<PAGE>
Filed Pursuant to Rule 497(c)
Registration File No.: 33-44782
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.
2
<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.
3
<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
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
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>
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.
27
<PAGE>
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.
28
<PAGE>
(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
--------------------------------------------------------------------------------
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
29
<PAGE>
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.
30
<PAGE>
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.
31
<PAGE>
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.
32
<PAGE>
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
33
<PAGE>
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 TOTAL RETURN 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
