
2000++ 1999++ 1998++ 1997*++ 1996
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period..................... $ 8.00 $ 9.12 $ 9.03 $ 9.33 $ 9.08
--------- ------- ------- --------- ---------
Income (loss) from investment operations:
Net investment income................................. 0.48 0.47 0.53 0.55 0.60
Net realized and unrealized gain (loss)............... (1.05) (1.02) 0.20 0.07 0.48
--------- ------- ------- --------- ---------
Total income (loss) from investment operations........... (0.57) (0.55) 0.73 0.62 1.08
--------- ------- ------- --------- ---------
Less dividends and distributions from:
Net investment income................................. (0.30) (0.19) (0.64) (0.92) (0.83)
Paid-in-capital....................................... (0.13) (0.38) -- -- --
--------- ------- ------- --------- ---------
Total dividends and distributions........................ (0.43) (0.57) (0.64) (0.92) (0.83)
--------- ------- ------- --------- ---------
Net asset value, end of period........................... $ 7.00 $ 8.00 $ 9.12 $ 9.03 $ 9.33
========= ======= ======= ========= =========
TOTAL RETURN+............................................ (7.32)% (6.20)% 8.61% 7.05% 12.60%
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................. 2.06 %(1) 2.09 %(1) 2.07%(1) 2.02% 1.96%
Net investment income.................................... 5.84 %(1) 5.53 %(1) 6.01%(1) 6.07% 6.39%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.................. $43,538 $65,415 $81,611 $94,556 $114,022
Portfolio turnover rate.................................. 73 % 144 % 309% 345% 263%
</TABLE>
---------------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date have been designated as Class B shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
19
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31 JULY 28, 1997*
----------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 7.99 $ 9.11 $ 9.02 $ 8.97
------- ------- ------- ---------
Income (loss) from investment operations:
Net investment income.................................... 0.47 0.47 0.53 0.14
Net realized and unrealized gain (loss).................. (1.04) (1.02) 0.20 0.05
------- ------- ------- ---------
Total income (loss) from investment operations.............. (0.57) (0.55) 0.73 0.19
------- ------- ------- ---------
Less dividends and distributions from:
Net investment income.................................... (0.30) (0.19) (0.64) (0.14)
Paid-in-capital.......................................... (0.13) (0.38) -- --
------- ------- ------- ---------
Total dividends and distributions........................... (0.43) (0.57) (0.64) (0.14)
------- ------- ------- ---------
Net asset value, end of period.............................. $ 6.99 $ 7.99 $ 9.11 $ 9.02
======= ======= ======= =========
TOTAL RETURN+............................................... (7.32)% (6.19)% 8.62% 2.12%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 2.06 %(3) 2.09 %(3) 2.07%(3) 2.00%(2)
Net investment income....................................... 5.84 %(3) 5.53 %(3) 6.01%(3) 5.89%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $668 $805 $234 $111
Portfolio turnover rate..................................... 73 % 144 % 309% 345%
</TABLE>
---------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
20
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31 JULY 28, 1997*
----------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS D SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 8.01 $ 9.12 $ 9.03 $ 8.97
------- ------- ------- -------
Income (loss) from investment operations:
Net investment income.................................... 0.51 0.53 0.72 0.16
Net realized and unrealized gain (loss).................. (1.03) (0.99) 0.09 0.05
------- ------- ------- -------
Total income (loss) from investment operations.............. (0.52) (0.46) 0.81 0.21
------- ------- ------- -------
Less dividends and distributions from:
Net investment income.................................... (0.34) (0.22) (0.72) (0.15)
Paid-in-capital.......................................... (0.15) (0.43) -- --
------- ------- ------- -------
Total dividends and distributions........................... (0.49) (0.65) (0.72) (0.15)
------- ------- ------- -------
Net asset value, end of period.............................. $ 7.00 $ 8.01 $ 9.12 $ 9.03
======= ======= ======= =======
TOTAL RETURN+............................................... (6.52)% (5.29)% 9.41% 2.44%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 1.21 %(3) 1.24 %(3) 1.22%(3) 1.16%(2)
Net investment income....................................... 6.69 %(3) 6.38 %(3) 6.86%(3) 6.83%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $6,562 $1,523 $1,006 $39
Portfolio turnover rate..................................... 73 % 144 % 309% 345%
</TABLE>
---------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
21
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OF MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Dean Witter World Wide Income Trust (the "Fund"), including the
portfolio of investments, as of October 31, 2000, and the related statements of
operations and changes in net assets, and the financial highlights for the year
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The statement of changes in net assets for the year ended October 31,
1999 and the financial highlights for each of the respective stated periods
ended October 31, 1999 were audited by other independent accountants whose
report, dated December 13, 1999, expressed an unqualified opinion on that
statement and financial highlights.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2000, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Dean Witter World Wide Income Trust as of October 31, 2000, the results
of its operations, the changes in its net assets, and the financial highlights
for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
DECEMBER 5, 2000
2000 FEDERAL TAX NOTICE (UNAUDITED)
Of the Fund's ordinary income dividends paid during the fiscal
year ended October 31, 2000, 17.93% was attributable to qualifying
Federal obligations. Please consult your tax advisor to determine
if any portion of the dividends you received is exempt from state
income tax.
22
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
CHANGE IN INDEPENDENT ACCOUNTANTS
On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.
The reports of PricewaterhouseCoopers LLP on the financial statements of the
Fund for the past two fiscal years contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle.
In connection with its audits for the two most recent fiscal years and through
July 1, 2000, there have been no disagreements with PricewaterhouseCoopers LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make
reference thereto in their report on the financial statements for such years.
The Fund, with the approval of its Board of Directors and its Audit Committee,
engaged Deloitte & Touche LLP as its new independent auditors as of July 1,
2000.
23
<PAGE>
TRUSTEES
Michael Bozic Morgan Stanley
Charles A. Fiumefreddo Dean Witter
Edwin J. Garn World Wide
Wayne E. Hedien Income Trust
James F. Higgins
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Mitchell M. Merin
President
Barry Fink
Vice President, Secretary and General Counsel
Rajesh K. Gupta
Vice President
Peter J. Seeley
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center -- Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc. Annual Report
Two World Trade Center October 31, 2000
New York, New York 10048
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and
trustees, fees, expenses and other pertinent information, please see the
prospectus of the Fund.
This report is not authorized for distribution to prospective investors in
the Fund unless preceded or accompanied by an effective prospectus. Read the
prospectus carefully before investing.
Morgan Stanley Dean Witter Distributors Inc., member NASD.
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PART B
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relates to the shares of Morgan
Stanley Dean Witter Diversified Income Trust ("Diversified Income") to be issued
pursuant to an Agreement and Plan of Reorganization, dated October 26, 2000,
between Diversified Income and Morgan Stanley Dean Witter World Wide Income
Trust ("World Wide Income") in connection with the acquisition by Diversified
Income of substantially all of the assets, subject to stated liabilities, of
World Wide Income. This Statement of Additional Information does not constitute
a prospectus. This Statement of Additional Information does not include all
information that a shareholder should consider before voting on the proposals
contained in the Proxy Statement and Prospectus, and, therefore, should be read
in conjunction with the related Proxy Statement and Prospectus, dated January
17, 2001. A copy of the Proxy Statement and Prospectus may be obtained without
charge by mailing a written request to Diversified Income at Two World Trade
Center, New York, New York 10048 or by calling (800) 869-NEWS (TOLL FREE).
Please retain this document for future reference.
The date of this Statement of Additional Information is January 17, 2001.
B-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION ............................................. B-3
ADDITIONAL INFORMATION ABOUT DIVERSIFIED INCOME .......... B-3
FINANCIAL STATEMENTS ..................................... B-4
</TABLE>
B-2
<PAGE>
INTRODUCTION
This Statement of Additional Information is intended to supplement the
information provided in the Proxy Statement and Prospectus dated January 8,
2001 (the "Proxy Statement and Prospectus"). The Proxy Statement and Prospectus
has been sent to World Wide Income shareholders in connection with the
solicitation of proxies by the Board of Trustees of World Wide Income to be
voted at the Special Meeting of shareholders of World Wide Income to be held on
March 27, 2001. This Statement of Additional Information incorporates by
reference the Statement of Additional Information of Diversified Income dated
January 8, 2001 and the Statement of Additional Information of World Wide
Income dated January 8, 2001.
ADDITIONAL INFORMATION ABOUT DIVERSIFIED INCOME
INVESTMENT OBJECTIVES AND POLICIES
For additional information about Diversified Income's investment
objectives and policies, see "Description of the Fund and Its Investments and
Risks" in Diversified Income's Statement of Additional Information.
MANAGEMENT
For additional information about the Board of Trustees, officers and
management personnel of Diversified Income, see "Management of the Fund" and
"Investment Management and Other Services" in Diversified Income's Statement of
Additional Information.
INVESTMENT ADVISORY AND OTHER SERVICES
For additional information about Diversified Income's investment manager,
see "Investment Management and Other Services" in Diversified Income's
Statement of Additional Information. For additional information about
Diversified Income's independent auditors, see "Investment Management and Other
Services" in Diversified Income's Statement of Additional Information. For
additional information about other services provided to Diversified Income, see
"Investment Management and Other Services" in Diversified Income's Statement of
Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE
For additional information about brokerage allocation practices, see
"Brokerage Allocation and Other Practices" in Diversified Income's Statement of
Additional Information.
DESCRIPTION OF FUND SHARES
For additional information about the voting rights and other
characteristics of the shares of Diversified Income, see "Capital Stock and
Other Securities" in Diversified Income's Statement of Additional Information.
PURCHASE, REDEMPTION AND PRICING OF SHARES
For additional information about the purchase and redemption of
Diversified Income's shares and the determination of net asset value, see
"Purchase, Redemption and Pricing of Shares" in Diversified Income's Statement
of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
For additional information about Diversified Income's policies regarding
dividends and distributions and tax matters affecting Diversified Income and
its shareholders, see "Taxation of the Fund and Shareholders" in Diversified
Income's Statement of Additional Information.
B-3
<PAGE>
DISTRIBUTION OF SHARES
For additional information about Diversified Income's distributor and the
distribution agreement between Diversified Income and its distributor, see
"Investment Management and Other Services" and "Underwriters" in Diversified
Income's Statement of Additional Information.
PERFORMANCE DATA
For additional information about Diversified Income's performance, see
"Calculation of Performance Data" in Diversified Income's Statement of
Additional Information.
FINANCIAL STATEMENTS
Diversified Income's most recent audited financial statements are set
forth in Diversified Income's Annual Report for the fiscal year ended October
31, 2000. A copy of the Annual Report accompanies, and is incorporated by
reference in, the Proxy Statement and Prospectus. World Wide Income's most
recent audited financial statements are set forth in World Wide Income's Annual
Report for the fiscal year ended October 31, 2000, which is incorporated by
reference in the Proxy Statement and Prospectus.
B-4
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PRO FORMA PORTFOLIO OF INVESTMENTS AS OF OCTOBER 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST
--------------------------------
PRINCIPAL
COUPON MATURITY AMOUNT
RATE DATE (IN THOUSANDS) VALUE
--------------- ---------- ----------------- --------------
<S> <C> <C> <C> <C>
GOVERNMENT &
CORPORATE BONDS (92.2%)
FOREIGN (31.4%)
AUSTRALIA (0.0%)
Cable/Satellite TV
Australis Holdings Property
Ltd. (a) .............................. 15.00##% 11/01/02 $ 12,468 $ 124,680
Australis Media Ltd. (a)(c) ............ 15.75 05/15/03 90 903
Australis Media Ltd.
(Units)++(a)(c) ....................... 15.75 05/15/03 4,700 47,000
----------
TOTAL AUSTRALIA 172,583
----------
BELGIUM (0.6%)
Government Obligation
Belgian Government Bond# ............... 8.50 10/01/07 -- --
----------
CANADA (3.3%)
Beverages -- Non-Alcoholic (0.6%)
Sparkling Spring Water ................. 11.50 11/15/07 5,500 4,290,000
----------
Consumer/Business Services (0.2%)
MDC Communication Corp. ................ 10.50 12/01/06 1,300 1,183,000
----------
Electronics/Appliances (0.0%)
International Semi-Tech
Microelectronics, Inc. (a)(c) ......... 11.50 08/15/03 12,061 120,610
----------
Government Obligations (2.3%)
Canada Government Bond ................. 5.50 09/01/02 CAD 14,150 9,230,664
Government of Canada ................... 7.25 06/01/07 -- --
Ontario (Province of) .................. 11.125 02/14/01 1,141 1,672,702
----------
10,903,366
----------
Specialty
Telecommunications (0.2%)
Worldwide Fiber Inc. ................... 12.00 08/01/09 $ 1,300 1,027,000
----------
TOTAL CANADA ........................... 17,523,976
----------
DENMARK (6.4%)
Finance/Rental/Leasing (0.8%)
Realkredit Denmark# .................... 6.00 10/01/29 -- --
Unikredit Realkredit# .................. 5.00 07/01/29 -- --
----------
--
----------
Government Obligations (5.6%)
Denmark (Kingdom of) ................... 9.00 11/15/00 DKK 182,000 20,791,160
Denmark (Kingdom of) (b) ............... 8.00 11/15/01 106,000 12,375,193
Kingdom of Denmark ..................... 6.00 11/15/09 -- --
Kingdom of Denmark# .................... 9.00 11/15/00 -- --
----------
33,166,353
----------
TOTAL DENMARK .......................... 33,166,353
----------
FINLAND (2.1%)
Government Obligation
Finland (Republic of) .................. 8.00 04/07/03 GBP 9,100 13,668,506
----------
GERMANY (2.7%)
Government Obligations (2.7%)
Deutschland Republic ................... 6.00 09/15/03 EUR 15,500 13,453,791
Germany (Republic of) .................. 8.00 07/22/02 5,000 4,438,475
----------
17,892,266
----------
<CAPTION>
MORGAN STANLEY DEAN WITTER
WORLD WIDE INCOME TRUST COMBINED
---------------------------- ----------------------------------
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT
(IN THOUSANDS) VALUE (IN THOUSANDS) VALUE
-------------- ------------- ------------------- --------------
<S> <C> <C> <C> <C>
GOVERNMENT &
CORPORATE BONDS (92.2%)
FOREIGN (31.4%)
AUSTRALIA (0.0%)
Cable/Satellite TV
Australis Holdings Property
Ltd. (a) .............................. -- -- $ 12,468 $ 124,680
Australis Media Ltd. (a)(c) ............ -- -- 90 903
Australis Media Ltd.
(Units)++(a)(c) ....................... -- -- 4,700 47,000
-- ----------
TOTAL AUSTRALIA -- 172,583
-- ----------
BELGIUM (0.6%)
Government Obligation
Belgian Government Bond# ............... CAD 4,250 $4,211,323 CAD 4,250 4,211,323
---------- ----------
CANADA (3.3%)
Beverages -- Non-Alcoholic (0.6%)
Sparkling Spring Water ................. -- -- $ 5,500 4,290,000
---------- ----------
Consumer/Business Services (0.2%)
MDC Communication Corp. ................ -- -- 1,300 1,183,000
---------- ----------
Electronics/Appliances (0.0%)
International Semi-Tech
Microelectronics, Inc. (a)(c) ......... -- -- 12,061 120,610
---------- ----------
Government Obligations (2.3%)
Canada Government Bond ................. -- -- CAD 14,150 9,230,664
Government of Canada ................... 6,350 4,469,388 6,350 4,469,388
Ontario (Province of) .................. -- -- 1,141 1,672,702
---------- ----------
4,469,388 15,372,754
---------- ----------
Specialty
Telecommunications (0.2%)
Worldwide Fiber Inc. ................... -- -- $ 1,300 1,027,000
---------- ----------
TOTAL CANADA ........................... 4,469,388 21,993,364
---------- ----------
DENMARK (6.4%)
Finance/Rental/Leasing (0.8%)
Realkredit Denmark# .................... 24,306 2,603,887 24,306 2,603,887
Unikredit Realkredit# .................. DKK 29,357 2,918,920 DKK 29,357 2,918,920
---------- ----------
5,522,807 5,522,807
---------- ----------
Government Obligations (5.6%)
Denmark (Kingdom of) ................... -- -- $ 182,000 20,791,160
Denmark (Kingdom of) (b) ............... -- -- 106,000 12,375,193
Kingdom of Denmark ..................... DKK 25,000 2,944,347 25,000 2,944,347
Kingdom of Denmark# .................... 12,000 1,370,846 12,000 1,370,846
---------- ----------
4,315,193 37,481,546
---------- ----------
TOTAL DENMARK .......................... 9,838,000 43,004,353
---------- ----------
FINLAND (2.1%)
Government Obligation
Finland (Republic of) .................. -- -- GBP 9,100 13,668,506
---------- ----------
GERMANY (2.7%)
Government Obligations (2.7%)
Deutschland Republic ................... -- -- EUR 15,500 13,453,791
Germany (Republic of) .................. -- -- 5,000 4,438,475
---------- ----------
-- 17,892,266
---------- ----------
</TABLE>
1
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PRO FORMA PORTFOLIO OF INVESTMENTS AS OF OCTOBER 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST
---------------------------------
PRINCIPAL
COUPON MATURITY AMOUNT
RATE DATE (IN THOUSANDS) VALUE
------------ ---------- ------------------ --------------
<S> <C> <C> <C> <C>
Major Banks (0.0%)
Bayerische Hypo-Und
Vereinsbank# ........................... 7.50% 12/27/00 -- --
--
TOTAL GERMANY ........................... $17,892,266
-----------
GREECE (1.6%)
Government Obligations
Greece (Republic of)# ................... 8.70 04/08/05 -- --
Greece (Republic of)# ................... 9.70 05/27/01 -- --
Greece (Republic of) .................... 6.30 01/29/09 -- --
-----------
--
-----------
LUXEMBOURG (0.2%)
Major Banks
European Investment Bank# ............... 6.00 04/04/01 -- --
-----------
NETHERLANDS (6.2%)
Government Obligations (6.0%)
BK Nederlandse .......................... 7.00 12/20/02 GBP 9,100 13,367,440
Netherlands Government
Bond (b) ............................... 8.50 03/15/01 EUR 13,500 11,588,941
Netherlands (Kingdom of) ................ 5.75 09/15/02 17,750 15,222,240
-----------
40,178,621
-----------
Specialty
Telecommunications (0.2%)
Versatel Telecom International
NV ..................................... 13.25 05/15/08 $ 1,300 994,500
-----------
TOTAL NETHERLANDS ....................... 41,173,121
-----------
NORWAY (4.2%)
Government Obligations
Norway Government Bond (b) .............. 9.50 10/31/02 NOK 136,570 15,327,185
Norway (Kingdom of)# .................... 5.75 11/30/04 -- --
Norway (Kingdom of)# .................... 6.75 01/15/07 -- --
Norway (Kingdom of)# .................... 9.50 10/31/02 -- --
-----------
15,327,185
-----------
SWEDEN (2.4%)
Government Obligations
Swedish Government Bond (b) ............. 5.50 04/12/02 SEK 160,000 16,215,499
-----------
UNITED KINGDOM (1.7%)
Cellular Telephone (0.1%)
Dolphin Telecom PLC ..................... 11.50## 06/01/08 $ 2,000 400,000
Dolphin Telecom PLC ..................... 14.00## 05/15/09 3,500 525,000
-----------
925,000
-----------
Major Banks (1.4%)
Abbey National Treasury
Service (b) ............................ 7.125 03/14/01 GBP 5,600 8,135,251
Union Bank of Switzerland ............... 8.00 01/08/07 -- --
-----------
8,135,251
-----------
Specialty
Telecommunications (0.2%)
Esprit Telecom Group PLC ................ 11.50 12/15/07 $ 1,200 276,000
Esprit Telecom Group PLC ................ 10.875 06/15/08 3,600 828,000
-----------
1,104,000
-----------
TOTAL UNITED KINGDOM .................... 10,164,251
-----------
TOTAL FOREIGN
(Cost $210,822,610, $56,666,333,
and $267,488,943, respectively)......... 165,303,740
-----------
<PAGE>
<CAPTION>
MORGAN STANLEY DEAN WITTER
WORLD WIDE INCOME TRUST COMBINED
-------------------------------- --------------------------------------
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT
(IN THOUSANDS) VALUE (IN THOUSANDS) VALUE
---------------- --------------- ---------------------- ---------------
<S> <C> <C> <C> <C>
Major Banks (0.0%)
Bayerische Hypo-Und
Vereinsbank# ........................... GBP 300 $ 435,490 GBP 300 $ 435,490
---------- -----------
TOTAL GERMANY ........................... 435,490 18,327,756
---------- -----------
GREECE (1.6%)
Government Obligations
Greece (Republic of)# ................... GRD 1,000,000 2,778,270 GRD 1,000,000 2,778,270
Greece (Republic of)# ................... 1,500,000 3,819,651 1,500,000 3,819,651
Greece (Republic of) .................... 1,650,000 4,205,607 1,650,000 4,205,607
---------- -----------
10,803,528 10,803,528
---------- -----------
LUXEMBOURG (0.2%)
Major Banks
European Investment Bank# ............... EUR 1,850 1,574,110 EUR 1,850 1,574,110
---------- -----------
NETHERLANDS (6.2%)
Government Obligations (6.0%)
BK Nederlandse .......................... -- -- GBP 9,100 13,367,440
Netherlands Government
Bond (b) ............................... -- -- EUR 13,500 11,588,941
Netherlands (Kingdom of) ................ -- -- 17,750 15,222,240
---------- -----------
-- 40,178,621
---------- -----------
Specialty
Telecommunications (0.2%)
Versatel Telecom International
NV ..................................... -- -- $ 1,300 994,500
---------- -----------
TOTAL NETHERLANDS ....................... -- 41,173,121
---------- -----------
NORWAY (4.2%)
Government Obligations
Norway Government Bond (b) .............. -- -- NOK 136,570 15,327,185
Norway (Kingdom of)# .................... NOK 5,000 520,885 5,000 520,885
Norway (Kingdom of)# .................... 30,000 3,273,226 30,000 3,273,226
Norway (Kingdom of)# .................... 82,000 9,202,821 82,000 9,202,821
---------- -----------
12,996,932 28,324,117
---------- -----------
SWEDEN (2.4%)
Government Obligations
Swedish Government Bond (b) ............. -- -- SEK 160,000 16,215,499
---------- -----------
UNITED KINGDOM (1.7%)
Cellular Telephone (0.1%)
Dolphin Telecom PLC ..................... -- -- $ 2,000 400,000
Dolphin Telecom PLC ..................... -- -- 3,500 525,000
---------- -----------
-- 925,000
---------- -----------
Major Banks (1.4%)
Abbey National Treasury
Service (b) ............................ -- -- GBP 5,600 8,135,251
Union Bank of Switzerland ............... GBP 500 772,121 500 772,121
---------- -----------
772,121 8,907,372
---------- -----------
Specialty
Telecommunications (0.2%)
Esprit Telecom Group PLC ................ -- -- $ 1,200 276,000
Esprit Telecom Group PLC ................ -- -- 3,600 828,000
---------- -----------
-- 1,104,000
---------- -----------
TOTAL UNITED KINGDOM .................... 772,121 10,936,372
---------- -----------
TOTAL FOREIGN
(Cost $210,822,610, $56,666,333,
and $267,488,943, respectively)......... 45,100,892 210,404,632
---------- -----------
</TABLE>
2
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PRO FORMA PORTFOLIO OF INVESTMENTS AS OF OCTOBER 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST
---------------------------
PRINCIPAL
AMOUNT
COUPON MATURITY (IN
RATE DATE THOUSANDS) VALUE
------------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
UNITED STATES (60.8%)
CORPORATE BONDS (27.1%)
Advertising/Marketing
Services (0.4%)
Interep National Radio Sales Inc....... 10.00% 07/01/08 $ 3,200 $2,720,000
----------
Aerospace & Defense (0.5%)
Loral Space & Communications
Ltd. ................................. 9.50 01/15/06 1,300 936,000
Sabreliner Corp. -- 144A* ............. 11.00 06/15/08 2,700 2,234,250
----------
3,170,250
----------
Broadcast/Media (0.5%)
Tri-State Outdoor Media Group,
Inc. ................................. 11.00 05/15/08 3,800 3,230,000
----------
Broadcasting (0.1%)
XM Satellite Radio Holdings Inc........ 14.00 03/15/10 1,200 816,000
----------
Cable/Satellite TV (0.2%)
Knology Holdings Inc. ................. 11.875## 10/15/07 3,000 1,350,000
----------
Casino/Gambling (1.6%)
Aladdin Gaming Holdings/Capital
Corp. LLC (Series B) ................. 13.50## 03/01/10 12,740 5,733,000
Fitzgeralds Gaming Corp.
(Series B) (c) ....................... 12.25 12/15/04 8,900 4,717,000
----------
10,450,000
----------
Cellular Telephone (1.3%)
Dobson/Sygnet Communications .......... 12.25 12/15/08 1,400 1,379,000
McCaw International Ltd. .............. 13.00## 04/15/07 7,300 5,146,500
Tritel PCS Inc. ....................... 12.75## 05/15/09 1,500 967,500
Triton Communications LLC ............. 11.00## 05/01/08 1,500 1,136,250
----------
8,629,250
----------
Commercial Printing/Forms (0.0%)
Premier Graphics Inc. (a)(c) .......... 11.50 12/01/05 2,700 189,000
----------
Consumer/Business Services (0.8%)
Anacomp, Inc. (Series B) (c) .......... 10.875 04/01/04 1,200 216,000
Anacomp, Inc. (Series D) (c) .......... 10.875 04/01/04 1,100 198,000
Comforce Operating, Inc. .............. 12.00 12/01/07 6,750 3,510,000
Muzak LLC ............................. 9.875 03/15/09 1,500 1,320,000
----------
5,244,000
----------
Containers/Packaging (1.3%)
Berry Plastics Corp. .................. 12.25 04/15/04 1,100 1,001,000
Envirodyne Industries, Inc. ........... 10.25 12/01/01 5,650 4,463,500
Packaging Resources, Inc. (c) ......... 11.625 05/01/03 3,500 3,430,000
----------
8,894,500
----------
Diversified Manufacturing (0.7%)
Eagle-Picher Industries, Inc. ......... 9.375 03/01/08 1,400 1,169,000
Jordan Industries, Inc. (Series B)..... 11.75## 04/01/09 2,588 1,630,440
Jordan Industries, Inc. ............... 10.375 08/01/07 1,800 1,620,000
----------
4,419,440
----------
Drugstore Chains (0.1%)
Rite Aid Corp. ........................ 7.70 02/15/27 1,700 340,000
----------
Electronic Distributors (0.0%)
CHS Electronics, Inc. (a) (c) ......... 9.875 04/15/05 5,600 112,000
----------
Electronic
Equipment/Instruments (0.3%)
High Voltage Engineering, Inc. ........ 10.75 08/15/04 2,700 1,755,000
----------
<PAGE>
<CAPTION>
MORGAN STANLEY DEAN WITTER
WORLD WIDE INCOME TRUST COMBINED
----------------------------------------- ---------------------------
PRINCIPAL
PRINCIPAL AMOUNT
AMOUNT (IN
(IN THOUSANDS) VALUE THOUSANDS) VALUE
--------------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
UNITED STATES (60.8%)
CORPORATE BONDS (27.1%)
Advertising/Marketing
Services (0.4%)
Interep National Radio Sales Inc....... -- -- $ 3,200 $2,720,000
-- ----------
Aerospace & Defense (0.5%)
Loral Space & Communications
Ltd. ................................. -- -- 1,300 936,000
Sabreliner Corp. -- 144A* ............. -- -- 2,700 2,234,250
---------- ----------
-- 3,170,250
---------- ----------
Broadcast/Media (0.5%)
Tri-State Outdoor Media Group,
Inc. ................................. -- -- 3,800 3,230,000
---------- ----------
Broadcasting (0.1%)
XM Satellite Radio Holdings Inc........ -- -- 1,200 816,000
---------- ----------
Cable/Satellite TV (0.2%)
Knology Holdings Inc. ................. -- -- 3,000 1,350,000
---------- ----------
Casino/Gambling (1.6%)
Aladdin Gaming Holdings/Capital
Corp. LLC (Series B) ................. -- -- 12,740 5,733,000
Fitzgeralds Gaming Corp.
(Series B) (c) ....................... -- -- 8,900 4,717,000
---------- ----------
-- 10,450,000
---------- ----------
Cellular Telephone (1.3%)
Dobson/Sygnet Communications .......... -- -- 1,400 1,379,000
McCaw International Ltd. .............. -- -- 7,300 5,146,500
Tritel PCS Inc. ....................... -- -- 1,500 967,500
Triton Communications LLC ............. -- -- 1,500 1,136,250
---------- ----------
-- 8,629,250
---------- ----------
Commercial Printing/Forms (0.0%)
Premier Graphics Inc. (a)(c) .......... -- -- 2,700 189,000
---------- ----------
Consumer/Business Services (0.8%)
Anacomp, Inc. (Series B) (c) .......... -- -- 1,200 216,000
Anacomp, Inc. (Series D) (c) .......... -- -- 1,100 198,000
Comforce Operating, Inc. .............. -- -- 6,750 3,510,000
Muzak LLC ............................. -- -- 1,500 1,320,000
---------- ----------
-- 5,244,000
---------- ----------
Containers/Packaging (1.3%)
Berry Plastics Corp. .................. -- -- 1,100 1,001,000
Envirodyne Industries, Inc. ........... -- -- 5,650 4,463,500
Packaging Resources, Inc. (c) ......... -- -- 3,500 3,430,000
---------- ----------
-- 8,894,500
---------- ----------
Diversified Manufacturing (0.7%)
Eagle-Picher Industries, Inc. ......... -- -- 1,400 1,169,000
Jordan Industries, Inc. (Series B)..... -- -- 2,588 1,630,440
Jordan Industries, Inc. ............... -- -- 1,800 1,620,000
---------- ----------
-- 4,419,440
---------- ----------
Drugstore Chains (0.1%)
Rite Aid Corp. ........................ -- -- 1,700 340,000
---------- ----------
Electronic Distributors (0.0%)
CHS Electronics, Inc. (a) (c) ......... -- -- 5,600 112,000
---------- ----------
Electronic
Equipment/Instruments (0.3%)
High Voltage Engineering, Inc. ........ -- -- 2,700 1,755,000
---------- ----------
</TABLE>
3
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PRO FORMA PORTFOLIO OF INVESTMENTS AS OF OCTOBER 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST
------------------------------
PRINCIPAL
COUPON MATURITY AMOUNT
RATE DATE (IN THOUSANDS) VALUE
------------- ---------- ---------------- -------------
<S> <C> <C> <C> <C>
Electronics/Appliances (0.2%)
Windmere-Durable Holdings, Inc...... 10.00% 07/31/08 $ 1,400 $1,260,000
----------
Environmental Services (0.3%)
Allied Waste North America, Inc.
(Series B) ........................ 10.00 08/01/09 2,500 2,162,500
----------
Financial Conglomerates (1.3%)
General Electric Capital Corp. ..... 6.25 09/01/09 -- --
General Electric Capital
Corp. (b) ......................... 6.625 03/16/01 GBP 4,200 6,088,373
----------
6,088,373
----------
Food Distributors (0.3%)
Fleming Companies, Inc.
(Series B) ........................ 10.625 07/31/07 $ 1,300 975,000
Volume Services of America Inc...... 11.25 03/01/09 1,300 1,176,500
----------
2,151,500
----------
Food Retail (0.5%)
Big V Supermarkets, Inc.
(Series B) ........................ 11.00 02/15/04 2,250 1,530,000
Eagle Food Centers, Inc. ........... 11.00 04/15/05 850 425,000
Pueblo Xtra International, Inc.
(Series C) ........................ 9.50 08/01/03 2,367 1,112,490
----------
3,067,490
----------
Food: Specialty/Candy (0.4%)
SFAC New Holdings Inc. (d) ......... 13.00## 06/15/09 44,552 2,673,103
----------
Hotels/Resorts (0.1%)
Epic Resorts LLC
(Series B) ........................ 13.00 06/15/05 2,700 810,000
----------
Household/Personal Care (0.3%)
J.B. Williams Holdings, Inc. ....... 12.00 03/01/04 2,015 1,974,700
----------
Industrial Specialties (0.7%)
Cabot Safety Corp. ................. 12.50 07/15/05 1,300 1,293,500
Indesco International Inc. ......... 9.75 04/15/08 1,800 450,000
International Wire Group, Inc.
(Series B) ........................ 11.75 06/01/05 1,000 995,000
Outsourcing Services Group, Inc.
(Series B) ........................ 10.875 03/01/06 2,250 1,800,000
----------
4,538,500
----------
International Banks (1.2%)
KFW International Finance Inc. ..... 10.625 09/03/01 -- --
KFW International Finance
Inc. (b) .......................... 10.625 09/03/01 GBP 3,061 4,582,969
----------
4,582,969
----------
Internet Software/Services (0.3%)
Globix Corp. -- 144A* .............. 12.50 02/01/10 $ 2,600 1,430,000
PSINET, Inc. ....................... 11.00 08/01/09 1,700 850,000
----------
2,280,000
----------
Major Banks (0.7%)
Morgan Guaranty Trust Co. .......... 7.375 12/28/01 GBP 1,000 1,462,748
Morgan Guaranty Trust Co.# ......... 7.75 12/30/03 -- --
----------
1,462,748
----------
Medical Specialties (0.6%)
Mediq Inc./PRN Life Support
Services Inc. ..................... 11.00 06/01/08 $ 5,100 153,000
<PAGE>
<CAPTION>
MORGAN STANLEY DEAN WITTER
WORLD WIDE INCOME TRUST COMBINED
-------------------------------- --------------------------------
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT
(IN THOUSANDS) VALUE (IN THOUSANDS) VALUE
------------------ ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Electronics/Appliances (0.2%)
Windmere-Durable Holdings, Inc...... -- -- $ 1,400 $1,260,000
-- ----------
Environmental Services (0.3%)
Allied Waste North America, Inc.
(Series B) ........................ -- -- 2,500 2,162,500
-- ----------
Financial Conglomerates (1.3%)
General Electric Capital Corp. ..... $ 2,000 $2,880,998 2,000 2,880,998
General Electric Capital
Corp. (b) ......................... -- -- GBP 4,200 6,088,373
---------- ----------
2,880,998 8,969,371
---------- ----------
Food Distributors (0.3%)
Fleming Companies, Inc.
(Series B) ........................ -- -- $ 1,300 975,000
Volume Services of America Inc...... -- -- 1,300 1,176,500
---------- ----------
-- 2,151,500
---------- ----------
Food Retail (0.5%)
Big V Supermarkets, Inc.
(Series B) ........................ -- -- 2,250 1,530,000
Eagle Food Centers, Inc. ........... -- -- 850 425,000
Pueblo Xtra International, Inc.
(Series C) ........................ -- -- 2,367 1,112,490
---------- ----------
-- 3,067,490
---------- ----------
Food: Specialty/Candy (0.4%)
SFAC New Holdings Inc. (d) ......... -- -- 44,552 2,673,103
---------- ----------
Hotels/Resorts (0.1%)
Epic Resorts LLC
(Series B) ........................ -- -- 2,700 810,000
---------- ----------
Household/Personal Care (0.3%)
J.B. Williams Holdings, Inc. ....... -- -- 2,015 1,974,700
---------- ----------
Industrial Specialties (0.7%)
Cabot Safety Corp. ................. -- -- 1,300 1,293,500
Indesco International Inc. ......... -- -- 1,800 450,000
International Wire Group, Inc.
(Series B) ........................ -- -- 1,000 995,000
Outsourcing Services Group, Inc.
(Series B) ........................ -- -- 2,250 1,800,000
---------- ----------
-- 4,538,500
---------- ----------
International Banks (1.2%)
KFW International Finance Inc. ..... GBP 2,500 3,743,032 GBP 2,500 3,743,032
KFW International Finance
Inc. (b) .......................... -- -- 3,061 4,582,969
---------- ----------
3,743,032 8,326,001
---------- ----------
Internet Software/Services (0.3%)
Globix Corp. -- 144A* .............. -- -- $ 2,600 1,430,000
PSINET, Inc. ....................... -- -- 1,700 850,000
---------- ----------
-- 2,280,000
---------- ----------
Major Banks (0.7%)
Morgan Guaranty Trust Co. .......... 1,076 1,573,917 GBP 2,076 3,036,665
Morgan Guaranty Trust Co.# ......... 1,000 1,499,647 1,000 1,499,647
---------- ----------
3,073,564 4,536,312
---------- ----------
Medical Specialties (0.6%)
Mediq Inc./PRN Life Support
Services Inc. ..................... -- -- $ 5,100 153,000
</TABLE>
4
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PRO FORMA PORTFOLIO OF INVESTMENTS AS OF OCTOBER 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST
---------------------------
PRINCIPAL
AMOUNT
COUPON MATURITY (IN
RATE DATE THOUSANDS) VALUE
------------ ---------- ------------- -------------
<S> <C> <C> <C> <C>
Universal Hospital Services, Inc. ..... 10.25% 03/01/08 $ 5,400 $3,888,000
----------
4,041,000
----------
Medical/Nursing Services (0.5%)
Pediatric Services of America, Inc.
(Series A) ........................... 10.00 04/15/08 5,250 3,675,000
----------
Office Equipment/Supplies (0.5%)
Mosler, Inc. .......................... 11.00 04/15/03 6,890 4,134,000
----------
Other Consumer Specialties (0.7%)
Samsonite Corp. ....................... 10.75 06/15/08 5,800 4,524,000
----------
Restaurants (1.4%)
American Restaurant Group
Holdings, Inc. -- 144A* (d) .......... 0.00 12/15/05 48,756 6,338,267
FRD Acquisition Corp.
(Series B) ........................... 12.50 07/15/04 5,200 1,872,000
Friendly Ice Cream Corp. .............. 10.50 12/01/07 1,300 871,000
----------
9,081,267
----------
Retail -- Specialty (0.4%)
Pantry, Inc. .......................... 10.25 10/15/07 1,300 1,202,500
Petro Stopping Centers L.P. ........... 10.50 02/01/07 1,700 1,445,000
----------
2,647,500
----------
Specialty
Telecommunications (2.9%)
Birch Telecom Inc. .................... 14.00 06/15/08 6,500 3,900,000
DTI Holdings Inc.
(Series B) ........................... 12.50## 03/01/08 3,000 1,020,000
Firstworld Communications, Inc. ....... 13.00## 04/15/08 16,300 3,586,000
Pac-West Telecommunications
Group, Inc. .......................... 13.50 02/01/09 1,500 1,335,000
Primus Telecommunications
Group, Inc. .......................... 12.75 10/15/09 2,300 1,173,000
Primus Telecommunications
Group, Inc. (Series B) ............... 9.875 05/15/08 2,700 1,377,000
Viatel, Inc. .......................... 11.25 04/15/08 3,800 1,976,000
Viatel, Inc. .......................... 11.50 03/15/09 800 416,000
World Access, Inc. (d) ................ 13.25 01/15/08 6,400 4,480,000
----------
19,263,000
----------
Telecommunications (2.9%)
CapRock Communications Corp. .......... 11.50 05/01/09 2,400 2,310,000
CapRock Communications Corp.
(Series B) ........................... 12.00 07/15/08 1,400 1,368,500
Covad Communications Group,
Inc. ................................. 12.50 02/15/09 1,500 780,000
e. Spire Communications, Inc. ......... 13.75 07/15/07 5,900 3,186,000
Focal Communications Corp.
(Series B) ........................... 12.125## 02/15/08 1,500 750,000
Hyperion Telecommunication, Inc.
(Series B) ........................... 12.25 09/01/04 1,300 1,105,000
In-Flight Phone Corp. (Series B)....... 14.00 05/15/02 28,500 1,425,000
Level 3 Communications, Inc. .......... 9.125 05/01/08 1,300 1,053,000
MGC Communications, Inc. .............. 13.00 04/01/10 1,000 610,000
NextLink Communications LLC ........... 10.75 06/01/09 1,300 1,144,000
Rhythms Netconnections, Inc. .......... 12.75 04/15/09 5,400 2,592,000
Startec Global Communications
Corp. ................................ 12.00 05/15/08 1,200 720,000
Talton Holdings, Inc. (Series B) ...... 11.00 06/30/07 3,000 2,490,000
----------
19,533,500
----------
<PAGE>
<CAPTION>
MORGAN STANLEY DEAN WITTER
WORLD WIDE INCOME TRUST COMBINED
----------------------------------- ---------------------------
PRINCIPAL
PRINCIPAL AMOUNT
AMOUNT (IN
(IN THOUSANDS) VALUE THOUSANDS) VALUE
-------------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Universal Hospital Services, Inc. ..... -- -- $ 5,400 $3,888,000
-- ----------
-- 4,041,000
-- ----------
Medical/Nursing Services (0.5%)
Pediatric Services of America, Inc.
(Series A) ........................... -- -- 5,250 3,675,000
----------- ----------
Office Equipment/Supplies (0.5%)
Mosler, Inc. .......................... -- -- 6,890 4,134,000
----------- ----------
Other Consumer Specialties (0.7%)
Samsonite Corp. ....................... -- -- 5,800 4,524,000
----------- ----------
Restaurants (1.4%)
American Restaurant Group
Holdings, Inc. -- 144A* (d) .......... -- -- 48,756 6,338,267
FRD Acquisition Corp.
(Series B) ........................... -- -- 5,200 1,872,000
Friendly Ice Cream Corp. .............. -- -- 1,300 871,000
----------- ----------
-- 9,081,267
----------- ----------
Retail -- Specialty (0.4%)
Pantry, Inc. .......................... -- -- 1,300 1,202,500
Petro Stopping Centers L.P. ........... -- -- 1,700 1,445,000
----------- ----------
-- 2,647,500
----------- ----------
Specialty
Telecommunications (2.9%)
Birch Telecom Inc. .................... -- -- 6,500 3,900,000
DTI Holdings Inc.
(Series B) ........................... -- -- 3,000 1,020,000
Firstworld Communications, Inc. ....... -- -- 16,300 3,586,000
Pac-West Telecommunications
Group, Inc. .......................... -- -- 1,500 1,335,000
Primus Telecommunications
Group, Inc. .......................... -- -- 2,300 1,173,000
Primus Telecommunications
Group, Inc. (Series B) ............... -- -- 2,700 1,377,000
Viatel, Inc. .......................... -- -- 3,800 1,976,000
Viatel, Inc. .......................... -- -- 800 416,000
World Access, Inc. (d) ................ -- -- 6,400 4,480,000
----------- ----------
-- 19,263,000
----------- ----------
Telecommunications (2.9%)
CapRock Communications Corp. .......... -- -- 2,400 2,310,000
CapRock Communications Corp.
(Series B) ........................... -- -- 1,400 1,368,500
Covad Communications Group,
Inc. ................................. -- -- 1,500 780,000
e. Spire Communications, Inc. ......... -- -- 5,900 3,186,000
Focal Communications Corp.
(Series B) ........................... -- -- 1,500 750,000
Hyperion Telecommunication, Inc.
(Series B) ........................... -- -- 1,300 1,105,000
In-Flight Phone Corp. (Series B)....... -- -- 28,500 1,425,000
Level 3 Communications, Inc. .......... -- -- 1,300 1,053,000
MGC Communications, Inc. .............. -- -- 1,000 610,000
NextLink Communications LLC ........... -- -- 1,300 1,144,000
Rhythms Netconnections, Inc. .......... -- -- 5,400 2,592,000
Startec Global Communications
Corp. ................................ -- -- 1,200 720,000
Talton Holdings, Inc. (Series B) ...... -- -- 3,000 2,490,000
----------- ----------
-- 19,533,500
----------- ----------
</TABLE>
5
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PRO FORMA PORTFOLIO OF INVESTMENTS AS OF OCTOBER 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST
-----------------------------
PRINCIPAL
AMOUNT
COUPON MATURITY (IN
RATE DATE THOUSANDS) VALUE
------------ ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Truck/Construction/Farm
Machinery (0.4%)
J.B. Poindexter & Co., Inc. .... 12.50% 05/15/04 $ 2,800 $ 2,604,000
-------------
Wireless Communications (2.7%) .
Advanced Radio Telecom Corp. ... 14.00 02/15/07 11,300 6,780,000
Arch Escrow Corp. .............. 13.75 04/15/08 900 540,000
CellNet Data Systems Inc. (a) .. 14.00## 10/01/07 21,800 109,000
Globalstar LP/Capital Corp. .... 10.75 11/01/04 1,000 150,000
Globalstar LP/Capital Corp. .... 11.50 06/01/05 1,850 277,500
Orbcomm Global LP/Capital
Corp. (a)(c) .................. 14.00 08/15/04 3,500 525,000
Paging Network, Inc. (a)(c) .... 10.125 08/01/07 4,600 966,000
Paging Network, Inc. (a)(c) .... 10.00 10/15/08 8,300 1,743,000
USA Mobile Communications
Holdings, Inc. ................ 14.00 11/01/04 5,850 4,446,000
Winstar Communications,
Inc.-144A ..................... 0.00 04/15/10 1,800 567,000
Winstar Communications, Inc. --
144A* ......................... 12.75 04/15/10 2,400 1,728,000
-------------
17,831,500
-------------
TOTAL CORPORATE BONDS
(Cost $288,431,367, $10,524,538,
and $298,955,905, respectively) 171,706,090
-------------
MORTGAGE-BACKED
SECURITIES (23.9%)
Federal Home Loan Mortgage
Corp. (0.3%)
............................... 7.00 04/01/04 1,646 1,642,906
............................... 8.00 10/01/24 689 697,880
-------------
2,340,786
-------------
Federal National Mortgage
Assoc. (11.6%)
............................... 6.00 02/01/11- 29,437
04/01/28 28,126,924
............................... 6.50 11/01/08- 29,085
11/01/23 28,140,138
............................... 7.00 10/01/08- 4,609
04/01/17 4,534,000
............................... 7.50 11/01/22 8,638 8,624,800
............................... 8.00 10/01/01- 2,815
06/01/22 2,847,048
............................... 8.50 07/01/17 5,225 5,336,053
-------------
77,608,963
-------------
Government National Mortgage
Assoc. (12.0%)
............................... 6.00 10/15/23 21,399 20,162,028
............................... 6.50 11/20/23- 21,831
02/15/26 21,051,936
............................... 7.00 12/15/22- 11,590
08/15/29 11,387,165
............................... 7.50 05/15/17- 17,439
07/20/25 17,493,243
............................... 8.00 12/15/22- 3,348
05/15/30 3,402,357
............................... 8.50 10/15/24 1,132 1,160,523
-------------
74,657,252
-------------
<PAGE>
<CAPTION>
MORGAN STANLEY DEAN WITTER
WORLD WIDE INCOME TRUST COMBINED
--------------------------- -----------------------------
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT
(IN (IN
THOUSANDS) VALUE THOUSANDS) VALUE
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Truck/Construction/Farm
Machinery (0.4%)
J.B. Poindexter & Co., Inc. .... -- -- $ 2,800 $ 2,604,000
-- -------------
Wireless Communications (2.7%) .
Advanced Radio Telecom Corp. ... -- -- 11,300 6,780,000
Arch Escrow Corp. .............. -- -- 900 540,000
CellNet Data Systems Inc. (a) .. -- -- 21,800 109,000
Globalstar LP/Capital Corp. .... -- -- 1,000 150,000
Globalstar LP/Capital Corp. .... -- -- 1,850 277,500
Orbcomm Global LP/Capital
Corp. (a)(c) .................. -- -- 3,500 525,000
Paging Network, Inc. (a)(c) .... -- -- 4,600 966,000
Paging Network, Inc. (a)(c) .... -- -- 8,300 1,743,000
USA Mobile Communications
Holdings, Inc. ................ -- -- 5,850 4,446,000
Winstar Communications,
Inc.-144A ..................... -- -- 1,800 567,000
Winstar Communications, Inc. --
144A* ......................... -- -- 2,400 1,728,000
-- -------------
-- 17,831,500
-- -------------
TOTAL CORPORATE BONDS
(Cost $288,431,367, $10,524,538,
and $298,955,905, respectively) 181,403,684
-------------
MORTGAGE-BACKED
SECURITIES (23.9%)
Federal Home Loan Mortgage
Corp. (0.3%)
............................... -- -- 1,646 1,642,906
............................... -- -- 689 697,880
-- -------------
-- 2,340,786
-- -------------
Federal National Mortgage
Assoc. (11.6%)
............................... -- 29,437
-- 28,126,924
............................... -- 29,085
-- 28,140,138
............................... -- 4,609
-- 4,534,000
............................... -- -- 8,638 8,624,800
............................... -- 2,815
-- 2,847,048
............................... -- -- 5,225 5,336,053
-- -------------
-- 77,608,963
-- -------------
Government National Mortgage
Assoc. (12.0%)
............................... -- -- 21,399 20,162,028
............................... -- 21,831
-- -- 21,051,936
............................... $ 1,927 13,517
-- $1,899,864 -- 13,287,029
............................... -- 17,439
-- -- 17,493,243
............................... 3,533 6,881
3,590,010 -- 6,992,367
............................... -- -- 1,132 1,160,523
---------- -------------
5,489,874 80,147,126
---------- -------------
</TABLE>
6
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PRO FORMA PORTFOLIO OF INVESTMENTS AS OF OCTOBER 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
MORGAN STANLEY
DEAN WITTER
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME
DIVERSIFIED INCOME TRUST TRUST
------------------------------------ ------------------
PRINCIPAL PRINCIPAL
COUPON MATURITY AMOUNT AMOUNT
RATE DATE (IN THOUSANDS) VALUE (IN THOUSANDS)
---------- ------------ -------------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
TOTAL MORTGAGE-BACKED
SECURITIES
(Cost $157,748,277, $5,407,479,
and $163,155,756, respectively)...... $154,607,001
------------
U.S. GOVERNMENT
AGENCIES &
OBLIGATIONS (9.8%)
Federal Home Loan
Banks (b) (1.7%)
..................................... 6.37% 09/25/07 $ 5,000 4,894,450 --
..................................... 6.385 10/23/07 5,000 4,897,800 --
..................................... 5.45 01/12/09 2,000 1,833,260 --
------------
11,625,510
------------
Federal Home Loan Mortgage
Corp. (2.1%)
..................................... 5.75 04/15/08 3,000 2,837,910 --
..................................... 0.00 07/02/12- 15,000 --
08/15/02 10,877,850
------------
13,715,760
------------
Federal National Mortgage
Assoc. (b) (4.2%)
..................................... 6.875 06/07/02 GBP 9,000 13,178,201 --
..................................... 6.50 07/10/02 AUD 6,340 3,293,153 AUD 2,400
..................................... 7.25 01/15/10 -- -- $ 1,000
Principal Strips ..................... 0.00 02/12/04- $ 6,000 --
02/01/05 4,607,560
U.S. Treasury Bond** # ............... 13.125 05/15/01 -- -- 4,650
------------
21,078,914
------------
Financing Corp. (1.5%) ............... 0.00 03/07/05- 13,475 --
04/06/06 9,885,508
------------
Tennessee Valley Authority
(0.3%) .............................. 0.00 01/15/03 2,320 2,010,651 --
------------
TOTAL U.S. GOVERNMENT
AGENCIES &
OBLIGATIONS .........................
(Cost $88,058,776, $9,277,716, and
$97,336,492, respectively)........... 58,316,343
------------
TOTAL UNITED STATES
(Cost $534,238,420, $25,209,733,
and $559,448,153, respectively)...... 384,629,434
------------
TOTAL GOVERNMENT &
CORPORATE BONDS
(Cost $745,061,030, $81,876,066,
and $826,937,096, respectively)...... 549,933,174
------------
NUMBER OF NUMBER OF
SHARES SHARES
------------ -----------
COMMON STOCKS (E) (0.1%)
Apparel/Footwear Retail (0.0%)
County Seat Stores, Inc. (d) ......... 1,310,596 11,795 --
------------
Casino/Gambling (0.0%)
Fitzgerald Gaming Corp.
(Class D)* .......................... 10,773 11 --
------------
Food Retail (0.0%)
Eagle Food Centers, Inc. ............. 6,435 5,430 --
------------
<PAGE>
<CAPTION>
MORGAN STANLEY
DEAN
WITTER
WORLD WIDE
INCOME
TRUST COMBINED
------------- ------------------------------------
PRINCIPAL
AMOUNT
VALUE (IN THOUSANDS) VALUE
------------- -------------------- ---------------
<S> <C> <C> <C>
TOTAL MORTGAGE-BACKED
SECURITIES
(Cost $157,748,277, $5,407,479,
and $163,155,756, respectively)...... $ 5,489,874 $160,096,875
----------- ------------
U.S. GOVERNMENT
AGENCIES &
OBLIGATIONS (9.8%)
Federal Home Loan
Banks (b) (1.7%)
..................................... -- $ 5,000 4,894,450
..................................... -- 5,000 4,897,800
..................................... -- 2,000 1,833,260
----------- ------------
-- 11,625,510
----------- ------------
Federal Home Loan Mortgage
Corp. (2.1%)
..................................... -- 3,000 2,837,910
..................................... 15,000
-- 10,877,850
----------- ------------
-- 13,715,760
----------- ------------
Federal National Mortgage
Assoc. (b) (4.2%)
..................................... -- GBP 9,000 13,178,201
..................................... 1,246,620 AUD 8,740 4,539,773
..................................... 1,036,750 $ 1,000 1,036,750
Principal Strips ..................... 6,000
-- 4,607,560
U.S. Treasury Bond** # ............... 4,811,402 4,650 4,811,402
----------- ------------
7,094,772 28,173,686
----------- ------------
Financing Corp. (1.5%) ............... 13,475
-- 9,885,508
----------- ------------
Tennessee Valley Authority
(0.3%) .............................. -- 2,320 2,010,651
----------- ------------
TOTAL U.S. GOVERNMENT
AGENCIES &
OBLIGATIONS .........................
(Cost $88,058,776, $9,277,716, and
$97,336,492, respectively)........... 7,094,772 65,411,115
----------- ------------
TOTAL UNITED STATES
(Cost $534,238,420, $25,209,733,
and $559,448,153, respectively)...... 22,282,240 406,911,674
----------- ------------
TOTAL GOVERNMENT &
CORPORATE BONDS
(Cost $745,061,030, $81,876,066,
and $826,937,096, respectively)...... 67,383,132 617,316,306
----------- ------------
NUMBER OF
SHARES
------------
COMMON STOCKS (E) (0.1%)
Apparel/Footwear Retail (0.0%)
County Seat Stores, Inc. (d) ......... -- 1,310,596 11,795
----------- ------------
Casino/Gambling (0.0%)
Fitzgerald Gaming Corp.
(Class D)* .......................... -- 10,773 11
----------- ------------
Food Retail (0.0%)
Eagle Food Centers, Inc. ............. -- 6,435 5,430
----------- ------------
</TABLE>
7
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PRO FORMA PORTFOLIO OF INVESTMENTS AS OF OCTOBER 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST
----------------------------------
NUMBER OF
SHARES VALUE
------------------- -------------
<S> <C> <C>
Food: Specialty/Candy (0.0%)
SFAC New Holdings Inc. (d)* .............................. 2,423 $ 606
Specialty Foods Acquisition Corp. -- 144A* ............... 198,750 1,988
-----------
2,594
-----------
Hotels/Resorts (0.0%)
Motels of America, Inc. -- 144A* ......................... 2,000 500
-----------
Medical/Nursing Services (0.0%)
Raintree Healthcare Corp. (d) ............................ 512,862 4,616
-----------
Restaurants (0.0%)
American Restaurant Group Holdings, Inc. -- 144A* ........ 6,000 1,500
-----------
Specialty Telecommunications (0.1%)
Versatel Telecom International NV (Netherlands) (d) ...... 37,335 746,700
World Access, Inc. (d) ................................... 20,110 98,036
-----------
844,736
-----------
Textiles (0.0%)
United States Leather, Inc. (d) .......................... 298,462 2,985
-----------
Wireless Communications (0.0%)
FWT, Inc. (Class A) ...................................... 196,000 1,960
-----------
TOTAL COMMON STOCKS
(Cost $19,171,388, $0, and $19,171,388, respectively)..... 876,127
-----------
CONVERTIBLE PREFERRED STOCKS (0.3%)
Oil & Gas Production (0.0%)
XCL Ltd. + -- 144A* ...................................... 989 495
XCL Ltd. (Units)++ + -- 144A* ............................ 5,000 2,500
-----------
2,995
-----------
Restaurants (0.1%)
American Restaurant Group Holdings, Inc. (Series B)
(Non-Conv.) + ........................................... 1,886 754,400
-----------
Wireless Communications (0.2%)
FWT, Inc. (Series A) (Non-Conv.) ......................... 1,960,000 980,000
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $11,257,977, $0, and $11,257,977, respectively)..... 1,737,395
-----------
<CAPTION>
MORGAN STANLEY DEAN WITTER
WORLD WIDE INCOME TRUST
-------------------------------
NUMBER OF
SHARES VALUE
---------------- --------------
<S> <C> <C>
Food: Specialty/Candy (0.0%)
SFAC New Holdings Inc. (d)* .............................. -- --
Specialty Foods Acquisition Corp. -- 144A* ............... -- --
--
--
--
Hotels/Resorts (0.0%)
Motels of America, Inc. -- 144A* ......................... -- --
--
Medical/Nursing Services (0.0%)
Raintree Healthcare Corp. (d) ............................ -- --
--
Restaurants (0.0%)
American Restaurant Group Holdings, Inc. -- 144A* ........ -- --
--
Specialty Telecommunications (0.1%)
Versatel Telecom International NV (Netherlands) (d) ...... -- --
World Access, Inc. (d) ................................... -- --
--
--
--
Textiles (0.0%)
United States Leather, Inc. (d) .......................... -- --
--
Wireless Communications (0.0%)
FWT, Inc. (Class A) ...................................... -- --
--
TOTAL COMMON STOCKS
(Cost $19,171,388, $0, and $19,171,388, respectively)..... --
-----------
CONVERTIBLE PREFERRED STOCKS (0.3%)
Oil & Gas Production (0.0%)
XCL Ltd. + -- 144A* ...................................... -- --
XCL Ltd. (Units)++ + -- 144A* ............................ -- --
-----------
--
-----------
Restaurants (0.1%)
American Restaurant Group Holdings, Inc. (Series B)
(Non-Conv.) + ........................................... -- --
-----------
Wireless Communications (0.2%)
FWT, Inc. (Series A) (Non-Conv.) ......................... -- --
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $11,257,977, $0, and $11,257,977, respectively)..... --
-----------
<CAPTION>
COMBINED
-------------------------------
NUMBER OF
SHARES VALUE
---------------- --------------
<S> <C> <C>
Food: Specialty/Candy (0.0%)
SFAC New Holdings Inc. (d)* .............................. 2,423 $ 606
Specialty Foods Acquisition Corp. -- 144A* ............... 198,750 1,988
-----------
2,594
-----------
Hotels/Resorts (0.0%)
Motels of America, Inc. -- 144A* ......................... 2,000 500
-----------
Medical/Nursing Services (0.0%)
Raintree Healthcare Corp. (d) ............................ 512,862 4,616
-----------
Restaurants (0.0%)
American Restaurant Group Holdings, Inc. -- 144A* ........ 6,000 1,500
-----------
Specialty Telecommunications (0.1%)
Versatel Telecom International NV (Netherlands) (d) ...... 37,335 746,700
World Access, Inc. (d) ................................... 20,110 98,036
-----------
844,736
-----------
Textiles (0.0%)
United States Leather, Inc. (d) .......................... 298,462 2,985
-----------
Wireless Communications (0.0%)
FWT, Inc. (Class A) ...................................... 196,000 1,960
-----------
TOTAL COMMON STOCKS
(Cost $19,171,388, $0, and $19,171,388, respectively)..... 876,127
-----------
CONVERTIBLE PREFERRED STOCKS (0.3%)
Oil & Gas Production (0.0%)
XCL Ltd. + -- 144A* ...................................... 989 495
XCL Ltd. (Units)++ + -- 144A* ............................ 5,000 2,500
-----------
2,995
-----------
Restaurants (0.1%)
American Restaurant Group Holdings, Inc. (Series B)
(Non-Conv.) + ........................................... 1,886 754,400
-----------
Wireless Communications (0.2%)
FWT, Inc. (Series A) (Non-Conv.) ......................... 1,960,000 980,000
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $11,257,977, $0, and $11,257,977, respectively)..... 1,737,395
-----------
</TABLE>
8
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PRO FORMA PORTFOLIO OF INVESTMENTS AS OF OCTOBER 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST
-----------------------------
EXPIRATION NUMBER OF
DATE WARRANTS VALUE
------------ -------------- --------------
<S> <C> <C> <C>
WARRANTS (E) (0.2%)
Aerospace & Defense (0.0%)
Sabreliner Corp. -- 144A* ........... 04/15/03 1,000 $ 10,000
----------
Broadcasting (0.0%)
UIH Australia/Pacific Inc. .......... 05/15/06 4,000 60,000
XM Satellite Radio Holdings Inc...... 03/15/10 1,200 168,000
----------
228,000
----------
Casino/Gambling (0.0%)
Aladdin Gaming Enterprises, Inc.
-- 144A* ........................... 03/01/10 68,000 680
----------
Cellular Telephone (0.0%)
McCaw International Ltd. --
144A* .............................. 04/15/07 5,300 106,000
----------
Hotels/Resorts (0.0%)
Epic Resorts LLC/Capital --
144A* .............................. 06/15/05 2,700 27
Specialty Telecommunications (0.2%)
Birch Telecom Inc. -- 144A* ......... 06/15/08 6,500 650,000
DTI Holdings Inc. -- 144A* .......... 03/01/08 15,000 150
Firstworld Communications, Inc. --
144A* .............................. 04/15/08 16,300 244,500
----------
894,650
----------
Restaurants (0.0%)
American Restaurant Group
Holdings, Inc. -- 144A* ............ 08/15/08 1,500 15
----------
Telecommunications (0.0%)
Startec Global Communications
Corp. -- 144A* ..................... 05/15/08 1,200 1,200
----------
TOTAL WARRANTS
(Cost $316,776, $0, and $316,776,
respectively) ...................... 1,240,572
----------
<CAPTION>
MORGAN STANLEY DEAN WITTER
WORLD WIDE INCOME TRUST COMBINED
-------------------------------- ---------------------------------
NUMBER OF NUMBER OF
WARRANTS VALUE WARRANTS VALUE
------------------ ------------- ------------------ --------------
<S> <C> <C> <C> <C>
WARRANTS (E) (0.2%)
Aerospace & Defense (0.0%)
Sabreliner Corp. -- 144A* ........... -- -- 1,000 $ 10,000
-- ----------
Broadcasting (0.0%)
UIH Australia/Pacific Inc. .......... -- -- 4,000 60,000
XM Satellite Radio Holdings Inc...... -- -- 1,200 168,000
-- ----------
-- 228,000
-- ----------
Casino/Gambling (0.0%)
Aladdin Gaming Enterprises, Inc.
-- 144A* ........................... -- -- 68,000 680
-- -- ----------
Cellular Telephone (0.0%)
McCaw International Ltd. --
144A* .............................. -- -- 5,300 106,000
-- -- ----------
Hotels/Resorts (0.0%)
Epic Resorts LLC/Capital --
144A* .............................. -- -- 2,700 27
Specialty Telecommunications (0.2%)
Birch Telecom Inc. -- 144A* ......... -- -- 6,500 650,000
DTI Holdings Inc. -- 144A* .......... -- -- 15,000 150
Firstworld Communications, Inc. --
144A* .............................. -- -- 16,300 244,500
-- ----------
-- 894,650
-- ----------
Restaurants (0.0%)
American Restaurant Group
Holdings, Inc. -- 144A* ............ -- -- 1,500 15
-- -- ----------
Telecommunications (0.0%)
Startec Global Communications
Corp. -- 144A* ..................... -- -- 1,200 1,200
-- -- ----------
TOTAL WARRANTS
(Cost $316,776, $0, and $316,776,
respectively) ...................... -- 1,240,572
-- ----------
<CAPTION>
PRINCIPAL
COUPON MATURITY AMOUNT
RATE DATE (IN THOUSANDS)
---- ---- --------------
<S> <C> <C> <C> <C>
SHORT-TERM
INVESTMENTS (4.3%)
UNITED STATES
TIME DEPOSITS (F) (2.6%)
Bank of America ..................... 7.70% 11/21/00 -- --
Chase Manhattan Bank ................ 6.875 11/02/00 NOK 59,063 6,358,411
Chase Manhattan Bank ................ 4.70 11/03/00 EUR 7,465 6,338,570
----------
TOTAL TIME DEPOSITS
(Cost $12,533,121, $5,340,835, and
$17,873,956, respectively).......... 12,696,981
----------
GOVERNMENT
AGENCY (G) (0.6%)
Student Loan Marketing Assoc. .......
(Cost $0, $3,800,000, and
$3,800,000, respectively)........... 6.45 11/01/00 -- --
----------
<CAPTION>
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT
(IN THOUSANDS) (IN THOUSANDS)
------------------ ------------------
<S> <C> <C> <C> <C>
SHORT-TERM
INVESTMENTS (4.3%)
UNITED STATES
TIME DEPOSITS (F) (2.6%)
Bank of America ..................... GRD 1,538,247 $3,843,888 GRD 1,538,247 3,843,888
Chase Manhattan Bank ................ -- -- NOK 59,063 6,358,411
Chase Manhattan Bank ................ EUR 984 835,690 EUR 8,449 7,174,260
----------
TOTAL TIME DEPOSITS
(Cost $12,533,121, $5,340,835, and
$17,873,956, respectively).......... 4,679,578 17,376,559
---------- ----------
GOVERNMENT
AGENCY (G) (0.6%)
Student Loan Marketing Assoc. .......
(Cost $0, $3,800,000, and
$3,800,000, respectively)........... $ 3,800 3,800,000 $ 3,800 3,800,000
---------- ----------
</TABLE>
9
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PRO FORMA PORTFOLIO OF INVESTMENTS AS OF OCTOBER 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST
----------------------------
PRINCIPAL
AMOUNT
COUPON MATURITY (IN
RATE DATE THOUSANDS) VALUE
---------- ---------- ------------ ---------------
<S> <C> <C> <C> <C>
REPURCHASE AGREEMENT (1.1%)
The Bank of New York
(dated 10/31/00; proceeds
$7,556,795) (h) (Cost $7,555,444,
$0, and $7,555,444, respectively)...... 6.44% 11/01/00 $ 7,555 $ 7,555,444
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $20,088,565, $9,140,835, and
$29,229,400, respectively)............. 20,252,425
------------
TOTAL INVESTMENTS
(Cost $795,895,736, $91,016,901,
and $886,912,637, respectively) (i) 97.1% 574,039,693
OTHER ASSETS AND
LIABILITIES ........................... 2.9 20,577,320
------ ------------
NET ASSETS ............................. 100.0% $594,617,013
====== ============
<CAPTION>
MORGAN STANLEY DEAN WITTER
WORLD WIDE INCOME TRUST COMBINED
-------------------------------- ----------------------------
PRINCIPAL
PRINCIPAL AMOUNT
AMOUNT (IN
(IN THOUSANDS) VALUE THOUSANDS) VALUE
---------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
REPURCHASE AGREEMENT (1.1%)
The Bank of New York
(dated 10/31/00; proceeds
$7,556,795) (h) (Cost $7,555,444,
$0, and $7,555,444, respectively)...... -- -- $ 7,555 $ 7,555,444
TOTAL SHORT-TERM INVESTMENTS
(Cost $20,088,565, $9,140,835, and
$29,229,400, respectively)............. $ 8,479,578 28,732,003
----------- ------------
TOTAL INVESTMENTS
(Cost $795,895,736, $91,016,901,
and $886,912,637, respectively) (i) 75,862,710 649,902,403
OTHER ASSETS AND
LIABILITIES ........................... (878,761) 19,698,559
----------- ------------
NET ASSETS ............................. $74,983,949 $669,600,962
=========== ============
</TABLE>
---------
* Resale is restricted to qualified institutional investors.
** The market value of securities pledged to cover margin requirements for
open future contracts is $630,000.
++ Consists of one or more class of securities traded together as a unit;
stocks or bonds with attached warrants.
+ Payment-in-kind security.
## Currently a zero coupon bond and will pay interest at the rate shown at a
future date.
# Some or all of these securities are segregated in connection with open
forward foreign currency contracts.
(a) Issuer in bankruptcy.
(b) Some or all of these securities are segregated in connection with open
forward foreign currency contracts and securities purchased on a forward
commitment basis.
(c) Non-income producing security; bond in default.
(d) Acquired through exchange offer.
(e) Non-income producing securities.
(f) Subject to withdrawal restrictions until maturity.
(g) Purchased on a discount basis. The interest rate shown has been adjusted
to reflect a money market equivalent yield.
(h) Collateralized by $7,562,416 U.S. Treasury Bill 6.25% due 07/31/02 valued
at $7,706,571.
(i) The aggregate cost for federal income tax purposes approximates the
aggregate cost for book purposes.
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED NET UNREALIZED
APPRECIATION DEPRECIATION DEPRECIATION
-------------- -------------- ------------------
<S> <C> <C> <C>
Morgan Stanley Dean Witter Diversified Income Trust ......... $11,396,154 $233,252,197 $ (221,856,043)
Morgan Stanley Dean Witter World Wide Income Trust .......... 119,399 15,273,590 (15,154,191)
----------- ------------ --------------
Combined .................................................... $11,515,553 $248,525,787 $ (237,010,234)
=========== ============ ==============
</TABLE>
10
<PAGE>
FUTURE CONTRACTS OPEN AT OCTOBER 31, 2000:
<TABLE>
<CAPTION>
MORGAN STANLEY DEAN WITTER MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST WORLD WIDE INCOME TRUST
-------------------------------------------------------------- --------------------------------------------------------
DESCRIPTION, UNDERLYING DESCRIPTION, UNDERLYING
NUMBER OF DELIVERY MONTH, FACE AMOUNT UNREALIZED NUMBER OF DELIVERY MONTH, FACE AMOUNT UNREALIZED
CONTRACTS AND YEAR AT VALUE GAIN CONTRACTS AND YEAR AT VALUE GAIN
----------------- ----------------- ------------- ------------ ----------- ----------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
-- -- -- -- 150 U.S Treasury $14,976,563 $8,203
Bond, =========== ======
December/2000
<CAPTION>
COMBINED
-------------------------------------------------------
DESCRIPTION, UNDERLYING
NUMBER OF DELIVERY MONTH, FACE AMOUNT UNREALIZED
CONTRACTS AND YEAR AT VALUE GAIN
----------- ----------------- ------------- -----------
<S> <C> <C> <C>
150 U.S Treasury $14,976,563 $8,203
Bond, =========== ======
December/2000
</TABLE>
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT OCTOBER 31, 2000:
<TABLE>
<CAPTION>
MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST
-----------------------------------------------------------------
UNREALIZED
CONTRACTS IN EXCHANGE DELIVERY APPRECIATION
TO DELIVER FOR DATE (DEPRECIATION)
---------------------- -------------- ---------- ----------------
<S> <C> <C> <C>
$ 6,307,965 EUR7,465,047 11/01/00 $ 30,607
EUR 15,946,000 $ 13,379,013 11/27/00 (177,957)
GBP 3,300,000 $ 4,797,411 11/13/00 10,307
GBP 1,615,235 $ 2,348,956 11/30/00 5,088
NOK 59,085,846 $ 6,307,833 11/02/00 (53,008)
----------
Net unrealized depreciation ..................... $ (184,963)
==========
<CAPTION>
MORGAN STANLEY DEAN WITTER
WORLD WIDE INCOME TRUST
-----------------------------------------------------------------------------------
UNREALIZED
CONTRACTS IN EXCHANGE DELIVERY APPRECIATION CONTRACTS
TO DELIVER FOR DATE (DEPRECIATION) TO DELIVER
-------------- ------------------ ---------- ---------------- ---------------------
<S> <C> <C> <C> <C>
$831,655 EUR 984,207 11/01/00 $4,035 $7,139,620
-- -- -- -- 15,946,000
-- -- -- -- 3,300,000
GBP 559,315 $813,384 11/30/00 1,762 GBP 2,174,550
-- -- -- -- NOK 59,085,846
------
Net unrealized appreciation ....... $5,797
======
<CAPTION>
COMBINED
-----------------------------------------------
UNREALIZED
IN EXCHANGE DELIVERY APPRECIATION
FOR DATE (DEPRECIATION)
-------------------- ---------- ---------------
<S> <C> <C>
EUR 8,449,254 11/01/00 $ 34,642
$13,379,013 11/27/00 (177,957)
$ 4,797,411 11/13/00 10,307
$ 3,162,340 11/30/00 6,850
$ 6,307,833 11/02/00 (53,008)
----------
Net unrealized depreciation $ (179,166)
==========
</TABLE>
-------
Currency Abbreviations:
-----------------------
AUD Australian Dollar.
GBP British Pound.
CAD Canadian Dollar.
DKK Danish Krone.
EUR Euro.
GRD Greek Drachma.
NOK Norwegian Krone.
SEK Swedish Krona.
See Notes to Financial Statements
11
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PRO FORMA FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
MORGAN STANLEY MORGAN STANLEY
DEAN WITTER DEAN WITTER
DIVERSIFIED INCOME WORLD WIDE INCOME PRO FORMA
TRUST TRUST ADJUSTMENTS COMBINED
-------------------- ------------------- --------------- -----------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities, at value (cost
$795,895,736, $91,016,901 and $886,912,637,
respectively) ........................................ $ 574,039,693 $ 75,862,710 -- $ 649,902,403
Unrealized appreciation on open forward foreign
currency contracts ................................... 46,002 5,797 -- 51,799
Cash .................................................. 10,865,719 163,003 -- 11,028,722
Receivable for:
Interest ............................................. 14,352,856 1,984,337 -- 16,337,193
Investments sold ..................................... 3,074,411 -- -- 3,074,411
Shares of beneficial interest ........................ 924,731 62,882 -- 987,613
Prepaid expenses and other assets ..................... 49,889 21,814 -- 71,703
--------------- ------------- -- ---------------
TOTAL ASSETS ......................................... 603,353,301 78,100,543 -- 681,453,844
--------------- ------------- -- ---------------
LIABILITIES:
Unrealized depreciation on open forward foreign
currency contracts ................................... 230,965 -- -- 230,965
Payable for:
Investments purchased ................................ 6,338,571 835,690 -- 7,174,261
Shares of beneficial interest purchased .............. 1,372,626 1,974,682 -- 3,347,308
Plan of distribution fee ............................. 445,329 39,080 -- 484,409
Investment management fee ............................ 214,041 50,904 -- 264,945
Accrued expenses and other payables ................... 134,756 216,238 -- 350,994
--------------- ------------- -- ---------------
TOTAL LIABILITIES .................................... 8,736,288 3,116,594 -- 11,852,882
--------------- ------------- -- ---------------
NET ASSETS ........................................... $ 594,617,013 $ 74,983,949 -- $ 669,600,962
=============== ============= == ===============
COMPOSITION OF NET ASSETS:
Paid-in-capital ....................................... $ 868,179,632 $ 107,003,165 -- $ 975,182,797
Net unrealized depreciation ........................... (222,546,422) (15,239,395) -- (237,785,817)
Dividends in excess of net investment income .......... (3,126,277) (79,858) -- (3,206,135)
Accumulated net realized loss ......................... (47,889,920) (16,699,963) -- (64,589,883)
--------------- ------------- -- ---------------
NET ASSETS ........................................... $ 594,617,013 $ 74,983,949 -- $ 669,600,962
=============== ============= == ===============
CLASS A SHARES:
Net Assets ............................................ $ 13,318,287 $ 24,216,402 $ 37,534,689
Shares Outstanding (unlimited authorized, $.01 par
value) ............................................... 1,911,492 3,469,748 4,628(1) 5,385,868
NET ASSET VALUE PER SHARE ............................ $ 6.97 $ 6.98 $ 6.97
=============== ============= ===============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44% of net asset value) ..... $ 7.28 $ 7.29 $ 7.28
=============== ============= ===============
CLASS B SHARES:
Net Assets ............................................ $ 565,492,583 $ 43,537,700 -- $ 609,030,283
Shares Outstanding (unlimited authorized, $.01 par
value) ............................................... 81,046,617 6,221,835 15,658(1) 87,284,110
NET ASSET VALUE PER SHARE ............................ $ 6.98 $ 7.00 $ 6.98
=============== ============= ===============
CLASS C SHARES:
Net Assets ............................................ $ 14,312,911 $ 667,516 -- $ 14,980,427
Shares Outstanding (unlimited authorized, $.01 par
value) ............................................... 2,054,667 95,529 241(1) 2,150,437
NET ASSET VALUE PER SHARE ............................ $ 6.97 $ 6.99 $ 6.97
=============== ============= ===============
CLASS D SHARES:
Net Assets ............................................ $ 1,493,232 $ 6,562,331 -- $ 8,055,563
Shares Outstanding (unlimited authorized, $.01 par
value) ............................................... 213,723 937,357 1,460(1) 1,152,540
NET ASSET VALUE PER SHARE ............................ $ 6.99 $ 7.00 $ 6.99
=============== ============= ===============
</TABLE>
----------
(1) Represents the difference between total additional shares to be issued
(see Note 2) and current World Wide Income Trust shares outstanding.
See Notes to Pro Forma Financial Statements
12
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PRO FORMA FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED OCTOBER 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
MORGAN STANLEY MORGAN STANLEY
DEAN WITTER DEAN WITTER PRO FORMA
DIVERSIFIED INCOME WORLD WIDE INCOME ADJUSTMENTS
TRUST TRUST (NOTE 3) COMBINED
-------------------- ------------------- -------------------- ----------------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ................................... $ 75,346,208 $ 6,985,965 -- $ 82,332,173
-------------- ------------- -- --------------
EXPENSES
Plan of distribution fee (Class A shares) ......... 35,950 58,120 -- 94,070
Plan of distribution fee (Class B shares) ......... 6,043,295 455,501 -- 6,498,796
Plan of distribution fee (Class C shares) ......... 141,669 6,493 -- 148,162
Investment management fee ......................... 2,991,996 661,679 $ (308,783)(1) 3,344,892
Transfer agent fees and expenses .................. 574,665 151,017 21,450 (3) 747,132
Registration fees ................................. 99,365 65,601 (43,741)(2) 121,225
Custodian fees .................................... 95,416 12,324 -- 107,740
Shareholder reports and notices ................... 94,666 77,732 (57,501)(2)
53,612 (3) 168,509
Professional fees ................................. 77,919 78,528 (78,528)(2)
62,000 (3) 139,919
Trustees' fees and expenses ....................... 17,188 17,776 (17,776)(2) 17,188
Other ............................................. 25,491 7,984 (788)(2) 32,687
-------------- ------------- ----------- --------------
TOTAL EXPENSES .................................... 10,197,620 1,592,755 (370,055) 11,420,320
-------------- ------------- ----------- --------------
NET INVESTMENT INCOME ............................. 65,148,588 5,393,210 370,055 70,911,853
-------------- ------------- ----------- --------------
NET REALIZED AND UNREALIZED GAIN
(LOSS):
NET REALIZED GAIN (LOSS) ON:
Investments ...................................... (40,481,232) (6,679,390) -- (47,160,622)
Futures contracts ................................ -- 852,131 -- 852,131
Foreign exchange transactions .................... 9,895,709 2,719,576 -- 12,615,285
-------------- ------------- ----------- --------------
NET LOSS ........................................ (30,585,523) (3,107,683) -- (33,693,206)
-------------- ------------- ----------- --------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
ON:
Investments ...................................... (82,907,458) (8,557,404) -- (91,464,862)
Futures contracts ................................ -- (200,534) -- (200,534)
Translation of forward foreign currrency
contracts, other assets and liabilities
denominated in foreign currencies ............... (1,425,031) (233,035) -- (1,658,066)
-------------- ------------- ----------- --------------
NET DEPRECIATION ................................ (84,332,489) (8,990,973) -- (93,323,462)
-------------- ------------- ----------- --------------
NET LOSS ........................................ (114,918,012) (12,098,656) -- (127,016,668)
-------------- ------------- ----------- --------------
NET INCREASE (DECREASE) ........................... $ (49,769,424) $ (6,705,446) $ 370,055 $ (56,104,815)
============== ============= =========== ==============
</TABLE>
----------
(1) Reflects adjustment to investment management fees based on the surviving
Fund's fee schedule.
(2) Reflects elimination of duplicate services or fees.
(3) Solicitation costs in connection with the organization, which will be
borne by World Wide Income Trust approximate $137,062.
See Notes to Pro Forma Financial Statements
13
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION -- The Pro Forma Statement of Assets and Liabilities,
including the Portfolio of Investments, at October 31, 2000 and the related
Statement of Operations ("Pro Forma Statements") for the twelve months ended
October 31, 2000, reflect the accounts of Morgan Stanley Dean Witter
Diversified Income Trust ("Diversified Income") and Morgan Stanley Dean Witter
World Wide Income Trust ("World Wide Income").
The Pro Forma Statements give effect to the proposed transfer of all assets and
liabilities of World Wide Income in exchange for shares in Diversified Income.
The Pro Forma Statements should be read in conjunction with the historical
financial statements of each Fund included in its Statement of Additional
Information.
2. SHARES OF BENEFICIAL INTEREST -- The pro forma net asset value per share
assumes the issuance of additional shares of Diversified Income which would
have been issued on October 31, 2000 in connection with the proposed
reorganization. Shareholders of World Wide Income would become shareholders of
Diversified Income receiving shares of the corresponding class of Diversified
Income equal to the value of their holdings in World Wide Income. The amount of
additional shares assumed to be issued was calculated based on the October 31,
2000 net assets of World Wide Income and the net asset value per share of
Diversified Income as follows:
<TABLE>
<CAPTION>
CLASS A B C D
----------------------------------- ---------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Additional Shares Issued .......... 3,474,376 6,237,493 95,770 938,817
Net Assets 10/31/00
World Wide Income ................ $ 24,216,402 $ 43,537,700 $ 667,516 $ 6,562,331
Net Asset Value Per Share
Diversified Income ............... $ 6.97 $ 6.98 $ 6.97 $ 6.99
</TABLE>
3. PRO FORMA OPERATIONS -- The Pro Forma Statement of Operations assumes
similar rates of gross investment income for the investments of each Fund.
Accordingly, the combined gross investment income is equal to the sum of each
Fund's gross investment income. Certain expenses have been adjusted to reflect
the expected expenses of the combined entity. The pro-forma investment
management fees and plan of distribution fees of the combined Fund are based on
the fee schedule in effect for Diversified Income at the combined level of
average net assets for the twelve months ended October 31, 2000. The Pro Forma
Statement of Operations does not include the effect of any realized gains or
losses, or transaction fees incurred in connection with the realignment of the
portfolio.
14
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MORGAN STANLEY DEAN WITTER
DIVERSIFIED INCOME TRUST
JANUARY 8, 2001
--------------------------------------------------------------------------------
This Statement of Additional Information is not a Prospectus. The
Prospectus (dated January 8, 2001 for Morgan Stanley Dean Witter Diversified
Income Trust may be obtained without charge from the Fund at its address or
telephone number listed below or from Dean Witter Reynolds at any of its branch
offices.
Morgan Stanley Dean Witter
Diversified Income Trust
Two World Trade Center
New York, NY 10048
(800) 869-NEWS
<PAGE>
TABLE OF CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
I. Fund History ...................................................... 4
II. Description of the Fund and Its Investments and Risks ............. 4
A. Classification .............................................. 4
B. Investment Strategies and Risks ............................. 4
C. Fund Policies/Investment Restrictions ....................... 13
III. Management of the Fund ............................................ 15
A. Board of Trustees ........................................... 15
B. Management Information ...................................... 15
C. Compensation ................................................ 20
IV. Control Persons and Principal Holders of Securities ............... 22
V. Investment Management and Other Services .......................... 22
A. Investment Manager .......................................... 22
B. Principal Underwriter ....................................... 23
C. Services Provided by the Investment Manager ................. 23
D. Dealer Reallowances ......................................... 24
E. Rule 12b-1 Plan ............................................. 24
F. Other Service Providers ..................................... 28
G. Codes of Ethics ............................................. 29
VI. Brokerage Allocation and Other Practices .......................... 29
A. Brokerage Transactions ...................................... 29
B. Commissions ................................................. 29
C. Brokerage Selection ......................................... 30
D. Directed Brokerage .......................................... 31
E. Regular Broker-Dealers ...................................... 31
VII. Capital Stock and Other Securities ................................ 31
VIII. Purchase, Redemption and Pricing of Shares ........................ 32
A. Purchase/Redemption of Shares ............................... 32
B. Offering Price .............................................. 32
IX. Taxation of the Fund and Shareholders ............................. 33
X. Underwriters ...................................................... 35
XI. Calculation of Performance Data ................................... 35
XII. Financial Statements .............................................. 37
</TABLE>
2
<PAGE>
Glossary of Selected Defined Terms
The terms defined in this glossary are frequently used in this Statement
of Additional Information (other terms used occasionally are defined in the
text of the document).
"Custodian" - The Bank of New York is the Custodian of the Fund's assets
as described in groupings 2 and 3 in the Fund's Prospectus. The Chase Manhattan
Bank is the Custodian of the Fund's assets as described in grouping 1 in the
Prospectus.
"Dean Witter Reynolds" - Dean Witter Reynolds Inc., a wholly-owned
broker-dealer subsidiary of MSDW.
"Distributor" - Morgan Stanley Dean Witter Distributors Inc., a
wholly-owned broker-dealer subsidiary of MSDW.
"Financial Advisors" - Morgan Stanley Dean Witter authorized financial
services representatives.
"Fund" - Morgan Stanley Dean Witter Diversified Income Trust, a registered
open-end investment company.
"Independent Trustees" - Trustees who are not "interested persons" (as
defined by the Investment Company Act) of the Fund.
"Investment Manager" - Morgan Stanley Dean Witter Advisors Inc., a
wholly-owned investment advisor subsidiary of MSDW.
"Morgan Stanley & Co." - Morgan Stanley & Co. Incorporated, a wholly-owned
broker-dealer subsidiary of MSDW.
"Morgan Stanley Dean Witter Funds" - Registered investment companies (i)
for which the Investment Manager serves as the investment advisor and (ii) that
hold themselves out to investors as related companies for investment and
investor services.
"MSDW" - Morgan Stanley Dean Witter & Co., a preeminent global financial
services firm.
"MSDW Services Company" - Morgan Stanley Dean Witter Services Company
Inc., a wholly-owned fund services subsidiary of the Investment Manager.
"Transfer Agent" - Morgan Stanley Dean Witter Trust FSB, a wholly-owned
transfer agent subsidiary of MSDW.
"Trustees" - The Board of Trustees of the Fund.
3
<PAGE>
I. FUND HISTORY
--------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust, under a
Declaration of Trust, on December 20, 1991, with the name Dean Witter
Diversified Income Trust. Effective June 22, 1998, the Fund's name was changed
to Morgan Stanley Dean Witter Diversified Income Trust.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
--------------------------------------------------------------------------------
A. CLASSIFICATION
The Fund is an open-end, diversified management investment company whose
primary investment objective is a high level of current income. As a secondary
objective, the Fund seeks to maximize total return but only to the extent
consistent with its primary objective.
B. INVESTMENT STRATEGIES AND RISKS
The following discussion of the Fund's investment strategies and risks
should be read with the sections of the Fund's Prospectus titled "Principal
Investment Strategies," "Principal Risks," "Additional Investment Strategy
Information," and "Additional Risk Information."
OTHER GLOBAL SECURITIES. The Fund may invest in loan participation
interests and may also invest in notes and commercial paper, the principal
amount of which is indexed to certain specific currency exchange rates. The
Fund may purchase these indexed obligations to generate current income or for
hedging purposes.
COLLATERALIZED MORTGAGE OBLIGATIONS. The Fund may invest in CMOs -
collateralized mortgage obligations. CMOs are debt obligations collateralized
by mortgage loans or mortgage pass-through securities (collectively "Mortgage
Assets"). Payments of principal and interest on the Mortgage Assets and any
reinvestment income are used to make payments on the CMOs. CMOs are issued in
multiple classes. Each class has a specific fixed or floating coupon rate and a
stated maturity or final distribution date. The principal and interest on the
Mortgage Assets may be allocated among the classes in a number of different
ways. Certain classes will, as a result of the collection, have more
predictable cash flows than others. As a general matter, the more predictable
the cash flow, the lower the yield relative to other Mortgage Assets. The less
predictable the cash flow, the higher the yield and the greater the risk. The
Fund may invest in any class of CMO.
Certain mortgage-backed securities in which the Fund may invest (e.g.,
certain classes of CMOs) may increase or decrease in value substantially with
changes in interest rates and/or the rates of prepayment. In addition, if the
collateral securing CMOs or any third party guarantees are insufficient to make
payments, the Fund could sustain a loss.
In addition, the Fund may purchase stripped mortgage-backed securities,
which are usually structured in two classes. One class entitles the holder to
receive all or most of the interest but little or none of the principal of a
pool of Mortgage Assets (the interest-only or "IO" Class), while the other
class entitles the holder to receive all or most of the principal but little or
none of the interest (the principal-only or "PO" Class). IOs tend to decrease
in value substantially if interest rates decline and prepayment rates become
more rapid. POs tend to decrease in value substantially if interest rates
increase and the rate of repayment decreases.
ASSET-BACKED SECURITIES. The Fund may invest in asset-backed securities.
Asset-backed securities have risk characteristics similar to mortgage-backed
securities. Like mortgage-backed securities, they generally decrease in value
as a result of interest rate increases, but may benefit less than other
fixed-income securities from declining interest rates, principally because of
prepayments. Also, as in the case of mortgage-backed securities, prepayments
generally increase during a period of declining interest rates although other
factors, such as changes in credit use and payment patterns, may also influence
prepayment rates. Asset-backed securities also involve the risk that various
federal and state consumer laws and other legal and economic factors may result
in the collateral backing the securities being insufficient to support payment
on the securities.
4
<PAGE>
The securitization techniques used to develop mortgage-backed securities
are also applied to a broad range of other assets. Various types of assets,
primarily automobile and credit card receivables and home equity loans, are
being securitized in pass-through structures similar to the mortgage
pass-through structures. New instruments and variations of existing
mortgage-backed securities and asset-backed securities continue to be
developed. The Fund may invest in any of these instruments or variations.
COMMON STOCKS. The Fund may invest in common stocks in an amount up to 20%
of its total assets. The Fund may acquire common stocks when attached to or
included in a unit with fixed-income securities, or when acquired upon
conversion of fixed-income securities or upon exercise of warrants attached to
fixed-income securities and may purchase common stocks directly when such
acquisitions are determined by the Investment Manager to further the Fund's
investment objectives. For example, the Fund may purchase the common stock of
companies involved in takeovers or recapitalizations where the issuer, or a
controlling stockholder, has offered, or pursuant to a "going private"
transaction is effecting, an exchange of its common stock for newly-issued
fixed-income securities. By purchasing the common stock of the company issuing
the fixed-income securities prior to the consummation of the transaction or
exchange offer, the Fund will be able to obtain the fixed-income securities
directly from the issuer at their face value, eliminating the payment of a
dealer's mark-up otherwise payable when fixed-income securities are acquired
from third parties, thereby increasing the net yield to the shareholders of the
Fund. While the Fund will incur brokerage commissions in connection with its
purchase of common stocks, it is anticipated that the amount of such
commissions will be significantly less than the amount of such mark-up.
Fixed-income securities acquired by the Fund through the purchase of
common stocks under the circumstances described in the preceding paragraph are
subject to the general credit risks and interest rate risks to which all
fixed-income securities purchased by the Fund are subject. Such securities
generally will be rated Baa/BBB or lower as are the other high yield, high risk
fixed income securities in which the Fund may invest. In addition, since
corporations involved in takeover situations are often highly leveraged, that
factor will be evaluated by the Investment Manager as part of its credit risk
determination with respect to the purchase of particular common stocks for the
Fund's investment portfolio. In the event the Fund purchases common stock of a
corporation in anticipation of a transaction (pursuant to which the common
stock is to be exchanged for fixed-income securities) which fails to take
place, the Investment Manager will continue to hold such common stocks for the
Fund's portfolio only if it determines that continuing to hold such common
stock under those circumstances is consistent with the Fund's investment
objectives.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may enter into
forward foreign currency exchange contracts ("forward contracts") as a hedge
against fluctuations in future foreign exchange rates. The Fund may conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. A
forward contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large, commercial and investment banks) and
their customers. Forward contracts only will be entered into with United States
banks and their foreign branches, insurance companies and other dealers whose
assets total $1 billion or more, or foreign banks whose assets total $1 billion
or more. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades.
The Investment Manager also may from time to time utilize forward
contracts to hedge a foreign security held in the portfolio or a security which
pays out principal tied to an exchange rate between the U.S. dollar and a
foreign currency, against a decline in value of the applicable foreign
currency. They also may be used to lock in the current exchange rate of the
currency in which those securities anticipated to be purchased are denominated.
At times, the Fund may enter into "cross-currency" hedging transactions
involving currencies other than those in which securities are held or proposed
to be purchased are denominated.
5
<PAGE>
The Fund will not enter into forward currency contracts or maintain a net
exposure to these contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. It will, however, do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the spread between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
The Fund may be limited in its ability to enter into hedging transactions
involving forward contracts by the Internal Revenue Code requirements relating
to qualification as a regulated investment company.
Forward currency contracts may limit gains on portfolio securities that
could otherwise be realized had they not been utilized and could result in
losses. The contracts also may increase the Fund's volatility and may involve a
significant amount of risk relative to the investment of cash.
OPTIONS AND FUTURES TRANSACTIONS. The Fund may engage in transactions in
listed and OTC options. Listed options are issued or guaranteed by the exchange
on which they are traded or by a clearing corporation such as the Options
Clearing Corporation ("OCC"). Ownership of a listed call option gives the Fund
the right to buy from the OCC (in the U.S.) or other clearing corporation or
exchange, the underlying security or currency covered by the option at the
stated exercise price (the price per unit of the underlying security) by filing
an exercise notice prior to the expiration date of the option. The writer
(seller) of the option would then have the obligation to sell to the OCC (in
the U.S.) or other clearing corporation or exchange, the underlying security or
currency at that exercise price prior to the expiration date of the option,
regardless of its then current market price. Ownership of a listed put option
would give the Fund the right to sell the underlying security or currency to
the OCC (in the U.S.) or other clearing corporation or exchange, at the stated
exercise price. Upon notice of exercise of the put option, the writer of the
put would have the obligation to purchase the underlying security or currency
from the OCC (in the U.S.) or other clearing corporation or exchange, at the
exercise price.
Covered Call Writing. The Fund is permitted to write covered call options
on portfolio securities and on the U.S. dollar and foreign currencies in which
they are denominated, without limit.
The Fund will receive from the purchaser, in return for a call it has
written, a "premium;" i.e., the price of the option. Receipt of these premiums
may better enable the Fund to earn a higher level of current income than it
would earn from holding the underlying securities (or currencies) alone.
Moreover, the premium received will offset a portion of the potential loss
incurred by the Fund if the securities (or currencies) underlying the option
decline in value.
The Fund may be required, at any time during the option period, to deliver
the underlying security (or currency) against payment of the exercise price on
any calls it has written. This obligation is terminated upon the expiration of
the option period or at such earlier time when the writer effects a closing
purchase transaction. A closing purchase transaction is accomplished by
purchasing an option of the same series as the option previously written.
However, once the Fund has been assigned an exercise notice, the Fund will be
unable to effect a closing purchase transaction.
A call option is "covered" if the Fund owns the underlying security
subject to the option or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional consideration
(in cash, Treasury bills or other liquid portfolio securities) held in a
segregated account on the Fund's books) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the Fund
holds a call on the same security as the call written where the exercise price
of the call held is (i) equal to or less than the exercise price of the call
written or (ii) greater than the exercise price of the call written if the
difference is maintained by the Fund in cash, Treasury bills or other liquid
portfolio securities in a segregated account on the Fund's books.
6
<PAGE>
Options written by the Fund normally have expiration dates of from up to
eighteen months from the date written. The exercise price of a call option may
be below, equal to or above the current market value of the underlying security
at the time the option is written.
Covered Put Writing. A writer of a covered put option incurs an obligation
to buy the security underlying the option from the purchaser of the put, at the
option's exercise price at any time during the option period, at the
purchaser's election. Through the writing of a put option, the Fund would
receive income from the premium paid by purchasers. The potential gain on a
covered put option is limited to the premium received on the option (less the
commissions paid on the transaction). During the option period, the Fund may be
required, at any time, to make payment of the exercise price against delivery
of the underlying security (or currency). A put option is "covered" if the Fund
maintains cash, Treasury bills or other liquid portfolio securities with a
value equal to the exercise price in a segregated account on the Fund's books,
or holds a put on the same security as the put written where the exercise price
of the put held is equal to or greater than the exercise price of the put
written. The aggregate value of the obligations underlying puts may not exceed
50% of the Fund's assets. The operation of and limitations on covered put
options in other respects are substantially identical to those of call options.
Purchasing Call and Put Options. The Fund may purchase listed and OTC call
and put options in amounts equaling up to 5% of its total assets. The purchase
of a call option would enable the Fund, in return for the premium paid to lock
in a purchase price for a security or currency during the term of the option.
The purchase of a put option would enable the Fund, in return for a premium
paid, to lock in a price at which it may sell a security or currency during the
term of the option.
Options on Foreign Currencies. The Fund may purchase and write options on
foreign currencies for purposes similar to those involved with investing in
forward foreign currency exchange contracts.
OTC Options. OTC options are purchased from or sold (written) to dealers
or financial institutions which have entered into direct agreements with the
Fund. With OTC options, such variables as expiration date, exercise price and
premium will be agreed upon between the Fund and the transacting dealer,
without the intermediation of a third party such as the OCC. The Fund will
engage in OTC option transactions only with member banks of the Federal Reserve
Bank System or primary dealers in U.S. Government securities or with affiliates
of such banks or dealers.
Risks of Options Transactions. The successful use of options depends on
the ability of the Investment Manager to forecast correctly interest rates,
currency exchange rates and/or market movements. If the market value of the
portfolio securities (or the currencies in which they are denominated) upon
which call options have been written increases, the Fund may receive a lower
total return from the portion of its portfolio upon which calls have been
written than it would have had such calls not been written. During the option
period, the covered call writer has, in return for the premium on the option,
given up the opportunity for capital appreciation above the exercise price
should the market price of the underlying security (or the value of its
denominated currency) increase, but has retained the risk of loss should the
price of the underlying security (or the value of its denominated currency)
decline. The covered put writer also retains the risk of loss should the market
value of the underlying security decline below the exercise price of the option
less the premium received on the sale of the option. In both cases, the writer
has no control over the time when it may be required to fulfill its obligation
as a writer of the option. Prior to exercise or expiration, an option position
can only be terminated by entering into a closing purchase or sale transaction.
Once an option writer has received an exercise notice, it cannot effect a
closing purchase transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price.
The Fund's ability to close out its position as a writer of an option is
dependent upon the existence of a liquid secondary market on option exchanges.
There is no assurance that such a market will exist, particularly in the case
of OTC options.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in options, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. In the case of
7
<PAGE>
OTC options, if the transacting dealer fails to make or take delivery of the
securities underlying an option it has written, in accordance with the terms of
that option, due to insolvency or otherwise, the Fund would lose the premium
paid for the option as well as any anticipated benefit of the transaction.
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security which may be
written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). An exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be
reflected in the option markets.
The markets in foreign currency options are relatively new and the Fund's
ability to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market.
There can be no assurance that a liquid secondary market will exist for a
particular option at any specific time.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and have no relationship to the investment merits of a foreign security.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in
an odd lot market (generally consisting of transactions of less than $1
million) for the underlying foreign currencies at prices that are less
favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the
extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may
take place in the underlying markets that are not reflected in the options
market.
Futures Contracts. The Fund may purchase and sell interest rate, currency
and index futures contracts that are traded on U.S. and foreign commodity
exchanges on such underlying securities as U.S. Treasury bonds, notes, bills
and GNMA Certificates and/or any foreign government fixed-income security, on
various currencies and on such indexes of U.S. and foreign securities as may
exist or come into existence.
A futures contract purchaser incurs an obligation to take delivery of a
specified amount of the obligation underlying the contract at a specified time
in the future for a specified price. A seller of a futures contract incurs an
obligation to deliver the specified amount of the underlying obligation at a
specified time in return for an agreed upon price. The purchase of a futures
contract enables the Fund, during the term of the contract, to lock in a price
at which it may purchase a security or currency and protect against a rise in
prices pending purchase of portfolio securities. The sale of a futures contract
enables the Fund to lock in a price at which it may sell a security or currency
and protect against declines in the value of portfolio securities.
Although most futures contracts call for actual delivery or acceptance of
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. Index futures contracts provide for
the delivery of an amount of cash equal to a specified dollar amount times the
8
<PAGE>
difference between the index value at the open or close of the last trading day
of the contract and the futures contract price. A futures contract sale is
closed out by effecting a futures contract purchase for the same aggregate
amount of the specific type of security (currency) and the same delivery date.
If the sale price exceeds the offsetting purchase price, the seller would be
paid the difference and would realize a gain. If the offsetting purchase price
exceeds the sale price, the seller would pay the difference and would realize a
loss. Similarly, a futures contract purchase is closed out by effecting a
futures contract sale for the same aggregate amount of the specific type of
security (currency) and the same delivery date. If the offsetting sale price
exceeds the purchase price, the purchaser would realize a gain, whereas if the
purchase price exceeds the offsetting sale price, the purchaser would realize a
loss. There is no assurance that the Fund will be able to enter into a closing
transaction.
Margin. If the Fund enters into a futures contract, it is initially
required to deposit an "initial margin" of cash, U.S. Government securities or
other liquid portfolio securities ranging from approximately 2% to 5% of the
contract amount. Initial margin requirements are established by the exchanges
on which futures contracts trade and may, from time to time, change. In
addition, brokers may establish margin deposit requirements in excess of those
required by the exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing
of funds by a broker's client but is, rather, a good faith deposit on the
futures contract which will be returned to the Fund upon the proper termination
of the futures contract. The margin deposits made are marked to market daily
and the Fund may be required to make subsequent deposits of cash, U.S.
Government securities or other liquid portfolio securities, called "variation
margin," which are reflective of price fluctuations in the futures contract.
Options on Futures Contracts. The Fund may purchase and write call and put
options on futures contracts and enter into closing transactions with respect
to such options to terminate an existing position. An option on a futures
contract gives the purchaser the right (in return for the premium paid), and
the writer the obligation, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put)
at a specified exercise price at any time during the term of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option is accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents
the amount by which the market price of the futures contract at the time of
exercise exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract.
The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an
option on a futures contract are included in initial margin deposits.
Limitations on Futures Contracts and Options on Futures. The Fund may not
enter into futures contracts or purchase related options thereon if,
immediately thereafter, the amount committed to margin plus the amount paid for
premiums for unexpired options on futures contracts exceeds 5% of the value of
the Fund's total assets, after taking into account unrealized gains and
unrealized losses on such contracts it has entered into, provided, however,
that in the case of an option that is in-the-money (the exercise price of the
call (put) option is less (more) than the market price of the underlying
security) at the time of purchase, the in-the-money amount may be excluded in
calculating the 5%. However, there is no overall limitation on the percentage
of the Fund's net assets which may be subject to a hedge position.
Risks of Transactions in Futures Contracts and Related Options. The prices
of securities and indexes subject to futures contracts (and thereby the futures
contract prices) may correlate imperfectly with the behavior of the cash prices
of the Fund's portfolio securities (and the currencies in which they are
denominated). Also, prices of futures contracts may not move in tandem with the
changes in prevailing interest rates, market movements and/or currency exchange
rates against which the Fund seeks a hedge. A correlation may also be distorted
(a) temporarily, by short-term traders' seeking to profit from the difference
between a contract or security price objective and their cost of borrowed
funds; (b) by investors in futures contracts electing to close out their
contracts through offsetting transactions rather
9
<PAGE>
than meet margin deposit requirements; (c) by investors in futures contracts
opting to make or take delivery of underlying securities rather than engage in
closing transactions, thereby reducing liquidity of the futures market; and (d)
temporarily, by speculators who view the deposit requirements in the futures
markets as less onerous than margin requirements in the cash market. Due to the
possibility of price distortion in the futures market and because of the
possible imperfect correlation between movements in the prices of securities
and movements in the prices of futures contracts, a correct forecast of
interest rate, currency exchange rate and/or market movement trends by the
Investment Manager may still not result in a successful hedging transaction.
There is no assurance that a liquid secondary market will exist for
futures contracts and related options in which the Fund may invest. In the
event a liquid market does not exist, it may not be possible to close out a
futures position and, in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin. The
absence of a liquid market in futures contracts might cause the Fund to make or
take delivery of the underlying securities (currencies) at a time when it may
be disadvantageous to do so.
Exchanges also limit the amount by which the price of a futures contract
may move on any day. If the price moves equal the daily limit on successive
days, then it may prove impossible to liquidate a futures position until the
daily limit moves have ceased. In the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin on open futures positions. In these situations, if the Fund has
insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do
so. In addition, the Fund may be required to take or make delivery of the
instruments underlying interest rate futures contracts it holds at a time when
it is disadvantageous to do so. The inability to close out options and futures
positions could also have an adverse impact on the Fund's ability to
effectively hedge its portfolio.
Futures contracts and options thereon which are purchased or sold on
foreign commodities exchanges may have greater price volatility than their U.S.
counterparts. Furthermore, foreign commodities exchanges may be less regulated
and under less governmental scrutiny than U.S. exchanges. Brokerage
commissions, clearing costs and other transaction costs may be higher on
foreign exchanges. Greater margin requirements may limit the Fund's ability to
enter into certain commodity transactions on foreign exchanges. Moreover,
differences in clearance and delivery requirements on foreign exchanges may
occasion delays in the settlement of the Fund's transactions effected on
foreign exchanges.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the
broker and/or incur a loss of all or part of its margin deposits with the
broker.
If the Fund maintains a short position in a futures contract or has sold a
call option in a futures contract, it will cover this position by holding, in a
segregated account maintained on the books of the Fund, cash, U.S. government
securities or other liquid portfolio securities equal in value (when added to
any initial or variation margin on deposit) to the market value of the
securities underlying the futures contract or the exercise price of the option.
Such a position may also be covered by owning the securities underlying the
futures contract (in the case of a stock index futures contract a portfolio of
securities substantially replicating the relevant index), or by holding a call
option permitting the Fund to purchase the same contract at a price no higher
than the price at which the short position was established.
In addition, if the Fund holds a long position in a futures contract or
has sold a put option on a futures contract, it will hold cash, U.S. government
securities or other liquid portfolio securities equal to the purchase price of
the contract or the exercise price of the put option (less the amount of
initial or variation margin on deposit) in a segregated account maintained on
the books of the Fund. Alternatively, the Fund could cover its long position by
purchasing a put option on the same futures contract with an exercise price as
high or higher than the price of the contract held by the Fund.
MONEY MARKET SECURITIES. In addition to the short-term fixed-income
securities in which the Fund may otherwise invest, the Fund may invest in
various money market securities for cash management
10
<PAGE>
purposes or when assuming a temporary defensive position, which among others
may include commercial paper, bank acceptances, bank obligations, corporate
debt securities, certificates of deposit, U.S. Government securities,
obligations of savings institutions and repurchase agreements. Such securities
include:
U.S. or Foreign Government Securities. Obligations issued or guaranteed as
to principal and interest by the United States or its agencies (such as the
Export-Import Bank of the United States, Federal Housing Administration and
Government National Mortgage Association) or its instrumentalities (such as the
Federal Home Loan Bank), including Treasury bills, notes and bonds;
Bank Obligations. Obligations (including certificates of deposit, time
deposits and bankers' acceptances) of banks subject to regulation by the U.S.
Government and having total assets of $1 billion or more, and instruments
secured by such obligations, not including obligations of foreign branches of
domestic banks except to the extent below;
Eurodollar Certificates of Deposit. Eurodollar certificates of deposit
issued by foreign branches of domestic banks having total assets of $1 billion
or more;
Obligations of Savings Institutions. Certificates of deposit of savings
banks and savings and loan associations, having total assets of $1 billion or
more;
Fully Insured Certificates of Deposit. Certificates of deposit of banks
and savings institutions, having total assets of less than $1 billion, if the
principal amount of the obligation is federally insured by the Bank Insurance
Fund or the Savings Association Insurance Fund (each of which is administered
by the FDIC), limited to $100,000 principal amount per certificate and to 10%
or less of the Fund's total assets in all such obligations and in all illiquid
assets, in the aggregate;
Commercial Paper. Commercial paper rated within the two highest grades by
Standard & Poor's Corporation ("S&P") or the two highest grades by Moody's
Investors Service, Inc. ("Moody's") or, if not rated, issued by a company
having an outstanding debt issue rated at least AA by S&P or Aa by Moody's; and
Repurchase Agreements. The Fund may invest in repurchase agreements. When
cash may be available for only a few days, it may be invested by the Fund in
repurchase agreements until such time as it may otherwise be invested or used
for payments of obligations of the Fund. These agreements, which may be viewed
as a type of secured lending by the Fund, typically involve the acquisition by
the Fund of debt securities from a selling financial institution such as a
bank, savings and loan association or broker-dealer. The agreement provides
that the Fund will sell back to the institution, and that the institution will
repurchase, the underlying security serving as collateral at a specified price
and at a fixed time in the future, usually not more than seven days from the
date of purchase. The collateral will be marked-to-market daily to determine
that the value of the collateral, as specified in the agreement, does not
decrease below the purchase price plus accrued interest. If such decrease
occurs, additional collateral will be requested and, when received, added to
the account to maintain full collateralization. The Fund will accrue interest
from the institution until the time when the repurchase is to occur. Although
this date is deemed by the Fund to be the maturity date of a repurchase
agreement, the maturities of securities subject to repurchase agreements are
not subject to any limits.
While repurchase agreements involve certain risks not associated with
direct investments in debt securities, the Fund follows procedures approved 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 Manager. In addition, as described
above, the value of the collateral underlying the repurchase agreement will be
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 Fund will seek to liquidate such collateral.
However, the exercising of the Fund'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 Fund could suffer a loss.
11
<PAGE>
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. The Fund may invest up to
25% of its total assets in reverse repurchase agreements and dollar rolls.
Reverse repurchase agreements involve sales by the Fund of portfolio
assets concurrently with an agreement by the Fund to repurchase the same assets
at a later date at a fixed price. Generally, the effect of such a transaction
is that the Fund can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities.
The Fund may enter into dollar rolls in which the Fund sells securities
for delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. The Fund is compensated by the difference between the current sales price
and the lower forward price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale.
The Fund will establish a segregated account in which it will maintain
cash, U.S. Government securities or other liquid portfolio securities equal in
value to its obligations in respect of reverse repurchase agreements and dollar
rolls. Reverse repurchase agreements and dollar rolls involve the risk that the
market value of the securities the Fund is obligated to repurchase under the
agreement may decline below the repurchase price. In the event the buyer of
securities under a reverse repurchase agreement or dollar roll files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the
agreement may be restricted pending a determination by the other party, or its
trustee or receiver, whether to enforce the Fund's obligation to repurchase the
securities. Reverse repurchase agreements and dollar rolls are speculative
techniques involving leverage, and are considered borrowings by the Fund.
LENDING PORTFOLIO SECURITIES. The Fund may lend its portfolio securities
to brokers, dealers and other financial institutions, provided that the loans
are callable at any time by the Fund, 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 100% of the market value,
determined daily, of the loaned securities. The advantage of these loans is
that the Fund continues to receive the income on the loaned securities while at
the same time earning interest on the cash amounts deposited as collateral,
which will be invested in short-term obligations. The Fund will not lend more
than 25% of the value of its total assets.
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 only be made to firms deemed by the Fund's management 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 Fund. Any gain or loss in the market price during
the loan period would inure to the Fund.
When voting or consent rights which accompany loaned securities pass to
the borrower, the Fund will follow the policy of calling the loaned securities,
to be delivered within one day after notice, to permit the exercise of the
rights if the matters involved would have a material effect on the Fund's
investment in the loaned securities. The Fund will pay reasonable finder's,
administrative and custodial fees in connection with a loan of its securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From
time to time the Fund may purchase securities on a when-issued or delayed
delivery basis or may purchase or sell securities on a forward commitment
basis. When these transactions are negotiated, the price is fixed at the time
of the commitment, but delivery and payment can take place a month or more
after the date of commitment. While the Fund will only purchase securities on a
when-issued, delayed delivery or forward commitment basis with the intention of
acquiring the securities, the Fund may sell the securities before the
settlement date, if it is deemed advisable. The securities so purchased or sold
are subject to market fluctuation and no interest or dividends accrue to the
purchaser prior to the settlement date.
12
<PAGE>
At the time the Fund makes the commitment to purchase or sell securities
on a when-issued, delayed delivery or forward commitment basis, it will record
the transaction and thereafter reflect the value, each day, of such security
purchased, or if a sale, the proceeds to be received, in determining its net
asset value. At the time of delivery of the securities, their value may be more
or less than the purchase or sale price. An increase in the percentage of the
Fund's assets committed to the purchase of securities on a when-issued, delayed
delivery or forward commitment basis may increase the volatility of its net
asset value. The Fund will also establish a segregated account on the Fund's
books in which it will continually maintain cash or cash equivalents or other
liquid portfolio securities equal in value to commitments to purchase
securities on a when-issued, delayed delivery or forward commitment basis.
WHEN, AS AND IF ISSUED SECURITIES. The Fund may purchase securities on a
"when, as and if issued" basis under which the issuance of the security depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization or debt restructuring. The commitment for the purchase
of any such security will not be recognized in the portfolio of the Fund until
the Investment Manager determines that issuance of the security is probable. At
that time, the Fund will record the transaction and, in determining its net
asset value, will reflect the value of the security daily. At that time, the
Fund will also establish a segregated account on the Fund's books in which it
will maintain cash, cash equivalents or other liquid portfolio securities equal
in value to recognized commitments for such securities.
The value of the Fund's commitments to purchase the securities of any one
issuer, together with the value of all securities of such issuer owned by the
Fund, may not exceed 5% of the value of the Fund's total assets at the time the
initial commitment to purchase such securities is made. An increase in the
percentage of the Fund's assets committed to the purchase of securities on a
"when, as and if issued" basis may increase the volatility of its net asset
value. The Fund may also sell securities on a "when, as and if issued" basis
provided that the issuance of the security will result automatically from the
exchange or conversion of a security owned by the Fund at the time of sale.
PRIVATE PLACEMENTS. The Fund may invest up to 15% of its net assets in
securities which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933 (the "Securities Act"), or
which are otherwise not readily marketable. (Securities eligible for resale
pursuant to Rule 144A under the Securities Act, and determined to be liquid
pursuant to the procedures discussed in the following paragraph, are not
subject to the foregoing restriction.) These securities are generally referred
to as private placements or restricted securities. Limitations on the resale of
these securities may have an adverse effect on their marketability, and may
prevent the Fund from disposing of them promptly at reasonable prices. The Fund
may have to bear the expense of registering the securities for resale and the
risk of substantial delays in effecting the registration.
Rule 144A permits the Fund to sell restricted securities to qualified
institutional buyers without limitation. The Investment Manager, pursuant to
procedures adopted by the Trustees, will make a determination as to the
liquidity of each restricted security purchased by the Fund. If a restricted
security is determined to be "liquid," the security will not be included within
the category "illiquid securities," which may not exceed 15% of the Fund's net
assets. However, investing in Rule 144A securities could have the effect of
increasing the level of Fund illiquidity to the extent the Fund, at a
particular point in time, may be unable to find qualified institutional buyers
interested in purchasing such securities.
C. FUND POLICIES/INVESTMENT RESTRICTIONS
The investment objectives, policies and restrictions listed below have
been adopted by the Fund as fundamental policies. Under the Investment Company
Act of 1940, as amended (the "Investment Company Act"), a fundamental policy
may not be changed without the vote of a majority of the outstanding voting
securities of the Fund. The Investment Company Act defines a majority as the
lesser of (a) 67% or more of the shares present at a meeting of shareholders,
if the holders of 50% of the outstanding shares of the Fund are present or
represented by proxy; or (b) more than 50% of the outstanding shares of the
Fund. For purposes of the following restrictions: (i) all percentage
limitations
13
<PAGE>
apply immediately after a purchase or initial investment; and (ii) any
subsequent change in any applicable percentage resulting from market
fluctuations or other changes in total or net assets does not require
elimination of any security from the portfolio.
The Fund will:
1. As a primary objective, seek a high level of current income.
2. As a secondary objective, seek to maximize total return but only to
the extent consistent with its primary objective.
The Fund may not:
1. Invest more than 5% of the value of its total assets in the securities
of any one issuer (other than obligations issued, or guaranteed by,
the United States Government, its agencies or instrumentalities).
2. Purchase more than 10% of all outstanding voting securities or any
class of securities of any one issuer.
3. Invest more than 25% of the value of its total assets in securities of
issuers in any one industry, except that the Fund will invest at least
25% of its total assets in Mortgage-Backed Securities under normal
market conditions. This restriction does not apply to obligations
issued or guaranteed by the United States Government, its agencies or
instrumentalities.
4. Invest in securities of any issuer if, to the knowledge of the Fund,
any officer or trustee of the Fund or of the Investment Manager owns
more than 1/2 of 1% of the outstanding securities of the issuer, and
the officers and trustees who own more than 1/2 of 1% own in the
aggregate more than 5% of the outstanding securities of the issuer.
5. Purchase or sell real estate or interests therein, although the Fund
may purchase securities of issuers which engage in real estate
operations and securities secured by real estate or interests therein.
6. Purchase or sell commodities except, the Fund may purchase or sell
(write) futures contracts and related options thereon.
7. Borrow money in excess of 331|M/3% of the Fund's total assets
(including the proceeds of the borrowings).
8. Pledge its assets or assign or otherwise encumber them, except to
secure permitted borrowings. For the purpose of this restriction,
collateral arrangements with respect to the writing of options and
collateral arrangements with respect to initial or variation margin
for futures are not deemed to be pledges of assets.
9. Issue senior securities as defined in the Investment Company Act,
except insofar as the Fund may be deemed to have issued a senior
security by reason of (a) entering into any repurchase or reverse
repurchase agreement; (b) purchasing any securities on a when-issued
or delayed delivery basis; (c) purchasing or selling futures
contracts, forward foreign exchange contracts or options; (d)
borrowing money; or (e) lending portfolio securities.
10. Make loans of money or securities, except: (a) by the purchase of
publicly distributed debt obligations; (b) by investment in repurchase
or reverse repurchase agreements; or (c) by lending its portfolio
securities.
11. Make short sales of securities.
12. Purchase securities on margin, except for short-term loans as are
necessary for the clearance of portfolio securities. The deposit or
payment by the Fund of initial or variation margin in connection with
futures contracts or related options thereon is not considered the
purchase of a security on margin.
14
<PAGE>
13. Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act in disposing of
a portfolio security.
14. Invest for the purpose of exercising control or management of any
other issuer.
15. Invest more than 5% of its net assets in warrants, including not more
than 2% of such assets which are not listed on the New York or
American Stock Exchange. However, warrants acquired by the Fund in
units or attached to other securities may be deemed to be without
value.
16. Invest more than 5% of the value of its total assets in securities of
issuers having a record, together with predecessors, of less than 3
years of continuous operation. This restriction shall not apply to
Mortgage-Backed and Asset-Backed Securities or to any obligation of
the United States Government, its agencies or instrumentalities.
17. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may
invest in the securities of companies which operate, invest in, or
sponsor these programs.
18. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition
of assets. For this purpose, Mortgage-Backed Securities and
Asset-Backed Securities are not deemed to be investment companies.
Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objectives by investing all or substantially all
of its assets in another investment company having substantially the same
investment objective and policies as the Fund.
III. MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------
A. BOARD OF TRUSTEES
The Board of Trustees of the Fund oversees the management of the Fund but
does not itself manage the Fund. The Trustees review various services provided
by or under the direction of the Investment Manager to ensure that the Fund's
general investment policies and programs are properly carried out. The Trustees
also conduct their review to ensure that administrative services are provided
to the Fund in a satisfactory manner.
Under state law, the duties of the Trustees are generally characterized as
a duty of loyalty and a duty of care. The duty of loyalty requires a Trustee to
exercise his or her powers in the interest of the Fund and not the Trustee's
own interest or the interest of another person or organization. A Trustee
satisfies his or her duty of care by acting in good faith with the care of an
ordinarily prudent person and in a manner the Trustee reasonably believes to be
in the best interest of the Fund and its shareholders.
B. MANAGEMENT INFORMATION
TRUSTEES AND OFFICERS. The Board of the Fund consists of nine (9)
Trustees. These same individuals also serve as directors or trustees for all of
the Morgan Stanley Dean Witter Funds. Six Trustees (67% of the total number)
have no affiliation or business connection with the Investment Manager or any
of its affiliated persons and do not own any stock or other securities issued
by the Investment Manager's parent company, MSDW. These are the
"non-interested" or "independent" Trustees. The other three Trustees (the
"management Trustees") are affiliated with the Investment Manager.
The Trustees and executive officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with the
Investment Manager, and with the Morgan Stanley Dean Witter Funds (there were
97 such funds as of the calendar year ended December 31, 2000), are shown
below.
15
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
------------------------------------------- ----------------------------------------------------
<S> <C>
Michael Bozic (59) ........................ Retired; Director or Trustee of the Morgan Stanley
Trustee Dean Witter Funds; formerly Vice Chairman of
c/o Mayer, Brown & Platt Kmart Corporation (December 1998-October
Counsel to the Independent Trustees 2000), formerly Chairman and Chief Executive
1675 Broadway Officer of Levitz Furniture Corporation (November
New York, New York 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.
Charles A. Fiumefreddo* (67) .............. 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 the Investment Manager, the Distributor
New York, New York and MSDW Services Company; Executive Vice
President and Director of Dean Witter Reynolds;
Chairman and Director of the Transfer Agent;
formerly Director and/or officer of various MSDW
subsidiaries (until June 1998).
Edwin J. Garn (68) ........................ Director or Trustee of the Morgan Stanley Dean
Trustee Witter Funds; formerly United States Senator (R-
c/o Summit Ventures LLC Utah)(1974-1992) and Chairman, Senate Banking
1 Utah Center Committee (1980-1986); formerly Mayor of Salt
201 S. Main Street Lake City, Utah (1971-1974); formerly Astronaut,
Salt Lake City, Utah 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 Utah
Regional Advisory Board of Pacific Corp.; member
of the board of various civic and charitable
organizations.
Wayne E. Hedien (66) ...................... Retired; Director or Trustee of the Morgan Stanley
Trustee Dean Witter Funds; Director of The PMI Group,
c/o Mayer, Brown & Platt Inc. (private mortgage insurance); Trustee and
Counsel to the Independent Trustees Vice Chairman of The Field Museum of Natural
1675 Broadway History; formerly associated with the Allstate
New York, New York Companies (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.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
------------------------------------------- ----------------------------------------------------
<S> <C>
James F. Higgins* (52) .................... Chairman of the Private Client Group of MSDW
Trustee (since August 2000); Director of the Transfer Agent
Two World Trade Center and Dean Witter Realty Inc.; Director or Trustee of
New York, New York the Morgan Stanley Dean Witter Funds (since
June 2000); previously President and Chief
Operating Officer of the Private Client Group of
MSDW (May 1999-August-2000), President and
Chief Operating Officer of Individual Securities of
MSDW (February 1997-May 1999), President and
Chief Operating Officer of Dean Witter Securities
of MSDW (1995-February 1997), and President
and Chief Operating Officer of Dean Witter
Financial (1989-1995) and Director (1985-1997) of
Dean Witter Reynolds.
Dr. Manuel H. Johnson (51) ................ Senior Partner, Johnson Smick International, Inc.,
Trustee a consulting firm; Co-Chairman and a founder of
c/o Johnson Smick International, Inc. the 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), Independence
Standards Board (private sector organization
governing independence of auditors) 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 and
Assistant Secretary of the U.S. Treasury.
Michael E. Nugent (64) .................... 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
New York, New York President, Bankers Trust Company and BT Capital
Corporation; director of various business
organizations.
Philip J. Purcell* (57) ................... Chairman of the Board of Directors and Chief
Trustee Executive Officer of MSDW, Dean Witter Reynolds
1585 Broadway and Novus Credit Services Inc.; Director of the
New York, New York Distributor; Director or Trustee of the Morgan
Stanley Dean Witter Funds; Director of American
Airlines, Inc. and its parent company, AMR
Corporation; Director and/or officer of various
MSDW subsidiaries.
John L. Schroeder (70) .................... Retired; Chairman of the Derivatives Committee
Trustee and Director or Trustee of the Morgan Stanley
c/o Mayer, Brown & Platt Dean Witter Funds; Director of Citizens
Counsel to the Independent Trustees Communications Company; (telecommunication
1675 Broadway company); formerly Executive Vice President and
New York, New York Chief Investment Officer of the Home Insurance
Company (August 1991-September 1995).
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
------------------------------------------- -----------------------------------------------------
<S> <C>
Mitchell M. Merin (47) .................... President and Chief Operating Officer of Asset
President Management of MSDW (since December 1998);
Two World Trade Center President and Director (since April 1997) and Chief
New York, New York Executive 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 the
Transfer Agent; 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 (45) ........................... General Counsel (since May 2000) and Managing
Vice President, Director (since December 2000) of Asset Management
Secretary and General Counsel of MSDW; Executive Vice President (since
Two World Trade Center December 1999) and Secretary and General Counsel
New York, New York (since February 1997) and Director (since July 1998)
of the Investment Manager and MSDW Services Company;
Vice President, Secretary and General Counsel of the
Morgan Stanley Dean Witter Funds (since February 1997);
Vice President and Secretary of the Distributor;
previously, Senior Vice President (March 1997-December
1999), First Vice President; Assistant Secretary and
Assistant General Counsel of the Investment Manager and
MSDW Services Company.
W. David Armstrong (42) ................... Managing Director of the Investment Manager and
Vice President Managing Director and member of the Interest
Two World Trade Center Rate Research Team of Miller Anderson &
New York, New York Sherrerd, LLP ("MAS") an affiliate of the Investment
Manager; previously Senior Vice President of
Lehman Brothers (April 1995-February 1998). Vice
President of various Morgan Stanley Dean Witter
Funds.
Stephen F. Esser (36) ..................... Managing Director of the Investment Manager and
Vice President Managing Director and member of the Interest
Two World Trade Center Rate Research Team of MAS, an affiliate of the
New York, New York Investment Manager; Vice President of various
Morgan Stanley Dean Witter Funds.
Paul F. O'Brien (44) ...................... Principal of the Investment Manager and Principal
Vice President and member of the Interest Rate Research Team
Two World Trade Center of MAS; previously an economist at JP Morgan,
New York, New York London (January 1994-January 1996). Vice
President of various Morgan Stanley Dean Witter
Funds.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
------------------------------------------- ----------------------------------------------------
<S> <C>
Thomas F. Caloia (54) ..................... First Vice President and Assistant Treasurer of the
Treasurer Investment Manager, the Distributor and MSDW
Two World Trade Center Services Company; Treasurer of the Morgan
New York, New York Stanley Dean Witter Funds.
</TABLE>
----------
* Denotes Trustees who are "interested persons" of the Fund as defined by the
Investment Company Act.
In addition, Ronald E. Robison, Executive Vice President, Chief
Administrative Officer and Director of the Investment Manager and MSDW Services
Company, Robert S. Giambrone, Senior Vice President of the Investment Manager,
MSDW Services Company, the Distributor and the Transfer Agent and Director of
the Transfer Agent, and Joseph J. McAlinden, Executive Vice President and Chief
Investment Officer of the Investment Manager and Director of the Transfer Agent
are Vice Presidents of the Fund.
In addition, Lou Anne D. McInnis, Carsten Otto and Ruth Rossi, Senior Vice
Presidents and Assistant General Counsels of the Investment Manager and MSDW
Services Company, Marilyn K. Cranney and Todd Lebo, First Vice Presidents and
Assistant General Counsels of the Investment Manager and MSDW Services Company,
and Natasha Kassian, Vice President and Assistant General Counsel of the
Investment Manager and MSDW Services Company, are Assistant Secretaries of the
Fund.
INDEPENDENT DIRECTORS/TRUSTEES AND THE COMMITTEES. Law and regulation
establish both general guidelines and specific duties for the independent
directors/trustees. The Morgan Stanley Dean Witter Funds seek as independent
directors/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 directors/trustees serve as members of the Audit
Committee. In addition, three of the directors/trustees, including two
independent directors/trustees, serve as members of the Derivatives Committee
and the Insurance Committee.
The independent directors/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 directors/trustees are required to select and nominate individuals
to fill any independent director/trustee vacancy on the board of any fund that
has a Rule 12b-1 plan of distribution. Most of the Morgan Stanley Dean Witter
Funds have a Rule 12b-1 plan.
The Audit Committee is charged with recommending to the full board the
engagement or discharge of the Fund's independent auditors; directing
investigations into matters within the scope of the independent auditors'
duties, including the power to retain outside specialists; reviewing with the
independent auditors the audit plan and results of the auditing engagement;
approving professional services provided by the independent auditors and other
accounting firms prior to the performance of the services; reviewing the
independence of the independent auditors; considering the range of audit and
non-audit fees; reviewing the adequacy of the Fund's system of internal
controls; and preparing and submitting Committee meeting minutes to the full
board.
The board of each fund has a Derivatives Committee to approve parameters
for and monitor the activities of the Fund with respect to derivative
investments, if any, made by the Fund.
Finally, the board of each fund has formed an Insurance Committee to
review and monitor the insurance coverage maintained by the Fund.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT DIRECTORS/TRUSTEES
FOR ALL MORGAN STANLEY DEAN WITTER FUNDS. The independent directors/trustees
and the Funds' management believe that having the same independent
directors/trustees for each of the Morgan Stanley Dean Witter Funds
19
<PAGE>
avoids the duplication of effort that would arise from having different groups
of individuals serving as independent directors/trustees for each of the funds
or even of sub-groups of Funds. They believe that having the same individuals
serve as independent directors/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 directors/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
directors/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
directors/trustees, of the caliber, experience and business acumen of the
individuals who serve as independent directors/trustees of the Morgan Stanley
Dean Witter Funds.
TRUSTEE AND OFFICER INDEMNIFICATION. The Fund's Declaration of Trust
provides that no Trustee, officer, employee or agent of the Fund is liable to
the Fund or to a shareholder, nor is any Trustee, officer, employee or agent
liable to any third persons in connection with the affairs of the Fund, except
as such liability may arise from his/her or its own bad faith, willful
misfeasance, gross negligence or reckless disregard of his/her or its duties.
It also provides that all third persons shall look solely to the Fund property
for satisfaction of claims arising in connection with the affairs of the Fund.
With the exceptions stated, the Declaration of Trust provides that a Trustee,
officer, employee or agent is entitled to be indemnified against all liability
in connection with the affairs of the Fund.
C. COMPENSATION
The Fund pays each Independent Trustee an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Trustees, the Independent
Trustees or Committees of the Board of Trustees attended by the Trustee (the
Fund pays the Chairman of the Audit Committee an additional annual fee of $750
and the Chairmen of the Derivatives and Insurance Committees additional annual
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 Fund. The Fund also reimburses such Trustees for
travel and other out-of-pocket expenses incurred by them in connection with
attending such meetings. Trustees and officers of the Fund who are or have been
employed by the Investment Manager or an affiliated company receive no
compensation or expense reimbursement from the Fund for their services as
Trustee.
The following table illustrates the compensation that the Fund paid to its
Independent Trustees for the fiscal year ended October 31, 2000.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
--------------------------- -------------
<S> <C>
Michael Bozic .......................... $1,500
Edwin J. Garn .......................... 1,550
Wayne E. Hedien ........................ 1,550
Dr. Manuel H. Johnson .................. 2,300
Michael E. Nugent ...................... 2,050
John L. Schroeder ...................... 2,000
</TABLE>
20
<PAGE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 2000 for services
to the 97 Morgan Stanley Dean Witter Funds that were in operation at December
31, 2000.
CASH COMPENSATION FROM MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
TOTAL CASH
COMPENSATION
FOR SERVICES TO
97 MORGAN
STANLEY DEAN
NAME OF INDEPENDENT TRUSTEE WITTER FUNDS
--------------------------- ---------------
<S> <C>
Michael Bozic ................. $146,917
Edwin J. Garn ................. 151,717
Wayne E. Hedien ............... 151,567
Dr. Manuel H. Johnson ......... 223,655
Michael E. Nugent ............. 199,759
John L. Schroeder ............. 194,809
</TABLE>
As of the date of this Statement of Additional Information, 55 of the
Morgan Stanley Dean Witter Funds, including the Fund, have adopted a retirement
program under which an independent director/ 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/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/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
Fund's Independent Trustees by the Fund for the fiscal year ended October 31,
2000 and by the 55 Morgan Stanley Dean Witter Funds (including the Fund) for
the year ended December 31, 2000, and the estimated retirement benefits for the
Independent Trustees, to commence upon their retirement, from the Fund as of
October 31, 2000 and from the 55 Morgan Stanley Dean Witter Funds as of
December 31, 2000.
----------
(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.
21
<PAGE>
RETIREMENT BENEFITS FROM THE FUND AND ALL MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS
------------------------------
ESTIMATED ANNUAL
RETIREMENT BENEFITS BENEFITS
ESTIMATED ACCRUED AS EXPENSES UPON RETIREMENT(2)
CREDITED YEARS ESTIMATED ------------------- --------------------
OF SERVICE AT PERCENTAGE BY ALL FROM ALL
NAME OF RETIREMENT OF ELIGIBLE BY THE ADOPTING FROM THE ADOPTING
INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS
-------------------------- ---------------- ------------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic ............ 10 60.44% $ 358 $20,001 $ 937 $52,885
Edwin J. Garn ............ 10 60.44 576 29,348 938 52,817
Wayne E. Hedien .......... 9 51.37 679 37,886 796 44,952
Dr. Manuel H. Johnson..... 10 60.44 373 21,187 1,390 77,817
Michael E. Nugent ........ 10 60.44 664 36,202 1,239 69,506
John L. Schroeder ........ 8 50.37 1,096 65,337 969 53,677
</TABLE>
----------
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1) on
page 21.
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
--------------------------------------------------------------------------------
The following owned 5% or more of the outstanding Class A shares of the
Fund as of December 7, 2000: Mitteldorf Family Trust, Harriet Mitteldorf
Trustee c/o Mike Tinkler U/A 10/30, 33 Beverly Ave, Landsdowne, PA 19050-2705 -
22.308%; Leo Sewell & Barbara Sewell Tencom c/o Michael Tinkler, 33 Beverly
Ave, Landsdowne, PA 19050-2705 - 8.311%; Vital Spark Foundation, Harriet
Mitteldorf, c/o Michael Tinkler, 33 Beverly Ave, Landsdowne, PA 19050-2705 -
7.810%. The following owned 5% or more of the oustanding Class D shares of the
Fund as of December 7, 2000: Lorraine Burton Marran SUCC Trustee FBO Florence
Eckel Burton REV TR dated 12-10-85, 505 Kubin Court, Califon, NJ 07830-4116 -
8.789%; Dean Witter Reynolds Custodian For Calvin D. Wilkerson IRA Standard
dated 8/11/00, 1502 Pacific Grove Lane, Katy, TX 77494-2830 - 6.390% and Dean
Witter Reynolds, Custodian For William S. Clark Jr. IRA Rollover dated 1/14/00,
5690 Worthington Road, Doylestown, PA 18901-9115 - 5.074%.
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's
officers and Trustees as a group was less than 1% of the Fund's shares of
beneficial interest outstanding.
V. INVESTMENT MANAGEMENT AND OTHER SERVICES
--------------------------------------------------------------------------------
A. INVESTMENT MANAGER
The Investment Manager to the Fund is Morgan Stanley Dean Witter Advisors
Inc., a Delaware corporation, whose address is Two World Trade Center, New
York, NY 10048. The Investment Manager is a wholly-owned subsidiary of MSDW, a
Delaware corporation. MSDW is a preeminent global financial services firm that
maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services.
Pursuant to an Investment Management Agreement (the "Management
Agreement") with the Investment Manager, the Fund has retained the Investment
Manager to provide administrative services and manage the investment of the
Fund's assets, including the placing of orders for the purchase and sale of
portfolio securities. The Fund pays the Investment Manager monthly compensation
calculated daily at the annual rate of 0.40% of the net assets of the Fund,
determined as of the close of each business day. The management fee is
allocated among the Classes pro rata based on the net assets of the Fund
attributable to each Class. For the fiscal years ended October 31, 1998, 1999
and 2000, the Investment Manager accrued total compensation under the
Management Agreement in the amounts of $4,031,496, $4,056,513 and $2,991,996,
respectively.
The Investment Manager has retained its wholly-owned subsidiary, MSDW
Services Company, to perform administrative services for the Fund.
22
<PAGE>
B. PRINCIPAL UNDERWRITER
The Fund's principal underwriter is the Distributor (which has the same
address as the Investment Manager). In this capacity, the Fund's shares are
distributed by the Distributor. The Distributor has entered into a selected
dealer agreement with Dean Witter Reynolds, which through its own sales
organization sells shares of the Fund. In addition, the Distributor may enter
into similar agreements with other selected broker-dealers. The Distributor, a
Delaware corporation, is a wholly-owned subsidiary of MSDW.
The Distributor bears all expenses it may incur in providing services
under the Distribution Agreement. These expenses include the payment of
commissions for sales of the Fund's shares and incentive compensation to
Financial Advisors, the cost of educational and/or business-related trips, and
educational and/or promotional and business-related expenses. The Distributor
also pays certain expenses in connection with the distribution of the Fund's
shares, including the costs of preparing, printing and distributing advertising
or promotional materials, and the costs of printing and distributing
prospectuses and supplements thereto used in connection with the offering and
sale of the Fund's shares. The Fund bears the costs of initial typesetting,
printing and distribution of prospectuses and supplements thereto to
shareholders. The Fund also bears the costs of registering the Fund and its
shares under federal and state securities laws and pays filing fees in
accordance with state securities laws.
The Fund and the Distributor have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act. Under the
Distribution Agreement, the Distributor uses its best efforts in rendering
services to the Fund, but in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations, the Distributor is
not liable to the Fund or any of its shareholders for any error of judgment or
mistake of law or for any act or omission or for any losses sustained by the
Fund or its shareholders.
C. SERVICES PROVIDED BY THE INVESTMENT MANAGER
The Investment Manager manages the investment of the Fund's assets,
including the placing of orders for the purchase and sale of portfolio
securities. The Investment Manager obtains and evaluates the information and
advice relating to the economy, securities markets, and specific securities as
it considers necessary or useful to continuously manage the assets of the Fund
in a manner consistent with its investment objectives.
Under the terms of the Management Agreement, in addition to managing the
Fund's investments, the Investment Manager maintains certain of the Fund's
books and records and furnishes, at its own expense, the office space,
facilities, equipment, clerical help, bookkeeping and certain legal services as
the Fund may reasonably require in the conduct of its business, including the
preparation of prospectuses, proxy statements and reports required to be filed
with federal and state securities commissions (except insofar as the
participation or assistance of independent auditors and attorneys is, in the
opinion of the Investment Manager, necessary or desirable). In addition, the
Investment Manager pays the salaries of all personnel, including officers of
the Fund, who are employees of the Investment Manager. The Investment Manager
also bears the cost of telephone service, heat, light, power and other
utilities provided to the Fund.
Expenses not expressly assumed by the Investment Manager under the
Management Agreement or by the Distributor, will be paid by the Fund. These
expenses will be allocated among the four Classes of shares pro rata based on
the net assets of the Fund attributable to each Class, except as described
below. Such expenses include, but are not limited to: expenses of the Plan of
Distribution pursuant to Rule 12b-1; charges and expenses of any registrar,
custodian, stock transfer and dividend disbursing agent; brokerage commissions;
taxes; engraving and printing share certificates; registration costs of the
Fund and its shares under federal and state securities laws; the cost and
expense of printing, including typesetting, and distributing prospectuses of
the Fund and supplements thereto to the Fund's shareholders; all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing of
proxy statements and reports to shareholders; fees and travel expenses of
Trustees or
23
<PAGE>
members of any advisory board or committee who are not employees of the
Investment Manager or any corporate affiliate of the Investment Manager; all
expenses incident to any dividend, withdrawal or redemption options; charges
and expenses of any outside service used for pricing of the Fund's shares; fees
and expenses of legal counsel, including counsel to the Trustees who are not
interested persons of the Fund or of the Investment Manager (not including
compensation or expenses of attorneys who are employees of the Investment
Manager); fees and expenses of the Fund's independent auditors; membership dues
of industry associations; interest on Fund borrowings; postage; insurance
premiums on property or personnel (including officers and Trustees) of the Fund
which inure to its benefit; extraordinary expenses (including, but not limited
to, legal claims and liabilities and litigation costs and any indemnification
relating thereto); and all other costs of the Fund's operation. The 12b-1 fees
relating to a particular Class will be allocated directly to that Class. In
addition, other expenses associated with a particular Class (except advisory or
custodial fees) may be allocated directly to that Class, provided that such
expenses are reasonably identified as specifically attributable to that Class
and the direct allocation to that Class is approved by the Trustees.
The Management Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Investment Manager is not liable to the Fund or any
of its investors for any act or omission by the Investment Manager or for any
losses sustained by the Fund or its investors.
The Management Agreement will remain in effect from year to year, provided
continuance of the Management Agreement is approved at least annually by the
vote of the holders of a majority, as defined in the Investment Company Act, of
the outstanding shares of the Fund, or by the Trustees; provided that in either
event such continuance is approved annually by the vote of a majority of the
Trustees, including a majority of the Independent Trustees.
D. DEALER REALLOWANCES
Upon notice to selected broker-dealers, the Distributor may reallow up to
the full applicable front-end sales charge during periods specified in such
notice. During periods when 90% or more of the sales charge is reallowed, such
selected broker-dealers may be deemed to be underwriters as that term is
defined in the Securities Act.
E. RULE 12B-1 PLAN
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under
the Investment Company Act (the "Plan") pursuant to which each Class, other
than Class D, pays the Distributor compensation accrued daily and payable
monthly at the following annual rates: 0.25% and 0.85% of the average daily net
assets of Class A and Class C, respectively, and, with respect to Class B,
0.85% of the lesser of: (a) the average daily aggregate gross sales of the
Fund's Class B shares since the inception of the Fund (not including
reinvestment of dividends or capital gains distributions), less the average
daily aggregate net asset value of the Fund's Class B shares redeemed since the
Fund's inception upon which a contingent deferred sales charge has been imposed
or upon which such charge has been waived, or (b) the average daily net assets
of Class B.
The Distributor also receives the proceeds of front-end sales charges
("FSCs") and of contingent deferred sales charges ("CDSCs") imposed on certain
redemptions of shares, which are separate and apart from payments made pursuant
to the Plan. The Distributor has informed the Fund that it and/or Dean Witter
Reynolds received the proceeds of CDSCs and FSCs, for the last three fiscal
years ended October 31, in approximate amounts as provided in the table below
(the Distributor did not retain any of these amounts).
24
<PAGE>
<TABLE>
<CAPTION>
2000 1999 1998
------------------- ------------------- -------------------
<S> <C> <C> <C>
Class A ........... FSCs:(1) $ 25,418 FSCs:(1) $ 59,153 FSCs:(1) $ 121,078
CDSCs: $ 985 CDSCs: $ 9,748 CDSCs: $ 0
Class B ........... CDSCs: $1,650,129 CDSCs: $1,855,516 CDSCs: $1,499,828
Class C. .......... CDSCs: $ 10,280 CDSCs: $ 18,712 CDSCs: $ 13,622
</TABLE>
----------
(1) FSCs apply to Class A only.
The Distributor has informed the Fund that the entire fee payable by Class
A and a portion of the fees payable by each of Class B and Class C each year
pursuant to the Plan equal to 0.20% of the average daily net assets of Class B
and 0.25% of the average daily net assets of Class C are currently each
characterized as a "service fee" under the Rules of the National Association of
Securities Dealers, Inc. (of which the Distributor is a member). The "service
fee" is a payment made for personal service and/or the maintenance of
shareholder accounts. The remaining portion of the Plan fees payable by a
Class, if any, is characterized as an "asset-based sales charge" as such is
defined by the Rules of the Association.
Under the Plan and as required by Rule 12b-1, the Trustees receive and
review promptly after the end of each calendar quarter a written report
provided by the Distributor of the amounts expended under the Plan and the
purpose for which such expenditures were made. Class B shares of the Fund
accrued amounts payable to the Distributor under the Plan, during the fiscal
year ended October 31, 2000, of $6,043,295. This amount is equal to 0.85% of
the average daily net assets of Class B for the fiscal year and was calculated
pursuant to clause (b) of the compensation formula under the Plan. For the
fiscal year ended October 31, 2000, Class A and Class C shares of the Fund
accrued payments under the Plan amounting to $35,950 and $141,669,
respectively, which amounts are equal to 0.20% and 0.85% of the average daily
net assets of Class A and Class C, respectively, for the fiscal year.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method the Fund offers four
Classes, each with a different distribution arrangement.
With respect to Class A shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from proceeds of the FSC, commissions for
the sale of Class A shares, currently a gross sales credit of up to 4.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.20% of the current value
of the respective accounts for which they are the Financial Advisors or dealers
of record in all cases. On orders of $1 million or more (for which no sales
charge was paid) or net asset value purchases by employer-sponsored employee
benefit plans, whether or not qualified under the Internal Revenue Code, for
which the Transfer Agent serves as Trustee or MSDW's Retirement Plan Services
serves as recordkeeper pursuant to a written Recordkeeping Services Agreement
("MSDW Eligible Plans"), the Investment Manager compensates Financial Advisors
by paying them, from its own funds, a gross sales credit of 1.0% of the amount
sold.
With respect to Class B shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class B shares, currently a gross sales credit of up to 4.0% of the amount
sold (except as provided in the following sentence) and an annual residual
commission, currently a residual of up to 0.20% of the current value (not
including reinvested dividends or distributions) of the amount sold in all
cases. In the case of Class B shares purchased by MSDW Eligible Plans, Dean
Witter Reynolds compensates its Financial Advisors by paying them, from its own
funds, a gross sales credit of 3.0% of the amount sold.
With respect to Class C shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class C shares, currently a gross sales credit of up to 1.0% of the amount
sold and an annual residual commission, currently up to 0.85% of the current
value of the respective accounts for which they are the Financial Advisors of
record.
With respect to Class D shares other than shares held by participants in
the Investment Manager's mutual fund asset allocation program and in the Morgan
Stanley Dean Witter Choice Program the Investment Manager compensates Dean
Witter Reynolds Financial Advisors by paying them, from its
25
<PAGE>
own funds, commissions for the sale of Class D shares, currently a gross sales
credit of up to 1.0% of the amount sold. There is a chargeback of 100% of the
amount paid if the Class D shares are redeemed in the first year and a
chargeback of 50% of the amount paid if the Class D shares are redeemed in the
second year after purchase. The Investment Manager also compensates Dean Witter
Reynolds' Financial Advisors by paying them, from its own funds, an annual
residual commission, currently up to 0.10% of the current value of the
respective accounts for which they are the Financial Advisors of record (not
including accounts of participants in the Investment Manager's mutual fund
asset allocation program and the Morgan Stanley Dean Witter Choice Program).
The gross sales credit is a charge which reflects commissions paid by Dean
Witter Reynolds to its Financial Advisors and Dean Witter Reynolds'
Fund-associated distribution-related expenses, including sales compensation,
and overhead and other branch office distribution-related expenses including
(a) the expenses of operating Dean Witter Reynolds' branch offices in
connection with the sale of Fund shares, including lease costs, the salaries
and employee benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies, (b) the costs of
client sales seminars, (c) travel expenses of mutual fund sales coordinators to
promote the sale of Fund shares and (d) other expenses relating to branch
promotion of Fund sales.
The Investment Manager pays a retention fee to Financial Advisors at an
annual rate of 0.05% of the value of shares of the Fund held for at least one
year. Shares purchased through the reinvestment of dividends will be eligible
for a retention fee, provided that such dividends were earned on shares
otherwise eligible for a retention fee payment. Shares owned in variable
annuities, closed-end fund shares and shares held in 401(k) plans where the
Transfer Agent or MSDW's Retirement Plan Services is either recordkeeper or
trustee are not eligible for a retention fee.
The retention fees are paid by the Investment Manager from its own assets,
which may include profits from investment management fees payable under the
Management Agreement, as well as from borrowed funds.
The distribution fee that the Distributor receives from the Fund under the
Plan, in effect, offsets distribution expenses incurred under the Plan on
behalf of the Fund and, in the case of Class B shares, opportunity costs, such
as the gross sales credit and an assumed interest charge thereon ("carrying
charge"). These expenses may include the cost of Fund-related educational
and/or business-related trips or payment of Fund-related educational and/or
promotional expenses of Financial Advisors. In the Distributor's reporting of
the distribution expenses to the Fund, in the case of Class B shares, such
assumed interest (computed at the "broker's call rate") has been calculated on
the gross credit as it is reduced by amounts received by the Distributor under
the Plan and any contingent deferred sales charges received by the Distributor
upon redemption of shares of the Fund. No other interest charge is included as
a distribution expense in the Distributor's calculation of its distribution
costs for this purpose. The broker's call rate is the interest rate charged to
securities brokers on loans secured by exchange-listed securities.
The Fund is authorized to reimburse expenses incurred or to be incurred in
promoting the distribution of the Fund's Class A and Class C shares and in
servicing shareholder accounts. Reimbursement will be made through payments at
the end of each month. The amount of each monthly payment may in no event
exceed an amount equal to a payment at the annual rate of 0.25%, in the case of
Class A, and 0.85%, in the case of Class C, of the average net assets of the
respective Class during the month. No interest or other financing charges, if
any, incurred on any distribution expenses on behalf of Class A and Class C
will be reimbursable under the Plan. With respect to Class A, in the case of
all expenses other than expenses representing the service fee, and, with
respect to Class C, in the case of all expenses other than expenses
representing a gross sales credit or a residual to Financial Advisors and other
authorized financial representatives, such amounts shall be determined at the
beginning of each calendar quarter by the Trustees, including, a majority of
the Independent Trustees. Expenses representing the service fee (for Class A)
or a gross sales credit or a residual to Financial Advisors and
26
<PAGE>
other authorized financial representatives (for Class C) may be reimbursed
without prior determination. In the event that the Distributor proposes that
monies shall be reimbursed for other than such expenses, then in making
quarterly determinations of the amounts that may be reimbursed by the Fund, the
Distributor will provide and the Trustees will review a quarterly budget of
projected distribution expenses to be incurred on behalf of the Fund, together
with a report explaining the purposes and anticipated benefits of incurring
such expenses. The Trustees will determine which particular expenses, and the
portions thereof, that may be borne by the Fund, and in making such a
determination shall consider the scope of the Distributor's commitment to
promoting the distribution of the Fund's Class A and Class C shares.
Each Class paid 100% of the amounts accrued under the Plan with respect to
that Class for the fiscal year ended October 31, 2000 to the Distributor. The
Distributor and Dean Witter Reynolds estimate that they have spent, pursuant to
the Plan, $65,145,985 on behalf of Class B since the inception of the Plan. It
is estimated that this amount was spent in approximately the following ways:
(i) 8.72% ($5,678,255)-advertising and promotional expenses; (ii) 0.49%
($318,699)-printing of prospectuses for distribution to other than current
shareholders; and (iii) 90.79% ($59,149,031)-other expenses, including the
gross sales credit and the carrying charge, of which 6.18% ($3,653,957)
represents carrying charges, 38.84% ($22,974,961) represents commission credits
to Dean Witter Reynolds branch offices and other selected broker-dealers for
payments of commissions to Financial Advisors and other authorized financial
representatives, and 54.97% ($32,520,113) represents overhead and other branch
office distribution-related expenses. The amounts accrued by Class A and a
portion of the amounts accrued by Class C under the Plan during the fiscal year
ended October 31, 2000 were service fees. The remainder of the amounts accrued
by Class C were for expenses which relate to compensation of sales personnel
and associated overhead expenses.
In the case of Class B shares, at any given time, the expenses of
distributing shares of the Fund may be more or less than the total of (i) the
payments made by the Fund pursuant to the Plan; and (ii) the proceeds of CDSCs
paid by investors upon redemption of shares. For example, if $1 million in
expenses in distributing Class B shares of the Fund had been incurred and
$750,000 had been received as described in (i) and (ii) above, the excess
expense would amount to $250,000. The Distributor has advised the Fund that in
the case of Class B shares the excess distribution expenses, including the
carrying charge designed to approximate the opportunity costs incurred by Dean
Witter Reynolds which arise from it having advanced monies without having
received the amount of any sales charges imposed at the time of sale of the
Fund's Class B shares, totaled $12,579,635 as of October 31, 2000 (the end of
the Fund's fiscal year), which was equal to 2.22% of the net assets of Class B
on such date. Because there is no requirement under the Plan that the
Distributor be reimbursed for all distribution expenses with respect to Class B
shares or any requirement that the Plan be continued from year to year, this
excess amount does not constitute a liability of the Fund. Although there is no
legal obligation for the Fund to pay expenses incurred in excess of payments
made to the Distributor under the Plan and the proceeds of CDSCs paid by
investors upon redemption of shares, if for any reason the Plan is terminated,
the Trustees will consider at that time the manner in which to treat such
expenses. Any cumulative expenses incurred, but not yet recovered through
distribution fees or CDSCs, may or may not be recovered through future
distribution fees or CDSCs.
In the case of Class A and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales commission credited to Morgan Stanley Dean Witter Financial
Advisors and other authorized financial representatives at the time of sale may
be reimbursed in the subsequent calendar year. The Distributor has advised the
Fund that unreimbursed expenses representing a gross sales commission credited
to Morgan Stanley Dean Witter Financial Advisors and other authorized financial
representatives at the time of sale totaled $1,204 in the case of Class C at
December 31, 1999 (end of the calendar year), which amount was equal to 0.01%
of the net assets of Class C on such date and that there were no such expenses
that may be reimbursed in the subsequent year in the case of Class A or on such
date. No interest or other financing charges will be incurred on any Class A or
Class C distribution expenses incurred by the Distributor under the Plan or on
any unreimbursed expenses due to the Distributor pursuant to the Plan.
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No interested person of the Fund nor any Independent Trustee has any
direct financial interest in the operation of the Plan except to the extent
that the Distributor, the Investment Manager, Dean Witter Reynolds, MSDW
Services Company or certain of their employees may be deemed to have such an
interest as a result of benefits derived from the successful operation of the
Plan or as a result of receiving a portion of the amounts expended thereunder
by the Fund.
On an annual basis the Trustees, including a majority of the Independent
Trustees, consider whether the Plan should be continued. Prior to approving the
last continuation of the Plan, the Trustees requested and received from the
Distributor and reviewed all the information which they deemed necessary to
arrive at an informed determination. In making their determination to continue
the Plan, the Trustees considered: (1) the Fund's experience under the Plan and
whether such experience indicates that the Plan is operating as anticipated;
(2) the benefits the Fund had obtained, was obtaining and would be likely to
obtain under the Plan, including that: (a) the Plan is essential in order to
give Fund investors a choice of alternatives for payment of distribution and
service charges and to enable the Fund to continue to grow and avoid a pattern
of net redemptions which, in turn, are essential for effective investment
management; and (b) without the compensation to individual brokers and the
reimbursement of distribution and account maintenance expenses of Dean Witter
Reynolds' branch offices made possible by the 12b-1 fees, Dean Witter Reynolds
could not establish and maintain an effective system for distribution,
servicing of Fund shareholders and maintenance of shareholder accounts; and (3)
what services had been provided and were continuing to be provided under the
Plan to the Fund and its shareholders. Based upon their review, the Trustees,
including each of the Independent Trustees, determined that continuation of the
Plan would be in the best interest of the Fund and would have a reasonable
likelihood of continuing to benefit the Fund and its shareholders. In the
Trustees' quarterly review of the Plan, they will consider its continued
appropriateness and the level of compensation provided therein.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of the
affected Class or Classes of the Fund, and all material amendments to the Plan
must also be approved by the Trustees in the manner described above. The Plan
may be terminated at any time, without payment of any penalty, by vote of a
majority of the Independent Trustees or by a vote of a majority of the
outstanding voting securities of the Fund (as defined in the Investment Company
Act) on not more than thirty days' written notice to any other party to the
Plan. So long as the Plan is in effect, the election and nomination of
Independent Trustees shall be committed to the discretion of the Independent
Trustees.
F. OTHER SERVICE PROVIDERS
(1) TRANSFER AGENT/DIVIDEND-PAYING AGENT
Morgan Stanley Dean Witter Trust FSB is the Transfer Agent for the Fund's
shares and the Dividend Disbursing Agent for payment of dividends and
distributions on Fund shares and Agent for shareholders under various
investment plans. The principal business address of the Transfer Agent is
Harborside Financial Center, Plaza Two, Jersey City, NJ 07311.
(2) CUSTODIAN AND INDEPENDENT AUDITORS
The Bank of New York, 100 Church Street, New York, NY 10007 is the
Custodian for the portion of the Fund's assets in groupings 2 and 3 in the
Fund's Prospectus. The Chase Manhattan Bank, One Chase Plaza, New York, NY
10005 is the Custodian for the portion of the Fund's assets in grouping 1 in
the Prospectus. As Custodian, The Chase Manhattan Bank has contracted with
various foreign banks and depositaries to hold portfolio securities of non-U.S.
issuers on behalf of the Fund. Any of the Fund's cash balances with either
Custodian in excess of $100,000 are unprotected by federal deposit insurance.
These balances may, at times, be substantial.
Deloitte & Touche LLP, Two World Financial Center, New York, NY 10281,
serves as the independent auditors of the Fund. The independent auditors are
responsible for auditing the annual financial statements of the Fund.
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(3) AFFILIATED PERSONS
The Transfer Agent is an affiliate of the Investment Manager, and of the
Distributor. As Transfer Agent and Dividend Disbursing Agent, the Transfer
Agent's responsibilities include maintaining shareholder accounts, disbursing
cash dividends and reinvesting dividends, processing account registration
changes, handling purchase and redemption transactions, mailing prospectuses
and reports, mailing and tabulating proxies, processing share certificate
transactions, and maintaining shareholder records and lists. For these
services, the Transfer Agent receives a per shareholder account fee from the
Fund and is reimbursed for its out-of-pocket expenses in connection with such
services.
G. CODES OF ETHICS
The Fund, the Investment Manager and the Distributor have each adopted a
Code of Ethics pursuant to Rule 17j-1 under the Investment Company Act. The
Codes of Ethics are designed to detect and prevent improper personal trading.
The Codes of Ethics permit personnel subject to the Codes to invest in
securities, including securities that may be purchased, sold or held by the
Fund, subject to a number of restrictions and controls including prohibitions
against purchases of securities in an Initial Public Offering and a
preclearance requirement with respect to personal securities transactions.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
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A. BROKERAGE TRANSACTIONS
Subject to the general supervision of the Board of Trustees, the
Investment Manager is responsible for decisions to buy and sell securities for
the Fund, the selection of brokers and dealers to effect the transactions, and
the negotiation of brokerage commissions, if any. Purchases and sales of
securities on a stock exchange are effected through brokers who charge a
commission for their services. The Fund expects that the primary market for the
securities in which it intends to invest will generally be the over-the-counter
market. In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a profit
to the dealer. The Fund 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. Options and
futures transactions will usually be effected through a broker and a commission
will be charged. On occasion, the Fund may also purchase certain money market
instruments directly from an issuer, in which case no commissions or discounts
are paid.
For the fiscal years ended October 31, 1998, 1999 and 2000, the Fund paid
a total of $25,846, $0 and $0, respectively, in brokerage commissions.
B. COMMISSIONS
Pursuant to an order of the SEC, the Fund may effect principal
transactions in certain money market instruments with Dean Witter Reynolds. The
Fund will limit its transactions with Dean Witter Reynolds to U.S. Government
and government agency securities, bank money instruments (i.e., certificates of
deposit and bankers' acceptances) and commercial paper. The transactions will
be effected with Dean Witter Reynolds only when the price available from Dean
Witter Reynolds is better than that available from other dealers.
During the fiscal years ended October 31, 1998, 1999 and 2000, the Fund
did not effect any principal transactions with Dean Witter Reynolds.
Brokerage transactions in securities listed on exchanges or admitted to
unlisted trading privileges may be effected through Dean Witter Reynolds,
Morgan Stanley & Co. and other affiliated brokers and dealers. In order for an
affiliated broker or dealer to effect any portfolio transactions on an exchange
for the Fund, the commissions, fees or other remuneration received by the
affiliated broker or dealer must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection
with comparable transactions involving similar securities being purchased or
sold on an
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exchange during a comparable period of time. This standard would allow the
affiliated broker or dealer to receive no more than the remuneration which
would be expected to be received by an unaffiliated broker in a commensurate
arm's-length transaction. Furthermore, the Trustees, including the Independent
Trustees, have adopted procedures which are reasonably designed to provide that
any commissions, fees or other remuneration paid to an affiliated broker or
dealer are consistent with the foregoing standard. The Fund does not reduce the
management fee it pays to the Investment Manager by any amount of the brokerage
commissions it may pay to an affiliated broker or dealer.
During the fiscal years ended October 31, 1998, 1999 and 2000, the Fund
paid no brokerage commissions to either Dean Witter Reynolds or Morgan Stanley
& Co.
C. BROKERAGE SELECTION
The policy of the Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid
in all circumstances. The Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Investment Manager from obtaining a high quality of
brokerage and research services. In seeking to determine the reasonableness of
brokerage commissions paid in any transaction, the Investment Manager relies
upon its experience and knowledge regarding commissions generally charged by
various brokers and on its judgment in evaluating the brokerage and research
services received from the broker effecting the transaction. These
determinations are necessarily subjective and imprecise, as in most cases an
exact dollar value for those services is not ascertainable.
The Fund anticipates that certain of its transactions involving foreign
securities will be effected on securities exchanges. Fixed commissions on such
transactions are generally higher than negotiated commissions on domestic
transactions. There is also generally less government supervision and
regulation of foreign securities exchanges and brokers than in the United
States.
In seeking to implement the Fund's policies, the Investment Manager
effects transactions with those brokers and dealers who the Investment Manager
believes provide the most favorable prices and are capable of providing
efficient executions. If the Investment Manager believes the prices and
executions are obtainable from more than one broker or dealer, it may give
consideration to placing portfolio transactions with those brokers and dealers
who also furnish research and other services to the Fund or the Investment
Manager. The services may include, but are not limited to, any one or more of
the following: information as to the availability of securities for purchase or
sale; statistical or factual information or opinions pertaining to investment;
wire services; and appraisals or evaluations of portfolio securities. The
information and services received by the Investment Manager from brokers and
dealers may be of benefit to the Investment Manager or any of its affiliates in
the management of accounts of some of its other clients and may not in all
cases benefit the Fund directly.
The Investment Manager and its affiliates currently serve as investment
manager to a number of clients, including other investment companies, and may
in the future act as investment manager or advisor to others. It is the
practice of the Investment Manager to cause purchase and sale transactions
(including transactions in certain initial and secondary public offerings) to
be allocated among the Fund and others whose assets it manages in such manner
as it deems equitable. In making such allocations among the Fund and other
client accounts, various factors may be considered, including the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the Fund and other client accounts.
The Investment Manager and its affiliates may operate one or more order
placement facilities and each facility will implement order allocation in
accordance with the procedures described above. From time to time, each
facility may transact in a security at the same time as other facilities are
trading in that security.
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D. DIRECTED BROKERAGE
During the fiscal year ended October 31, 2000, the Fund did not pay any
brokerage commissions to brokers because of research services provided.
E. REGULAR BROKER-DEALERS
During the fiscal year ended October 31, 2000, the Fund did not purchase
securities issued by brokers or dealers that were among the ten brokers or the
ten dealers that executed transactions for or with the Fund in the largest
dollar amounts during the year.
VII. CAPITAL STOCK AND OTHER SECURITIES
--------------------------------------------------------------------------------
The shareholders of the Fund are entitled to a full vote for each full
share of beneficial interest held. The Fund is authorized to issue an unlimited
number of shares of beneficial interest. All shares of beneficial interest of
the Fund are of $0.01 par value and are equal as to earnings, assets and voting
privileges except that each Class will have exclusive voting privileges with
respect to matters relating to distribution expenses borne solely by such Class
or any other matter in which the interests of one Class differ from the
interests of any other Class. In addition, Class B shareholders will have the
right to vote on any proposed material increase in Class A's expenses, if such
proposal is submitted separately to Class A shareholders. Also, Class A, Class
B and Class C bear expenses related to the distribution of their respective
shares.
The Fund's Declaration of Trust permits the Trustees to authorize the
creation of additional series of shares (the proceeds of which would be
invested in separate, independently managed portfolios) and additional Classes
of shares within any series. The Trustees have not presently authorized any
such additional series or Classes of shares other than as set forth in the
Prospectus.
The Fund is not required to hold annual meetings of shareholders and in
ordinary circumstances the Fund does not intend to hold such meetings. The
Trustees may call special meetings of shareholders for action by shareholder
vote as may be required by the Investment Company Act or the Declaration of
Trust. Under certain circumstances, the Trustees may be removed by the actions
of the Trustees. In addition, under certain circumstances, the shareholders may
call a meeting to remove the Trustees and the Fund is required to provide
assistance in communication with shareholders about such a meeting. The voting
rights of shareholders are not cumulative, so that holders of more than 50
percent of the shares voting can, if they choose, elect all Trustees being
selected, while the holders of the remaining shares would be unable to elect
any Trustees.
Under Massachusetts law, shareholders of a business trust may, under
certain limited circumstances, be held personally liable as partners for the
obligations of the Fund. However, the Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Fund,
requires that notice of such Fund obligations include such disclaimer, and
provides for indemnification out of the Fund's property for any shareholder
held personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability, and
the nature of the Fund's assets and operations, the possibility of the Fund
being unable to meet its obligations is remote and thus, in the opinion of
Massachusetts counsel to the Fund, the risk to Fund shareholders of personal
liability is remote.
All of the Trustees, except for James F. Higgins, have been elected by the
shareholders of the Fund, most recently at a Special Meeting of Shareholders
held on May 21, 1997. The Trustees themselves have the power to alter the
number and the terms of office of the Trustees (as provided for in the
Declaration of Trust), and they may at any time lengthen or shorten their own
terms or make their terms of unlimited duration and appoint their own
successors, provided that always at least a majority of the Trustees has been
elected by the shareholders of the Fund.
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VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
--------------------------------------------------------------------------------
A. PURCHASE/REDEMPTION OF SHARES
Information concerning how Fund shares are offered to the public (and how
they are redeemed and exchanged) is provided in the Fund's Prospectus.
TRANSFER AGENT AS AGENT. With respect to the redemption or repurchase of
Fund shares, the application of proceeds to the purchase of new shares in the
Fund or any other Morgan Stanley Dean Witter Funds and the general
administration of the exchange privilege, the Transfer Agent acts as agent for
the Distributor and for the shareholder's authorized broker-dealer, if any, in
the performance of such functions. With respect to exchanges, redemptions or
repurchases, the Transfer Agent shall be liable for its own negligence and not
for the default or negligence of its correspondents or for losses in transit.
The Fund shall not be liable for any default or negligence of the Transfer
Agent, the Distributor or any authorized broker-dealer.
The Distributor and any authorized broker-dealer have appointed the
Transfer Agent to act as their agent in connection with the application of
proceeds of any redemption of Fund shares to the purchase of shares of any
other Morgan Stanley Dean Witter Fund and the general administration of the
exchange privilege. No commission or discounts will be paid to the Distributor
or any authorized broker-dealer for any transaction pursuant to the exchange
privilege.
TRANSFERS OF SHARES. In the event a shareholder requests a transfer of
Fund shares to a new registration, the shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the CDSC or free of such charge (and with regard to the
length of time shares subject to the charge have been held), any transfer
involving less than all of the shares in an account will be made on a pro rata
basis (that is, by transferring shares in the same proportion that the
transferred shares bear to the total shares in the account immediately prior to
the transfer). The transferred shares will continue to be subject to any
applicable CDSC as if they had not been so transferred.
B. OFFERING PRICE
The Fund's Class B, Class C and Class D shares are offered at net asset
value per share and the Class A shares are offered at net asset value per share
plus any applicable FSC which is distributed among the Fund's Distributor, Dean
Witter Reynolds and other authorized dealers as described in Section "V.
Investment Management and Other Services-E. Rule 12b-1 Plan." The price of Fund
shares, called "net asset value," is based on the value of the Fund's portfolio
securities. Net asset value per share of each Class is calculated by dividing
the value of the portion of the Fund's securities and other assets attributable
to that Class, less the liabilities attributable to that Class, by the number
of shares of that Class outstanding. The assets of each Class of shares are
invested in a single portfolio. The net asset value of each Class, however,
will differ because the Classes have different ongoing fees.
In the calculation of the Fund's net asset value: (1) an equity portfolio
security listed or traded on the New York or American Stock Exchange, NASDAQ,
or other exchange is valued at its latest sale price, prior to the time when
assets are valued; if there were no sales that day, the security is valued at
the latest bid price (in cases where a security is traded on more than one
exchange, the security is valued on the exchange designated as the primary
market pursuant to procedures adopted by the Trustees; and (2) all other
portfolio securities for which over-the-counter market quotations are readily
available are valued at the latest bid price. When market quotations are not
readily available, including circumstances under which it is determined by the
Investment Manager that sale or bid prices are not reflective of a security's
market value, portfolio securities are valued at their fair value as determined
in good faith under procedures established by and under the general supervision
of the Fund's Trustees. For valuation purposes, quotations of foreign portfolio
securities, other assets and liabilities and forward contracts stated in
foreign currency are translated into U.S. dollar equivalents at the prevailing
market rates prior to the close of the New York Stock Exchange.
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Short-term debt securities with remaining maturities of sixty days or less
at the time of purchase are valued at amortized cost, unless the Trustees
determine such does not reflect the securities' market value, in which case
these securities will be valued at their fair value as determined by the
Trustees.
Certain of the Fund's portfolio securities may be valued by an outside
pricing service approved by the Fund's Trustees. The pricing service may
utilize a matrix system incorporating security quality, maturity and coupon as
the evaluation model parameters, and/or research evaluations by its staff,
including review of broker-dealer market price quotations in determining what
it believes is the fair valuation of the portfolio securities valued by such
pricing service.
Listed options on debt securities are valued at the latest sale price on
the exchange on which they are listed unless no sales of such options have
taken place that day, in which case they will be valued at the mean between
their latest bid and asked prices. Unlisted options on debt securities and all
options on equity securities are valued at the mean between their latest bid
and asked prices. Futures are valued at the latest sale price on the
commodities exchange on which they trade unless the Trustees determine such
price does not reflect their market value, in which case they will be valued at
their fair value as determined in good faith under procedures established by
and under the supervision of the Trustees.
Generally, trading in foreign securities, as well as corporate bonds, U.S.
Government securities and money market instruments, is substantially completed
each day at various times prior to the close of the New York Stock Exchange.
The values of such securities used in computing the net asset value of the
Fund's shares are determined as of such times. Foreign currency exchange rates
are also generally determined prior to the close of the New York Stock
Exchange. Occasionally, events which may affect the values of such securities
and such exchange rates may occur between the times at which they are
determined and the close of the New York Stock Exchange and will therefore not
be reflected in the computation of the Fund's net asset value. If events that
may affect the value of such securities occur during such period, then these
securities may be valued at their fair value as determined in good faith under
procedures established by and under the supervision of the Trustees.
IX. TAXATION OF THE FUND AND SHAREHOLDERS
--------------------------------------------------------------------------------
The Fund generally will make two basic types of distributions: ordinary
dividends and long-term capital gain distributions. These two types of
distributions are reported differently on a shareholder's income tax return and
they are also subject to different rates of tax. The tax treatment of the
investment activities of the Fund will affect the amount and timing and
character of the distributions made by the Fund. Tax issues relating to the
Fund are not generally a consideration for shareholders such as tax-exempt
entities and tax-advantaged retirement vehicles such as an IRA or 401(k) plan.
Shareholders are urged to consult their own tax professionals regarding
specific questions as to federal, state or local taxes.
INVESTMENT COMPANY TAXATION. The Fund intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986. As such, the Fund will not be subject to federal income tax on its net
investment income and capital gains, if any, to the extent that it distributes
such income and capital gains to its shareholders.
The Fund generally intends to distribute sufficient income and gains so
that the Fund will not pay corporate income tax on its earnings. The Fund also
generally intends to distribute to its shareholders in each calendar year a
sufficient amount of ordinary income and capital gains to avoid the imposition
of a 4% excise tax. However, the Fund may instead determine to retain all or
part of any net long-term capital gains in any year for reinvestment. In such
event, the Fund will pay federal income tax (and possibly excise tax) on such
retained gains.
Gains or losses on sales of securities by the Fund will be long-term
capital gains or losses if the securities have a tax holding period of more
than one year at the time of such sale. Gains or losses on the sale of
securities with a tax holding period of one year or less will be short-term
capital gains or losses. Special tax rules may change the normal treatment of
gains and losses recognized by the Fund when the Fund invests in forward
foreign currency exchange contracts, options, futures transactions, and
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non-U.S. corporations classified as "passive foreign investment companies."
Those special tax rules can, among other things, affect the treatment of
capital gain or loss as long-term or short-term and may result in ordinary
income or loss rather than capital gain or loss. The application of these
special rules would therefore also affect the character of distributions made
by the Fund.
Under certain tax rules, the Fund may be required to accrue a portion of
any discount at which certain securities are purchased as income each year even
though the Fund receives no payments in cash on the security during the year.
To the extent that the Fund invests in such securities, it would be required to
pay out such accrued income as an income distribution in each year in order to
avoid taxation at the Fund level. Such distributions will be made from the
available cash of the Fund or by liquidation of portfolio securities if
necessary. If a distribution of cash necessitates the liquidation of portfolio
securities, the Investment Manager will select which securities to sell. The
Fund may realize a gain or loss from such sales. In the event the Fund realizes
net capital gains from such transactions, its shareholders may receive a larger
capital gain distribution, if any, than they would in the absence of such
transactions.
TAXATION OF DIVIDENDS AND DISTRIBUTIONS. Shareholders normally will have
to pay federal income taxes, and any state and/or local income taxes, on the
dividends and other distributions they receive from the Fund. Such dividends
and distributions, to the extent that they are derived from net investment
income or short-term capital gains, are taxable to the shareholder as ordinary
income regardless of whether the shareholder receives such payments in
additional shares or in cash.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder
has held the Fund's shares and regardless of whether the distribution is
received in additional shares or in cash. Under current law the maximum tax
rate on long-term capital gains realized by non-corporate shareholders
generally is 20%. A special lower tax rate of 18% on long-term capital gains is
available to non-corporate shareholders to the extent the distributions of
long-term capital gains are derived from securities which the Fund purchased
after December 31, 2000, and held for more than five years.
Shareholders are generally taxed on any ordinary dividend or capital gain
distributions from the Fund in the year they are actually distributed. However,
if any such dividends or distributions are declared in October, November or
December and paid in January then such amounts will be treated for tax purposes
as received by the shareholders on December 31, to shareholders of record of
such month.
Shareholders who are not citizens or residents of the United States and
certain foreign entities may be subject to withholding of United States tax on
distributions made by the Fund of investment income and short-term capital
gains.
After the end of each calendar year, shareholders will be sent information
on their dividends and capital gain distributions for tax purposes, including
the portion taxable as ordinary income and the portion taxable as long-term
capital gains.
PURCHASES AND REDEMPTIONS AND EXCHANGES OF FUND SHARES. Any dividend or
capital gains distribution received by a shareholder from any investment
company will have the effect of reducing the net asset value of the
shareholder's stock in that company by the exact amount of the dividend or
capital gains distribution. Furthermore, such dividends and capital gains
distributions are subject to federal income taxes. If the net asset value of
the shares should be reduced below a shareholder's cost as a result of the
payment of dividends or the distribution of realized long-term capital gains,
such payment or distribution would be in part a return of the shareholder's
investment but nonetheless would be taxable to the shareholder. Therefore, an
investor should consider the tax implications of purchasing Fund shares
immediately prior to a distribution record date.
In general, a sale of shares results in capital gain or loss, and for
individual shareholders, is taxable at a federal rate dependent upon the length
of time the shares were held. A redemption of a shareholder's Fund shares is
normally treated as a sale for tax purposes. Fund shares held for a period of
one year or less at the time of such sale or redemption will, for tax purposes,
generally result in short-term capital gains or losses and those held for more
than one year generally result in long-term capital gain or loss.
34
<PAGE>
Under current law, the maximum tax rate on long-term capital gains realized by
non-corporate shareholders is generally 20%. A special lower tax rate of 18% on
long-term capital gains is available for non-corporate shareholders who
purchased shares after December 31, 2000, and held such shares for more than
five years. This special lower tax rate of 18% for five-year property does not
apply to non-corporate shareholders holding Fund shares which were purchased on
or prior to December 31, 2000, unless such shareholders make an election to
treat the Fund shares as being sold and re-acquired on January 1, 2001. A
shareholder making such election may realize capital gains or losses. Any loss
realized by shareholders upon a sale or redemption of shares within six months
of the date of their purchase will be treated as a long-term capital loss to
the extent of any distributions of net long-term capital gains with respect to
such shares during the six-month period.
Gain or loss on the sale or redemption of shares in the Fund is measured
by the difference between the amount received and the tax basis of the shares.
Shareholders should keep records of investments made (including shares acquired
through reinvestment of dividends and distributions) so they can compute the
tax basis of their shares. Under certain circumstances a shareholder may
compute and use an average cost basis in determining the gain or loss on the
sale or redemption of shares.
Exchanges of Fund shares for shares of another fund, including shares of
other Morgan Stanley Dean Witter Funds, are also subject to similar tax
treatment. Such an exchange is treated for tax purposes as a sale of the
original shares in the first fund, followed by the purchase of shares in the
second fund.
If a shareholder realizes a loss on the redemption or exchange of a fund's
shares and reinvests in that fund's shares within 30 days before or after the
redemption or exchange, the transactions may be subject to the "wash sale"
rules, resulting in a postponement of the recognition of such loss for tax
purposes.
X. UNDERWRITERS
--------------------------------------------------------------------------------
The Fund's shares are offered to the public on a continuous basis. The
Distributor, as the principal underwriter of the shares, has certain
obligations under the Distribution Agreement concerning the distribution of the
shares. These obligations and the compensation the Distributor receives are
described above in the sections titled "Principal Underwriter" and "Rule 12b-1
Plan."
XI. CALCULATION OF PERFORMANCE DATA
--------------------------------------------------------------------------------
From time to time the Fund may quote its "yield" and/or its "total return"
in advertisements and sales literature. These figures are computed separately
for Class A, Class B, Class C and Class D shares. Yield is calculated for any
30-day period as follows: the amount of interest income for each security in
the Fund's portfolio is determined in accordance with regulatory requirements;
the total for the entire portfolio constitutes the Fund's gross income for the
period. Expenses accrued during the period are subtracted to arrive at "net
investment income" of each Class. The resulting amount is divided by the
product of the maximum offering price per share on the last day of the period,
multiplied by the average number of shares of the applicable Class outstanding
during the period that were entitled to dividends. This amount is added to 1
and raised to the sixth power. 1 is then subtracted from the result and the
difference is multiplied by 2 to arrive at the annualized yield. For the 30-day
period ended October 31, 2000, the yield, calculated pursuant to the formula
described above, was approximately 12.20%, 12.09%, 12.08% and 12.91% for Class
A, Class B, Class C and Class D, respectively.
The Fund's "average annual total return" represents an annualization of
the Fund's total return over a particular period and is computed by finding the
annual percentage rate which will result in the ending redeemable value of a
hypothetical $1,000 investment made at the beginning of a one, five or ten year
period, or for the period from the date of commencement of operations, if
shorter than any of the foregoing. The ending redeemable value is reduced by
any contingent deferred sales charge ("CDSC") at the end of the one, five, ten
year or other period. For the purpose of this calculation, it is assumed that
all dividends and distributions are reinvested. The formula for computing the
average annual total return
35
<PAGE>
involves a percentage obtained by dividing the ending redeemable value by the
amount of the initial investment (which in the case of Class A shares is
reduced by the Class A initial sales charge), taking a root of the quotient
(where the root is equivalent to the number of years in the period) and
subtracting 1 from the result. The average annual total returns for Class B for
the one year, five year and the life of the Fund periods ended October 31, 2000
were -11.52%, 1.31% and 3.63%, respectively. The average annual total returns
of Class A for the fiscal year ended October 31, 2000 and for the period July
28, 1997 (inception of the Class) through October 31, 2000 were -10.62% and
-2.22%, respectively. The average annual total returns of Class C for the
fiscal year ended October 31, 2000 and for the period July 28, 1997 (inception
of the Class) through October 31, 2000 were -7.97% and -1.50%, respectively.
The average annual total returns of Class D for the fiscal year ended October
31, 2000 and for the period July 28, 1997 (inception of the Class) through
October 31, 2000 were -6.20% and -0.62%, respectively.
In addition, the Fund may advertise its total return for each Class over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. These calculations may or may not reflect the
imposition of the maximum front-end sales charge for Class A or the deduction
of the CDSC for each of Class B and Class C which, if reflected, would reduce
the performance quoted. For example, the average annual total return of the
Fund may be calculated in the manner described above, but without deduction for
any applicable sales charge. Based on this calculation, the average annual
total returns of Class B for the one year, five year and the life of the Fund
periods ended October 31, 2000, were -7.24%, 1.58% and 3.63%, respectively.
Based on this calculation, the average annual total returns of Class A for the
fiscal year ended October 31, 2000 and for the period July 28, 1997 through
October 31, 2000 were -6.66% and -0.91%, respectively, the average annual total
returns of Class C for the fiscal year ended October 31, 2000 and for the
period July 28, 1997 through October 31, 2000 were -7.12% and -1.50%,
respectively, and the average annual total returns of Class D for the fiscal
year ended October 31, 2000 and for the period July 28, 1997 through October
31, 2000 were -6.20% and -2.00%, respectively.
In addition, the Fund may compute its aggregate total return for each
Class for specified periods by determining the aggregate percentage rate which
will result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is assumed
that all dividends and distributions are reinvested. The formula for computing
aggregate total return involves a percentage obtained by dividing the ending
value (without reduction for any sales charge) by the initial $1,000 investment
and subtracting 1 from the result. Based on the foregoing calculation, the
total returns for Class B for the one year, five year and the life of the Fund
periods ended October 31, 2000, were -7.24%, 8.16% and 35.75%, respectively.
Based on the foregoing calculation, the total returns of Class A for the fiscal
year ended October 31, 2000 and for the period July 28, 1997 through October
31, 2000 were -6.66% and -2.94%, respectively, the total returns of Class C for
the fiscal year ended October 31, 2000 and for the period July 28, 1997 through
October 31, 2000 were -7.12% and -4.82%, respectively, and the total returns of
Class D for the fiscal year ended October 31, 2000 and for the period July 28,
1997 through October 31, 2000 were -6.20% and -0.62%, respectively.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in each Class of shares of the Fund by adding 1
to the Fund's aggregate total return to date (expressed as a decimal and
without taking into account the effect of any applicable CDSC) and multiplying
by $9,575, $48,250 and $97,250 in the case of Class A (investments of $10,000,
$50,000 and $100,000 adjusted for the initial sales charge) or by $10,000,
$50,000 and $100,000 in the case of each of Class B, Class C and Class D, as
the case may be. Investments of $10,000, $50,000 and $100,000 in each Class at
inception of the Class would have grown or declined to the following amounts at
October 31, 2000:
36
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT AT INCEPTION OF:
----------------------------------
INCEPTION
CLASS DATE: $10,000 $50,000 $100,000
----- ----- ------- ------- --------
<S> <C> <C> <C> <C>
Class A ......... 07/28/97 $9,294 $46,831 $94,391
Class B ......... 04/09/92 13,575 67,875 135,750
Class C ......... 07/28/97 9,518 47,590 95,180
Class D ......... 07/28/97 9,800 49,000 98,000
</TABLE>
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by recognized organizations.
XII. FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
EXPERTS. The financial statements of the Fund for the fiscal year ended
October 31, 2000 included in this Statement of Additional Information and
incorporated by reference in the Prospectus have been so included and
incorporated in reliance on the report of Deloitte & Touche LLP, independent
auditors, given on the authority of said firm as experts in auditing and
accounting.
* * * * *
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the SEC. The complete Registration Statement may be obtained from
the SEC.
37
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GOVERNMENT & CORPORATE BONDS (92.4%)
FOREIGN (27.8%)
AUSTRALIA (0.0%)
Cable/Satellite TV
$ 12,468 Australis Holdings Property
Ltd. (a) ................................ 15.00++% 11/01/02 $ 124,680
90 Australis Media Ltd. (a) (c) ............ 15.75 05/15/03 903
4,700 Australis Media Ltd. (Units)|P^ (a) (c)
15.75 05/15/03 47,000
------------
TOTAL AUSTRALIA .................................................... 172,583
------------
CANADA (3.0%)
Beverages - Non-Alcoholic (0.7%)
5,500 Sparkling Spring Water .................. 11.50 11/15/07 4,290,000
------------
Consumer/Business Services (0.2%)
1,300 MDC Communication Corp. ................. 10.50 12/01/06 1,183,000
------------
Electronics/Appliances (0.0%)
12,061 International Semi-Tech
Microelectronics, Inc. (a) (c) .......... 11.50 08/15/03 120,610
------------
Government Obligations (1.9%)
CAD 14,150 Canada Government Bond .................. 5.50 09/01/02 9,230,664
1,141 Ontario (Province of) ................... 11.125 02/14/01 1,672,702
------------
10,903,366
------------
Specialty Telecommunications (0.2%)
$ 1,300 Worldwide Fiber Inc. .................... 12.00 08/01/09 1,027,000
------------
TOTAL CANADA ....................................................... 17,523,976
------------
DENMARK (5.6%)
Government Obligations
DKK 182,000 Denmark (Kingdom of) .................... 9.00 11/15/00 20,791,160
106,000 Denmark (Kingdom of) (b) ................ 8.00 11/15/01 12,375,193
------------
TOTAL DENMARK ...................................................... 33,166,353
------------
FINLAND (2.3%)
Government Obligation
GBP 9,100 Finland (Republic of) ................... 8.00 04/07/03 13,668,506
------------
GERMANY (3.0%)
Government Obligations
EUR 15,500 Deutschland Republic .................... 6.00 09/15/03 13,453,791
5,000 Germany (Republic of) ................... 8.00 07/22/02 4,438,475
------------
TOTAL GERMANY ...................................................... 17,892,266
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
38
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NETHERLANDS (6.9%)
Government Obligations (6.7%)
GBP 9,100 BK Nederlandse ......................... 7.00 % 12/20/02 $ 13,367,440
EUR 13,500 Netherlands Government Bond (b)......... 8.50 03/15/01 11,588,941
17,750 Netherlands (Kingdom of) ............... 5.75 09/15/02 15,222,240
------------
40,178,621
------------
Specialty Telecommunications (0.2%)
$ 1,300 Versatel Telecom International NV....... 13.25 05/15/08 994,500
------------
TOTAL NETHERLANDS ................................................. 41,173,121
------------
NORWAY (2.6%)
Government Obligation
NOK 136,570 Norway Government Bond (b) ............. 9.50 10/31/02 15,327,185
------------
SWEDEN (2.7%)
Government Obligation
SEK 160,000 Swedish Government Bond (b) ............ 5.50 04/12/02 16,215,499
------------
UNITED KINGDOM (1.7%)
Cellular Telephone (0.1%)
$ 2,000 Dolphin Telecom PLC .................... 11.50 ++ 06/01/08 400,000
3,500 Dolphin Telecom PLC .................... 14.00 ++ 05/15/09 525,000
------------
925,000
------------
Major Banks (1.4%)
GBP 5,600 Abbey National Treasury
Service (b) ............................ 7.125 03/14/01 8,135,251
------------
Specialty Telecommunications (0.2%)
$ 1,200 Esprit Telecom Group PLC ............... 11.50 12/15/07 276,000
3,600 Esprit Telecom Group PLC ............... 10.875 06/15/08 828,000
------------
1,104,000
------------
TOTAL UNITED KINGDOM .............................................. 10,164,251
------------
TOTAL FOREIGN (Cost $210,822,610) ................................. 165,303,740
------------
UNITED STATES (64.6%)
CORPORATE BONDS (28.8%)
Advertising/Marketing Services (0.5%)
3,200 Interep National Radio Sales Inc. ...... 10.00 07/01/08 2,720,000
------------
Aerospace & Defense (0.5%)
1,300 Loral Space & Communications Ltd........ 9.50 01/15/06 936,000
2,700 Sabreliner Corp. - 144A* ............... 11.00 06/15/08 2,234,250
------------
3,170,250
------------
Broadcast/Media (0.5%)
3,800 Tri-State Outdoor Media Group,
Inc. ................................... 11.00 05/15/08 3,230,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
39
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broadcasting (0.1%)
$ 1,200 XM Satellite Radio Holdings Inc. ........ 14.00% 03/15/10 $ 816,000
------------
Cable/Satellite TV (0.2%)
3,000 Knology Holdings Inc. ................... 11.875++ 10/15/07 1,350,000
------------
Casino/Gambling (1.8%)
12,740 Aladdin Gaming Holdings/Capital
Corp. LLC (Series B) .................... 13.50++ 03/01/10 5,733,000
8,900 Fitzgeralds Gaming Corp.
(Series B) (c) .......................... 12.25 12/15/04 4,717,000
------------
10,450,000
------------
Cellular Telephone (1.5%)
1,400 Dobson/Sygnet Communications ............ 12.25 12/15/08 1,379,000
7,300 McCaw International Ltd. ................ 13.00++ 04/15/07 5,146,500
1,500 Tritel PCS Inc. ......................... 12.75++ 05/15/09 967,500
1,500 Triton Communications LLC ............... 11.00++ 05/01/08 1,136,250
------------
8,629,250
------------
Commercial Printing/Forms (0.0%)
2,700 Premier Graphics Inc. (a) (c) ........... 11.50 12/01/05 189,000
------------
Consumer/Business Services (0.9%)
1,200 Anacomp, Inc. (Series B) (c) ............ 10.875 04/01/04 216,000
1,100 Anacomp, Inc. (Series D) (c) ............ 10.875 04/01/04 198,000
6,750 Comforce Operating, Inc. ................ 12.00 12/01/07 3,510,000
1,500 Muzak LLC ............................... 9.875 03/15/09 1,320,000
------------
5,244,000
------------
Containers/Packaging (1.5%)
1,100 Berry Plastics Corp. .................... 12.25 04/15/04 1,001,000
5,650 Envirodyne Industries, Inc. ............. 10.25 12/01/01 4,463,500
3,500 Packaging Resources, Inc. (c) ........... 11.625 05/01/03 3,430,000
------------
8,894,500
------------
Diversified Manufacturing (0.7%)
1,400 Eagle-Picher Industries, Inc. ........... 9.375 03/01/08 1,169,000
2,588 Jordan Industries, Inc. (Series B) ...... 11.75++ 04/01/09 1,630,440
1,800 Jordan Industries, Inc. ................. 10.375 08/01/07 1,620,000
------------
4,419,440
------------
Drugstore Chains (0.1%)
1,700 Rite Aid Corp. .......................... 7.70 02/15/27 340,000
------------
Electronic Distributors (0.0%)
5,600 CHS Electronics, Inc. (a) (c) ........... 9.875 04/15/05 112,000
------------
Electronic Equipment/Instruments (0.3%)
2,700 High Voltage Engineering, Inc. .......... 10.75 08/15/04 1,755,000
------------
Electronics/Appliances (0.2%)
1,400 Windmere-Durable Holdings, Inc. ......... 10.00 07/31/08 1,260,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
40
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Environmental Services (0.4%)
$ 2,500 Allied Waste North America, Inc.
(Series B) .............................. 10.00 % 08/01/09 $ 2,162,500
------------
Financial Conglomerates (1.0%)
GBP 4,200 General Electric Capital Corp. (b) ...... 6.625 03/16/01 6,088,373
------------
Food Distributors (0.4%)
$ 1,300 Fleming Companies, Inc. (Series B)....... 10.625 07/31/07 975,000
1,300 Volume Services of America Inc. ......... 11.25 03/01/09 1,176,500
------------
2,151,500
------------
Food Retail (0.5%)
2,250 Big V Supermarkets, Inc.
(Series B) .............................. 11.00 02/15/04 1,530,000
850 Eagle Food Centers, Inc. ................ 11.00 04/15/05 425,000
2,367 Pueblo Xtra International, Inc.
(Series C) .............................. 9.50 08/01/03 1,112,490
------------
3,067,490
------------
Food: Specialty/Candy (0.5%)
44,552 SFAC New Holdings Inc. (d) .............. 13.00++ 06/15/09 2,673,103
------------
Hotels/Resorts (0.1%)
2,700 Epic Resorts LLC (Series B) ............. 13.00 06/15/05 810,000
------------
Household/Personal Care (0.3%)
2,015 J.B. Williams Holdings, Inc. ............ 12.00 03/01/04 1,974,700
------------
Industrial Specialties (0.8%)
1,300 Cabot Safety Corp. ...................... 12.50 07/15/05 1,293,500
1,800 Indesco International Inc. .............. 9.75 04/15/08 450,000
1,000 International Wire Group, Inc.
(Series B) .............................. 11.75 06/01/05 995,000
2,250 Outsourcing Services Group, Inc.
(Series B) .............................. 10.875 03/01/06 1,800,000
------------
4,538,500
------------
International Banks (0.8%)
GBP 3,061 KFW International Finance (b) ........... 10.625 09/03/01 4,582,969
------------
Internet Software/Services (0.4%)
$ 2,600 Globix Corp. - 144A* .................... 12.50 02/01/10 1,430,000
1,700 PSINET, Inc. ............................ 11.00 08/01/09 850,000
------------
2,280,000
------------
Major Banks (0.2%)
GBP 1,000 Morgan Guaranty Trust Corp. ............. 7.375 12/28/01 1,462,748
------------
Medical Specialties (0.7%)
$ 5,100 Mediq Inc./PRN Life Support
Services Inc. (c) ....................... 11.00 06/01/08 153,000
5,400 Universal Hospital Services, Inc. ....... 10.25 03/01/08 3,888,000
------------
4,041,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
41
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Medical/Nursing Services (0.6%)
$ 5,250 Pediatric Services of America, Inc.
(Series A) ................................ 10.00 % 04/15/08 $ 3,675,000
------------
Office Equipment/Supplies (0.7%)
6,890 Mosler, Inc. .............................. 11.00 04/15/03 4,134,000
------------
Other Consumer Specialties (0.8%)
5,800 Samsonite Corp. ........................... 10.75 06/15/08 4,524,000
------------
Restaurants (1.5%)
48,756 American Restaurant Group
Holdings, Inc. - 144A* (d) ................ 0.00 12/15/05 6,338,267
5,200 FRD Acquisition Corp. (Series B) .......... 12.50 07/15/04 1,872,000
1,300 Friendly Ice Cream Corp. .................. 10.50 12/01/07 871,000
------------
9,081,267
------------
Retail - Specialty (0.4%)
1,300 Pantry, Inc. .............................. 10.25 10/15/07 1,202,500
1,700 Petro Stopping Centers L.P. ............... 10.50 02/01/07 1,445,000
------------
2,647,500
------------
Specialty Telecommunications (3.2%)
6,500 Birch Telecom Inc. ........................ 14.00 06/15/08 3,900,000
3,000 DTI Holdings Inc. (Series B) .............. 12.50++ 03/01/08 1,020,000
16,300 Firstworld Communications, Inc. ........... 13.00++ 04/15/08 3,586,000
1,500 Pac-West Telecommunications
Group, Inc. ............................... 13.50 02/01/09 1,335,000
2,300 Primus Telecommunications Group,
Inc. ...................................... 12.75 10/15/09 1,173,000
2,700 Primus Telecommunications Group,
Inc. (Series B) ........................... 9.875 05/15/08 1,377,000
3,800 Viatel, Inc. .............................. 11.25 04/15/08 1,976,000
800 Viatel, Inc. .............................. 11.50 03/15/09 416,000
6,400 World Access, Inc. (d) .................... 13.25 01/15/08 4,480,000
------------
19,263,000
------------
Telecommunications (3.3%)
2,400 CapRock Communications Corp. .............. 11.50 05/01/09 2,310,000
1,400 CapRock Communications Corp.
(Series B) ................................ 12.00 07/15/08 1,368,500
1,500 Covad Communications Group, Inc. 12.50 02/15/09 780,000
5,900 e. Spire Communications, Inc. ............. 13.75 07/15/07 3,186,000
1,500 Focal Communications Corp.
(Series B) ................................ 12.125++ 02/15/08 750,000
1,300 Hyperion Telecommunication, Inc.
(Series B) ................................ 12.25 09/01/04 1,105,000
28,500 In-Flight Phone Corp. (Series B) .......... 14.00 05/15/02 1,425,000
1,300 Level 3 Communications, Inc. .............. 9.125 05/01/08 1,053,000
1,000 MGC Communications, Inc. .................. 13.00 04/01/10 610,000
1,300 NextLink Communications LLC ............... 10.75 06/01/09 1,144,000
5,400 Rhythms Netconnections, Inc. .............. 12.75 04/15/09 2,592,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
42
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 1,200 Startec Global Communications
Corp. ..................................... 12.00 % 05/15/08 $ 720,000
3,000 Talton Holdings, Inc. (Series B) .......... 11.00 06/30/07 2,490,000
------------
19,533,500
------------
Truck/Construction/Farm Machinery (0.4%)
2,800 J.B. Poindexter & Co., Inc. ............... 12.50 05/15/04 2,604,000
------------
Wireless Communications (3.0%)
11,300 Advanced Radio Telecom Corp. .............. 14.00 02/15/07 6,780,000
900 Arch Escrow Corp. ......................... 13.75 04/15/08 540,000
21,800 CellNet Data Systems Inc. (a) ............. 14.00++ 10/01/07 109,000
1,000 Globalstar LP/Capital Corp. ............... 10.75 11/01/04 150,000
1,850 Globalstar LP/Capital Corp. ............... 11.50 06/01/05 277,500
3,500 Orbcomm Global LP/Capital
Corp. (a) (c) ............................. 14.00 08/15/04 525,000
4,600 Paging Network, Inc. (a) (c) .............. 10.125 08/01/07 966,000
8,300 Paging Network, Inc. (a) (c) .............. 10.00 10/15/08 1,743,000
5,850 USA Mobile Communications
Holdings, Inc. ............................ 14.00 11/01/04 4,446,000
1,800 Winstar Communications, Inc. -
144A* ..................................... 0.00 04/15/10 567,000
2,400 Winstar Communications, Inc. -
144A* ..................................... 12.75 04/15/10 1,728,000
------------
17,831,500
------------
TOTAL CORPORATE BONDS
(Cost $288,431,367).................................................... 171,706,090
------------
MORTGAGE-BACKED SECURITIES (26.0%)
Federal Home Loan Mortgage Corp. (0.4%)
1,646 ........................................... 7.00 04/01/04 1,642,906
689 ........................................... 8.00 10/01/24 697,880
------------
2,340,786
------------
Federal National Mortgage Assoc. (13.1%)
29,437 ........................................... 6.00 02/01/11-
04/01/28 28,126,924
29,085 .......................................... 6.50 11/01/08-
11/01/23 28,140,138
4,609 .......................................... 7.00 10/01/08-
04/01/17 4,534,000
8,638 .......................................... 7.50 11/01/22 8,624,800
2,815 .......................................... 8.00 10/01/01-
06/01/22 2,847,048
5,225 .......................................... 8.50 07/01/17 5,336,053
------------
77,608,963
------------
Government National Mortgage Assoc. (12.5%)
21,399 .......................................... 6.00 10/15/23 20,162,028
21,831 .......................................... 6.50 11/20/23-
02/15/26 21,051,936
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
43
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 11,590 ............................... 7.00% 12/15/22-
06/20/29 $ 11,387,165
17,439 ............................... 7.50 05/15/17-
11/15/06 17,493,243
3,348 ............................... 8.00 01/15/22 3,402,357
1,132 ............................... 8.50 10/15/24 1,160,523
------------
74,657,252
------------
TOTAL MORTGAGE-BACKED SECURITIES
(Cost $157,748,277)...................................... 154,607,001
------------
U.S. GOVERNMENT AGENCIES & OBLIGATIONS (9.8%)
Federal Home Loan Banks (b) (2.0%)
5,000 ............................... 6.37 09/25/07 4,894,450
5,000 ............................... 6.385 10/23/07 4,897,800
2,000 ................................ 5.45 01/12/09 1,833,260
------------
11,625,510
------------
Federal Home Loan Mortgage Corp. (2.3%)
3,000 ................................ 5.75 04/15/08 2,837,910
15,000 ................................ 0.00 07/02/12-
08/15/02 10,877,850
------------
13,715,760
------------
Federal National Mortgage Assoc. (b)
(3.5%)
GBP 9,000 ................................ 6.875 06/07/02 13,178,201
AUD 6,340 ................................ 6.50 07/10/02 3,293,153
$ 6,000 Principal Strips ................ 0.00 02/12/04-
02/01/05 4,607,560
------------
21,078,914
------------
13,475 Financing Corp. (1.7%) .......... 0.00 03/07/05-
04/06/06 9,885,508
------------
2,320 Tennessee Valley Authority (0.3%) 0.00 01/15/03 2,010,651
------------
TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS
(Cost $88,058,776)....................................... 58,316,343
------------
TOTAL UNITED STATES
(Cost $534,238,420)...................................... 384,629,434
------------
TOTAL GOVERNMENT & CORPORATE BONDS
(Cost $745,061,030)...................................... 549,933,174
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES
------
<S> <C> <C>
COMMON STOCKS (e) (0.2%)
Apparel/Footwear Retail (0.0%)
1,310,596 County Seat Stores, Inc. (d) ............................ 11,795
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
44
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------------------------------------------------------------------------------------------
<S> <C> <C>
Casino/Gambling (0.0%)
10,773 Fitzgerald Gaming Corp. (Class D)* ........................... $ 11
------------
Food Retail (0.0%)
6,435 Eagle Food Centers, Inc. ..................................... 5,430
------------
Food: Specialty/Candy (0.0%)
2,423 SFAC New Holdings Inc. (d)* .................................. 606
198,750 Specialty Foods Acquisition Corp. - 144A* .................... 1,988
------------
2,594
------------
Hotels/Resorts (0.0%)
2,000 Motels of America, Inc. - 144A* .............................. 500
------------
Medical/Nursing Services (0.0%)
512,862 Raintree Healthcare Corp. (d) ................................ 4,616
------------
Restaurants (0.0%)
6,000 American Restaurant Group Holdings, Inc. - 144A* ............. 1,500
------------
Specialty Telecommunications (0.2%)
37,335 Versatel Telecom International NV (Netherlands) (d) .......... 746,700
20,110 World Access, Inc. (d) ....................................... 98,036
------------
844,736
------------
Textiles (0.0%)
298,462 United States Leather, Inc. (d) .............................. 2,985
------------
Wireless Communications (0.0%)
196,000 FWT, Inc. (Class A) .......................................... 1,960
------------
TOTAL COMMON STOCKS
(Cost $19,171,388)............................................ 876,127
------------
CONVERTIBLE PREFERRED STOCKS (0.3%)
Oil & Gas Production (0.0%)
989 XCL Ltd.+ - 144A* ............................................ 495
5,000 XCL Ltd. (Units)#+ - 144A* ................................... 2,500
------------
2,995
------------
Restaurants (0.1%)
1,886 American Restaurant Group Holdings, Inc. (Series B)
(Non-Conv.)+ ................................................. 754,400
------------
Wireless Communications (0.2%)
1,960,000 FWT, Inc. (Series A) (Non-Conv.) ............................. 980,000
------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $11,257,977)............................................ 1,737,395
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE
-------- ----
<S> <C> <C> <C>
WARRANTS (e) (0.2%)
Aerospace & Defense (0.0%)
1,000 Sabreliner Corp. - 144A* ......................... 04/15/03 10,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
45
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Broadcasting (0.0%)
4,000 UIH Australia/Pacific Inc. ........................ 05/15/06 $ 60,000
1,200 XM Satellite Radio Holdings Inc. .................. 03/15/10 168,000
------------
228,000
------------
Casino/Gambling (0.0%)
68,000 Aladdin Gaming Enterprises, Inc. - 144A* .......... 03/01/10 680
------------
Cellular Telephone (0.0%)
5,300 McCaw International Ltd. - 144A* .................. 04/15/07 106,000
------------
Hotels/Resorts (0.0%)
2,700 Epic Resorts LLC/Capital - 144A* .................. 06/15/05 27
------------
Restaurants (0.0%)
1,500 American Restaurant Group Holdings, Inc. -
144A* ............................................. 08/15/08 15
------------
Specialty Telecommunications (0.2%)
6,500 Birch Telecom Inc. - 144A* ........................ 06/15/08 650,000
15,000 DTI Holdings Inc. - 144A* ......................... 03/01/08 150
16,300 Firstworld Communications, Inc. - 144A* ........... 04/15/08 244,500
------------
894,650
------------
Telecommunications (0.0%)
1,200 Startec Global Communications Corp. - 144A* ....... 05/15/08 1,200
------------
TOTAL WARRANTS
(Cost $316,776)................................................. 1,240,572
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
--------- ---- ----
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS (3.4%)
UNITED STATES
TIME DEPOSITS (f) (2.1%)
NOK 59,063 Chase Manhattan Bank .......... 6.875% 11/02/00 6,358,411
EUR 7,465 Chase Manhattan Bank .......... 4.70 11/03/00 6,338,570
------------
TOTAL TIME DEPOSITS
(Cost $12,533,121)...................................... 12,696,981
------------
REPURCHASE AGREEMENT (1.3%)
$ 7,555 The Bank of New York (dated
10/31/00; proceeds $7,556,795) (g)
(Cost $7,555,444)............. 6.44 11/01/00 7,555,444
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $20,088,565)...................................... 20,252,425
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
46
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
<TABLE>
<CAPTION>
VALUE
------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENTS
(Cost $795,895,736) (h) 96.5% $574,039,693
OTHER ASSETS IN EXCESS OF
LIABILITIES ........... 3.5 20,577,320
----- ------------
NET ASSETS ............ 100.0% $594,617,013
===== ============
</TABLE>
---------------------
* Resale is restricted to qualified institutional investors.
# Consists of one or more class of securities traded together as a unit;
stocks or bonds with attached warrants.
+ Payment-in-kind security.
++ Currently a zero coupon bond and will pay interest at the rate shown at a
future date.
(a) Issuer in bankruptcy.
(b) Some or all of these securities are segregated in connection with open
forward foreign currency contracts and securities purchased on a forward
commitment basis.
(c) Non-income producing security; bond in default.
(d) Acquired through exchange offer.
(e) Non-income producing securities.
(f) Subject to withdrawal restrictions until maturity.
(g) Collateralized by $7,562,416 U.S. Treasury Bill 6.25% due 07/31/02 valued
at $7,706,571.
(h) The aggregate cost for federal income tax purposes approximates the
aggregate cost for book purposes. The aggregate gross unrealized
appreciation is $11,396,154 and the aggregate gross unrealized depreciation
is $233,252,197, resulting in net unrealized depreciation of $221,856,043.
SEE NOTES TO FINANCIAL STATEMENTS
47
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 2000, continued
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT OCTOBER 31, 2000:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS TO IN EXCHANGE DELIVERY APPRECIATION
DELIVER FOR DATE (DEPRECIATION)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 6,307,965 EUR 7,465,047 11/01/2000 $ 30,607
EUR 15,946,000 $ 13,379,013 11/27/2000 (177,957)
GBP 3,300,000 $ 4,797,411 11/13/2000 10,307
GBP 1,615,235 $ 2,348,956 11/30/2000 5,088
NOK 59,085,846 $ 6,307,833 11/02/2000 (53,008)
----------
Net unrealized depreciation ................ $ (184,963)
==========
</TABLE>
Currency Abbreviations:
-----------------------
<TABLE>
<S> <C>
AUD Australian Dollar.
GBP British Pound.
CAD Canadian Dollar.
DKK Danish Krone.
EUR Euro.
NOK Norwegian Krone.
SEK Swedish Krona.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
48
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2000
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities, at value (cost $795,895,736)................... $574,039,693
Unrealized appreciation on open forward foreign currency contracts ....... 46,002
Cash ..................................................................... 10,865,719
Receivable for:
Interest .............................................................. 14,352,856
Investments sold ...................................................... 3,074,411
Shares of beneficial interest sold .................................... 924,731
Prepaid expenses and other assets ........................................ 49,889
------------
TOTAL ASSETS .......................................................... 603,353,301
------------
LIABILITIES:
Unrealized depreciation on open forward foreign currency contracts ....... 230,965
Payable for:
Investments purchased ................................................. 6,338,571
Shares of beneficial interest repurchased ............................. 1,372,626
Plan of distribution fee .............................................. 445,329
Investment management fee ............................................. 214,041
Accrued expenses and other payables ...................................... 134,756
------------
TOTAL LIABILITIES ..................................................... 8,736,288
------------
NET ASSETS ............................................................ $594,617,013
============
COMPOSITION OF NET ASSETS:
Paid-in-capital .......................................................... $868,179,632
Net unrealized depreciation .............................................. (222,546,422)
Dividends in excess of net investment income ............................. (3,126,277)
Accumulated net realized loss ............................................ (47,889,920)
------------
NET ASSETS ............................................................ $594,617,013
============
CLASS A SHARES:
Net Assets ............................................................... $13,318,287
Shares Outstanding (unlimited authorized, $.01 par value)................. 1,911,492
NET ASSET VALUE PER SHARE ............................................. $6.97
=====
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44% of net asset value) ....................... $7.28
=====
CLASS B SHARES:
Net Assets ............................................................... $565,492,583
Shares Outstanding (unlimited authorized, $.01 par value) ................ 81,046,617
NET ASSET VALUE PER SHARE ............................................. $6.98
=====
CLASS C SHARES:
Net Assets ............................................................... $14,312,911
Shares Outstanding (unlimited authorized, $.01 par value) ................ 2,054,667
NET ASSET VALUE PER SHARE ............................................. $6.97
=====
CLASS D SHARES:
Net Assets ............................................................... $1,493,232
Shares Outstanding (unlimited authorized, $.01 par value)................. 213,723
NET ASSET VALUE PER SHARE ............................................. $6.99
=====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
49
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended October 31, 2000
<TABLE>
<CAPTION>
NET INVESTMENT INCOME:
<S> <C>
INTEREST INCOME ...................................................... $ 75,346,208
------------
EXPENSES
Plan of distribution fee (Class A shares) ............................ 35,950
Plan of distribution fee (Class B shares) ............................ 6,043,295
Plan of distribution fee (Class C shares) ............................ 141,669
Investment management fee ............................................ 2,991,996
Transfer agent fees and expenses ..................................... 574,665
Registration fees .................................................... 99,365
Custodian fees ....................................................... 95,416
Shareholder reports and notices ...................................... 94,666
Professional fees .................................................... 77,919
Trustees' fees and expenses .......................................... 17,188
Other ................................................................ 25,491
------------
TOTAL EXPENSES .................................................... 10,197,620
------------
NET INVESTMENT INCOME ............................................. 65,148,588
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain/(loss) on:
Investments ....................................................... (40,481,232)
Foreign exchange transactions ..................................... 9,895,709
------------
NET LOSS .......................................................... (30,585,523)
------------
Net change in unrealized appreciation/depreciation on:
Investments ....................................................... (82,907,458)
Translation of forward foreign currency contracts, other assets and
liabilities denominated in foreign currencies ................... (1,425,031)
------------
NET DEPRECIATION .................................................. (84,332,489)
------------
NET LOSS .......................................................... (114,918,012)
------------
NET DECREASE ......................................................... $(49,769,424)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
50
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
------------------ -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income .................................... $ 65,148,588 $ 80,184,261
Net realized loss ........................................ (30,585,523) (18,452,394)
Net change in unrealized depreciation .................... (84,332,489) (83,376,343)
-------------- -------------
NET DECREASE .......................................... (49,769,424) (21,644,476)
-------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A shares ........................................ (1,450,663) (1,474,948)
Class B shares ........................................ (52,380,875) (64,975,880)
Class C shares ........................................ (1,259,557) (1,307,832)
Class D shares ........................................ (194,544) (67,347)
Paid-in-capital:
Class A shares ........................................ (131,489) (204,223)
Class B shares ........................................ (4,747,855) (8,996,654)
Class C shares ........................................ (114,168) (181,085)
Class D shares ........................................ (17,634) (9,325)
-------------- -------------
TOTAL DIVIDENDS AND DISTRIBUTIONS ..................... (60,296,785) (77,217,294)
-------------- -------------
Net decrease from transactions in shares of beneficial
interest ............................................... (197,194,430) (54,811,256)
-------------- -------------
NET DECREASE .......................................... (307,260,639) (153,673,026)
NET ASSETS:
Beginning of period ...................................... 901,877,652 1,055,550,678
-------------- -------------
END OF PERIOD
(Including dividends in excess of net investment
income of $3,126,277 and $2,194,141, respectively)..... $ 594,617,013 $ 901,877,652
============== =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
51
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 2000
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Diversified Income Trust (the "Fund") is registered
under the Investment Company Act of 1940, as amended (the "Act"), as a
diversified, open-end management investment company. The Fund's primary
investment objective is to provide a high level of current income and, as a
secondary objective, seeks to maximize total return, but only when consistent
with its primary objective. The Fund was organized as a Massachusetts business
trust on December 20, 1991 and commenced operations on April 9, 1992. On July
28, 1997, the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year,
six years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS - (1) an equity portfolio security listed or traded
on the New York or American Stock Exchange, NASDAQ, or other exchange is valued
at its latest sale price prior to the time when assets are valued; if there
were no sales that day, the security is valued at the latest bid price (in
cases where securities are traded on more than one exchange, the securities are
valued on the exchange designated as the primary market by the Trustees); (2)
all other portfolio securities for which over-the-counter market quotations are
readily available are valued at the latest available bid price;
(3) when market quotations are not readily available, including circumstances
under which it is determined by Morgan Stanley Dean Witter Advisors Inc. (the
"Investment Manager") that sale or bid prices are not reflective of a
security's market value, portfolio securities are valued at their fair value as
determined in good faith under procedures established by and under the general
supervision of the Trustees; (4) certain portfolio securities may be valued by
an outside pricing service approved by the Trustees. The pricing service may
utilize a matrix system incorporating security quality, maturity and coupon as
the evaluation model parameters, and/or research and evaluations by its staff,
including review of broker-dealer market price quotations, if available, in
determining what it believes is the fair valuation of the portfolio securities
valued by such pricing service; and (5) short-term debt securities having a
maturity date of
52
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 2000, continued
more than sixty days at time of purchase are valued on a mark-to-market basis
until sixty days prior to maturity and thereafter at amortized cost based on
their value on the 61st day. Short-term debt securities having a maturity date
of sixty days or less at the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS - Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS - Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date
such items are recognized. Distribution fees are charged directly to the
respective class.
D. FOREIGN CURRENCY TRANSLATION - The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, other assets and liabilities and forward foreign
currency contracts ("forward contracts") are translated at the exchange rates
prevailing at the end of the period; and (2) purchases, sales, income and
expenses are translated at the exchange rates prevailing on the respective
dates of such transactions. The resultant exchange gains and losses are
included in the Statement of Operations as realized and unrealized gain/loss on
foreign exchange transactions. Pursuant to U.S. Federal income tax regulations,
certain foreign exchange gains/losses included in realized and unrealized
gain/loss are included in or are a reduction of ordinary income for federal
income tax purposes. The Fund does not isolate that portion of the results of
operations arising as a result of changes in the foreign exchange rates from
the changes in the market prices of the securities.
E. FORWARD FOREIGN CURRENCY CONTRACTS - The Fund may enter into forward
contracts which are valued daily at the appropriate exchange rates. The
resultant unrealized exchange gains and losses are included in the Statement of
Operations as unrealized foreign currency gain or loss. The Fund records
realized gains or losses on delivery of the currency or at the time the forward
contract is extinguished (compensated) by entering into a closing transaction
prior to delivery.
F. FEDERAL INCOME TAX STATUS - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - The Fund records dividends and
distributions to its shareholders on the record date. The amount of dividends
and distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered
53
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 2000, continued
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax-basis treatment; temporary differences do not require
reclassification. Dividends and distributions which exceed net investment
income and net realized capital gains for tax purposes, are reported as
distributions of paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.40% to the net assets of the Fund determined as of the close
of each business day.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan"), pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A - up
to 0.25% of the average daily net assets of Class A; (ii) Class B - 0.85% of
the lesser of: (a) the average daily aggregate gross sales of the Class B
shares since inception of the Fund (not including reinvestment of dividend or
capital gain distributions) less the average net asset value of the Class B
shares redeemed since the Fund's inception upon which a contingent deferred
sales charge has been imposed or waived; or (b) the average daily net assets of
Class B; and (iii) Class C - up to 0.85% of the average daily net assets of
Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund
pursuant to the Plan and contingent deferred sales charges paid by investors
upon redemption of Class B shares. Although there is no legal obligation for
the Fund to pay expenses incurred in excess of payments made to the Distributor
under the Plan and the proceeds of contingent deferred sales charges paid by
investors upon redemption of shares, if for any reason the Plan is terminated,
the Trustees will consider at that time the manner in which to treat such
expenses. The Distributor has advised the Fund that such excess amounts totaled
$12,579,635 at October 31, 2000.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected
54
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 2000, continued
broker-dealer representatives may be reimbursed in the subsequent calendar
year. For the year ended October 31, 2000, the distribution fee was accrued for
Class A shares and Class C shares at the annual rate of 0.20% and 0.85%,
respectively.
The Distributor has informed the Fund that for the year ended October 31, 2000,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $985, $1,650,129
and $10,280, respectively and received $25,418 in front-end sales charges from
sales of the Fund's Class A shares. The respective shareholders pay such
charges which are not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities,
excluding short-term investments, for the year ended October 31, 2000
aggregated $283,039,098 and $502,923,467, respectively. Included in the
aforementioned are purchases and sales of U.S. Government securities of
$75,731,778 and $217,145,403, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager
and Distributor, is the Fund's transfer agent. At October 31, 2000, the Fund
had transfer agent fees and expenses payable of approximately $1,000.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended October 31, 2000
included in Trustees' fees and expenses in the Statement of Operations amounted
to $4,824. At October 31, 2000, the Fund had an accrued pension liability of
$40,676 which is included in accrued expenses in the Statement of Assets and
Liabilities.
55
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 2000, continued
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
---------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold ................................................ 16,027,157 $ 121,559,975 2,848,419 $ 24,256,392
Reinvestment of dividends and distributions ......... 78,885 604,053 65,553 563,411
Redeemed ............................................ (16,870,559) (128,128,766) (1,917,929) (16,068,227)
----------- ------------- ---------- -------------
Net increase (decrease) - Class A ................... (764,517) (5,964,738) 996,043 8,751,576
----------- ------------- ---------- -------------
CLASS B SHARES
Sold ................................................ 30,585,618 235,249,712 46,504,109 405,026,436
Reinvestment of dividends and distributions ......... 3,104,016 23,959,224 3,786,566 32,666,180
Redeemed ............................................ (57,995,493) (448,750,812) (58,638,989) (507,410,583)
----------- ------------- ----------- -------------
Net decrease - Class B .............................. (24,305,859) (189,541,876) (8,348,314) (69,717,967)
----------- ------------- ----------- -------------
CLASS C SHARES
Sold ................................................ 1,559,481 11,632,644 1,432,185 12,480,926
Reinvestment of dividends and distributions ......... 92,656 709,891 94,887 815,013
Redeemed ............................................ (1,984,780) (14,956,054) (880,512) (7,540,173)
----------- ------------- ----------- -------------
Net increase (decrease) - Class C ................... (332,643) (2,613,519) 646,560 5,755,766
----------- ------------- ----------- -------------
CLASS D SHARES
Sold ................................................ 6,633,983 53,098,178 82,581 708,190
Reinvestment of dividends and distributions ......... 14,355 111,419 5,374 46,101
Redeemed ............................................ (6,562,867) (52,283,894) (41,881) (354,922)
----------- ------------- ----------- -------------
Net increase - Class D .............................. 85,471 925,703 46,074 399,369
----------- ------------- ----------- -------------
Net decrease in Fund ................................ (25,317,548) $(197,194,430) (6,659,637) $ (54,811,256)
=========== ============= =========== =============
</TABLE>
6. FEDERAL INCOME TAX STATUS
At October 31, 2000, the Fund had a net capital loss carryover of $47,738,000,
which may be used to offset future capital gains to the extent provided by
regulations, which is available through October 31 of the following years:
<TABLE>
<CAPTION>
AMOUNT IN THOUSANDS
-----------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2007 2008
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$3,024 $3,677 $2,482 $7,131 $3,233 $7,708 $20,483
====== ====== ====== ====== ====== ====== =======
</TABLE>
As of October 31, 2000, the Fund had temporary book/tax differences primarily
attributable to the mark-to-market of open forward foreign currency exchange
contracts, capital loss deferrals on wash sales and interest on bonds in
default and permanent books/tax differences primarily attributable to foreign
56
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 2000, continued
currency losses. To reflect reclassifications arising from the permanent
differences, dividends in excess of net investment income was charged
$10,796,085, paid-in-capital was credited $3,668,879 and accumulated net
realized loss was credited $7,126,206.
7. PURPOSE OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward contracts to facilitate settlement of foreign
currency denominated portfolio transactions or to manage its foreign currency
exposure or to sell, for a fixed amount of U.S. dollars or other currency, the
amount of foreign currency approximating the value of some or all of its
holdings denominated in such foreign currency or an amount of foreign currency
other than the currency in which the securities to be hedged are denominated
approximating the value of some or all of its holdings to be hedged.
Additionally, when the Investment Manager anticipates purchasing securities at
some time in the future, the Fund may enter into a forward contract to purchase
an amount of currency equal to some or all the value of the anticipated
purchase for a fixed amount of U.S. dollars or other currency.
To hedge against adverse interest rate, foreign currency and market risks, the
Fund may enter into written options on interest rate futures and interest rate
futures contracts ("derivative investments").
Forward contracts and derivative instruments involve elements of market risk in
excess of the amount reflected in the Statement of Assets and Liabilities. The
Fund bears the risk of an unfavorable change in the foreign exchange rates
underlying the forward contracts. Risks may also arise upon entering into these
contracts from the potential inability of the counterparties to meet the terms
of their contracts.
At October 31, 2000, there were outstanding forward contracts.
8. FUND MERGER
On October 26, 2000, the Trustees of the Fund and Morgan Stanley Dean Witter
World Wide Income Trust ("World Wide") approved a plan of reorganization ("the
Plan") whereby World Wide would be merged into the Fund. The Plan is subject to
the consent of World Wide's shareholders. If approved, the assets of World Wide
would be combined with the assets of the Fund and shareholders of World Wide
would become shareholders of the Fund, receiving shares of the corresponding
class of the Fund equal to the value of their holdings in World Wide.
57
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31, JULY 28, 1997*
----------------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES#
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $8.16 $9.01 $9.46 $9.40
----- ----- ----- -----
Income (loss) from investment operations:
Net investment income ................................. 0.72 0.74 0.74 0.22
Net realized and unrealized gain (loss) ............... (1.23) (0.87) (0.46) 0.04
----- ----- ----- -----
Total income (loss) from investment operations ......... (0.51) (0.13) 0.28 0.26
----- ----- ----- -----
Less dividends and distributions from:
Net investment income ................................. (0.62) (0.63) (0.70) (0.20)
Paid-in-capital ....................................... (0.06) (0.09) (0.03) -
----- ----- ----- -----
Total dividends and distributions ...................... (0.68) (0.72) (0.73) (0.20)
----- ----- ----- -----
Net asset value, end of period ......................... $6.97 $8.16 $9.01 $9.46
===== ===== ===== =====
TOTAL RETURN+ .......................................... (6.66)% (1.61)% 2.86% 2.74%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 0.73 %(3) 0.72 %(3) 0.77%(3) 0.85%(2)
Net investment income .................................. 9.28 %(3) 8.56 %(3) 7.94%(3) 8.98%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $13,318 $21,828 $15,130 $4,933
Portfolio turnover rate ................................ 40 % 71 % 130% 104%
</TABLE>
-------------
* The date shares were first issued.
# The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
58
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------
2000# 1999# 1998# 1997*# 1996
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............... $8.16 $9.01 $9.46 $9.78 $9.62
----- ----- ----- ----- -----
Income (loss) from investment operations:
Net investment income ............................. 0.67 0.68 0.68 0.74 0.78
Net realized and unrealized gain (loss) ........... (1.22) (0.87) (0.46) (0.15) 0.10
----- ----- ----- ----- -----
Total income (loss) from investment operations ..... (0.55) (0.19) 0.22 0.59 0.88
----- ----- ----- ----- -----
Less dividends and distributions from:
Net investment income ............................. (0.58) (0.58) (0.65) (0.91) (0.72)
Paid-in-capital ................................... (0.05) (0.08) (0.02) - -
----- ----- ----- ----- -----
Total dividends and distributions .................. (0.63) (0.66) (0.67) (0.91) (0.72)
----- ----- ----- ----- -----
Net asset value, end of period ..................... $6.98 $8.16 $9.01 $9.46 $9.78
===== ===== ===== ===== =====
TOTAL RETURN+ ...................................... (7.24)% (2.14)% 2.23% 6.46% 9.49%
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................... 1.38 %(1) 1.38 %(1) 1.38%(1) 1.40% 1.42%
Net investment income .............................. 8.63 %(1) 7.90 %(1) 7.33%(1) 7.90% 8.38%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ............ $565,493 $859,553 $1,024,021 $915,899 $745,581
Portfolio turnover rate ............................ 40 % 71 % 130% 104% 82%
</TABLE>
-------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date have been designated Class B shares.
# The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
59
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31, JULY 28, 1997*
---------------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C SHARES#
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $8.15 $9.00 $9.45 $9.40
----- ----- ----- -----
Income (loss) from investment operations:
Net investment income ................................. 0.67 0.68 0.68 0.20
Net realized and unrealized gain (loss) ............... (1.22) (0.87) (0.46) 0.04
----- ----- ----- -----
Total income (loss) from investment operations ......... (0.55) (0.19) 0.22 0.24
----- ----- ----- -----
Less dividends and distributions from:
Net investment income ................................. (0.58) (0.58) (0.65) (0.19)
Paid-in-capital ....................................... (0.05) (0.08) (0.02) -
----- ----- ----- -----
Total dividends and distributions ...................... (0.63) (0.66) (0.67) (0.19)
----- ----- ----- -----
Net asset value, end of period ......................... $6.97 $8.15 $9.00 $9.45
===== ===== ===== =====
TOTAL RETURN+ .......................................... (7.12)% (2.25)% 2.26% 2.52%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.38 %(3) 1.38 %(3) 1.38%(3) 1.44%(2)
Net investment income .................................. 8.63 %(3) 7.90 %(3) 7.33%(3) 8.17%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $14,313 $19,450 $15,659 $3,773
Portfolio turnover rate ................................ 40 % 71 % 130% 104%
</TABLE>
-------------
* The date shares were first issued.
# The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
60
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31, JULY 28, 1997*
---------------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS D SHARES#
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $8.15 $9.00 $9.45 $9.40
----- ----- ----- -----
Income (loss) from investment operations:
Net investment income ................................. 0.33 0.76 0.76 0.23
Net realized and unrealized gain (loss) ............... (0.80) (0.88) (0.46) 0.02
----- ----- ----- -----
Total income (loss) from investment operations ......... (0.47) (0.12) 0.30 0.25
----- ----- ----- -----
Less dividends and distributions from:
Net investment income ................................. (0.63) (0.64) (0.72) (0.20)
Paid-in-capital ....................................... (0.06) (0.09) (0.03) -
----- ----- ----- -----
Total dividends and distributions ...................... (0.69) (0.73) (0.75) (0.20)
----- ----- ----- -----
Net asset value, end of period ......................... $6.99 $8.15 $9.00 $9.45
===== ===== ===== =====
TOTAL RETURN+ .......................................... (6.20)% (1.42)% 3.21% 2.69%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 0.53 %(3) 0.53 %(3) 0.53%(3) 0.59%(2)
Net investment income .................................. 9.48 %(3) 8.75 %(3) 8.18%(3) 9.26%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $1,493 $1,046 $740 $99
Portfolio turnover rate ................................ 40 % 71 % 130% 104%
</TABLE>
-------------
* The date shares were first issued.
# The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
61
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OF MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Dean Witter Diversified Income Trust (the "Fund"), including the
portfolio of investments, as of October 31, 2000, and the related statements of
operations and changes in net assets, and the financial highlights for the year
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The statement of changes in net assets for the year ended October 31,
1999 and the financial highlights for each of the respective stated periods
ended October 31, 1999 were audited by other independent accountants whose
report, dated December 20, 1999, expressed an unqualified opinion on that
statement and financial highlights.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 2000, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Morgan Stanley Dean Witter Diversified Income Trust as of October 31, 2000, the
results of its operations, the changes in its net assets, and the financial
highlights for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
December 5, 2000
--------------------------------------------------------------------------------
2000 FEDERAL TAX NOTICE (unaudited)
Of the Fund's ordinary income dividends paid during the fiscal year ended
October 31, 2000, 3.18% was attributable to qualifying Federal
obligations. Please consult your tax advisor to determine if any portion
of the dividends you received is exempt from state income tax.
--------------------------------------------------------------------------------
62
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
CHANGE IN INDEPENDENT ACCOUNTANTS
On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.
The reports of PricewaterhouseCoopers LLP on the financial statements of the
Fund for the past two fiscal years contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle.
In connection with its audits for the two most recent fiscal years and through
July 1, 2000, there have been no disagreements with PricewaterhouseCoopers LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to
make reference thereto in their report on the financial statements for such
years.
The Fund, with the approval of its Board of Trustees and its Audit Committee,
engaged Deloitte & Touche LLP as its new independent auditors as of July 1,
2000.
63
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OF MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
In our opinion, the statement of changes in net assets and the financial
highlights of Morgan Stanley Dean Witter Diversified Income Trust (the "Fund")
(not presented separately herein) present fairly, in all material respects, the
changes in its net assets for the year ended October 31, 1999 and the financial
highlights for each of the years in the period ended October 31, 1999, in
conformity with generally accepted accounting principles. This financial
statement and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above. We have not audited the financial statements or
financial highlights of the Fund for any period subsequent to October 31, 1999.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
December 20, 1999
64
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION MORGAN
JANUARY 8, 2001 STANLEY
DEAN WITTER
WORLD WIDE
INCOME TRUST
--------------------------------------------------------------------------------
This STATEMENT OF ADDITIONAL INFORMATION is not a PROSPECTUS. The
PROSPECTUS, dated January 8, 2001, for Morgan Stanley Dean Witter World Wide
Income Trust may be obtained without charge from the Fund at its address or
telephone number listed below or from Dean Witter Reynolds at any of its branch
offices.
Morgan Stanley Dean Witter
World Wide Income Trust
Two World Trade Center
New York, NY 10048
(800) 869-NEWS
<PAGE>
TABLE OF CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
I. Fund History............................................. 4
II. Description of the Fund and Its Investments and Risks... 4
A. Classification......................................... 4
B. Investment Strategies and Risks........................ 4
C. Fund Policies/Investment Restrictions.................. 13
III. Management of the Fund................................. 14
A. Board of Trustees...................................... 14
B. Management Information................................. 15
C. Compensation........................................... 19
IV. Control Persons and Principal Holders of Securities..... 21
V. Investment Management and Other Services................. 21
A. Investment Manager..................................... 21
B. Principal Underwriter.................................. 22
C. Services Provided by the Investment Manager............ 22
D. Dealer Reallowances.................................... 23
E. Rule 12b-1 Plan........................................ 23
F. Other Service Providers................................ 27
G. Codes of Ethics........................................ 28
VI. Brokerage Allocation and Other Practices................ 28
A. Brokerage Transactions................................. 28
B. Commissions............................................ 28
C. Brokerage Selection.................................... 29
D. Directed Brokerage..................................... 29
E. Regular Broker-Dealers................................. 30
VII. Capital Stock and Other Securities..................... 30
VIII. Purchase, Redemption and Pricing of Shares............ 30
A. Purchase/Redemption of Shares.......................... 30
B. Offering Price......................................... 31
IX. Taxation of the Fund and Shareholders................... 32
X. Underwriters............................................. 34
XI. Calculation of Performance Data......................... 34
XII. Financial Statements................................... 35
</TABLE>
2
<PAGE>
GLOSSARY OF SELECTED DEFINED TERMS
--------------------------------------------------------------------------------
The terms defined in this glossary are frequently used in this STATEMENT OF
ADDITIONAL INFORMATION (other terms used occasionally are defined in the text of
the document).
"CUSTODIAN"--The Chase Manhattan Bank.
"DEAN WITTER REYNOLDS"--Dean Witter Reynolds Inc., a wholly-owned broker-dealer
subsidiary of MSDW.
"DISTRIBUTOR"--Morgan Stanley Dean Witter Distributors Inc., a wholly-owned
broker-dealer subsidiary of MSDW.
"FINANCIAL ADVISORS"--Morgan Stanley Dean Witter authorized financial services
representatives.
"FUND"--Morgan Stanley Dean Witter World Wide Income Trust, a registered
open-end investment company.
"INDEPENDENT TRUSTEES"--Trustees who are not "interested persons" (as defined by
the Investment Company Act) of the Fund.
"INVESTMENT MANAGER"--Morgan Stanley Dean Witter Advisors Inc., a wholly-owned
investment advisor subsidiary of MSDW.
"MORGAN STANLEY & CO."--Morgan Stanley & Co. Incorporated, a wholly-owned
broker-dealer subsidiary of MSDW.
"MORGAN STANLEY DEAN WITTER FUNDS"--Registered investment companies (i) for
which the Investment Manager serves as the investment advisor; and (ii) that
hold themselves out to investors as related companies for investment and
investor services.
"MSDW"--Morgan Stanley Dean Witter & Co., a preeminent global financial services
firm.
"MSDW SERVICES COMPANY"--Morgan Stanley Dean Witter Services Company Inc., a
wholly-owned fund services subsidiary of the Investment Manager.
"TRANSFER AGENT"--Morgan Stanley Dean Witter Trust FSB, a wholly-owned transfer
agent subsidiary of MSDW.
"TRUSTEES"--The Board of Trustees of the Fund.
3
<PAGE>
I. FUND HISTORY
--------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust, under a
Declaration of Trust on October 14, 1988 with the name Dean Witter World Wide
Income Trust. Effective June 22, 1998, the Fund's name was changed to Morgan
Stanley Dean Witter World Wide Income Trust.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
--------------------------------------------------------------------------------
A. CLASSIFICATION
The Fund is an open-end, non-diversified management investment company whose
primary investment objective is to earn a high level of current income. As a
secondary objective, the Fund will seek appreciation in the value of its assets.
B. INVESTMENT STRATEGIES AND RISKS
The following discussion of the Fund's investment strategies and risks
should be read with the sections of the Fund's PROSPECTUS titled "Principal
Investment Strategies," "Principal Risks," "Additional Investment Strategy
Information" and "Additional Risk Information."
CONVERTIBLE SECURITIES. The Fund may invest in fixed-income securities
which are convertible into common stock. Convertible securities rank senior to
common stocks in a corporation's capital structure and, therefore, entail less
risk than the corporation's common stock. The value of a convertible security is
a function of its "investment value" (its value as if it did not have a
conversion privilege), and its "conversion value" (the security's worth if it
were to be exchanged for the underlying security, at market value, pursuant to
its conversion privilege).
To the extent that a convertible security's investment value is greater than
its conversion value, its price will be primarily a reflection of such
investment value and its price will be likely to increase when interest rates
fall and decrease when interest rates rise, as with a fixed-income security (the
credit standing of the issuer and other factors may also have an effect on the
convertible security's value). If the conversion value exceeds the investment
value, the price of the convertible security will rise above its investment
value and, in addition, will sell at some premium over its conversion value.
(This premium represents the price investors are willing to pay for the
privilege of purchasing a fixed-income security with a possibility of capital
appreciation due to the conversion privilege.) At such times the price of the
convertible security will tend to fluctuate directly with the price of the
underlying equity security. Convertible securities may be purchased by the Fund
at varying price levels above their investment values and/or their conversion
values in keeping with the Fund's objectives.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may enter into
forward foreign currency exchange contracts ("forward contracts") as a hedge
against fluctuations in future foreign exchange rates. The Fund may conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. A
forward contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
These contracts are traded in the interbank market conducted directly between
currency traders (usually large, commercial and investment banks) and their
customers. Forward contracts only will be entered into with United States banks
and their foreign branches, insurance companies and other dealers whose assets
total $1 billion or more, or foreign banks whose assets total $1 billion or
more. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades.
The Investment Manager also may from time to time utilize forward contracts
to hedge a foreign security held in the portfolio or a security which pays out
principal tied to an exchange rate between the U.S. dollar and a foreign
currency, against a decline in value of the applicable foreign currency. They
also may be used to lock in the current exchange rate of the currency in which
those securities anticipated to
4
<PAGE>
be purchased are denominated. At times, the Fund may enter into "cross-currency"
hedging transactions involving currencies other than those in which securities
are held or proposed to be purchased are denominated.
The Fund will not enter into forward currency contracts or maintain a net
exposure to these contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. It will, however, do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the spread
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
The Fund may be limited in its ability to enter into hedging transactions
involving forward contracts by the Internal Revenue Code requirements relating
to qualification as a regulated investment company.
Forward currency contracts may limit gains on portfolio securities that
could otherwise be realized had they not been utilized and could result in
losses. The contracts also may increase the Fund's volatility and may involve a
significant amount of risk relative to the investment of cash.
OPTION AND FUTURES TRANSACTIONS. The Fund may engage in transactions in
listed and OTC options. Listed options are issued or guaranteed by the exchange
on which they are traded or by a clearing corporation such as the Options
Clearing Corporation ("OCC"). Ownership of a listed call option gives the Fund
the right to buy from the OCC (in the U.S.) or other clearing corporation or
exchange, the underlying security or currency covered by the option at the
stated exercise price (the price per unit of the underlying security) by filing
an exercise notice prior to the expiration date of the option. The writer
(seller) of the option would then have the obligation to sell to the OCC (in the
U.S.) or other clearing corporation or exchange, the underlying security or
currency at that exercise price prior to the expiration date of the option,
regardless of its then current market price. Ownership of a listed put option
would give the Fund the right to sell the underlying security or currency to the
OCC (in the U.S.) or other clearing corporation or exchange, at the stated
exercise price. Upon notice of exercise of the put option, the writer of the put
would have the obligation to purchase the underlying security or currency from
the OCC (in the U.S.) or other clearing corporation or exchange, at the exercise
price.
COVERED CALL WRITING. The Fund is permitted to write covered call options
on portfolio securities and on the U.S. dollar and foreign currencies in which
they are denominated, without limit.
The Fund will receive from the purchaser, in return for a call it has
written, a "premium;" i.e., the price of the option. Receipt of these premiums
may better enable the Fund to earn a higher level of current income than it
would earn from holding the underlying securities (or currencies) alone.
Moreover, the premium received will offset a portion of the potential loss
incurred by the Fund if the securities (or currencies) underlying the option
decline in value.
The Fund may be required, at any time during the option period, to deliver
the underlying security (or currency) against payment of the exercise price on
any calls it has written. This obligation is terminated upon the expiration of
the option period or at such earlier time when the writer effects a closing
purchase transaction. A closing purchase transaction is accomplished by
purchasing an option of the same series as the option previously written.
However, once the Fund has been assigned an exercise notice, the Fund will be
unable to effect a closing purchase transaction.
A call option is "covered" if the Fund owns the underlying security subject
to the option or has an absolute and immediate right to acquire that security
without additional cash consideration (or for additional consideration (in cash,
Treasury bills or other liquid portfolio securities) held in a segregated
account on the Fund's books) upon conversion or exchange of other securities
held in its portfolio. A call
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option is also covered if the Fund holds a call on the same security as the call
written where the exercise price of the call held is (i) equal to or less than
the exercise price of the call written or (ii) greater than the exercise price
of the call written if the difference is maintained by the Fund in cash,
Treasury bills or other liquid portfolio securities in a segregated account on
the Fund's books.
Options written by the Fund normally have expiration dates of from up to
eighteen months from the date written. The exercise price of a call option may
be below, equal to or above the current market value of the underlying security
at the time the option is written.
COVERED PUT WRITING. A writer of a covered put option incurs an obligation
to buy the security underlying the option from the purchaser of the put, at the
option's exercise price at any time during the option period, at the purchaser's
election. Through the writing of a put option, the Fund would receive income
from the premium paid by purchasers. The potential gain on a covered put option
is limited to the premium received on the option (less the commissions paid on
the transaction). During the option period, the Fund may be required, at any
time, to make payment of the exercise price against delivery of the underlying
security (or currency). A put option is "covered" if the Fund maintains cash,
Treasury bills or other liquid portfolio securities with a value equal to the
exercise price in a segregated account on the Fund's books, or holds a put on
the same security as the put written where the exercise price of the put held is
equal to or greater than the exercise price of the put written. The aggregate
value of the obligations underlying puts may not exceed 50% of the Fund's
assets. The operation of and limitations on covered put options in other
respects are substantially identical to those of call options.
PURCHASING CALL AND PUT OPTIONS. The Fund may purchase listed and OTC call
and put options in amounts equaling up to 5% of its total assets. The purchase
of a call option would enable the Fund, in return for the premium paid to lock
in a purchase price for a security or currency during the term of the option.
The purchase of a put option would enable the Fund, in return for a premium
paid, to lock in a price at which it may sell a security or currency during the
term of the option.
OPTIONS ON FOREIGN CURRENCIES. The Fund may purchase and write options on
foreign currencies for purposes similar to those involved with investing in
forward foreign currency exchange contracts.
OTC OPTIONS. OTC options are purchased from or sold (written) to dealers or
financial institutions which have entered into direct agreements with the Fund.
With OTC options, such variables as expiration date, exercise price and premium
will be agreed upon between the Fund and the transacting dealer, without the
intermediation of a third party such as the OCC. The Fund will engage in OTC
option transactions only with member banks of the Federal Reserve Bank System or
primary dealers in U.S. Government securities or with affiliates of such banks
or dealers.
RISKS OF OPTIONS TRANSACTIONS. The successful use of options depends on the
ability of the Investment Manager to forecast correctly interest rates, currency
exchange rates and/or market movements. If the market value of the portfolio
securities (or the currencies in which they are denominated) upon which call
options have been written increases, the Fund may receive a lower total return
from the portion of its portfolio upon which calls have been written than it
would have had such calls not been written. During the option period, the
covered call writer has, in return for the premium on the option, given up the
opportunity for capital appreciation above the exercise price should the market
price of the underlying security (or the value of its denominated currency)
increase, but has retained the risk of loss should the price of the underlying
security (or the value of its denominated currency) decline. The covered put
writer also retains the risk of loss should the market value of the underlying
security decline below the exercise price of the option less the premium
received on the sale of the option. In both cases, the writer has no control
over the time when it may be required to fulfill its obligation as a writer of
the option. Prior to exercise or expiration, an option position can only be
terminated by entering into a closing purchase or sale transaction. Once an
option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver or receive the underlying securities at the exercise price.
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The Fund's ability to close out its position as a writer of an option is
dependent upon the existence of a liquid secondary market on option exchanges.
There is no assurance that such a market will exist, particularly in the case of
OTC options.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in options, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. In the case of OTC
options, if the transacting dealer fails to make or take delivery of the
securities underlying an option it has written, in accordance with the terms of
that option, due to insolvency or otherwise, the Fund would lose the premium
paid for the option as well as any anticipated benefit of the transaction.
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security which may be
written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). An exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
The markets in foreign currency options are relatively new and the Fund's
ability to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. There can be no assurance that a
liquid secondary market will exist for a particular option at any specific time.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and have no relationship to the investment merits of a foreign security. Because
foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that are not reflected in the options market.
FUTURES CONTRACTS. The Fund may purchase and sell interest rate, currency
and index futures contracts that are traded on U.S. and foreign commodity
exchanges on such underlying securities as U.S. Treasury bonds, notes, bills and
GNMA Certificates and/or any foreign government fixed-income security, on
various currencies and on such indexes of U.S. and foreign securities as may
exist or come into existence.
A futures contract purchaser incurs an obligation to take delivery of a
specified amount of the obligation underlying the contract at a specified time
in the future for a specified price. A seller of a futures contract incurs an
obligation to deliver the specified amount of the underlying obligation at a
specified time in return for an agreed upon price. The purchase of a futures
contract enables the Fund, during the term of the contract, to lock in a price
at which it may purchase a security or currency and
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protect against a rise in prices pending purchase of portfolio securities. The
sale of a futures contract enables the Fund to lock in a price at which it may
sell a security or currency and protect against declines in the value of
portfolio securities.
Although most futures contracts call for actual delivery or acceptance of
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. Index futures contracts provide for
the delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value at the open or close of the last trading day
of the contract and the futures contract price. A futures contract sale is
closed out by effecting a futures contract purchase for the same aggregate
amount of the specific type of security (currency) and the same delivery date.
If the sale price exceeds the offsetting purchase price, the seller would be
paid the difference and would realize a gain. If the offsetting purchase price
exceeds the sale price, the seller would pay the difference and would realize a
loss. Similarly, a futures contract purchase is closed out by effecting a
futures contract sale for the same aggregate amount of the specific type of
security (currency) and the same delivery date. If the offsetting sale price
exceeds the purchase price, the purchaser would realize a gain, whereas if the
purchase price exceeds the offsetting sale price, the purchaser would realize a
loss. There is no assurance that the Fund will be able to enter into a closing
transaction.
MARGIN. If the Fund enters into a futures contract, it is initially
required to deposit an "initial margin" of cash, U.S. Government securities or
other liquid portfolio securities ranging from approximately 2% to 5% of the
contract amount. Initial margin requirements are established by the exchanges on
which futures contracts trade and may, from time to time, change. In addition,
brokers may establish margin deposit requirements in excess of those required by
the exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a broker's client but is, rather, a good faith deposit on the futures
contract which will be returned to the Fund upon the proper termination of the
futures contract. The margin deposits made are marked to market daily and the
Fund may be required to make subsequent deposits of cash, U.S. Government
securities or other liquid portfolio securities, called "variation margin,"
which are reflective of price fluctuations in the futures contract.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write call and put
options on futures contracts and enter into closing transactions with respect to
such options to terminate an existing position. An option on a futures contract
gives the purchaser the right (in return for the premium paid), and the writer
the obligation, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option is accompanied by delivery of the accumulated balance in
the writer's futures margin account, which represents the amount by which the
market price of the futures contract at the time of exercise exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.
The writer of an option on a futures contract is required to deposit initial
and variation margin pursuant to requirements similar to those applicable to
futures contracts. Premiums received from the writing of an option on a futures
contract are included in initial margin deposits.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Fund may not
enter into futures contracts or purchase related options thereon if, immediately
thereafter, the amount committed to margin plus the amount paid for premiums for
unexpired options on futures contracts exceeds 5% of the value of the Fund's
total assets, after taking into account unrealized gains and unrealized losses
on such contracts it has entered into, provided, however, that in the case of an
option that is in-the-money (the exercise price of the call (put) option is less
(more) than the market price of the underlying security) at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%.
However, there is no overall limitation on the percentage of the Fund's net
assets which may be subject to a hedge position.
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RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. The prices
of securities and indexes subject to futures contracts (and thereby the futures
contract prices) may correlate imperfectly with the behavior of the cash prices
of the Fund's portfolio securities (and the currencies in which they are
denominated). Also, prices of futures contracts may not move in tandem with the
changes in prevailing interest rates, market movements and/or currency exchange
rates against which the Fund seeks a hedge. A correlation may also be distorted
(a) temporarily, by short-term traders seeking to profit from the difference
between a contract or security price objective and their cost of borrowed funds;
(b) by investors in futures contracts electing to close out their contracts
through offsetting transactions rather than meet margin deposit requirements;
(c) by investors in futures contracts opting to make or take delivery of
underlying securities rather than engage in closing transactions, thereby
reducing liquidity of the futures market; and (d) temporarily, by speculators
who view the deposit requirements in the futures markets as less onerous than
margin requirements in the cash market. Due to the possibility of price
distortion in the futures market and because of the possible imperfect
correlation between movements in the prices of securities and movements in the
prices of futures contracts, a correct forecast of interest rate, currency
exchange rate and/or market movement trends by the Investment Manager may still
not result in a successful hedging transaction.
There is no assurance that a liquid secondary market will exist for futures
contracts and related options in which the Fund may invest. In the event a
liquid market does not exist, it may not be possible to close out a futures
position and, in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin. The absence of a
liquid market in futures contracts might cause the Fund to make or take delivery
of the underlying securities (currencies) at a time when it may be
disadvantageous to do so.
Exchanges also limit the amount by which the price of a futures contract may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased. In the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin on open
futures positions. In these situations, if the Fund has insufficient cash, it
may have to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In addition, the
Fund may be required to take or make delivery of the instruments underlying
interest rate futures contracts it holds at a time when it is disadvantageous to
do so. The inability to close out options and futures positions could also have
an adverse impact on the Fund's ability to effectively hedge its portfolio.
Futures contracts and options thereon which are purchased or sold on foreign
commodities exchanges may have greater price volatility than their U.S.
counterparts. Furthermore, foreign commodities exchanges may be less regulated
and under less governmental scrutiny than U.S. exchanges. Brokerage commissions,
clearing costs and other transaction costs may be higher on foreign exchanges.
Greater margin requirements may limit the Fund's ability to enter into certain
commodity transactions on foreign exchanges. Moreover, differences in clearance
and delivery requirements on foreign exchanges may occasion delays in the
settlement of the Fund's transactions effected on foreign exchanges.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
If the Fund maintains a short position in a futures contract or has sold a
call option in a futures contract, it will cover this position by holding, in a
segregated account maintained on the books of the Fund, cash, U.S. government
securities or other liquid portfolio securities equal in value (when added to
any initial or variation margin on deposit) to the market value of the
securities underlying the futures contract or the exercise price of the option.
Such a position may also be covered by owning the securities underlying the
futures contract (in the case of a stock index futures contract a portfolio of
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securities substantially replicating the relevant index), or by holding a call
option permitting the Fund to purchase the same contract at a price no higher
than the price at which the short position was established.
In addition, if the Fund holds a long position in a futures contract or has
sold a put option on a futures contract, it will hold cash, U.S. government
securities or other liquid portfolio securities equal to the purchase price of
the contract or the exercise price of the put option (less the amount of initial
or variation margin on deposit) in a segregated account maintained on the books
of the Fund. Alternatively, the Fund could cover its long position by purchasing
a put option on the same futures contract with an exercise price as high or
higher than the price of the contract held by the Fund.
MONEY MARKET SECURITIES. In addition to the short term fixed-income
securities in which the Fund may otherwise invest, the Fund may invest in
various money market securities for cash management purposes or when assuming a
temporary defensive position, which among others may include commercial paper,
bank acceptances, bank obligations, corporate debt securities, certificates of
deposit, U.S. Government securities, obligations of savings institutions and
repurchase agreements. Such securities are limited to:
U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed as to
principal and interest by the United States Government or its agencies (such as
the Export-Import Bank of the United States, Federal Housing Administration and
Government National Mortgage Association) or its instrumentalities (such as the
Federal Home Loan Bank), including Treasury bills, notes and bonds;
BANK OBLIGATIONS. Obligations (including certificates of deposit, time
deposits and bankers' acceptances) of banks subject to regulation by the U.S.
Government and having total assets of $1 billion or more, and instruments
secured by such obligations, not including obligations of foreign branches of
domestic banks except to the extent below;
EURODOLLAR CERTIFICATES OF DEPOSIT. Eurodollar certificates of deposit
issued by foreign branches of domestic banks having total assets of $1 billion
or more;
OBLIGATIONS OF SAVINGS INSTITUTIONS. Certificates of deposit of savings
banks and savings and loan associations, having total assets of $1 billion or
more;
FULLY INSURED CERTIFICATES OF DEPOSIT. Certificates of deposits of banks
and savings institutions, having total assets of less than $1 billion, if the
principal amount of the obligation is federally insured by the Bank Insurance
Fund or the Savings Association Insurance Fund (each of which is administered by
the FDIC), limited to $100,000 principal amount per certificate and to 10% or
less of the Fund's total assets in all such obligations and in all illiquid
assets, in the aggregate;
COMMERCIAL PAPER. Commercial paper rated within the two highest grades by
Standard & Poor's Corporation ("S&P") or the two highest grades by Moody's
Investors Service, Inc. ("Moody's") or, if not rated, issued by a company having
an outstanding debt issue rated at least AA by S&P or Aa by Moody's; and
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements. When
cash may be available for only a few days, it may be invested by the Fund in
repurchase agreements until such time as it may otherwise be invested or used
for payments of obligations of the Fund. These agreements, which may be viewed
as a type of secured lending by the Fund, typically involve the acquisition by
the Fund of debt securities from a selling financial institution such as a bank,
savings and loan association or broker-dealer. The agreement provides that the
Fund will sell back to the institution, and that the institution will
repurchase, the underlying security serving as collateral at a specified price
and at a fixed time in the future, usually not more than seven days from the
date of purchase. The collateral will be marked-to-market daily to determine
that the value of the collateral, as specified in the agreement, does not
decrease below the purchase price plus accrued interest. If such decrease
occurs, additional collateral will be requested and, when received, added to the
account to maintain full collateralization. The Fund
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will accrue interest from the institution until the time when the repurchase is
to occur. Although this date is deemed by the Fund to be the maturity date of a
repurchase agreement, the maturities of securities subject to repurchase
agreements are not subject to any limits.
While repurchase agreements involve certain risks not associated with direct
investments in debt securities, the Fund follows procedures approved 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 Manager. In addition, as described above, the value of the
collateral underlying the repurchase agreement will be 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 Fund will seek to liquidate such collateral. However, the
exercising of the Fund'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
Fund could suffer a loss. It is the current policy of the Fund not to invest in
repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by the Fund, amounts to
more than 10% of its total assets.
REVERSE REPURCHASE AGREEMENTS. The Fund may also use reverse repurchase
agreements for purposes of meeting redemptions or as part of its investment
strategy. Reverse repurchase agreements involve sales by the Fund of portfolio
assets concurrently with an agreement by the Fund to repurchase the same assets
at a later date at a fixed price. Reverse repurchase agreements involve the risk
that the market value of the securities the Fund is obligated to repurchase
under the agreement may decline below the repurchase price. In the event the
buyer of securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, the Fund's use of the proceeds of the agreement may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
Reverse repurchase agreements are speculative techniques involving leverage, and
are considered borrowings by the Fund. Reverse repurchase agreements may not
exceed 10% of the Fund's total assets.
LENDING PORTFOLIO SECURITIES. The Fund may lend its portfolio securities to
brokers, dealers and other financial institutions, provided that the loans are
callable at any time by the Fund, 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 100% of the market value, determined
daily, of the loaned securities. The advantage of these loans is that the Fund
continues to receive the income on the loaned securities while at the same time
earning interest on the cash amounts deposited as collateral, which will be
invested in short-term obligations. The Fund 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.
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
only be made to firms deemed by the Fund's management 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 Fund. Any gain or loss in the market price during the loan
period would inure to the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of the rights
if the matters involved would have a material effect on the Fund's investment in
the loaned securities. The Fund will pay reasonable finder's, administrative and
custodial fees in connection with a loan of its securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From
time to time the Fund may purchase securities on a when-issued or delayed
delivery basis or may purchase or sell securities on a forward commitment basis.
When these transactions are negotiated, the price is fixed at
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the time of the commitment, but delivery and payment can take place a month or
more after the date of commitment. While the Fund will only purchase securities
on a when-issued, delayed delivery or forward commitment basis with the
intention of acquiring the securities, the Fund may sell the securities before
the settlement date, if it is deemed advisable. The securities so purchased or
sold are subject to market fluctuation and no interest or dividends accrue to
the purchaser prior to the settlement date.
At the time the Fund makes the commitment to purchase or sell securities on
a when-issued, delayed delivery or forward commitment basis, it will record the
transaction and thereafter reflect the value, each day, of such security
purchased, or if a sale, the proceeds to be received, in determining its net
asset value. At the time of delivery of the securities, their value may be more
or less than the purchase or sale price. An increase in the percentage of the
Fund's assets committed to the purchase of securities on a when-issued, delayed
delivery or forward commitment basis may increase the volatility of its net
asset value. The Fund will also establish a segregated account on the Fund's
books in which it will continually maintain cash or cash equivalents or other
liquid portfolio securities equal in value to commitments to purchase securities
on a when-issued, delayed delivery or forward commitment basis.
WHEN, AS AND IF ISSUED SECURITIES. The Fund may purchase securities on a
"when, as and if issued" basis under which the issuance of the security depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization or debt restructuring. The commitment for the purchase
of any such security will not be recognized in the portfolio of the Fund until
the Investment Manager determines that issuance of the security is probable. At
that time, the Fund will record the transaction and, in determining its net
asset value, will reflect the value of the security daily. At that time, the
Fund will also establish a segregated account on the Fund's books in which it
will maintain cash, cash equivalents or other liquid portfolio securities equal
in value to recognized commitments for such securities.
The value of the Fund's commitments to purchase the securities of any one
issuer, together with the value of all securities of such issuer owned by the
Fund, may not exceed 5% of the value of the Fund's total assets at the time the
initial commitment to purchase such securities is made. An increase in the
percentage of the Fund's assets committed to the purchase of securities on a
"when, as and if issued" basis may increase the volatility of its net asset
value. The Fund may also sell securities on a "when, as and if issued" basis
provided that the issuance of the security will result automatically from the
exchange or conversion of a security owned by the Fund at the time of sale.
PRIVATE PLACEMENTS. The Fund may invest up to 10% of its total assets in
securities which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933 (the "Securities Act"), or
which are otherwise not readily marketable. (Securities eligible for resale
pursuant to Rule 144A under the Securities Act, and determined to be liquid
pursuant to the procedures discussed in the following paragraph, are not subject
to the foregoing restriction.) These securities are generally referred to as
private placements or restricted securities. Limitations on the resale of these
securities may have an adverse effect on their marketability, and may prevent
the Fund from disposing of them promptly at reasonable prices. The Fund may have
to bear the expense of registering the securities for resale and the risk of
substantial delays in effecting the registration.
Rule 144A permits the Fund to sell restricted securities to qualified
institutional buyers without limitation. The Investment Manager, pursuant to
procedures adopted by the Trustees, will make a determination as to the
liquidity of each restricted security purchased by the Fund. If a restricted
security is determined to be "liquid," the security will not be included within
the category "illiquid securities," which may not exceed 10% of the Fund's total
assets. However, investing in Rule 144A securities could have the effect of
increasing the level of Fund illiquidity to the extent the Fund, at a particular
point in time, may be unable to find qualified institutional buyers interested
in purchasing such securities.
WARRANTS AND SUBSCRIPTION RIGHTS. The Fund may acquire warrants and
subscription rights attached to other securities. A warrant is, in effect, an
option to purchase equity securities at a specific price, generally valid for a
specific period of time, and has no voting rights, pays no dividends and has no
rights with respect to the corporation issuing it.
12
<PAGE>
A subscription right is a privilege granted to existing shareholders of a
corporation to subscribe to shares of a new issue of common stock before it is
offered to the public. A subscription right normally has a life of two to four
weeks and a subscription price lower than the current market value of the common
stock.
C. FUND POLICIES/INVESTMENT RESTRICTIONS
The investment objectives, policies and restrictions listed below have been
adopted by the Fund as fundamental policies. Under the Investment Company Act of
1940, as amended (the "Investment Company Act"), a fundamental policy may not be
changed without the vote of a majority of the outstanding voting securities of
the Fund. The Investment Company Act defines a majority as the lesser of
(a) 67% or more of the shares present at a meeting of shareholders, if the
holders of 50% of the outstanding shares of the Fund are present or represented
by proxy; or (b) more than 50% of the outstanding shares of the Fund. For
purposes of the following restrictions: (i) all percentage limitations apply
immediately after a purchase or initial investment; and (ii) any subsequent
change in any applicable percentage resulting from market fluctuations or other
changes in total or net assets does not require elimination of any security from
the portfolio.
The Fund will:
1. As a primary objective, seek to earn a high level of current income
and as a secondary objective, seek appreciation in the value of its assets.
The Fund may not:
1. Invest 25% or more of the value of its total assets in securities
of issuers in any one industry.
2. Invest more than 5% of the value of its total assets in securities
of issuers having a record, together with predecessors, of less than three
years of continuous operation. This restriction shall not apply to any
obligation issued or guaranteed by the United States Government, its
agencies or instrumentalities.
3. Invest more than 10% of its total assets in "illiquid securities"
(securities for which market quotations are not readily available) and
repurchase agreements which have a maturity of longer than seven days.
4. Invest in securities of any issuer if, to the knowledge of the
Fund, any officer or trustee of the Fund or of the Investment Manager owns
more than 1/2 of 1% of the outstanding securities of the issuer, and the
officers and trustees who own more than 1/2 of 1% own in the aggregate more
than 5% of the outstanding securities of the issuer.
5. Purchase or sell real estate or interests therein, although the
Fund may purchase securities of issuers which engage in real estate
operations and securities secured by real estate or interests therein.
6. Purchase oil, gas or other mineral leases, rights or royalty
contracts or exploration or development programs, except that the Fund may
invest in the securities of companies which operate, invest in, or sponsor
these programs.
7. Purchase or sell commodities or commodities contracts, except that
the Fund may purchase or sell (write) interest rate, currency and stock and
bond index futures contracts and related options thereon.
8. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets. However, the Fund may invest up to 10% of the value of its total
assets in the securities of foreign investment companies, but only under
circumstances where purchase of the securities of foreign investment
companies would secure entry to national markets which are otherwise not
open to the Fund for investment or where the security is issued by a foreign
bank which is deemed to be an investment company under U.S. securities laws
and/or regulations.
13
<PAGE>
The Fund anticipates that it will incur any indirect expenses incurred
through investment in a foreign investment company, such as the payment of a
management fee. Furthermore, it should be noted that foreign investment
companies are not subject to the U.S. securities laws and may be subject to
fewer or less stringent regulations than U.S. investment companies.
9. Borrow money (except insofar as the Fund may be deemed to have
borrowed by entrance into a reverse repurchase agreement up to an amount not
exceeding 10% of the Fund's total assets), except that the Fund may borrow
from a bank for temporary or emergency purposes, in amounts not exceeding 5%
of its total assets (not including the amount borrowed).
10. Pledge its assets or assign or otherwise encumber them except to
secure permitted borrowings. For the purpose of this restriction, collateral
arrangements with respect to the writing of options and collateral
arrangements with respect to initial or variation margin for futures are not
deemed to be pledges of assets.
11. Issue senior securities as defined in the Investment Company Act,
except insofar as the Fund may be deemed to have issued a senior security by
reason of: (a) entering into any repurchase or reverse repurchase agreement;
(b) purchasing any securities on a when-issued or delayed delivery basis;
(c) purchasing or selling futures contracts, forward foreign exchange
contracts or options; (d) borrowing money; or (e) lending portfolio
securities.
12. Make loans of money or securities, except: (a) by the purchase of
publicly distributed debt obligations; (b) by investment in repurchase or
reverse repurchase agreements; or (c) by lending its portfolio securities.
13. Make short sales of securities.
14. Purchase securities on margin, except for short-term loans as are
necessary for the clearance of portfolio securities. The deposit or payment
by the Fund of initial or variation margin in connection with futures
contracts or related options thereon is not considered the purchase of a
security on margin.
15. Engage in the underwriting of securities, except insofar as the
Fund may be deemed an underwriter under the Securities Act in disposing of a
portfolio security.
16. Invest for the purpose of exercising control or management of any
other issuer.
Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objectives by investing all or substantially all
of its assets in another investment company having substantially the same
investment objective and policies as the Fund.
For the fiscal years ended October 31, 1999 and 2000, the Funds portfolio
turnover rates were 144% and 73%, respectively. This variation resulted from the
portfolio managers' response to varying market conditions during these periods.
III. MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------
A. BOARD OF TRUSTEES
The Board of Trustees of the Fund oversees the management of the Fund but
does not itself manage the Fund. The Trustees review various services provided
by or under the direction of the Investment Manager to ensure that the Fund's
general investment policies and programs are properly carried out. The Trustees
also conduct their review to ensure that administrative services are provided to
the Fund in a satisfactory manner.
Under state law, the duties of the Trustees are generally characterized as a
duty of loyalty and a duty of care. The duty of loyalty requires a Trustee to
exercise his or her powers in the interest of the Fund and not the Trustee's own
interest or the interest of another person or organization. A Trustee satisfies
his or her duty of care by acting in good faith with the care of an ordinarily
prudent person and in a manner the Trustee reasonably believes to be in the best
interest of the Fund and its shareholders.
14
<PAGE>
B. MANAGEMENT INFORMATION
TRUSTEES AND OFFICERS. The Board of the Fund consists of nine
(9) Trustees. These same individuals also serve as directors or trustees for all
of the Morgan Stanley Dean Witter Funds. Six Trustees (67% of the total number)
have no affiliation or business connection with the Investment Manager or any of
its affiliated persons and do not own any stock or other securities issued by
the Investment Manager's parent company, MSDW. These are the "non-interested" or
"independent" Trustees. The other three Trustees (the "management Trustees") are
affiliated with the Investment Manager.
The Trustees and executive officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with the
Investment Manager, and with the Morgan Stanley Dean Witter Funds (there were 97
such Funds as of the calendar year ended December 31, 2000), are shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
--------------------------------------------- -----------------------------------------------
<S> <C>
Michael Bozic (59) .......................... Retired; Director or Trustee of the Morgan
Trustee Stanley Dean Witter Funds, formerly Vice
c/o Mayer, Brown & Platt Chairman of Kmart Corporation (December
Counsel to the Independent Trustees 1998-October 2000), Chairman and Chief
1675 Broadway Executive Officer of Levitz Furniture
New York, New York Corporation (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.
Charles A. Fiumefreddo* (67) ................ Chairman, Director or Trustee and Chief
Chairman of the Board, Executive Officer of the Morgan Stanley Dean
Chief Executive Officer and Trustee Witter Funds; formerly Chairman, Chief
Two World Trade Center Executive Officer and Director of the
New York, New York Investment Manager, the Distributor and MSDW
Services Company; Executive Vice President and
Director of Dean Witter Reynolds; Chairman and
Director of the Transfer Agent; formerly
Director and/or officer of various MSDW
subsidiaries (until June 1998).
Edwin J. Garn (68) .......................... Director or Trustee of the Morgan Stanley Dean
Trustee Witter Funds; formerly United States Senator
c/o Summit Ventures LLC (R-Utah) (1974-1992) and Chairman, Senate
1 Utah Center Banking Committee (1980-1986); formerly Mayor
201 S. Main Street of Salt Lake City, Utah (1971-1974); formerly
Salt Lake City, Utah 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 Utah Regional
Advisory Board of Pacific Corp.; member of the
board of various civic and charitable
organizations.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
--------------------------------------------- -----------------------------------------------
<S> <C>
Wayne E. Hedien (66) ........................ Retired; Director or Trustee of the Morgan
Trustee Stanley Dean Witter Funds; Director of The PMI
c/o Mayer, Brown & Platt Group, Inc. (private mortgage insurance);
Counsel to the Independent Trustees Trustee and Vice Chairman of The Field Museum
1675 Broadway of Natural History; formerly associated with
New York, New York the Allstate Companies (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.
James F. Higgins* (52) ...................... Chairman of the Private Client Group of MSDW
Trustee (since August 2000); Director of the Transfer
Two World Trade Center Agent and Dean Witter Realty Inc.; Director or
New York, New York Trustee of the Morgan Stanley Dean Witter Funds
(since June 2000); previously President and
Chief Operating Officer of the Private Client
Group of MSDW (May 1999-August 2000), President
and Chief Operating Officer of Individual
Securities of MSDW (February 1997-May 1999),
President and Chief Operating Officer of Dean
Witter Securities of MSDW (1995-February 1997),
and President and Chief Operating Officer of
Dean Witter Financial (1989-1995) and Director
(1985-1997) of Dean Witter Reynolds.
Dr. Manuel H. Johnson (51) .................. Senior Partner, Johnson Smick
Trustee International, Inc., a consulting firm;
c/o Johnson Smick International, Inc. Co-Chairman and a founder of the Group of Seven
1133 Connecticut Avenue, N.W. Council (G7C), an international economic
Washington, D.C. commission; Chairman of the Audit Committee and
Director or Trustee of the Morgan Stanley Dean
Witter Funds; Director of Greenwich Capital
Markets, Inc. (broker-dealer) Independence
Standards Board (organization governing
independence of auditors) 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 and Assistant Secretary of the U.S.
Treasury.
Michael E. Nugent (64) ...................... General Partner, Triumph Capital, L.P., a
Trustee private investment partnership; Chairman of the
c/o Triumph Capital, L.P. Insurance Committee and Director or Trustee of
237 Park Avenue the Morgan Stanley Dean Witter Funds; formerly
New York, New York Vice President, Bankers Trust Company and BT
Capital Corporation; director of various
business organizations.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
--------------------------------------------- -----------------------------------------------
<S> <C>
Philip J. Purcell* (57) ..................... Chairman of the Board of Directors and Chief
Trustee Executive Officer of MSDW, Dean Witter Reynolds
1585 Broadway and Novus Credit Services Inc.; Director of the
New York, New York Distributor; Director or Trustee of the Morgan
Stanley Dean Witter Funds; Director of American
Airlines Inc. and its parent company, AMR
Corporation; Director and/or officer of various
MSDW subsidiaries.
John L. Schroeder (70) ...................... Retired; Chairman of the Derivatives Committee
Trustee and Director or Trustee of the Morgan Stanley
c/o Mayer, Brown & Platt Dean Witter Funds; Director of Citizens
Counsel to the Independent Trustees Communications Company (telecommunications
1675 Broadway company); formerly Executive Vice President and
New York, New York Chief Investment Officer of the Home Insurance
Company (August 1991-September 1995).
Mitchell M. Merin (47) ...................... President and Chief Operating Officer of Asset
President Management of MSDW (since December 1998);
Two World Trade Center President and Director (since April 1997) and
New York, New York Chief Executive 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
the Transfer Agent; 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 (45) ............................. General Counsel of Asset Management of MSDW
Vice President, (since May 2000); Executive Vice President
Secretary and General Counsel (since December 1999) and Secretary and General
Two World Trade Center Counsel (since February 1997) and Director
New York, New York (since July 1998) of the Investment Manager and
MSDW Services Company; Vice President,
Secretary and General Counsel of the Morgan
Stanley Dean Witter Funds (since February
1997); Vice President and Secretary of the
Distributor; previously, Senior Vice President
(March 1997-December 1999), First Vice
President; Assistant Secretary and Assistant
General Counsel of the Investment Manager and
MSDW Services Company.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
--------------------------------------------- -----------------------------------------------
<S> <C>
Peter J. Seeley (51) ........................ Vice President of the Investment Manager (since
Vice President April 1996); Vice President of various Morgan
Two World Trade Center Stanley Dean Witter Funds.
New York, New York
Thomas F. Caloia (54) ....................... First Vice President and Assistant Treasurer of
Treasurer the Investment Manager, the Distributor and
Two World Trade Center MSDW Services Company; Treasurer of the Morgan
New York, New York Stanley Dean Witter Funds.
</TABLE>
------------------------
* Denotes Trustees who are "interested persons" of the Fund as defined by the
Investment Company Act.
In addition, RONALD E. ROBISON, Executive Vice President, Chief
Administrative Officer and Director of the Investment Manager and MSDW Services
Company, ROBERT S. GIAMBRONE, Senior Vice President of the Investment Manager,
MSDW Services Company, the Distributor and the Transfer Agent and Director of
the Transfer Agent, and JOSEPH J. MCALINDEN, Executive Vice President and Chief
Investment Officer of the Investment Manager and Director of the Transfer Agent,
are Vice Presidents of the Fund.
In addition, LOU ANNE D. MCINNIS, CARSTEN OTTO and RUTH ROSSI, Senior Vice
Presidents and Assistant General Counsels of the Investment Manager and MSDW
Services Company, MARILYN K. CRANNEY and TODD LEBO, First Vice Presidents and
Assistant General Counsels of the Investment Manager and MSDW Services Company
and NATASHA KASSIAN, Vice President and Assistant General Counsel of the
Investment Manager and MSDW Services Company, are Assistant Secretaries of the
Fund.
INDEPENDENT DIRECTORS/TRUSTEES AND THE COMMITTEES. Law and regulation
establish both general guidelines and specific duties for the independent
directors/trustees. The Morgan Stanley Dean Witter Funds seek as independent
directors/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 directors/trustees serve as members of the Audit
Committee. In addition, three of the directors/trustees, including two
independent directors/trustees serve as members of the Derivatives Committee and
the Insurance Committee.
The independent directors/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 directors/trustees are required to select and nominate individuals
to fill any independent director/trustee vacancy on the board of any fund that
has a Rule 12b-1 plan of distribution. Most of the Morgan Stanley Dean Witter
Funds have a Rule 12b-1 plan.
18
<PAGE>
The Audit Committee is charged with recommending to the full board the
engagement or discharge of the Fund's independent auditors; directing
investigations into matters within the scope of the independent auditors'
duties, including the power to retain outside specialists; reviewing with the
independent auditors the audit plan and results of the auditing engagement;
approving professional services provided by the independent auditors and other
accounting firms prior to the performance of the services; reviewing the
independence of the independent auditors; considering the range of audit and
non-audit fees; reviewing the adequacy of the Fund's system of internal
controls; and preparing and submitting Committee meeting minutes to the full
board.
The board of each Fund has a Derivatives Committee to approve parameters for
and monitor the activities of the Fund with respect to derivative investments,
if any, made by the Fund.
Finally, the board of each Fund has formed an Insurance Committee to review
and monitor the insurance coverage maintained by the Fund.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT DIRECTORS/TRUSTEES FOR
ALL MORGAN STANLEY DEAN WITTER FUNDS. The independent directors/trustees and
the funds' management believe that having the same independent
directors/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 directors/trustees for each of the funds or
even of sub-groups of funds. They believe that having the same individuals serve
as independent directors/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 directors/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
directors/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
directors/trustees, of the caliber, experience and business acumen of the
individuals who serve as independent directors/trustees of the Morgan Stanley
Dean Witter Funds.
TRUSTEE AND OFFICER INDEMNIFICATION. The Fund's Declaration of Trust
provides that no Trustee, officer, employee or agent of the Fund is liable to
the Fund or to a shareholder, nor is any Trustee, officer, employee or agent
liable to any third persons in connection with the affairs of the Fund, except
as such liability may arise from his/her or its own bad faith, willful
misfeasance, gross negligence or reckless disregard of his/her or its duties. It
also provides that all third persons shall look solely to the Fund property for
satisfaction of claims arising in connection with the affairs of the Fund. With
the exceptions stated, the Declaration of Trust provides that a Trustee,
officer, employee or agent is entitled to be indemnified against all liability
in connection with the affairs of the Fund.
C. COMPENSATION
The Fund pays each Independent Trustee an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Trustees, the Independent
Trustees or Committees of the Board of Trustees attended by the Trustee (the
Fund pays the Chairman of the Audit Committee an additional annual fee of $750
and the Chairman 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 Fund. The Fund also reimburses such Trustees for travel and
other out-of-pocket expenses incurred by them in connection with attending such
meetings. Trustees and officers of the Fund who are or have been employed by the
Investment Manager or an affiliated company receive no compensation or expense
reimbursement from the Fund for their services as Trustee.
19
<PAGE>
The following table illustrates the compensation that the Fund paid to its
Independent Trustees for the fiscal year ended October 31, 2000.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
--------------------------- --------------
<S> <C>
Michael Bozic................................................. $1,550
Edwin J. Garn................................................. 1,550
Wayne E. Hedien............................................... 1,550
Dr. Manuel H. Johnson......................................... 2,300
Michael E. Nugent............................................. 2,050
John L. Schroeder............................................. 2,000
</TABLE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 2000 for services
to the 97 Morgan Stanley Dean Witter Funds that were in operation at
December 31, 2000.
CASH COMPENSATION FROM MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
TOTAL CASH
COMPENSATION
FOR SERVICES TO
97 MORGAN
STANLEY DEAN
NAME OF INDEPENDENT TRUSTEE WITTER FUNDS
--------------------------- ---------------
<S> <C>
Michael Bozic.............. $146,917
Edwin J. Garn.............. 151,717
Wayne E. Hedien............ 151,567
Dr. Manuel H. Johnson...... 223,655
Michael E. Nugent.......... 199,759
John L. Schroeder.......... 194,809
</TABLE>
As of the date of this STATEMENT OF ADDITIONAL INFORMATION, 55 of the Morgan
Stanley Dean Witter Funds, including the Fund, have adopted a retirement program
under which an independent director/ 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/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/ 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.
------------------------
(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.
20
<PAGE>
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the Fund for the fiscal year ended October 31,
2000 and by the 55 Morgan Stanley Dean Witter Funds (including the Fund) for the
year ended December 31, 2000, and the estimated retirement benefits for the
Independent Trustees, to commence upon their retirement, from the Fund as of
October 31, 2000 and from the 55 Morgan Stanley Dean Witter Funds as of
December 31, 2000.
RETIREMENT BENEFITS FROM THE FUND AND ALL MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS
------------------------------ RETIREMENT BENEFITS ESTIMATED ANNUAL
ESTIMATED ACCRUED AS BENEFITS
CREDITED EXPENSES UPON RETIREMENT(2)
YEARS ESTIMATED ------------------- ------------------
OF SERVICE AT PERCENTAGE OF BY ALL FROM FROM ALL
RETIREMENT ELIGIBLE BY THE ADOPTING THE ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS
--------------------------- -------------- -------------- ------ ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic................ 10 60.44% $ 358 $20,001 $ 937 $52,885
Edwin J. Garn................ 10 60.44 490 29,348 938 52,817
Wayne E. Hedien.............. 9 51.37 679 37,886 796 44,952
Dr. Manuel H. Johnson........ 10 60.44 348 21,187 1,390 77,817
Michael E. Nugent............ 10 60.44 579 36,202 1,239 69,506
John L. Schroeder............ 8 50.37 1,096 65,337 969 53,677
</TABLE>
------------------------
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote 1 on page
20.
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
--------------------------------------------------------------------------------
The following owned 5% or more of the outstanding Class A shares of the Fund
as of December 7, 2000: Morgan Stanley Dean Witter Trust FSB Trustee K&S,
Harborside Financial Center, Plaza 2, 7th Floor, Jersey City, NJ 07311--8.648%.
The following owned 5% or more of the outstanding Class C shares of the Fund as
of December 7, 2000: MSDW Trust, Custodian FBO Charles B. Pennington 403(B)
Transfer & Rollover Account, 1449 Westminster Drive, Columbus, OH
43221-3445--29.063%; Janet D. Herterick, 6 Sheepmeadow Lane, Sandwich, MA
02563-2247--6.311% and Jennifer A. Katz, Trustee, Jennifer A. Katz Trust dated
7/12/00, 100 Forest Ave, Rockville, MD 20850-1817--5.130%.
As of the date of this STATEMENT OF ADDITIONAL INFORMATION, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's officers
and Trustees as a group was less than 1% of the Fund's shares of beneficial
interest outstanding.
V. INVESTMENT MANAGEMENT AND OTHER SERVICES
--------------------------------------------------------------------------------
A. INVESTMENT MANAGER
The Investment Manager to the Fund is Morgan Stanley Dean Witter Advisors
Inc., a Delaware corporation, whose address is Two World Trade Center, New York,
NY 10048. The Investment Manager is a wholly-owned subsidiary of MSDW, a
Delaware corporation. MSDW is a preeminent global financial services firm that
maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services.
Pursuant to an Investment Management Agreement (the "Management Agreement")
with the Investment Manager, the Fund has retained the Investment Manager to
provide administrative services and manage the investment of the Fund's assets,
including the placing of orders for the purchase and sale of portfolio
securities. The Fund pays the Investment Manager monthly compensation calculated
daily by applying the following annual rates to the net assets of the Fund
determined as of the close of each business day: 0.75% to the portion of daily
net assets not exceeding $250 million; 0.60% to the portion of daily net assets
exceeding $250 million but not exceeding $500 million; 0.50% to the portion of
daily net assets exceeding $500 million but not exceeding $750 billion; 0.40% to
the portion of daily net
21
<PAGE>
assets exceeding $750 million but not exceeding $1 billion; and 0.30% to the
portion of daily net assets exceeding $1 billion. The management fee is
allocated among the Classes pro rata based on the net assets of the Fund
attributable to each Class. For the fiscal years ended October 31, 1998, 1999
and 2000, the Investment Manager accrued total compensation under the Management
Agreement in the amounts of $658,757, $766,491 and $661,679, respectively.
The Investment Manager has retained its wholly-owned subsidiary, MSDW
Services Company, to perform administrative services for the Fund.
B. PRINCIPAL UNDERWRITER
The Fund's principal underwriter is the Distributor (which has the same
address as the Investment Manager). In this capacity, the Fund's shares are
distributed by the Distributor. The Distributor has entered into a selected
dealer agreement with Dean Witter Reynolds, which through its own sales
organization sells shares of the Fund. In addition, the Distributor may enter
into similar agreements with other selected broker-dealers. The Distributor, a
Delaware corporation, is a wholly-owned subsidiary of MSDW.
The Distributor bears all expenses it may incur in providing services under
the Distribution Agreement. These expenses include the payment of commissions
for sales of the Fund's shares and incentive compensation to Financial Advisors,
the costs of educational and/or business-related trips, and educational and/or
promotional and business-related expenses. The Distributor also pays certain
expenses in connection with the distribution of the Fund's shares, including the
costs of preparing, printing and distributing advertising or promotional
materials, and the costs of printing and distributing prospectuses and
supplements thereto used in connection with the offering and sale of the Fund's
shares. The Fund bears the costs of initial typesetting, printing and
distribution of prospectuses and supplements thereto to shareholders. The Fund
also bears the costs of registering the Fund and its shares under federal and
state securities laws and pays filing fees in accordance with state securities
laws.
The Fund and the Distributor have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act. Under the
Distribution Agreement, the Distributor uses its best efforts in rendering
services to the Fund, but in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations, the Distributor is
not liable to the Fund or any of its shareholders for any error of judgment or
mistake of law or for any act or omission or for any losses sustained by the
Fund or its shareholders.
C. SERVICES PROVIDED BY THE INVESTMENT MANAGER
The Investment Manager manages the investment of the Fund's assets,
including the placing of orders for the purchase and sale of portfolio
securities. The Investment Manager obtains and evaluates the information and
advice relating to the economy, securities markets, and specific securities as
it considers necessary or useful to continuously manage the assets of the Fund
in a manner consistent with its investment objective.
Under the terms of the Management Agreement, in addition to managing the
Fund's investments, the Investment Manager maintains certain of the Fund's books
and records and furnishes, at its own expense, the office space, facilities,
equipment, clerical help, bookkeeping and certain legal services as the Fund may
reasonably require in the conduct of its business, including the preparation of
prospectuses, proxy statements and reports required to be filed with federal and
state securities commissions (except insofar as the participation or assistance
of independent auditors and attorneys is, in the opinion of the Investment
Manager, necessary or desirable). In addition, the Investment Manager pays the
salaries of all personnel, including officers of the Fund, who are employees of
the Investment Manager. The Investment Manager also bears the cost of telephone
service, heat, light, power and other utilities provided to the Fund.
Expenses not expressly assumed by the Investment Manager under the
Management Agreement or by the Distributor, will be paid by the Fund. These
expenses will be allocated among the four Classes of shares pro rata based on
the net assets of the Fund attributable to each Class, except as described
22
<PAGE>
below. Such expenses include, but are not limited to: expenses of the Plan of
Distribution pursuant to Rule 12b-1; charges and expenses of any registrar,
custodian, stock transfer and dividend disbursing agent; brokerage commissions;
taxes; engraving and printing share certificates; registration costs of the Fund
and its shares under federal and state securities laws; the cost and expense of
printing, including typesetting, and distributing prospectuses of the Fund and
supplements thereto to the Fund's shareholders; all expenses of shareholders'
and Trustees' meetings and of preparing, printing and mailing of proxy
statements and reports to shareholders; fees and travel expenses of Trustees or
members of any advisory board or committee who are not employees of the
Investment Manager or any corporate affiliate of the Investment Manager; all
expenses incident to any dividend, withdrawal or redemption options; charges and
expenses of any outside service used for pricing of the Fund's shares; fees and
expenses of legal counsel, including counsel to the Trustees who are not
interested persons of the Fund or of the Investment Manager (not including
compensation or expenses of attorneys who are employees of the Investment
Manager); fees and expenses of the Fund's independent auditors; membership dues
of industry associations; interest on Fund borrowings; postage; insurance
premiums on property or personnel (including officers and Trustees) of the Fund
which inure to its benefit; extraordinary expenses (including, but not limited
to, legal claims and liabilities and litigation costs and any indemnification
relating thereto); and all other costs of the Fund's operation. The 12b-1 fees
relating to a particular Class will be allocated directly to that Class. In
addition, other expenses associated with a particular Class (except advisory or
custodial fees) may be allocated directly to that Class, provided that such
expenses are reasonably identified as specifically attributable to that
Class and the direct allocation to that Class is approved by the Trustees.
The Management Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Investment Manager is not liable to the Fund or any
of its investors for any act or omission by the Investment Manager or for any
losses sustained by the Fund or its investors.
The Management Agreement will remain in effect from year to year, provided
continuance of the Management Agreement is approved at least annually by the
vote of the holders of a majority, as defined in the Investment Company Act, of
the outstanding shares of the Fund, or by the Trustees; provided that in either
event such continuance is approved annually by the vote of a majority of the
Trustees, including a majority of the Independent Trustees.
D. DEALER REALLOWANCES
Upon notice to selected broker-dealers, the Distributor may reallow up to
the full applicable front-end sales charge during periods specified in such
notice. During periods when 90% or more of the sales charge is reallowed, such
selected broker-dealers may be deemed to be underwriters as that term is defined
in the Securities Act.
E. RULE 12b-1 PLAN
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Investment Company Act (the "Plan") pursuant to which each Class, other than
Class D, pays the Distributor compensation accrued daily and payable monthly at
the following annual rates: 0.25% and 0.85% of the average daily net assets of
Class A and Class C, respectively, and, with respect to Class B, 0.85% of the
lesser of: (a) the average daily aggregate gross sales of the Fund's Class B
shares since the inception of the Fund (not including reinvestment of dividends
or capital gains distributions), less the average daily aggregate net asset
value of the Fund's Class B shares redeemed since the Fund's inception upon
which a contingent deferred sales charge has been imposed or upon which such
charge has been waived; or (b) the average daily net assets of Class B.
The Distributor also receives the proceeds of front-end sales charges
("FSCs") and of contingent deferred sales charges ("CDSCs") imposed on certain
redemptions of shares, which are separate and apart from payments made pursuant
to the Plan. The Distributor has informed the Fund that it and/or
23
<PAGE>
Dean Witter Reynolds received the proceeds of CDSCs and FSCs, for the last three
fiscal years ended October 31, in approximate amounts as provided in the table
below (the Distributor did not retain any of these amounts).
<TABLE>
<CAPTION>
2000 1999 1998
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Class A......................... FSCs:(1) $ 462 FSCs:(1) $ 8,331 FSCs:(1) $ 232
CDSCs: $ 0 CDSCs: $ 0 CDSCs: $ 0
Class B......................... CDSCs: $40,577 CDSCs: $47,245 CDSCs: $44,911
Class C......................... CDSCs: $ 466 CDSCs: $ 570 CDSCs: $ 10
</TABLE>
------------------------
(1) FSCs apply to Class A only.
The Distributor has informed the Fund that the entire fee payable by
Class A and a portion of the fees payable by each of Class B and Class C each
year pursuant to the Plan equal to 0.20% of the average daily net assets of
Class B and 0.25% of the average daily net assets of Class C are currently each
characterized as a "service fee" under the Rules of the National Association of
Securities Dealers, Inc. (of which the Distributor is a member). The "service
fee" is a payment made for personal service and/or the maintenance of
shareholder accounts. The remaining portion of the Plan fees payable by a Class,
if any, is characterized as an "asset-based sales charge" as such is defined by
the Rules of the Association.
Under the Plan and as required by Rule 12b-1, the Trustees receive and
review promptly after the end of each calendar quarter a written report provided
by the Distributor of the amounts expended under the Plan and the purpose for
which such expenditures were made. Class B shares of the Fund accrued amounts
payable to the Distributor under the Plan, during the fiscal year ended
October 31, 2000, of $455,501. This amount is equal to 0.85% of the Fund's
average daily net assets for the fiscal year and was calculated pursuant to
clause (b) of the compensation formula under the Plan. For the fiscal year ended
October 31, 2000, Class A and Class C shares of the Fund accrued payments under
the Plan amounting to $58,120 and $6,493, respectively, which amounts are equal
to 0.20% and 0.85% of the average daily net assets of Class A and Class C,
respectively, for the fiscal year.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method the Fund offers four
Classes, each with a different distribution arrangement.
With respect to Class A shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from proceeds of the FSC, commissions for the
sale of Class A shares, currently a gross sales credit of up to 4.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.20% of the current value of
the respective accounts for which they are the Financial Advisors or dealers of
record in all cases. On orders of $1 million or more (for which no sales charge
was paid) or net asset value purchases by employer-sponsored employee benefit
plans, whether or not qualified under the Internal Revenue Code, for which the
Transfer Agent serves as Trustee or Morgan Stanley Dean Witter's Retirement Plan
Services serves as recordkeeper pursuant to a written Recordkeeping Services
Agreement ("MSDW Eligible Plans"), the Investment Manager compensates Financial
Advisors by paying them, from its own funds, a gross sales credit of 1.0% of the
amount sold.
With respect to Class B shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class B shares, currently a gross sales credit of up to 4.0% of the amount
sold (except as provided in the following sentence) and an annual residual
commission, currently a residual of up to 0.20% of the current value (not
including reinvested dividends or distributions) of the amount sold in all
cases. In the case of Class B shares purchased by MSDW Eligible Plans, Dean
Witter Reynolds compensates its Financial Advisors by paying them, from its own
funds, a gross sales credit of 3.0% of the amount sold.
With respect to Class C shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class C shares, currently a gross sales credit of up to 1.0% of the amount
sold and an annual residual commission, currently up to 0.85% of the current
value of the respective accounts for which they are the Financial Advisors of
record.
24
<PAGE>
With respect to Class D shares other than shares held by participants in the
Investment Manager's mutual fund asset allocation program and in the Morgan
Stanley Dean Witter Choice Program, the Investment Manager compensates Dean
Witter Reynolds' Financial Advisors by paying them, from its own funds,
commissions for the sale of Class D shares, currently a gross sales credit of up
to 1.0% of the amount sold. There is a chargeback of 100% of the amount paid if
the Class D shares are redeemed in the first year and a chargeback of 50% of the
amount paid if the Class D shares are redeemed in the second year after
purchase. The Investment Manager also compensates Dean Witter Reynolds'
Financial Advisors by paying them, from its own funds, an annual residual
commission, currently up to 0.10% of the current value of the respective
accounts for which they are the Financial Advisors of record (not including
accounts of participants in the Investment Manager's mutual fund asset
allocation program and the Morgan Stanley Dean Witter Choice Program).
The gross sales credit is a charge which reflects commissions paid by Dean
Witter Reynolds to its Financial Advisors and Dean Witter Reynolds'
Fund-associated distribution-related expenses, including sales compensation, and
overhead and other branch office distribution-related expenses including
(a) the expenses of operating Dean Witter Reynolds' branch offices in connection
with the sale of Fund shares, including lease costs, the salaries and employee
benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies; (b) the costs of
client sales seminars; (c) travel expenses of mutual fund sales coordinators to
promote the sale of Fund shares; and (d) other expenses relating to branch
promotion of Fund sales.
The Investment Manager pays a retention fee to Financial Advisors at an
annual rate of 0.05% of the value of shares of the Fund sold after January 1,
2000 and held for at least one year. Shares purchased through the reinvestment
of dividends will be eligible for a retention fee, provided that such dividends
were earned on shares otherwise eligible for a retention fee payment. Shares
owned in variable annuities, closed-end fund shares and shares held in 401(k)
plans where the Transfer Agent or MSDW's Retirement Plan Services is either
recordkeeper or trustee are not eligible for a retention fee.
For the first year only, the retention fee is paid on any shares of the Fund
sold after January 1, 2000 and held by shareholders on December 31, 2000.
The retention fees are paid by the Investment Manager from its own assets,
which may include profits from investment management fees payable under the
Management Agreement, as well as from borrowed funds.
The distribution fee that the Distributor receives from the Fund under the
Plan, in effect, offsets distribution expenses incurred under the Plan on behalf
of the Fund and, in the case of Class B shares, opportunity costs, such as the
gross sales credit and an assumed interest charge thereon ("carrying charge").
These expenses may include the cost of Fund-related educational and/or
business-related trips or payment of Fund-related educational and/or promotional
expenses of Financial Advisors. For example, the Distributor has implemented a
compensation program available only to Financial Advisors meeting specified
criteria under which certain marketing and/or promotional expenses of those
Financial Advisors are paid by the Distributor out of compensation it receives
under the Plan. In the Distributor's reporting of the distribution expenses to
the Fund, in the case of Class B shares, such assumed interest (computed at the
"broker's call rate") has been calculated on the gross credit as it is reduced
by amounts received by the Distributor under the Plan and any contingent
deferred sales charges received by the Distributor upon redemption of shares of
the Fund. No other interest charge is included as a distribution expense in the
Distributor's calculation of its distribution costs for this purpose. The
broker's call rate is the interest rate charged to securities brokers on loans
secured by exchange-listed securities.
The Fund is authorized to reimburse expenses incurred or to be incurred in
promoting the distribution of the Fund's Class A and Class C shares and in
servicing shareholder accounts. Reimbursement will be made through payments at
the end of each month. The amount of each monthly payment may in no event exceed
an amount equal to a payment at the annual rate of 0.25%, in the case of
Class A, and 0.85%, in the case of Class C, of the average net assets of the
respective Class during the month. No interest or other financing charges, if
any, incurred on any distribution expenses on behalf of Class A and Class C will
be reimbursable under the Plan. With respect to Class A, in the case of all
expenses other than expenses representing the service fee, and, with respect to
Class C, in the case of all expenses other than expenses representing a gross
sales credit or a residual to Financial Advisors and other
25
<PAGE>
authorized financial representatives, such amounts shall be determined at the
beginning of each calendar quarter by the Trustees, including, a majority of the
Independent Trustees. Expenses representing the service fee (for Class A) or a
gross sales credit or a residual to Financial Advisors and other authorized
financial representatives (for Class C) may be reimbursed without prior
determination. In the event that the Distributor proposes that monies shall be
reimbursed for other than such expenses, then in making quarterly determinations
of the amounts that may be reimbursed by the Fund, the Distributor will provide
and the Trustees will review a quarterly budget of projected distribution
expenses to be incurred on behalf of the Fund, together with a report explaining
the purposes and anticipated benefits of incurring such expenses. The Trustees
will determine which particular expenses, and the portions thereof, that may be
borne by the Fund, and in making such a determination shall consider the scope
of the Distributor's commitment to promoting the distribution of the Fund's
Class A and Class C shares.
Each Class paid 100% of the amounts accrued under the Plan with respect to
that Class for the fiscal year ended October 31, 2000 to the Distributor. The
Distributor and Dean Witter Reynolds estimate that they have spent, pursuant to
the Plan, $38,877,516 on behalf of Class B since the inception of the Fund. It
is estimated that this amount was spent in approximately the following ways:
(i) 9.48% ($3,686,071)--advertising and promotional expenses; (ii) 0.65%
($250,825)--printing of prospectuses for distribution to other than current
shareholders; and (iii) 89.87% ($34,940,620)--other expenses, including the
gross sales credit and the carrying charge, of which 16.69% ($5,832,104)
represents carrying charges, 34.49% ($12,050,926) represents commission credits
to Dean Witter Reynolds branch offices and other selected broker-dealers for
payments of commissions to Financial Advisors and other authorized financial
representatives, and 48.81% ($17,057,590) represents overhead and other branch
office distribution-related expenses. The amounts accrued by Class A and a
portion of the amounts accrued by Class C under the Plan during the fiscal year
ended October 31, 2000 were service fees. The remainder of the amounts accrued
by Class C were for expenses which relate to compensation of sales personnel and
associated overhead expenses.
In the case of Class B shares, at any given time, the expenses of
distributing shares of the Fund may be more or less than the total of (i) the
payments made by the Fund pursuant to the Plan; and (ii) the proceeds of CDSCs
paid by investors upon redemption of shares. For example, if $1 million in
expenses in distributing Class B shares of the Fund had been incurred and
$750,000 had been received as described in (i) and (ii) above, the excess
expense would amount to $250,000. The Distributor has advised the Fund that in
the case of Class B shares the excess distribution expenses, including the
carrying charge designed to approximate the opportunity costs incurred by Dean
Witter Reynolds which arise from it having advanced monies without having
received the amount of any sales charges imposed at the time of sale of the
Fund's Class B shares, totaled $9,092,910 as of October 31, 2000 (the end of the
Fund's fiscal year), which was equal to 20.90% of the net assets of Class B on
such date. Because there is no requirement under the Plan that the Distributor
be reimbursed for all distribution expenses with respect to Class B shares or
any requirement that the Plan be continued from year to year, this excess amount
does not constitute a liability of the Fund. Although there is no legal
obligation for the Fund to pay expenses incurred in excess of payments made to
the Distributor under the Plan and the proceeds of CDSCs paid by investors upon
redemption of shares, if for any reason the Plan is terminated, the Trustees
will consider at that time the manner in which to treat such expenses. Any
cumulative expenses incurred, but not yet recovered through distribution fees or
CDSCs, may or may not be recovered through future distribution fees or CDSCs.
In the case of Class A and Class C shares, expenses incurred pursuant to the
Plan in any calendar year in excess of 0.25% or 0.85% of the average daily net
assets of Class A or Class C, respectively, will not be reimbursed by the Fund
through payments in any subsequent year, except that expenses representing a
gross sales commission credited to Morgan Stanley Dean Witter Financial Advisors
and other authorized financial representatives at the time of sale may be
reimbursed in the subsequent calendar year. The Distributor has advised the Fund
that unreimbursed expenses representing a gross sales commission credited to
Morgan Stanley Dean Witter Financial Advisors and other authorized financial
representatives at the time of sale totaled $2,474 in the case of Class C at
December 31, 1999 (end of the calendar year), which amount was equal to 0.31% of
the net assets of Class C on such date, and that there were no such expenses
that may be reimbursed in the subsequent year in the case of
26
<PAGE>
Class A on such date. No interest or other financing charges will be incurred on
any Class A or Class C distribution expenses incurred by the Distributor under
the Plan or on any unreimbursed expenses due to the Distributor pursuant to the
Plan.
No interested person of the Fund nor any Independent Trustee has any direct
financial interest in the operation of the Plan except to the extent that the
Distributor, the Investment Manager, Dean Witter Reynolds, MSDW Services Company
or certain of their employees may be deemed to have such an interest as a result
of benefits derived from the successful operation of the Plan or as a result of
receiving a portion of the amounts expended thereunder by the Fund.
On an annual basis, the Trustees, including a majority of the Independent
Trustees, consider whether the Plan should be continued. Prior to approving the
last continuation of the Plan, the Trustees requested and received from the
Distributor and reviewed all the information which they deemed necessary to
arrive at an informed determination. In making their determination to continue
the Plan, the Trustees considered: (1) the Fund's experience under the Plan and
whether such experience indicates that the Plan is operating as anticipated;
(2) the benefits the Fund had obtained, was obtaining and would be likely to
obtain under the Plan, including that: (a) the Plan is essential in order to
give Fund investors a choice of alternatives for payment of distribution and
service charges and to enable the Fund to continue to grow and avoid a pattern
of net redemptions which, in turn, are essential for effective investment
management; and (b) without the compensation to individual brokers and the
reimbursement of distribution and account maintenance expenses of Dean Witter
Reynolds' branch offices made possible by the 12b-1 fees, Dean Witter Reynolds
could not establish and maintain an effective system for distribution, servicing
of Fund shareholders and maintenance of shareholder accounts; and (3) what
services had been provided and were continuing to be provided under the Plan to
the Fund and its shareholders. Based upon their review, the Trustees, including
each of the Independent Trustees, determined that continuation of the Plan would
be in the best interest of the Fund and would have a reasonable likelihood of
continuing to benefit the Fund and its shareholders. In the Trustees' quarterly
review of the Plan, they will consider its continued appropriateness and the
level of compensation provided therein.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of the
affected Class or Classes of the Fund, and all material amendments to the Plan
must also be approved by the Trustees in the manner described above. The Plan
may be terminated at any time, without payment of any penalty, by vote of a
majority of the Independent Trustees or by a vote of a majority of the
outstanding voting securities of the Fund (as defined in the Investment Company
Act) on not more than thirty days' written notice to any other party to the
Plan. So long as the Plan is in effect, the election and nomination of
Independent Trustees shall be committed to the discretion of the Independent
Trustees.
F. OTHER SERVICE PROVIDERS
(1) TRANSFER AGENT/DIVIDEND-PAYING AGENT
Morgan Stanley Dean Witter Trust FSB is the Transfer Agent for the Fund's
shares and the Dividend Disbursing Agent for payment of dividends and
distributions on Fund shares and Agent for shareholders under various investment
plans. The principal business address of the Transfer Agent is Harborside
Financial Center, Plaza Two, Jersey City, NJ 07311.
(2) CUSTODIAN AND INDEPENDENT AUDITORS
The Chase Manhattan Bank, One Chase Plaza, New York, NY, 10005 is the
Custodian of the Fund's assets. Any of the Fund's cash balances with the
Custodian in excess of $100,000 are unprotected by federal deposit insurance.
These balances may, at times, be substantial.
Deloitte & Touche LLP, Two World Financial Center, New York, NY 10281,
serves as the independent auditors of the Fund. The independent auditors are
responsible for auditing the annual financial statements of the Fund.
(3) AFFILIATED PERSONS
The Transfer Agent is an affiliate of the Investment Manager, and of the
Distributor. As Transfer Agent and Dividend Disbursing Agent, the Transfer
Agent's responsibilities include maintaining shareholder
27
<PAGE>
accounts, disbursing cash dividends and reinvesting dividends, processing
account registration changes, handling purchase and redemption transactions,
mailing prospectuses and reports, mailing and tabulating proxies, processing
share certificate transactions, and maintaining shareholder records and lists.
For these services, the Transfer Agent receives a per shareholder account fee
from the Fund and is reimbursed for its out-of-pocket expenses in connection
with such services.
G. CODES OF ETHICS
The Fund, the Investment Manager and the Distributor have each adopted a
Code of Ethics pursuant to Rule 17j-1 under the Investment Company Act. The
Codes of Ethics are designed to detect and prevent improper personal trading.
The Codes of Ethics permit personnel subject to the Codes to invest in
securities, including securities that may be purchased, sold or held by the
Fund, subject to a number of restrictions and controls including prohibitions
against purchases of securities in an Initial Public Offering and a preclearance
requirement with respect to personal securities transactions.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
--------------------------------------------------------------------------------
A. BROKERAGE TRANSACTIONS
Subject to the general supervision of the Trustees, the Investment Manager
is responsible for decisions to buy and sell securities for the Fund, the
selection of brokers and dealers to effect the transactions, and the negotiation
of brokerage commissions, if any. Purchases and sales of securities on a stock
exchange are effected through brokers who charge a commission for their
services. In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a profit
to the dealer. The Fund 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.
Options and futures transactions will usually be effected through a broker and a
commission will be charged. On occasion, the Fund may also purchase certain
money market instruments directly from an issuer, in which case no commissions
or discounts are paid.
For the fiscal years ended October 31, 1998, 1999 and 2000, the Fund paid a
total of $13,277, and $0 and $0, respectively, in brokerage commissions.
B. COMMISSIONS
Pursuant to an order of the SEC, the Fund may effect principal transactions
in certain money market instruments with Dean Witter Reynolds. The Fund will
limit its transactions with Dean Witter Reynolds to U.S. Government and
government agency securities, bank money instruments (i.e., certificates of
deposit and bankers' acceptances) and commercial paper. The transactions will be
effected with Dean Witter Reynolds only when the price available from Dean
Witter Reynolds is better than that available from other dealers.
During the fiscal years ended October 31, 1998, 1999 and 2000, the Fund did
not effect any principal transactions with Dean Witter Reynolds.
Brokerage transactions in securities listed on exchanges or admitted to
unlisted trading privileges may be effected through Dean Witter Reynolds, Morgan
Stanley & Co. and other affiliated brokers and dealers. In order for an
affiliated broker or dealer to effect any portfolio transactions on an exchange
for the Fund, the commissions, fees or other remuneration received by the
affiliated broker or dealer must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection with
comparable 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 Trustees, including the Independent
Trustees, have adopted procedures which are reasonably designed to provide that
any commissions, fees or other remuneration paid to an affiliated broker or
dealer are consistent with the foregoing standard. The Fund does not reduce the
management fee it pays to the Investment Manager by any amount of the brokerage
commissions it may pay to an affiliated broker or dealer.
28
<PAGE>
During the fiscal years ended October 31, 1998, 1999 and 2000, no brokerage
commissions were paid to Dean Witter Reynolds. During the fiscal years ended
October 31, 1998, 1999 and 2000, the Fund paid no brokerage commissions to
Morgan Stanley & Co..
C. BROKERAGE SELECTION
The policy of the Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid in
all circumstances. The Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Investment Manager from obtaining a high quality of
brokerage and research services. In seeking to determine the reasonableness of
brokerage commissions paid in any transaction, the Investment Manager relies
upon its experience and knowledge regarding commissions generally charged by
various brokers and on its judgment in evaluating the brokerage and research
services received from the broker effecting the transaction. These
determinations are necessarily subjective and imprecise, as in most cases an
exact dollar value for those services is not ascertainable.
The Fund anticipates that certain of its transactions involving foreign
securities will be effected on foreign securities exchanges. Fixed commissions
on such transactions are generally higher than negotiated commissions on
domestic transactions. There is also generally less government supervision and
regulation of foreign securities exchanges and brokers than in the United
States.
In seeking to implement the Fund's policies, the Investment Manager effects
transactions with those brokers and dealers who the Investment Manager believes
provide the most favorable prices and are capable of providing efficient
executions. If the Investment Manager believes the prices and executions are
obtainable from more than one broker or dealer, it may give consideration to
placing portfolio transactions with those brokers and dealers who also furnish
research and other services to the Fund or the Investment Manager. The services
may include, but are not limited to, any one or more of the following:
information as to the availability of securities for purchase or sale;
statistical or factual information or opinions pertaining to investment; wire
services; and appraisals or evaluations of portfolio securities. The information
and services received by the Investment Manager from brokers and dealers may be
of benefit to the Investment Manager in the management of accounts of some of
its other clients and may not in all cases benefit the Fund directly.
The Investment Manager and its affiliates currently serve as investment
manager to a number of clients, including other investment companies, and may in
the future act as investment manager or advisor to others. It is the practice of
the Investment Manager or any of its affiliates to cause purchase and sale
transactions (including transactions in certain initial and secondary public
offerings) to be allocated among the Fund and others whose assets it manages in
such manner as it deems equitable. In making such allocations among the Fund and
other client accounts, various factors may be considered, including the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the Fund and other client accounts.
The Investment Manager and its affiliates may operate one or more order
placement facilities and each facility will implement order allocation in
accordance with the procedures described above. From time to time, each facility
may transact in a security at the same time as other facilities are trading in
that security.
D. DIRECTED BROKERAGE
During the fiscal year ended October 31, 2000, the Fund did not pay any
brokerage commissions in connection with transactions because of research
services provided.
29
<PAGE>
E. REGULAR BROKER-DEALERS
During the fiscal year ended October 31, 2000, the Fund did not purchase
securities issued by brokers or dealers that were among the ten brokers or the
ten dealers which executed transactions for or with the Fund in the largest
dollar amounts during the year. At October 31, 2000, the Fund did not own any
securities issued by any of such issuers.
VII. CAPITAL STOCK AND OTHER SECURITIES
--------------------------------------------------------------------------------
The shareholders of the Fund are entitled to a full vote for each full share
of beneficial interest held. The Fund is authorized to issue an unlimited number
of shares of beneficial interest. All shares of beneficial interest of the Fund
are of $0.01 par value and are equal as to earnings, assets and voting
privileges except that each Class will have exclusive voting privileges with
respect to matters relating to distribution expenses borne solely by such
Class or any other matter in which the interests of one Class differ from the
interests of any other Class. In addition, Class B shareholders will have the
right to vote on any proposed material increase in Class A's expenses, if such
proposal is submitted separately to Class A shareholders. Also, Class A,
Class B and Class C bear expenses related to the distribution of their
respective shares.
The Fund's Declaration of Trust permits the Trustees to authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios) and additional Classes of shares
within any series. The Trustees have not presently authorized any such
additional series or Classes of shares other than as set forth in the
PROSPECTUS.
The Fund is not required to hold annual meetings of shareholders and in
ordinary circumstances the Fund does not intend to hold such meetings. The
Trustees may call special meetings of shareholders for action by shareholder
vote as may be required by the Investment Company Act or the Declaration of
Trust. Under certain circumstances, the Trustees may be removed by the actions
of the Trustees. In addition, under certain circumstances, the shareholders may
call a meeting to remove the Trustees, and the Fund is required to provide
assistance in communicating with shareholders about such a meeting. The voting
rights of shareholders are not cumulative, so that holders of more than
50 percent of the shares voting can, if they choose, elect all Trustees being
selected, while the holders of the remaining shares would be unable to elect any
Trustees.
Under Massachusetts law, shareholders of a business trust may, under certain
limited circumstances, be held personally liable as partners for the obligations
of the Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that notice
of such Fund obligations include such disclaimer, and provides for
indemnification out of the Fund's property for any shareholder held personally
liable for the obligations of the Fund. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations.
Given the above limitations on shareholder personal liability, and the nature of
the Fund's assets and operations, the possibility of the Fund being unable to
meet its obligations is remote and thus, in the opinion of Massachusetts counsel
to the Fund, the risk to Fund shareholders of personal liability is remote.
All of the Trustees, except for James F. Higgins, have been elected by the
shareholders of the Fund, most recently at a Special Meeting of Shareholders
held on May 21, 1997. The Trustees themselves have the power to alter the number
and the terms of office of the Trustees (as provided for in the Declaration of
Trust), and they may at any time lengthen or shorten their own terms or make
their terms of unlimited duration and appoint their own successors, provided
that always at least a majority of the Trustees has been elected by the
shareholders of the Fund.
VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
--------------------------------------------------------------------------------
A. PURCHASE/REDEMPTION OF SHARES
Information concerning how Fund shares are offered to the public (and how
they are redeemed and exchanged) is provided in the Fund's PROSPECTUS.
TRANSFER AGENT AS AGENT. With respect to the redemption or repurchase of
Fund shares, the application of proceeds to the purchase of new shares in the
Fund or any other Morgan Stanley Dean Witter Funds and the general
administration of the exchange privilege, the Transfer Agent acts as agent for
the Distributor and for the shareholder's authorized broker-dealer, if any, in
the performance of such
30
<PAGE>
functions. With respect to exchanges, redemptions or repurchases, the Transfer
Agent shall be liable for its own negligence and not for the default or
negligence of its correspondents or for losses in transit. The Fund shall not be
liable for any default or negligence of the Transfer Agent, the Distributor or
any authorized broker-dealer.
The Distributor and any authorized broker-dealer have appointed the Transfer
Agent to act as their agent in connection with the application of proceeds of
any redemption of Fund shares to the purchase of shares of any other Morgan
Stanley Dean Witter Fund and the general administration of the exchange
privilege. No commission or discounts will be paid to the Distributor or any
authorized broker-dealer for any transaction pursuant to the exchange privilege.
TRANSFERS OF SHARES. In the event a shareholder requests a transfer of Fund
shares to a new registration, the shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the CDSC or free of such charge (and with regard to the length
of time shares subject to the charge have been held), any transfer involving
less than all of the shares in an account will be made on a pro rata basis (that
is, by transferring shares in the same proportion that the transferred shares
bear to the total shares in the account immediately prior to the transfer). The
transferred shares will continue to be subject to any applicable CDSC as if they
had not been so transferred.
OUTSIDE BROKERAGE ACCOUNTS. If a shareholder wishes to maintain his or her
fund account through a brokerage company other than Dean Witter Reynolds, he or
she may do so only if the distributor has entered into a selected dealer
agreement with that brokerage company. Accounts maintained through a brokerage
company other than Dean Witter Reynolds may be subject to certain restrictions
on subsequent purchases and exchanges. Please contact your brokerage company or
the Transfer Agent for more information.
B. OFFERING PRICE
The Fund's Class B, Class C and Class D shares are offered at net asset
value per share and the Class A shares are offered at net asset value plus any
applicable FSC, which is distributed among the Fund's Distributor, Dean Witter
Reynolds and other authorized dealers as described in Section "V. Investment
Management and Other Services--E. Rule 12b-1 Plan."
The price of Fund shares, called "net asset value," is based on the value of
the Fund's portfolio securities. Net asset value per share of each Class is
calculated by dividing the value of the portion of the Fund's securities and
other assets attributable to that Class, less the liabilities attributable to
that Class, by the number of shares of that Class outstanding. The assets of
each Class of shares are invested in a single portfolio. The net asset value of
each Class, however, will differ because the Classes have different ongoing
fees.
In the calculation of the Fund's net asset value: (1) an equity portfolio
security listed or traded on the New York or American Stock Exchange, NASDAQ, or
other exchange is valued at its latest sale price, prior to the time when assets
are valued; if there were no sales that day, the security is valued at the
latest bid price (in cases where a security is traded on more than one exchange,
the security is valued on the exchange designated as the primary market pursuant
to procedures adopted by the Trustees; and (2) all other portfolio securities
for which over-the-counter market quotations are readily available are valued at
the latest bid price. When market quotations are not readily available,
including circumstances under which it is determined by the Investment Manager
that sale or bid prices are not reflective of a security's market value,
portfolio securities are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Fund's
Trustees. For valuation purposes, quotations of foreign portfolio securities,
other assets and liabilities and forward contracts stated in foreign currency
are translated into U.S. dollar equivalents at the prevailing market rates prior
to the close of the New York Stock Exchange.
Short-term debt securities with remaining maturities of sixty days or less
at the time of purchase are valued at amortized cost, unless the Trustees
determine such does not reflect the securities' market value, in which case
these securities will be valued at their fair value as determined by the
Trustees.
Certain of the Fund's portfolio securities may be valued by an outside
pricing service approved by the Fund's Trustees. The pricing service may utilize
a matrix system incorporating security quality, maturity and coupon as the
evaluation model parameters, and/or research evaluations by its staff, including
review of broker-dealer market price quotations in determining what it believes
is the fair valuation of the portfolio securities valued by such pricing
service.
31
<PAGE>
Listed options on debt securities are valued at the latest sale price on the
exchange on which they are listed unless no sales of such options have taken
place that day, in which case they will be valued at the mean between their
latest bid and asked prices. Unlisted options on debt securities and all options
on equity securities are valued at the mean between their latest bid and asked
prices. Futures are valued at the latest sale price on the commodities exchange
on which they trade unless the Trustees determine such price does not reflect
their market value, in which case they will be valued at their fair value as
determined in good faith under procedures established by and under the
supervision of the Trustees.
Generally, trading in foreign securities, as well as corporate bonds, U.S.
Government securities and money market instruments, is substantially completed
each day at various times prior to the close of the New York Stock Exchange. The
values of such securities used in computing the net asset value of the Fund's
shares are determined as of such times. Foreign currency exchange rates are also
generally determined prior to the close of the New York Stock Exchange.
Occasionally, events which may affect the values of such securities and such
exchange rates may occur between the times at which they are determined and the
close of the New York Stock Exchange and will therefore not be reflected in the
computation of the Fund's net asset value. If events that may affect the value
of such securities occur during such period, then these securities may be valued
at their fair value as determined in good faith under procedures established by
and under the supervision of the Trustees.
IX. TAXATION OF THE FUND AND SHAREHOLDERS
--------------------------------------------------------------------------------
The Fund generally will make two basic types of distributions: ordinary
dividends and long-term capital gain distributions. These two types of
distributions are reported differently on a shareholder's income tax return and
they are also subject to different rates of tax. The tax treatment of the
investment activities of the Fund will affect the amount and timing and
character of the distributions made by the Fund. Tax issues relating to the Fund
are not generally a consideration for shareholders such as tax-exempt entities
and tax-advantaged retirement vehicles such as an IRA or 401(k) plan.
Shareholders are urged to consult their own tax professionals regarding specific
questions as to federal, state or local taxes.
INVESTMENT COMPANY TAXATION. The Fund intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986. As such, the Fund will not be subject to federal income tax on its net
investment income and capital gains, if any, to the extent that it distributes
such income and capital gains to its shareholders.
The Fund generally intends to distribute sufficient income and gains so that
the Fund will not pay corporate income tax on its earnings. The Fund also
generally intends to distribute to its shareholders in each calendar year a
sufficient amount of ordinary income and capital gains to avoid the imposition
of a 4% excise tax. However, the Fund may instead determine to retain all or
part of any net long-term capital gains in any year for reinvestment. In such
event, the Fund will pay federal income tax (and possibly excise tax) on such
retained gains.
Gains or losses on sales of securities by the Fund will be long-term capital
gains or losses if the securities have a tax holding period of more than one
year at the time of such sale. Gains or losses on the sale of securities with a
tax holding period of one year or less will be short-term capital gains or
losses. Special tax rules may change the normal treatment of gains and losses
recognized by the Fund when the Fund invests in forward foreign currency
exchange contracts, options, futures transactions, and non-U.S. corporations
classified as "passive foreign investment companies". Those special tax rules
can, among other things, affect the treatment of capital gain or loss as
long-term or short-term and may result in ordinary income or loss rather than
capital gain or loss. The application of these special rules would therefore
also affect the character of distributions made by the Fund.
Under certain tax rules, the Fund may be required to accrue a portion of any
discount at which certain securities are purchased as income each year even
though the Fund receives no payments in cash on the security during the year. To
the extent that the Fund invests in such securities, it would be required to pay
out such accrued income as an income distribution in each year in order to avoid
taxation at the Fund level. Such distributions will be made from the available
cash of the Fund or by liquidation of portfolio securities if necessary. If a
distribution of cash necessitates the liquidation of portfolio securities, the
Investment Manager will select which securities to sell. The Fund may realize a
32
<PAGE>
gain or loss from such sales. In the event the Fund realizes net capital gains
from such transactions, its shareholders may receive a larger capital gain
distribution, if any, than they would in the absence of such transactions.
TAXATION OF DIVIDENDS AND DISTRIBUTIONS. Shareholders normally will have to
pay federal income taxes, and any state and/or local income taxes, on the
dividends and other distributions they receive from the Fund. Such dividends and
distributions, to the extent that they are derived from net investment income or
short-term capital gains, are taxable to the shareholder as ordinary income
regardless of whether the shareholder receives such payments in additional
shares or in cash.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder has
held the Fund's shares and regardless of whether the distribution is received in
additional shares or in cash. Under current law, the maximum tax rate on long-
term capital gains realized by non-corporate shareholders generally is 20%. A
special lower tax rate of 18% on long-term capital gains is available to
non-corporate shareholders to the extent the distributions of long-term capital
gains are derived from securities which the Fund purchased after December 31,
2000, and held for more than five years.
Shareholders are generally taxed on any ordinary dividend or capital gain
distributions from the Fund in the year they are actually distributed. However,
if any such dividends or distributions are declared in October, November or
December and paid in January then such amounts will be treated for tax purposes
as received by the shareholders on December 31, to shareholders of record of
such month.
Shareholders who are not citizens or residents of the United States and
certain foreign entities may be subject to withholding of U.S. tax on
distributions by the Fund of investment income and short-term capital gains.
After the end of each calendar year, shareholders will be sent information
on their dividends and capital gain distributions for tax purposes, including
the portion taxable as ordinary income and the portion taxable as long-term
capital gains and the amount of any dividends eligible for the federal dividends
received deduction for corporations.
PURCHASES AND REDEMPTIONS AND EXCHANGES OF FUND SHARES. Any dividend or
capital gains distribution received by a shareholder from any investment company
will have the effect of reducing the net asset value of the shareholder's stock
in that company by the exact amount of the dividend or capital gains
distribution. Furthermore, such dividends and capital gains distributions are
subject to federal income taxes. If the net asset value of the shares should be
reduced below a shareholder's cost as a result of the payment of dividends or
the distribution of realized long-term capital gains, such payment or
distribution would be in part a return of the shareholder's investment but
nonetheless would be taxable to the shareholder. Therefore, an investor should
consider the tax implications of purchasing Fund shares immediately prior to a
distribution record date.
In general, a sale of shares results in capital gain or loss, and for
individual shareholders, is taxable at a federal rate dependent upon the length
of time the shares were held. A redemption of a shareholder's Fund shares is
normally treated as a sale for tax purposes. Fund shares held for a period of
one year or less will, for tax purposes, generally result in short-term capital
gains or losses and those held for more than one year generally result in
long-term capital gains or losses. Under current law, the maximum tax rate on
long-term capital gains realized by non-corporate shareholders is generally 20%.
A special lower tax rate of 18% on long-term capital gains is available for
non-corporate shareholders who purchased shares after December 31, 2000, and
held such shares for more than five years. This special lower tax rate of 18%
for five-year property does not apply to non-corporate shareholders holding Fund
shares which were purchased on or prior to December 31, 2000, unless such
shareholders make an election to treat the Fund shares as being sold and
reacquired on January 1, 2001. A shareholder making such election may realize
capital gains or losses. Any loss realized by shareholders upon a sale or
redemption of shares within six months of the date of their purchase will be
treated as a long-term capital loss to the extent of any distributions of net
long-term capital gains with respect to such shares during the six-month period.
Gain or loss on the sale or redemption of shares in the Fund is measured by
the difference between the amount received and the tax basis of the shares.
Shareholders should keep records of investments
33
<PAGE>
made (including shares acquired through reinvestment of dividends and
distributions) so they can compute the tax basis of their shares. Under certain
circumstances a shareholder may compute and use an average cost basis in
determining the gain or loss on the sale or redemption of shares.
Exchanges of Fund shares for shares of another fund, including shares of
other Morgan Stanley Dean Witter Funds, are also subject to similar tax
treatment. Such an exchange is treated for tax purposes as a sale of the
original shares in the first fund, followed by the purchase of shares in the
second fund.
If a shareholder realizes a loss on the redemption or exchange of a fund's
shares and reinvests in that fund's shares within 30 days before or after the
redemption or exchange, the transactions may be subject to the "wash sale"
rules, resulting in a postponement of the recognition of such loss for tax
purposes.
X. UNDERWRITERS
--------------------------------------------------------------------------------
The Fund's shares are offered to the public on a continuous basis. The
Distributor, as the principal underwriter of the shares, has certain obligations
under the Distribution Agreement concerning the distribution of the shares.
These obligations and the compensation the Distributor receives are described
above in the sections titled "Principal Underwriter" and "Rule 12b-1 Plan."
XI. CALCULATION OF PERFORMANCE DATA
--------------------------------------------------------------------------------
From time to time, the Fund may quote its "yield" and/or "total return" in
advertisements and sales literature. These figures are computed separately for
Class A, Class B, Class C and Class D shares. Yield is calculated for any 30-day
period as follows: the amount of interest income for each security in the Fund's
portfolio is determined in accordance with regulatory requirements; the total
for the entire portfolio constitutes the Fund's gross income for the period.
Expenses accrued during the period are subtracted to arrive at "net investment
income" of each Class. The resulting amount is divided by the product of the
maximum offering price per share on the last day of the period multiplied by the
average number of shares of the applicable Class outstanding during the period
that were entitled to dividends. This amount is added to 1 and raised to the
sixth power. 1 is then subtracted from the result and the difference is
multiplied by 2 to arrive at the annualized yield. The yields for the 30-day
period ended October 31, 2000, calculated pursuant to the formula described
above, were 5.22%, 4.85%, 4.84% and 5.72% for Class A, Class B, Class C and
Class D, respectively.
These figures are computed separately for Class A, Class B, Class C and
Class D shares. The Fund's "average annual total return" represents an
annualization of the Fund's total return over a particular period and is
computed by finding the annual percentage rate which will result in the ending
redeemable value of a hypothetical $1,000 investment made at the beginning of a
one, five or ten year period, or for the period from the date of commencement of
operations, if shorter than any of the foregoing. The ending redeemable value is
reduced by any contingent deferred sales charge ("CDSC") at the end of the one,
five, ten year or other period. For the purpose of this calculation, it is
assumed that all dividends and distributions are reinvested. The formula for
computing the average annual total return involves a percentage obtained by
dividing the ending redeemable value by the amount of the initial investment
(which in the case of Class A shares is reduced by the Class A initial sales
charge), taking a root of the quotient (where the root is equivalent to the
number of years in the period) and subtracting 1 from the result. The average
annual total returns for Class B for the one year, five year and ten year period
ended October 31, 2000 were -11.69%, 2.34% and 3.56%, respectively. The average
annual total returns of Class A for the fiscal year ended October 31, 2000 and
for the period July 28, 1997 (inception of the Class) through October 31, 2000
were -10.69% and -1.83%, respectively. The average annual total returns of
Class C for the fiscal year ended October 31, 2000 and for the period July 28,
1997 (inception of the Class) through October 31, 2000 were -8.19% and -1.11%,
respectively. The average annual total returns of Class D for the fiscal year
ended October 31, 2000 and for the period July 28, 1997 (inception of the Class)
through October 31, 2000 were -6.52% and -0.24%, respectively.
In addition, the Fund may advertise its total return for each Class over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. These calculations may or may not reflect the
imposition of the maximum front-end sales charge for Class A or the deduction of
34
<PAGE>
the CDSC for each of Class B and Class C which, if reflected, would reduce the
performance quoted. For example, the average annual total return of the Fund may
be calculated in the manner described above, but without deduction for any
applicable sales charge. Based on this calculation, the average annual total
returns of Class B for the one year, five year and ten year periods ended
October 31, 2000, were -7.32%, 2.62% and 3.56%, respectively. Based on this
calculation, the average annual total returns of Class A for the fiscal year
ended October 31, 2000 and for the period July 28, 1997 through October 31, 2000
were -6.73% and -0.51%, respectively, the average annual total returns of
Class C for the fiscal year ended October 31, 2000 and for the period July 28,
1997 through October 31, 2000 were -7.32% and -1.11%, respectively, and the
average annual total returns of Class D for the fiscal year ended October 31,
2000 and for the period July 28, 1997 through October 31, 2000 were -6.52% and
-0.24%, respectively.
In addition, the Fund may compute its aggregate total return for each
Class for specified periods by determining the aggregate percentage rate which
will result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is assumed that
all dividends and distributions are reinvested. The formula for computing
aggregate total return involves a percentage obtained by dividing the ending
value (without reduction for any sales charge) by the initial $1,000 investment
and subtracting 1 from the result. Based on the foregoing calculation, the total
returns for Class B for the one year, five year and ten year period ended
October 31, 2000, were -7.32%, 13.81% and 41.90%, respectively. Based on the
foregoing calculation, the total returns of Class A for the fiscal year ended
October 31, 2000 and for the period July 28, 1997 through October 31, 2000 were
-6.73% and -1.66%, respectively, the total returns of Class C for the fiscal
year ended October 31, 2000 and for the period July 28, 1997 through
October 31, 2000 were -7.32% and -3.56%, respectively, and the total returns of
Class D for the fiscal year ended October 31, 2000 and for the period July 28,
1997 through October 31, 2000 were -6.52% and -0.77%, respectively.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in each Class of shares of the Fund by adding 1 to
the Fund's aggregate total return to date (expressed as a decimal and without
taking into account the effect of any applicable CDSC) and multiplying by
$9,575, $48,250 and $97,250 in the case of Class A (investments of $10,000,
$50,000 and $100,000 adjusted for the initial sales charge) or by $10,000,
$50,000 and $100,000 in the case of each of Class B, Class C and Class D, as the
case may be. Investments of $10,000, $50,000 and $100,000 in each Class at
inception of the Class would have grown or declined to the following amounts at
October 31, 2000:
<TABLE>
<CAPTION>
INVESTMENT AT INCEPTION OF:
INCEPTION -------------------------------
CLASS DATE: $10,000 $50,000 $100,000
----- --------- -------- -------- ---------
<S> <C> <C> <C> <C>
Class A............................................. 7/28/97 $ 9,416 $47,449 $ 95,636
Class B............................................. 3/30/89 16,984 84,920 169,840
Class C............................................. 7/28/97 9,644 48,220 96,440
Class D............................................. 7/28/97 9,923 49,615 99,230
</TABLE>
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by recognized organizations.
XII. FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
EXPERTS. The financial statements of the Fund for the fiscal year ended
October 31, 2000 included in this STATEMENT OF ADDITIONAL INFORMATION and
incorporated by reference in the PROSPECTUS have been so included and
incorporated in reliance on the report of Deloitte & Touche LLP, independent
auditors, given on the authority of said firm as experts in auditing and
accounting.
* * * * *
This STATEMENT OF ADDITIONAL INFORMATION and the PROSPECTUS do not contain
all of the information set forth in the REGISTRATION STATEMENT the Fund has
filed with the SEC. The complete REGISTRATION STATEMENT may be obtained from the
SEC.
35
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
GOVERNMENT & CORPORATE BONDS (89.9%)
BELGIUM (5.6%)
GOVERNMENT OBLIGATION
EUR 4,250 Belgian Government Bond+.................................................... 8.50% 10/01/07 $ 4,211,323
-----------
CANADA (6.0%)
GOVERNMENT OBLIGATION
CAD 6,350 Government of Canada........................................................ 7.25 06/01/07 4,469,388
-----------
DENMARK (13.1%)
FINANCE/RENTAL/LEASING (7.4%)
DKK 24,306 Realkredit Denmark+......................................................... 6.00 10/01/29 2,603,887
29,357 Unikredit Realkredit+....................................................... 5.00 07/01/29 2,918,920
-----------
5,522,807
-----------
GOVERNMENT OBLIGATIONS (5.7%)
25,000 Kingdom of Denmark.......................................................... 6.00 11/15/09 2,944,347
12,000 Kingdom of Denmark+......................................................... 9.00 11/15/00 1,370,846
-----------
4,315,193
-----------
TOTAL DENMARK................................................................................. 9,838,000
-----------
GERMANY (0.6%)
MAJOR BANKS
GBP 300 Bayerische Hypo-Und Vereinsbank+............................................ 7.50 12/27/00 435,490
-----------
GREECE (14.4%)
GOVERNMENT OBLIGATIONS
GRD 1,000,000 Greece (Republic of)+....................................................... 8.70 04/08/05 2,778,270
1,500,000 Greece (Republic of)+....................................................... 9.70 05/27/01 3,819,651
1,650,000 Greece (Republic of)........................................................ 6.30 01/29/09 4,205,607
-----------
10,803,528
-----------
LUXEMBOURG (2.1%)
MAJOR BANKS
EUR 1,850 European Investment Bank+................................................... 6.00 04/04/01 1,574,110
-----------
NORWAY (17.4%)
GOVERNMENT OBLIGATIONS
NOK 5,000 Norway (Kingdom of)+........................................................ 5.75 11/30/04 520,885
30,000 Norway (Kingdom of)+........................................................ 6.75 01/15/07 3,273,226
82,000 Norway (Kingdom of)+........................................................ 9.50 10/31/02 9,202,821
-----------
12,996,932
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
36
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2000, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
UNITED KINGDOM (1.0%)
MAJOR BANKS
GBP 500 Union Bank of Switzerland................................................... 8.00% 01/08/07 $ 772,121
-----------
UNITED STATES (29.7%)
FINANCIAL CONGLOMERATES (3.8%)
2,000 General Electric Capital Corp............................................... 6.25 09/01/09 2,880,998
-----------
GOVERNMENT AGENCIES & OBLIGATIONS (9.5%)
AUD 2,400 Federal National Mortgage Assoc............................................. 6.50 07/10/02 1,246,620
$ 1,000 Federal National Mortgage Assoc............................................. 7.25 01/15/10 1,036,750
4,650 U.S. Treasury Bond*+........................................................ 13.125 05/15/01 4,811,402
-----------
7,094,772
-----------
INTERNATIONAL BANKS (5.0%)
GBP 2,500 KFW International Finance Inc............................................... 10.625 09/03/01 3,743,032
-----------
MAJOR BANKS (4.1%)
1,076 Morgan Guaranty Trust Co.................................................... 7.375 12/28/01 1,573,917
1,000 Morgan Guaranty Trust Co.+.................................................. 7.75 12/30/03 1,499,647
-----------
3,073,564
-----------
MORTGAGE-BACKED SECURITIES (7.3%)
$ 1,927 Government National Mortgage Assoc.......................................... 7.00 02/15/29-
08/15/29 1,899,864
3,533 Government National Mortgage Assoc.......................................... 8.00 12/15/29-
05/15/30 3,590,010
-----------
5,489,874
-----------
TOTAL UNITED STATES........................................................................... 22,282,240
-----------
TOTAL GOVERNMENT & CORPORATE BONDS
(COST $81,876,066)............................................................................ 67,383,132
-----------
SHORT-TERM INVESTMENTS (11.3%)
UNITED STATES
TIME DEPOSITS (a) (6.2%)
MAJOR BANKS
GRD 1,538,247 Bank of America............................................................. 7.70 11/21/00 3,843,888
EUR 984 Chase Manhattan Bank........................................................ 4.70 11/03/00 835,690
-----------
TOTAL TIME DEPOSITS
(COST $5,340,835)............................................................................. 4,679,578
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
37
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2000, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
GOVERNMENT AGENCY (b) (5.1%)
$ 3,800 Student Loan Marketing Assoc.
(COST $3,800,000)......................................................... 6.45% 11/01/00 $ 3,800,000
-----------
TOTAL SHORT-TERM INVESTMENTS
(COST $9,140,835)............................................................................. 8,479,578
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(COST $91,016,901) (C)..................................................................... 101.2% 75,862,710
LIABILITIES IN EXCESS OF OTHER ASSETS...................................................... (1.2) (878,761)
----- ------------
NET ASSETS................................................................................. 100.0% $ 74,983,949
----- ------------
----- ------------
</TABLE>
---------------------
* The market value of securities pledged to cover margin requirements for
open futures contracts is $630,000.
+ Some or all of these securities are segregated in connection with open
forward foreign currency contracts.
(a) Subject to withdrawal restrictions until maturity.
(b) Purchased on a discount basis. The interest rate shown has been adjusted to
reflect a money market equivalent yield.
(c) The aggregate cost for federal income tax purposes approximates the
aggregate cost for book purposes. The aggregate gross unrealized
appreciation is $119,399 and the aggregate gross unrealized depreciation is
$15,273,590, resulting in net unrealized depreciation of $15,154,191.
SEE NOTES TO FINANCIAL STATEMENTS
38
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2000, CONTINUED
FUTURE CONTRACTS OPEN AT OCTOBER 31, 2000:
<TABLE>
<CAPTION>
UNDERLYING
NUMBER OF DESCRIPTION, DELIVERY MONTH, FACE AMOUNT UNREALIZED
CONTRACTS AND YEAR AT VALUE GAIN
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S Treasury Bond, December/2000
150 $14,976,563 $ 8,203
============ ============
</TABLE>
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT OCTOBER 31, 2000:
<TABLE>
<CAPTION>
IN
CONTRACTS EXCHANGE DELIVERY UNREALIZED
TO DELIVER FOR DATE APPRECIATION
-------------------------------------------------------------------
<S> <C> <C> <C>
$ 831,655 EUR 984,207 11/01/00 $ 4,035
GBP 559,315 $ 813,384 11/30/00 1,762
------------
Net unrealized appreciation.................. $ 5,797
============
</TABLE>
CURRENCY ABBREVIATIONS:
------------------------
<TABLE>
<S> <C>
AUD Australian Dollar.
GBP British Pound.
CAD Canadian Dollar.
DKK Danish Krone.
EUR Euro.
GRD Greek Drachma.
NOK Norwegian Krone.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
39
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2000
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (cost $91,016,901)........................................ $ 75,862,710
Unrealized appreciation on open forward foreign currency contracts............................ 5,797
Cash.......................................................................................... 163,003
Receivable for:
Interest.................................................................................. 1,984,337
Shares of beneficial interest sold........................................................ 62,882
Prepaid expenses and other assets............................................................. 21,814
------------
TOTAL ASSETS............................................................................. 78,100,543
------------
LIABILITIES:
Payable for:
Shares of beneficial interest repurchased................................................. 1,974,682
Investments purchased..................................................................... 835,690
Investment management fee................................................................. 50,904
Plan of distribution fee.................................................................. 39,080
Accrued expenses and other payables........................................................... 216,238
------------
TOTAL LIABILITIES........................................................................ 3,116,594
------------
NET ASSETS............................................................................... $ 74,983,949
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $107,003,165
Net unrealized depreciation................................................................... (15,239,395)
Dividends in excess of net investment income.................................................. (79,858)
Accumulated net realized loss................................................................. (16,699,963)
------------
NET ASSETS............................................................................... $ 74,983,949
============
CLASS A SHARES:
Net Assets.................................................................................... $ 24,216,402
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 3,469,748
NET ASSET VALUE PER SHARE................................................................ $6.98
=====
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE)........................................ $7.29
=====
CLASS B SHARES:
Net Assets.................................................................................... $ 43,537,700
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 6,221,835
NET ASSET VALUE PER SHARE................................................................ $7.00
=====
CLASS C SHARES:
Net Assets.................................................................................... $667,516
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 95,529
NET ASSET VALUE PER SHARE................................................................ $6.99
=====
CLASS D SHARES:
Net Assets.................................................................................... $6,562,331
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 937,357
NET ASSET VALUE PER SHARE................................................................ $7.00
=====
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2000
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME............................................................................... $ 6,985,965
------------
EXPENSES
Investment management fee..................................................................... 661,679
Plan of distribution fee (Class A shares)..................................................... 58,120
Plan of distribution fee (Class B shares)..................................................... 455,501
Plan of distribution fee (Class C shares)..................................................... 6,493
Transfer agent fees and expenses.............................................................. 151,017
Professional fees............................................................................. 78,528
Shareholder reports and notices............................................................... 77,732
Registration fees............................................................................. 65,601
Trustees' fees and expenses................................................................... 17,776
Custodian fees................................................................................ 12,324
Other......................................................................................... 7,984
------------
TOTAL EXPENSES........................................................................... 1,592,755
------------
NET INVESTMENT INCOME:................................................................... 5,393,210
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments............................................................................... (6,679,390)
Futures contracts......................................................................... 852,131
Foreign exchange transactions............................................................. 2,719,576
------------
NET LOSS................................................................................. (3,107,683)
------------
Net change in unrealized appreciation/ depreciation on:
Investments............................................................................... (8,557,404)
Futures contracts......................................................................... (200,534)
Translation of forward foreign currency contracts, other assets and liabilities
denominated in foreign currencies....................................................... (233,035)
------------
NET DEPRECIATION......................................................................... (8,990,973)
------------
NET LOSS................................................................................. (12,098,656)
------------
NET DECREASE.................................................................................. $ (6,705,446)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
40
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................................................ $ 5,393,210 $ 5,824,612
Net realized loss.................................................................... (3,107,683) (8,285,374)
Net change in unrealized depreciation................................................ (8,990,973) (3,878,832)
------------ ------------
NET DECREASE.................................................................... (6,705,446) (6,339,594)
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A shares................................................................... (1,286,492) (583,059)
Class B shares................................................................... (2,117,644) (1,711,510)
Class C shares................................................................... (30,348) (14,322)
Class D shares................................................................... (199,689) (49,551)
Paid-in-capital
Class A shares................................................................... (576,179) (1,140,000)
Class B shares................................................................... (948,425) (3,346,351)
Class C shares................................................................... (13,592) (28,002)
Class D shares................................................................... (89,435) (96,883)
------------ ------------
TOTAL DIVIDENDS AND DISTRIBUTIONS............................................... (5,261,804) (6,969,678)
------------ ------------
Net increase (decrease) from transactions in shares of beneficial interest........... (17,044,238) 33,226,526
------------ ------------
NET INCREASE (DECREASE)......................................................... (29,011,488) 19,917,254
NET ASSETS:
Beginning of period.................................................................. 103,995,437 84,078,183
------------ ------------
END OF PERIOD
(INCLUDING DIVIDENDS IN EXCESS OF NET INVESTMENT INCOME OF $79,858, AND $186,241
RESPECTIVELY).................................................................... $ 74,983,949 $103,995,437
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
41
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter World Wide Income Trust (the "Fund") is registered
under the Investment Company Act of 1940, as amended (the "Act"), as a
non-diversified, open-end management investment company. The Fund's primary
investment objective is to provide a high level of current income and, as a
secondary objective, seeks appreciation in the value of its assets. The Fund was
organized as a Massachusetts business trust on October 14, 1988 and commenced
operations on March 30, 1989. On July 28, 1997, the Fund converted to a multiple
class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
these estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) all portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest available bid price prior to the time of valuation; (2) futures contracts
are valued at the latest sale price on the commodities exchange on which it
trades unless the Trustees determine that such price does not reflect their
market value, in which case they will be valued at fair value as determined by
the Trustees; (3) when market quotations are not readily available, including
circumstances under which it is determined by Morgan Stanley Dean Witter
Advisors Inc. (the "Investment Manager") that sale or bid prices are not
reflective of a security's market value, portfolio securities are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Trustees (valuation of debt securities for
which market quotations are not readily available may be based upon current
market prices of securities which are comparable in coupon, rating and maturity
or an appropriate matrix utilizing similar factors); (4) certain portfolio
securities may be valued by an outside pricing service approved by the Trustees.
The pricing service may utilize a matrix system
42
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, CONTINUED
incorporating security quality, maturity and coupon as the evaluation model
parameters, and/or research and evaluations by its staff, including review of
broker-dealer market price quotations, if available, in determining what it
believes is the fair valuation of the securities valued by such pricing service;
and (5) short-term debt securities having a maturity date of more than sixty
days at time of purchase are valued on a mark-to-market basis until sixty days
prior to maturity and thereafter at amortized cost based on their value on the
61st day. Short-term debt securities having a maturity date of sixty days or
less at the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. FUTURES CONTRACTS -- A futures contract is an agreement between two parties
to buy and sell financial instruments at a set price on a future date. Upon
entering into such a contract, the Fund is required to pledge to the broker
cash, U.S. Government securities or other liquid portfolio securities equal to
the minimum initial margin requirements of the applicable futures exchange.
Pursuant to the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in the value of the contract
which is known as variation margin. Such receipts or payments are recorded by
the Fund as unrealized gains or losses. Upon closing of the contract, the Fund
realizes a gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
E. FOREIGN CURRENCY TRANSLATION -- The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, other assets and liabilities and forward foreign currency
contracts ("forward contracts") are translated at the exchange rates prevailing
at the end of the period; and (2) purchases, sales, income and expenses are
translated at the exchange rates prevailing on the respective dates of such
transactions. The resultant exchange gains and losses are included in the
Statement of Operations as realized and unrealized gain/loss on foreign exchange
transactions. Pursuant to U.S. Federal income tax regulations, certain foreign
43
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, CONTINUED
exchange gains/losses included in realized and unrealized gain/loss are included
in or are a reduction of ordinary income for federal income tax purposes. The
Fund does not isolate that portion of the results of operations arising as a
result of changes in the foreign exchange rates from the changes in the market
prices of the securities.
F. FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may enter into forward
contracts which are valued daily at the appropriate exchange rates. The
resultant unrealized exchange gains and losses are included in the Statement of
Operations as unrealized foreign currency gain or loss. The Fund records
realized gains or losses on delivery of the currency or at the time the forward
contract is extinguished (compensated) by entering into a closing transaction
prior to delivery.
G. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the record date. The amount of dividends
and distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and distributions which
exceed net investment income and net realized capital gains for tax purposes are
reported as distributions of paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays a management fee,
accrued daily and payable monthly, by applying the following annual rates to the
net assets of the Fund determined as of the close of each business day: 0.75% to
the portion of daily net assets not exceeding $250 million; 0.60% to the portion
of daily net assets exceeding $250 million but not exceeding $500 million; 0.50%
to the portion of daily net assets exceeding $500 million but not exceeding
$750 million; 0.40% to the portion of daily net assets exceeding $750 million
but not exceeding $1 billion; and 0.30% to the portion of daily net assets
exceeding $1 billion.
44
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, CONTINUED
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A -- up
to 0.25% of the average daily net assets of Class A; (ii) Class B -- 0.85% of
the lesser of: (a) the average daily aggregate gross sales of the Class B shares
since inception of the Fund (not including reinvestment of dividend or capital
gain distributions) less the average daily aggregate net asset value of the
Class B shares redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or waived; or (b) the average daily net
assets of Class B; and (iii) Class C -- up to 0.85% of the average daily net
assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled $9,092,910
at October 31, 2000.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.85% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the year ended October 31, 2000, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.20% and
0.85%, respectively.
The Distributor has informed the Fund that for the year ended October 31, 2000,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C
45
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, CONTINUED
shares of $40,577 and $466, respectively, and received $462 in front-end sales
charges from sales of the Fund's Class A shares. The respective shareholders pay
such charges which are not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended October 31, 2000 aggregated
$54,349,950, and $54,571,083, respectively. Included in the aforementioned are
purchases and sales of U.S. Government securities of $12,564,677 and
$13,161,448, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At October 31, 2000, the Fund had
transfer agent fees and expenses payable of approximately $200.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended October 31, 2000 included
in Trustees' fees and expenses in the Statement of Operations amounted to
$6,632. At October 31, 2000, the Fund had an accrued pension liability of
$78,096 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. FEDERAL INCOME TAX STATUS
At October 31, 2000, the Fund had a net capital loss carryover of approximately
$16,692,000, which may be used to offset future capital gains to the extent
provided by regulations, which will be available through October 31 of the
following years:
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS
-------------------------------------------------------------
2001 2002 2004 2005 2007 2008
------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$4,853 $5,322 $214 $471 $4,300 $1,532
====== ====== ==== ==== ====== ======
</TABLE>
Due to the Fund's acquisition of Morgan Stanley Dean Witter Global Short-Term
Income Fund, utilization of this carryover is subject to limitations imposed by
the Internal Revenue Code and Treasury Regulations, significantly reducing the
total carryover available.
46
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, CONTINUED
As of October 31, 2000, the Fund had permanent book/tax differences primarily
attributable to foreign currency losses and an expired capital loss carryover.
To reflect reclassifications arising from these differences, dividends in excess
of net investment income was charged $1,652,654, paid-in-capital was credited
$659,023 and accumulated net realized loss was credited $993,631.
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
--------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold............................................................. 4,088,315 $ 30,496,900 1,815,359 $ 14,907,629
Reinvestment of dividends........................................ 139,433 1,039,705 126,396 1,038,579
Acquisition of Morgan Stanley Dean Witter Global Short-Term
Income Fund..................................................... -- -- 4,683,780 40,215,931
Redeemed......................................................... (5,299,850) (39,523,297) (2,218,440) (18,155,151)
----------- ------------- ---------- ------------
Net increase (decrease) - Class A................................ (1,072,102) (7,986,692) 4,407,095 38,006,988
----------- ------------- ---------- ------------
CLASS B SHARES
Sold............................................................. 5,767,090 43,845,960 8,073,133 69,770,271
Reinvestment of dividends........................................ 249,379 1,863,870 356,189 3,038,854
Redeemed......................................................... (7,971,906) (60,348,308) (9,201,928) (79,010,074)
----------- ------------- ---------- ------------
Net decrease - Class B........................................... (1,955,437) (14,638,478) (772,606) (6,200,949)
----------- ------------- ---------- ------------
CLASS C SHARES
Sold............................................................. 29,593 221,714 98,810 856,107
Reinvestment of dividends........................................ 5,115 38,063 4,130 34,529
Redeemed......................................................... (39,889) (298,005) (27,927) (229,069)
----------- ------------- ---------- ------------
Net increase (decrease) - Class C................................ (5,181) (38,228) 75,013 661,567
----------- ------------- ---------- ------------
CLASS D SHARES
Sold............................................................. 2,349,533 17,644,185 2,794,192 22,574,638
Reinvestment of dividends........................................ 22,216 163,189 13,041 106,851
Redeemed......................................................... (1,624,579) (12,188,214) (2,727,393) (21,922,569)
----------- ------------- ---------- ------------
Net increase - Class D........................................... 747,170 5,619,160 79,840 758,920
----------- ------------- ---------- ------------
Net increase (decrease) in Fund.................................. (2,285,550) $ (17,044,238) 3,789,342 $ 33,226,526
=========== ============= ========== ============
</TABLE>
7. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward contracts to facilitate settlement of foreign
currency denominated portfolio transactions or to manage its foreign currency
exposure or to sell, for a fixed amount of U.S. dollars or other currency, the
amount of foreign currency approximating the value of some or all of its
holdings denominated in such foreign currency or an amount of foreign currency
other than the
47
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, CONTINUED
currency in which the securities to be hedged are denominated approximating the
value of some or all of its holdings to be hedged. Additionally, when the
Investment Manager anticipates purchasing securities at some time in the future,
the Fund may enter into a forward contract to purchase an amount of currency
equal to some or all the value of the anticipated purchase for a fixed amount of
U.S. dollars or other currency.
To hedge against adverse interest rate, foreign currency and market risks, the
Fund may enter into written options on interest rate futures and interest rate
futures contracts ("derivative investments").
Forward contracts and derivative instruments involve elements of market risk in
excess of the amount reflected in the Statement of Assets and Liabilities. The
Fund bears the risk of an unfavorable change in the foreign exchange rates
underlying the forward contracts. Risks may also arise upon entering into these
contracts from the potential inability of the counterparties to meet the terms
of their contracts.
At October 31, 2000, there were outstanding forward contracts and futures
contracts.
8. ACQUISITION OF MORGAN STANLEY DEAN WITTER GLOBAL SHORT-TERM INCOME FUND
INC.
As of the close of business on March 12, 1999, the Fund acquired all the net
assets of Morgan Stanley Dean Witter Global Short-Term Income Fund Inc. ("Global
Short-Term") pursuant to a plan of reorganization approved by the shareholders
of Global Short-Term on February 24, 1999. The acquisition was accomplished by a
tax-free exchange of 4,683,780 Class A shares of the Fund at a net asset value
of $8.59 per share for 4,700,195 shares of Global Short-Term. The net assets of
the Fund and Global Short-Term immediately before the acquisition were
$80,419,774 and $40,215,931, respectively, including unrealized depreciation of
$893,307 for Global Short-Term. Immediately after the acquisition, the combined
net assets of the Fund amounted to $120,635,705.
9. FUND MERGER
On October 26, 2000, the Trustees of the Fund and Morgan Stanley Dean Witter
Diversified Income Trust ("Diversified") approved a plan of reorganization ("the
Plan") whereby the Fund would be merged into Diversified. The Plan is subject to
the consent of the Fund's shareholders. If approved, the assets of the Fund
would be combined with the assets of Diversified and shareholders of the Fund
would become shareholders of Diversified, receiving shares of the corresponding
class of Diversified equal to the value of their holdings in the Fund.
48
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31 JULY 28, 1997*
-------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 7.98 $ 9.11 $ 9.02 $ 8.97
------- ------- ------- -------
Income (loss) from investment operations:
Net investment income.................................... 0.53 0.52 0.59 0.15
Net realized and unrealized gain (loss).................. (1.05) (1.02) 0.20 0.05
------- ------- ------- -------
Total income (loss) from investment operations.............. (0.52) (0.50) 0.79 0.20
------- ------- ------- -------
Less dividends and distributions from:
Net investment income.................................... (0.33) (0.21) (0.70) (0.15)
Paid-in-capital.......................................... (0.15) (0.42) -- --
------- ------- ------- -------
Total dividends and distributions........................... (0.48) (0.63) (0.70) (0.15)
------- ------- ------- -------
Net asset value, end of period.............................. $ 6.98 $ 7.98 $ 9.11 $ 9.02
======= ======= ======= =======
TOTAL RETURN+............................................... (6.73)% (5.56)% 9.16% 2.27%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 1.41 %(3) 1.48 %(3) 1.45%(3) 1.46%(2)
Net investment income....................................... 6.49 %(3) 6.14 %(3) 6.63%(3) 6.69%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $24,216 $36,253 $1,227 $682
Portfolio turnover rate..................................... 73 % 144 % 309% 345%
</TABLE>
---------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
49
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31
---------------------------------------------------------------------
2000++ 1999++ 1998++ 1997*++ 1996
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 8.00 $ 9.12 $ 9.03 $ 9.33 $ 9.08
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income.................................... 0.48 0.47 0.53 0.55 0.60
Net realized and unrealized gain (loss).................. (1.05) (1.02) 0.20 0.07 0.48
------ ------ ------ ------ ------
Total income (loss) from investment operations.............. (0.57) (0.55) 0.73 0.62 1.08
------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income.................................... (0.30) (0.19) (0.64) (0.92) (0.83)
Paid-in-capital.......................................... (0.13) (0.38) -- -- --
------ ------ ------ ------ ------
Total dividends and distributions........................... (0.43) (0.57) (0.64) (0.92) (0.83)
------ ------ ------ ------ ------
Net asset value, end of period.............................. $ 7.00 $ 8.00 $ 9.12 $ 9.03 $ 9.33
====== ====== ====== ====== ======
TOTAL RETURN+............................................... (7.32)% (6.20)% 8.61% 7.05% 12.60%
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 2.06 %(1) 2.09 %(1) 2.07%(1) 2.02% 1.96%
Net investment income....................................... 5.84 %(1) 5.53 %(1) 6.01%(1) 6.07% 6.39%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $43,538 $65,415 $81,611 $94,556 $114,022
Portfolio turnover rate..................................... 73 % 144 % 309% 345% 263%
</TABLE>
---------------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date have been designated as Class B shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
50
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31 JULY 28, 1997*
--------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 7.99 $ 9.11 $ 9.02 $ 8.97
------ ------ ------ ------
Income (loss) from investment operations:
Net investment income.................................... 0.47 0.47 0.53 0.14
Net realized and unrealized gain (loss).................. (1.04) (1.02) 0.20 0.05
------ ------ ------ ------
Total income (loss) from investment operations.............. (0.57) (0.55) 0.73 0.19
------ ------ ------ ------
Less dividends and distributions from:
Net investment income.................................... (0.30) (0.19) (0.64) (0.14)
Paid-in-capital.......................................... (0.13) (0.38) -- --
------- ------- ------- ---------
Total dividends and distributions........................... (0.43) (0.57) (0.64) (0.14)
------ ------ ------ ------
Net asset value, end of period.............................. $ 6.99 $ 7.99 $ 9.11 $ 9.02
====== ====== ====== ======
TOTAL RETURN+............................................... (7.32)% (6.19)% 8.62% 2.12%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 2.06 %(3) 2.09 %(3) 2.07%(3) 2.00%(2)
Net investment income....................................... 5.84 %(3) 5.53 %(3) 6.01%(3) 5.89%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $668 $805 $234 $111
Portfolio turnover rate..................................... 73 % 144 % 309% 345%
</TABLE>
---------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
51
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31 JULY 28, 1997*
--------------------------------------- THROUGH
2000 1999 1998 OCTOBER 31, 1997
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS D SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 8.01 $ 9.12 $ 9.03 $ 8.97
------ ------ ------ ------
Income (loss) from investment operations:
Net investment income.................................... 0.51 0.53 0.72 0.16
Net realized and unrealized gain (loss).................. (1.03) (0.99) 0.09 0.05
------ ------ ------ ------
Total income (loss) from investment operations.............. (0.52) (0.46) 0.81 0.21
------ ------ ------ ------
Less dividends and distributions from:
Net investment income.................................... (0.34) (0.22) (0.72) (0.15)
Paid-in-capital.......................................... (0.15) (0.43) -- --
------ ------ ------ ------
Total dividends and distributions........................... (0.49) (0.65) (0.72) (0.15)
------ ------ ------ ------
Net asset value, end of period.............................. $ 7.00 $ 8.01 $ 9.12 $ 9.03
====== ====== ====== ======
TOTAL RETURN+............................................... (6.52)% (5.29)% 9.41% 2.44%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 1.21 %(3) 1.24 %(3) 1.22%(3) 1.16%(2)
Net investment income....................................... 6.69 %(3) 6.38 %(3) 6.86%(3) 6.83%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $6,562 $1,523 $1,006 $39
Portfolio turnover rate..................................... 73 % 144 % 309% 345%
</TABLE>
---------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
52
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OF MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Dean Witter World Wide Income Trust (the "Fund"), including the
portfolio of investments, as of October 31, 2000, and the related statements of
operations and changes in net assets, and the financial highlights for the year
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The statement of changes in net assets for the year ended October 31,
1999 and the financial highlights for each of the respective stated periods
ended October 31, 1999 were audited by other independent accountants whose
report, dated December 13, 1999, expressed an unqualified opinion on that
statement and financial highlights.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2000, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Dean Witter World Wide Income Trust as of October 31, 2000, the results
of its operations, the changes in its net assets, and the financial highlights
for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
DECEMBER 5, 2000
2000 FEDERAL TAX NOTICE (UNAUDITED)
Of the Fund's ordinary income dividends paid during the fiscal
year ended October 31, 2000, 17.93% was attributable to qualifying
Federal obligations. Please consult your tax advisor to determine
if any portion of the dividends you received is exempt from state
income tax.
53
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
CHANGE IN INDEPENDENT ACCOUNTANTS
On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.
The reports of PricewaterhouseCoopers LLP on the financial statements of the
Fund for the past two fiscal years contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle.
In connection with its audits for the two most recent fiscal years and through
July 1, 2000, there have been no disagreements with PricewaterhouseCoopers LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make
reference thereto in their report on the financial statements for such years.
The Fund, with the approval of its Board of Directors and its Audit Committee,
engaged Deloitte & Touche LLP as its new independent auditors as of July 1,
2000.
54
<PAGE>
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
MORGAN STANLEY DEAN WITTER WORLD WIDE INCOME TRUST
In our opinion, the statement of changes in net assets and the financial
highlights of Morgan Stanley Dean Witter World Wide Income Trust (the "Fund")
(not presented separately herein) present fairly, in all material respects, the
changes in its net assets for the year ended October 31, 1999 and the financial
highlights for each of the years in the period ended October 31, 1999, in
conformity with generally accepted accounting principles. This financial
statement and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. We have not
audited the financial statements or financial highlights of the Fund for any
period subsequent to October 31, 1999.
PricewaterhouseCoopers LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
DECEMBER 13, 1999
55
<PAGE>
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
The response to this item is incorporated herein by reference to Exhibits
1 and 2 under Item 16 below and by reference to Item 27 of Post-Effective
Amendment No. 10 to the Registrant's Registration Statement on Form N-1A, dated
February 3, 2000, which was filed electronically pursuant to Regulation S-T on
January 31, 2000 ("Post-Effective Amendment No. 10") as an amendment to
Registrant's Registration Statement on Form N-1A (File Nos. 811-6515 and
33-44782) (the "Registration Statement").
ITEM 16. EXHIBITS
(1) Declaration of Trust dated December 18, 1991 (the "Declaration")
(incorporated herein by reference to Exhibit 1 of Post-Effective Amendment
No. 4 to the Fund's Registration Statement on Form N-1A filed on January
25, 1996); Amendment to the Declaration Establishing and Designating
Additional Classes of Shares (incorporated herein by reference to Exhibit
1 to Post-Effective Amendment No. 6 filed on July 14, 1997 ("Post
Effective Amendment No. 6")); Amendment to the Declaration of Trust of the
Registrant dated June 22, 1998 (incorporated herein by reference to
Exhibit 1 of Post-Effective Amendment No. 8 to the Registration Statement
filed on December 28, 1998 ("Post-Effective Amendment No. 8").
(2) Amended and Restated By-Laws of Registrant dated as of May 1, 1999
(incorporated herein by reference to Exhibit 2 to the Registrant's
Post-Effective Amendment No. 10 to the Registration Statement filed on
January 31, 2000).
(3) Not Applicable.
(4) Copy of Agreement and Plan of Reorganization (filed herewith as Exhibit A
to the Proxy Statement and Prospectus).
(5) Not Applicable.
(6) (a) Amended Investment Management Agreement dated April 30, 1998
(incorporated herein by reference to Exhibit 4(a) to Registrant's
Post-Effective Amendment No. 8 to the Registration Statement filed on
December 28, 1998.
(7) (a) Amended Distribution Agreement between Registrant and Morgan Stanley
Dean Witter Distributors Inc. (incorporated herein by reference to
Exhibit 6(a) to Post-Effective Amendment No. 8 to the Registration
Statement) filed on December 28, 1998.
(b) Multiple Class Distribution Agreement between Registrant and Morgan
Stanley Dean Witter Distributors, Inc. (incorporated herein by
reference to Exhibit 6(b) of Post-Effective Amendment No. 2 to the
Registration Statement.) filed on December 30, 1993.
(c) Form of Selected Dealer Agreement (incorporated herein by reference to
Exhibit 6(c) to Registrant's Post-Effective Amendment No. 8 to the
Registration Statement) filed on December 28, 1998.
(8) Not Applicable
(9) (a) Custody Agreement dated November 30, 1995 (incorporated herein by
reference to Exhibit 8 to Post-Effective Amendment No. 4 to the
Registration Statement); Amendment to the Custody Agreement between the
Bank of New York and the Registrant (incorporated herein by reference
to Exhibit 8 of Post-Effective Amendment No. 5 to the Registration
Statement) filed on December 24, 1996.
C-1
<PAGE>
(b) Amended and Restated Transfer Agency and Services Agreement dated
September 1, 2000 between the Registrant and Morgan Stanley Dean Witter
Trust FSB (incorporated herein by reference to Exhibit 8(a) to
Post-Effective Amendment No. 11 to the Registration Statement) filed on
October 27, 2000.
(10) (a) Amended and Restated Plan of Distribution pursuant to Rule 12b-1,
dated July 28, 1997 (incorporated herein by reference to Exhibit 15 to
Post-Effective Amendment No. 6 to the Registration Statement) filed on
July 14, 1997.
(b) Morgan Stanley Dean Witter Funds Multiple Class Plan pursuant to Rule
18f-3 dated August 15, 2000 (incorporated herein by reference to
Exhibit (15) to Post-Effective Amendment No. 11 to the Registration
Statement) filed on October 27, 2000.
(11) (a) Opinion and consent of Mayer, Brown & Platt*.
(b) Opinion and consent of Nutter, McClennen & Fish LLP*.
(12) Opinion and consent of Mayer, Brown & Platt regarding tax matters*.
(13) Form of Services Agreement between Morgan Stanley Dean Witter Advisors
Inc. and Morgan Stanley Dean Witter Services Company Inc. (incorporated
herein by reference to Exhibit 8(b) to Post-Effective Amendment No. 8 to
the Registration Statement) filed on December 28, 1998.
(14) (a) Consent of Independent Auditors, filed herein.
(b) Consent of PricewaterhouseCoopers LLP, filed herein.
(15) Not Applicable.
(16) Powers of Attorney*.
(17) (a) Registrant's Rule 24f-2 Notice pursuant to Rule 24f-2 under the
Investment Company Act of 1940, for its fiscal year ended October 31,
2000 (incorporated herein by reference to Form 24f-2 filed with the
Securities and Exchange Commission on December 13, 2000).
(b) Form of Proxy.
(c) Voting Information Card.
ITEM 17. UNDERTAKINGS
1. The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of the prospectus which is a part
of this registration statement on Form N-14 by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c) of the Securities
Act of 1933, the reoffering prospectus will contain the information called for
by the applicable registration form for reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
items of the applicable form.
2. The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to this
registration statement on Form N-14 and will not be used until the amendment is
effective, and that, in determining any liability under the Securities Act of
1933, each post-effective amendment shall be deemed to be a new registration
statement for the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide offering of
them.
----------
* Previously filed with the Initial Registration Statement on Form N-14 on
November 8, 2000 and incorporated herein by reference.
C-2
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this registration statement has
been signed on behalf of the registrant, in the City of New York and State of
New York, on the 18th day of January, 2001.
MORGAN STANLEY DEAN WITTER DIVERSIFIED INCOME TRUST
By: /s/ Barry Fink
.........................................
Barry Fink
Vice President and Secretary
As required by the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
1. Principal Executive Officer
/s/ Charles A. Fiumefreddo President, Chief Executive Officer,
............................ Trustee and Chairman January 18, 2001
2. Principal Financial Officer
/s/ Thomas F. Caloia Treasurer and Principal
............................ Accounting Officer January 18, 2001
3. Majority of Trustees
/s/ Michael Bozic Trustee January 18, 2001
............................
/s/ Edwin J. Garn Trustee January 18, 2001
............................
/s/ Wayne E. Hedien Trustee January 18, 2001
............................
/s/ James F. Higgins Trustee January 18, 2001
............................
/s/ Manuel H. Johnson Trustee January 18, 2001
............................
/s/ Michael E. Nugent Trustee January 18, 2001
............................
/s/ John L. Schroeder Trustee January 18, 2001
............................
/s/ Philip J. Purcell Trustee January 18, 2001
............................
</TABLE>
C-3
