<PAGE>
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST Two World Trade Center,
LETTER TO THE SHAREHOLDERS July 31, 1998 New York, New York 10048
DEAR SHAREHOLDER:
Trends in the broad market continued to be reflected in the health-care sector
in the first half of 1998 as small-cap stocks continued to struggle. Concerns
over problems in Asia have focused investor attention on larger, more liquid
securities, causing the "nifty fifty" stocks to significantly outperform their
small and mid-cap brethren.
Further, revolutionary products continue to boost the earnings growth of many
of the large-cap pharmaceutical companies. The popularity of these new drugs,
such as Viagra, has demonstrated a "new consumerism" in health care.
Historically, demand for new drugs has been driven by doctor prescriptions.
What the Viagra craze demonstrates is that today's health-care consumers are
much more aware of new forms of therapy. Unfortunately, this has made it more
difficult for the management of HMOs to anticipate the demand for new
therapies. Thus, HMOs were down for the first half of 1998 and we expect the
group to continue to underperform over the foreseeable future as many companies
wrestle with rising medical costs.
FUND PERFORMANCE
For the fiscal year ended July 31, 1998, the Fund's Class B shares produced a
total return of 9.33 percent versus 19.28 percent for the Standard & Poor's 500
Composite Stock Price Index (S&P 500) and 15.46 percent for the Lipper
Health/Biotechnology Funds Index (Lipper Index). The Fund's underperformance
can be attributed primarily to its underweighting in large-cap health-care
stocks (particularly pharmaceuticals) and its overweighting in small-cap
health-care stocks.
The accompanying chart illustrates the growth of a hypothetical $10,000
investment in the Fund's Class B shares from inception (October 30, 1992)
through the fiscal year ended July 31, 1998 versus similar investments in the
issues that comprise the S&P 500 and the Lipper Index.
PORTFOLIO REVIEW
During this fiscal period, large-cap pharmaceutical holdings continued to do
well, especially Schering-Plough. Thus, we have dramatically increased
<PAGE>
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST
LETTER TO THE SHAREHOLDERS July 31, 1998, continued
our holdings in this sector, including Eli Lilly and Warner Lambert, in
anticipation of strong earnings in the second half of calendar year 1998.
Thanks to strong prescription unit growth in the United States, drug
distribution stocks, such as McKesson, were also strong. HBO & Co. and other
health-care information stocks performed well as a result of hospitals
scrambling to upgrade their systems by the year 2000. Other areas in which
holdings increased include medical device stocks, where there are a number of
companies entering new product cycles, and drug retailers, where we foresee
continued consolidation, positive sales trends and limited Asian exposure.
Conversely, small-cap biotechnology stocks languished, as evidenced by the Amex
Biotech Index turning in flat performance for the fiscal year. Thus, we
dramatically reduced the Fund's exposure to small-cap stocks as it became
apparent that investors were uncomfortable with the lack of earnings visibility
and liquidity characteristic of many of the names. We recognize that there is a
valuation gap favoring small-cap stocks but it is our belief that over the next
few quarters investors will continue to focus on larger, more defensive stocks.
On a weighted average basis the Fund's average market capitalization, which on
December 31 1997 was $6.9 billion, is currently more than $20 billion, a
significant increase over the prior reporting period.
LOOKING AHEAD
With the outlook for the global economy uncertain, we expect volatility in the
financial markets to persist. However, we believe the fundamentals for the
health-care sector should remain robust, since the demand for health care
abides in both good and bad economic times. These strong fundamentals, combined
with global uncertainty, should allow health-care stocks to potentially
outperform the broader market in the second half of the year. We will continue
to look for larger health-care companies with established track records of
consistent earnings growth in their own segments of the industry and feel
confident that the Fund is positioned to outperform during the second half of
calendar year 1998.
Very truly yours,
/s/ Charles A. Fiumefreddo
- --------------------------
CHARLES A. FIUMEFREDDO
Chairman of the Board
2
<PAGE>
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST
FUND PERFORMANCE July 31, 1998
GROWTH OF $10,000 CLASS B
<TABLE>
<CAPTION>
DATE TOTAL S&P 500 LIPPER
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
October 30, 1992 $10,000 $10,000 $10,000
- --------------------------------------------------------------------------------
July 31, 1993 $9,220 $10,932 $9,437
- --------------------------------------------------------------------------------
July 31, 1994 $9,320 $11,496 $10,253
- --------------------------------------------------------------------------------
July 31, 1995 $12,880 $14,489 $13,881
- --------------------------------------------------------------------------------
July 31, 1996 $16,079 $16,881 $16,455
- --------------------------------------------------------------------------------
July 31, 1997 $17,293 $25,670 $21,890
- --------------------------------------------------------------------------------
July 31, 1998 $18,806(3) $30,618 $25,274
- --------------------------------------------------------------------------------
</TABLE>
-- FUND -- S&P 500(4) -- LIPPER(5)
past performance is not predictive of future returns. Performance for Class A,
Class C and Class D shares will vary from the performance of Class B shares
shown above due to differences in sales charges and expenses.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS*
- ----------------------------------------------------------------------------------------------------------
CLASS B SHARES** CLASS A SHARES+
- ---------------------------------------------------- --------------------------------------------------
PERIOD ENDED 7/31/98 PERIOD ENDED 7/31/98
- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
1 Year 9.33%(1) 4.33%(2) 1 Year 9.94%(1) 4.17%(2)
5 Years 15.45%(1) 15.22%(2) Since Inception (7/28/97) 10.37%(1) 4.62%(2)
Since Inception (10/30/92) 11.71%(1) 11.61%(2)
CLASS C SHARES++ CLASS D SHARES++
- ---------------------------------------------------- --------------------------------------------------
PERIOD ENDED 7/31/98 PERIOD ENDED 7/31/98
- -------------------- --------------------
1 Year 9.40%(1) 8.40%(2) 1 Year 10.22%(1)
Since Inception (7/28/97) 9.83%(1) 9.83%(2) Since Inception (7/28/97) 10.65%(1)
</TABLE>
- ---------------
(1) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and the deduction
of the maximum applicable sales charge. See the Fund's current prospectus
for complete details on fees and sales charges.
(3) Closing value after the deduction of a 1% contingent deferred sales charge
(CDSC), assuming a complete redemption on July 31, 1998.
(4) The Standard & Poor's 500 Stock Index (S&P 500) is a broad-based index, the
performance of which is based on the average performance of 500 widely
held common stocks. The performance of the Index does not include any
expenses, fees or charges. The Index is unmanaged and should not be
considered an investment.
(5) The Lipper Health/Biotechnology Funds Index is an equally-weighted
performance index of the largest qualifying funds (based on net assets) in
the Lipper Health/Biotechnology Funds objective. The Index, which is
adjusted for capital gains distributions and income dividends, is unmanaged
and should not be considered an investment. There are currently 10 funds
represented in this index.
* For periods of less than one year, the Fund quotes its total return on a
non-annualized basis.
** The maximum CDSC for Class B shares is 5.00%. The CDSC declines to 0%
after six years.
+ The maximum front-end sales charge for Class A shares is 5.25%.
++ The maximum CDSC for Class C shares is 1% for shares redeemed within one
year of purchase.
++ Class D shares have no sales charge.
3
<PAGE>
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST
PORTFOLIO OF INVESTMENTS July 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (93.8%)
Biotechnology (8.0%)
120,000 Amgen Inc.* ........................... $ 8,805,000
120,000 Biogen, Inc.* ......................... 6,667,500
33,200 Biomira, Inc. (Canada)* ............... 66,769
110,000 Celgene Corp.* ........................ 1,058,750
155,000 ImClone Systems, Inc.* ................ 1,918,125
40,000 Immunex Corp.* ........................ 2,810,000
75,000 KV Pharmaceutical Co. (Class A)*....... 1,518,750
100,000 MedImmune, Inc.* ...................... 5,875,000
------------
28,719,894
------------
Business Services (1.9%)
110,000 IMS Health Inc. ....................... 6,909,375
------------
Chemicals -- Diversified (2.3%)
140,000 Monsanto Co. .......................... 7,927,500
------------
Commercial Services (1.0%)
157,500 Medquist, Inc.* ....................... 3,642,187
------------
Computer Software (0.5%)
50,000 Cerner Corp.* ......................... 1,418,750
15,000 QuadraMed Corp.* ...................... 438,750
------------
1,857,500
------------
Computer Software & Services (1.5%)
110,000 Dendrite International, Inc.* ......... 5,101,250
------------
Computers (0.3%)
20,000 IDX Systems Corp.* .................... 992,500
------------
Distributors -- Food & Health (3.0%)
110,000 Cardinal Health, Inc. ................. 10,566,875
------------
Drugs (16.0%)
30,000 Barr Laboratories, Inc.* .............. 969,375
85,000 Bristol-Myers Squibb Co. .............. 9,684,687
100,000 Elan Corp. PLC (ADR) (Ireland)*........ 7,200,000
100,000 Forest Laboratories, Inc.* ............ 3,750,000
65,000 Glaxo Wellcome PLC (ADR)
(United Kingdom) ...................... 3,952,812
80,000 Hoechst AG (ADR) (Germany) ............ 3,625,000
40,000 Intelligent Polymers Ltd. (Units) ++* . 880,000
100,000 Labopharm Inc. (Canada)* .............. 185,234
210,000 Maxim Pharmaceuticals, Inc.* .......... 3,963,750
150,000 Mylan Laboratories, Inc. .............. 4,078,125
64,000 Novo Nordisk A/S (ADR) (Denmark) ...... 4,224,000
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------
<S> <C> <C>
60,000 Rhone-Poulenc S.A. (ADR) (France) ..... $ 3,240,000
120,000 Schering-Plough Corp. ................. 11,610,000
------------
57,362,983
------------
Drugs & Healthcare (0.6%)
50,000 Abbott Laboratories ................... 2,078,125
------------
Finance (1.0%)
70,000 HealthCare Financial Partners, Inc.* .. 3,508,750
------------
Health Equipment & Services (1.7%)
115,000 DVI, Inc.* ............................ 2,364,687
150,000 United Payors & United Providers, Inc.* 3,750,000
------------
6,114,687
------------
Healthcare (3.6%)
215,000 Allegiance Corp. ...................... 12,711,875
------------
Healthcare -- Diversified (3.5%)
42,500 Access Health, Inc.* .................. 1,115,625
150,000 Warner-Lambert Co. .................... 11,334,375
------------
12,450,000
------------
Healthcare -- Drugs (5.3%)
35,000 Lilly (Eli) & Co. ..................... 2,353,750
15,000 Merck & Co., Inc. ..................... 1,849,688
90,000 Pfizer, Inc. .......................... 9,900,000
100,000 Pharmacia & Upjohn, Inc. .............. 4,737,500
------------
18,840,938
------------
Healthcare -- Miscellaneous (2.8%)
85,200 Bergin Brunswig Corp. (Class A)........ 4,515,600
50,000 Envoy Corp.* .......................... 1,868,750
120,000 Trigon Healthcare, Inc.* .............. 3,757,500
------------
10,141,850
------------
Hospital Management (3.3%)
180,000 Renal Care Group, Inc.* ............... 7,357,500
150,166 Total Renal Care Holdings, Inc.* ...... 4,570,678
------------
11,928,178
------------
Manufacturing (0.7%)
35,000 Axogen Ltd. (Units) ++* ............... 2,537,500
------------
Medical Equipment (4.7%)
125,000 IGEN International, Inc.* ............. 4,671,875
100,000 Medtronic, Inc. ....................... 6,193,750
100,000 STERIS Corp.* ......................... 6,100,000
------------
16,965,625
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST
PORTFOLIO OF INVESTMENTS July 31, 1998, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------
<S> <C> <C>
Medical Products & Supplies (18.5%)
40,000 Baxter International, Inc. ............ $ 2,390,000
110,000 Becton, Dickinson & Co. ............... 9,088,750
70,000 Biomatrix, Inc.* ...................... 3,828,125
50,000 Biomet, Inc. .......................... 1,550,000
19,700 Cryolife, Inc.* ....................... 265,950
100,000 Eclipse Surgical Technologies, Inc.* 756,250
100,000 Hanger Orthopedic Group, Inc.* ........ 1,700,000
100,000 IDEXX Laboratories, Inc.* ............. 2,250,000
40,000 Invacare Corp. ........................ 937,500
220,000 Lincare Holdings, Inc.* ............... 8,607,500
100,000 Maxxim Medical, Inc.* ................. 2,537,500
120,000 McKesson Corp. ........................ 9,675,000
50,000 MiniMed, Inc.* ........................ 2,537,500
40,000 NewVision Technology, Inc. (Units) ++* 125,000
25,000 Omnicare, Inc. ........................ 989,063
100,000 Patterson Dental Co.* ................. 3,637,500
80,000 ResMed, Inc.* ......................... 3,590,000
100,000 Serologicals Corp.* ................... 3,075,000
130,000 Trex Medical Corp.* ................... 2,193,750
100,000 VISX, Inc.* ........................... 6,250,000
------------
65,984,388
------------
Medical Services (2.7%)
318,160 HBO & Co. ............................. 9,365,835
50,000 Health Management Systems, Inc.* 412,500
------------
9,778,335
------------
Medical Software/Services (0.9%)
120,000 Medical Manager Corp.* ................ 3,315,000
------------
Medical Supplies (0.6%)
105,000 Priority Healthcare Corp.* ............ 2,257,500
------------
Miscellaneous (1.7%)
80,000 Advance Paradigm, Inc.* ............... 1,840,000
70,000 National Data Corp. ................... 2,883,125
55,000 Shire Pharmaceuticals Group PLC (ADR)
(United Kingdom)* ..................... 1,320,000
------------
6,043,125
------------
Pharmaceuticals (5.6%)
90,000 Andrx Corp.* .......................... 3,217,500
50,001 Bindley Western Industries, Inc. ...... 1,531,281
50,000 BioChem Pharma Inc. (Canada)* ......... 1,196,875
90,000 Coulter Pharmaceutical, Inc.* ......... $ 2,351,250
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------
<S> <C> <C>
220,000 Cypros Pharmaceutical Corp.* .......... 742,500
105,000 Pharmacyclics, Inc.* .................. 2,441,250
100,000 SangStat Medical Corp.* ............... 2,350,000
140,000 Vical, Inc.* .......................... 1,610,000
100,000 Watson Pharmaceuticals, Inc.* ......... 4,512,604
------------
19,953,260
------------
Retail -- Drug Stores (1.2%)
100,000 Walgreen Co. .......................... 4,318,750
------------
Retail -- Specialty (0.9%)
80,736 CVS Corp. ............................. 3,310,177
------------
TOTAL COMMON STOCKS
(Identified Cost $279,270,534)......... 335,318,127
------------
PRINCIPAL
AMOUNT IN
THOUSANDS
---------
SHORT-TERM INVESTMENT (a) (6.4%)
U.S. GOVERNMENT AGENCY
$ 22,900 Federal Home Loan Mortgage
Corp. 5.56% due 08/03/98
(Amortized Cost $22,892,926)........... 22,892,926
------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
TOTAL INVESTMENTS
(Identified Cost $302,163,460) (b)..... 100.2% 358,211,053
LIABILITIES IN EXCESS OF CASH
AND OTHER ASSETS ...................... ( 0.2) (804,961)
----- -----------
NET ASSETS ............................ 100.0% $357,406,092
===== ============
</TABLE>
- ---------------
ADR American Depository Receipt.
* Non-income producing security.
++ Consists of more than one class of securities traded together as a
unit; stocks with attached warrants.
(a) Security was purchased on a discount basis. The interest rate shown has
been justed to reflect a money market equivalent yield.
(b) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$64,477,409 and the aggregate gross unrealized depreciation is
$8,429,816, resulting in net unrealized appreciation of $56,047,593.
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS :
Investments in securities, at value
(identified cost $302,163,460)................................... $358,211,053
Cash .............................................................. 80,753
Receivable for:
Investments sold ................................................ 4,688,541
Shares of beneficial interest sold .............................. 237,159
Dividends ....................................................... 39,592
Prepaid expenses and other assets ................................. 18,336
------------
TOTAL ASSETS .................................................... 363,275,434
------------
LIABILITIES:
Payable for:
Investments purchased ........................................... 4,679,938
Shares of beneficial interest repurchased ....................... 439,762
Investment management fee ....................................... 317,756
Plan of distribution fee ........................................ 317,233
Accrued expenses and other payables ............................... 114,653
------------
TOTAL LIABILITIES ............................................... 5,869,342
------------
NET ASSETS ...................................................... $357,406,092
============
COMPOSITION OF NET ASSETS:
Paid-in-capital ................................................... $234,294,758
Net unrealized appreciation ....................................... 56,041,955
Accumulated net investment loss ................................... (36,149)
Accumulated undistributed net realized gain ....................... 67,105,528
------------
NET ASSETS ...................................................... $357,406,092
============
CLASS A SHARES:
Net Assets ........................................................ $ 260,232
Shares Outstanding (unlimited authorized, $.01 par value) ......... 16,995
NET ASSET VALUE PER SHARE ....................................... $ 15.31
============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value) ............... $ 16.16
============
CLASS B SHARES:
Net Assets ........................................................ $355,416,328
Shares Outstanding (unlimited authorized, $.01 par value) ......... 23,349,092
NET ASSET VALUE PER SHARE ....................................... $ 15.22
============
CLASS C SHARES:
Net Assets ........................................................ $ 485,460
Shares Outstanding (unlimited authorized, $.01 par value) ......... 31,881
NET ASSET VALUE PER SHARE ....................................... $ 15.23
============
CLASS D SHARES:
Net Assets ........................................................ $ 1,244,072
Shares Outstanding (unlimited authorized, $.01 par value) ......... 81,022
NET ASSET VALUE PER SHARE ....................................... $ 15.35
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended July 31, 1998
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INCOME
Dividends (net of $16,053 foreign withholding tax)......... $ 796,300
Interest .................................................. 767,661
-------------
TOTAL INCOME ............................................ 1,563,961
-------------
EXPENSES
Investment management fee ................................. 4,024,502
Plan of distribution fee (Class A shares) ................. 345
Plan of distribution fee (Class B shares) ................. 4,014,573
Plan of distribution fee (Class C shares) ................. 2,652
Transfer agent fees and expenses .......................... 691,372
Registration fees ......................................... 118,291
Shareholder reports and notices ........................... 82,210
Professional fees ......................................... 56,934
Custodian fees ............................................ 46,335
Trustees' fees and expenses ............................... 17,495
Organizational expenses ................................... 8,034
Other ..................................................... 6,546
-------------
TOTAL EXPENSES .......................................... 9,069,289
-------------
NET INVESTMENT LOSS ..................................... (7,505,328)
-------------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain ......................................... 100,959,963
Net change in unrealized appreciation ..................... (55,763,026)
-------------
NET GAIN ................................................ 45,196,937
-------------
NET INCREASE .............................................. $ 37,691,609
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JULY 31, 1998 JULY 31, 1997 *
--------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss .................................. $ (7,505,328) $ (9,365,663)
Net realized gain .................................... 100,959,963 14,671,544
Net change in unrealized appreciation ................ (55,763,026) 23,334,942
------------- -------------
NET INCREASE ....................................... 37,691,609 28,640,823
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAIN:
Class A shares ....................................... (7,675) --
Class B shares ....................................... (29,731,527) (28,286,327)
Class C shares ....................................... (13,129) --
Class D shares ....................................... (1,158) --
------------- -------------
TOTAL DISTRIBUTIONS ................................ (29,753,489) (28,286,327)
------------- -------------
Net decrease from transactions in shares of beneficial
interest ........................................... (73,239,092) (20,523,010)
------------- -------------
NET DECREASE ....................................... (65,300,972) (20,168,514)
NET ASSETS:
Beginning of period .................................. 422,707,064 442,875,578
------------- -------------
END OF PERIOD
(Including net investment losses of $36,149 and
$32,076, respectively) ............................ $ 357,406,092 $ 422,707,064
============= =============
</TABLE>
- ---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST
NOTES TO FINANCIAL STATEMENTS July 31, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Health Sciences Trust (the "Fund") , formerly Dean
Witter Health Sciences Trust, is registered under the Investment Company Act of
1940, as amended (the "Act"), as a non-diversified, open-end management
investment company. The Fund's investment objective is capital appreciation.
The Fund seeks to achieve its objective by investing in securities of companies
in the health sciences industry throughout the world. The Fund was organized as
a Massachusetts business trust on May 26, 1992 and commenced operations on
October 30, 1992. On July 28, 1997, the Fund commenced offering three
additional classes of shares, with the then current shares designated as Class
B shares.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase, some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year,
six years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York or American or other domestic or foreign stock exchange is valued at
its latest sale price on that exchange prior to the time when assets are
valued; if there were no sales that day, the security is valued at the latest
bid price (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); (2) all other portfolio securities for
which over-the-counter market quotations are readily available are valued at
the latest available bid price prior to the time of valuation; (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"), formerly Dean Witter InterCapital Inc., that sale or bid prices are
not reflective of a security's market value, portfolio securities are valued at
their fair value as determined in good faith under procedures established by
and under the general supervision of the Trustees (valuation of debt securities
for which market quotations are not readily available may be based upon current
market prices of securities which are comparable in coupon, rating and maturity
or an appropriate matrix utilizing similar factors); (4) short-term debt
securities having a maturity date of more than sixty days at time of
9
<PAGE>
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST
NOTES TO FINANCIAL STATEMENTS July 31, 1998, continued
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; and (5) the market value of
foreign denominated portfolio securities is translated at the exchange rate
prevailing at the end of the period.
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.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date
such items are recognized. Distribution fees are charged directly to the
respective class.
D. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which
may differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
F. ORGANIZATIONAL EXPENSES -- The Investment Manager paid the organizational
expenses of the Fund in the amount of approximately $162,000 which have been
reimbursed for the full amount thereof. Such expenses were deferred and fully
amortized as of October 30, 1997.
10
<PAGE>
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST
NOTES TO FINANCIAL STATEMENTS July 31, 1998, continued
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
following annual rates to the net assets of the Fund determined at the close of
each business day: 1.0% to the portion of daily net assets not exceeding $500
million and 0.95% to the portion of daily net assets exceeding $500 million.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's book and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services,
heat, light, power and other utilities provided to the Fund.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A - up
to 0.25% of the average daily net assets of Class A; (ii) Class B - 1.0% of the
lesser of: (a) the average daily aggregate gross sales of the Class B shares
since the inception of the Fund (not including reinvestment of dividend or
capital gain distributions) less the average daily aggregate net asset value of
the Class B shares redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or waived; or (b) the average daily net
assets of Class B; and (iii) Class C - up to 1.0% of the average daily net
assets of Class C. In the case of Class A shares, amounts paid under the Plan
are paid to the Distributor for services provided. In the case of Class B and
Class C shares, amounts paid under the Plan are paid to the Distributor for
services provided and the expenses borne by it and others in the distribution
of the shares of these Classes, including the payment of commissions for sales
of these Classes and incentive compensation to, and expenses of, Morgan Stanley
Dean Witter Financial Advisors and others who engage in or support distribution
of the shares or who service shareholder accounts, including overhead and
telephone expenses; printing and distribution of prospectuses and reports used
in connection with the offering of these shares to other than current
shareholders; and preparation, printing and distribution of sales literature
and advertising materials. In addition, the Distributor may utilize fees paid
pursuant to the Plan, in the case of Class B shares, to compensate Dean Witter
Reynolds Inc. ("DWR"), an affiliate of the
11
<PAGE>
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST
NOTES TO FINANCIAL STATEMENTS July 31, 1998, continued
Investment Manager and Distributor, and other selected broker-dealers for their
opportunity costs in advancing such amounts, which compensation would be in the
form of a carrying charge on any unreimbursed expenses.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund
pursuant to the Plan and contingent deferred sales charges paid by investors
upon redemption of Class B shares. Although there is no legal obligation for
the Fund to pay expenses incurred in excess of payments made to the Distributor
under the Plan and the proceeds of contingent deferred sales charges paid by
investors upon redemption of shares, if for any reason the Plan is terminated,
the Trustees will consider at that time the manner in which to treat such
expenses. The Distributor has advised the Fund that such excess amounts,
including carrying charges, totaled $13,965,055 at
July 31, 1998.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 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 credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the year ended July 31, 1998, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.24% and
1.0%, respectively.
The Distributor has informed the Fund that for the year ended July 31, 1998, it
received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $944,044, and $249, respectively
and received $4,691, 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 July 31, 1998, aggregated
$538,689,234 and $664,660,038, respectively.
At July 31, 1998, the Fund's payable for investments purchased and receivable
for investments sold included unsettled trades with DWR of $946,688 and
$1,420,888, respectively.
For the year ended July 31, 1998, the Fund incurred brokerage commissions of
$38,725 with DWR for portfolio transactions executed on behalf of the Fund.
12
<PAGE>
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST
NOTES TO FINANCIAL STATEMENTS July 31, 1998, continued
For the year ended July 31, 1998, the Fund incurred brokerage commissions of
$33,730 with Morgan Stanley & Co., Inc., an affiliate of the Investment
Manager, for portfolio transactions executed on behalf of the Fund.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager
and Distributor, is the Fund's transfer agent. At July 31, 1998, the Fund had
transfer agent fees and expenses payable of approximately $11,500.
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 July 31, 1998 included
in Trustees' fees and expenses in the Statement of Operations amounted to
$5,569. At July 31, 1998, the Fund had an accrued pension liability of $36,149
which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. FEDERAL INCOME TAX STATUS
At July 31, 1998, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and permanent book/tax
differences attributable to a net operating loss. To reflect reclassifications
arising from the permanent differences, accumulated undistributed net realized
gain was charged and accumulated net investment loss was credited $7,501,255.
13
<PAGE>
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST
NOTES TO FINANCIAL STATEMENTS July 31, 1998, continued
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JULY 31, 1998 JULY 31, 1997*
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold .................................. 152,175 $ 2,404,229 667 $ 10,018
Reinvestment of distributions ......... 558 7,674 -- --
Redeemed .............................. (136,405) (2,170,034) -- --
-------- ------------- --- -------------
Net increase - Class A ................ 16,328 241,869 667 10,018
-------- ------------- --- -------------
CLASS B SHARES
Sold .................................. 6,622,726 102,936,128 12,042,815 183,250,429
Reinvestment of distributions ......... 2,032,581 27,866,668 1,860,102 26,655,267
Redeemed .............................. (13,300,594) (205,944,607) (15,501,740) (230,468,760)
----------- ------------- ----------- -------------
Net decrease - Class B ................ (4,645,287) (75,141,811) (1,598,823) (20,563,064)
----------- ------------- ----------- -------------
CLASS C SHARES
Sold .................................. 36,728 575,630 1,329 20,018
Reinvestment of distributions ......... 941 12,903 -- --
Redeemed .............................. (7,117) (111,331) -- --
----------- ------------- ----------- -------------
Net increase - Class C ................ 30,552 477,202 1,329 20,018
----------- ------------- ----------- -------------
CLASS D SHARES
Sold .................................. 211,349 3,206,216 667 10,018
Reinvestment of distributions ......... 83 1,142 -- --
Redeemed .............................. (131,077) (2,023,710) -- --
----------- ------------- ----------- -------------
Net increase - Class D ................ 80,355 1,183,648 667 10,018
----------- ------------- ----------- -------------
Net decrease in Fund .................. (4,518,052) $ (73,239,092) (1,596,160) $ (20,523,010)
=========== ============= =========== =============
</TABLE>
- ---------------
* For Class A, C and D shares, for the period July 28, 1997 (issue date)
through July 31, 1997.
14
<PAGE>
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31,
-----------------------------------------------
1998++ 1997** 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
CLASS B SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $15.10 $14.97 $12.88
------ ------ ------
Net investment loss ............................... (0.31) (0.31) (0.26)
Net realized and unrealized gain (loss) ........... 1.59 1.39 3.44
------ ------ ------
Total from investment operations .................. 1.28 1.08 3.18
------ ------ ------
Less distributions from net realized gain ......... (1.16) (0.95) (1.09)
------ ------ ------
Net asset value, end of period .................... $15.22 $15.10 $14.97
====== ====== ======
TOTAL INVESTMENT RETURN+ .......................... 9.33 % 7.55 % 24.84 %
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 2.26 % 2.25 % 2.20 %
Net investment loss ............................... (1.87)% (2.08)% ( 2.03)%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $355,416 $422,667 $442,876
Portfolio turnover rate ........................... 139 % 85 % 63 %
</TABLE>
[RESTUB TABLLE CONTINUOUS FROM ABOVE]
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED JULY 31, OCTOBER 30, 1992*
------------------------------- THROUGH
1995 1994 JULY 31, 1993
--------------- --------------- ------------------
<S> <C> <C> <C>
CLASS B SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $ 9.32 $9.22 $10.00
------ ----- ------
Net investment loss ............................... (0.24) (0.22) (0.08)
Net realized and unrealized gain (loss) ........... 3.80 0.32 (0.70)
------ ----- ------
Total from investment operations .................. 3.56 0.10 (0.78)
------ ----- ------
Less distributions from net realized gain ......... -- -- --
------ ----- ------
Net asset value, end of period .................... $12.88 $9.32 $9.22
====== ===== ======
TOTAL INVESTMENT RETURN+ .......................... 38.20 % 1.08 % (7.80)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 2.30 % 2.30 % 2.38 %(2)
Net investment loss ............................... (2.05)% (2.06)% ( 1.38)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $273,735 $228,573 $231,646
Portfolio turnover rate ........................... 145 % 106 % 55 %(1)
</TABLE>
- -------------
* Commencement of operations.
** 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) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE>
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
JULY 31, 1998++ JULY 31, 1997++
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $15.10 $15.03
------ ------
Net investment loss ............................... (0.18) --
Net realized and unrealized gain .................. 1.55 0.07
------ ------
Total from investment operations .................. 1.37 0.07
------ ------
Less distributions from net realized gain......... (1.16) --
------ ------
Net asset value, end of period .................... $15.31 $15.10
====== ======
TOTAL INVESTMENT RETURN+ .......................... 9.94 % 0.47 %(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 1.51 % 1.57 %(2)
Net investment loss ............................... (1.06)% (0.55)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $260 $10
Portfolio turnover rate ........................... 139 % 85 %
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $15.10 $15.03
------ ------
Net investment loss ............................... (0.29) --
Net realized and unrealized gain .................. 1.58 0.07
------ ------
Total from investment operations .................. 1.29 0.07
------ ------
Less distributions from net realized gain......... (1.16) --
------ ------
Net asset value, end of period .................... $15.23 $15.10
====== ======
TOTAL INVESTMENT RETURN+ .......................... 9.40 % 0.47 %(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 2.27 % 2.31 %(2)
Net investment loss ............................... (1.78)% (1.28)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $485 $20
Portfolio turnover rate ........................... 139 % 85 %
</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.
SEE NOTES TO FINANCIAL STATEMENTS
16
<PAGE>
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
JULY 31, 1998++ JULY 31, 1997++
----------------- ------------------
<S> <C> <C>
CLASS D SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $15.10 $15.03
------ ------
Net investment loss ............................... (0.14) --
Net realized and unrealized gain .................. 1.55 0.07
------ ------
Total from investment operations .................. 1.41 0.07
------ ------
Less distributions from net realized gain......... (1.16) --
------ ------
Net asset value, end of period .................... $15.35 $15.10
====== ======
TOTAL INVESTMENT RETURN+ .......................... 10.22 % 0.47 %(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 1.26 % 1.31 %(2)
Net investment loss ............................... (0.79)% (0.29)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $1,244 $10
Portfolio turnover rate ........................... 139 % 85 %
</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.
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE>
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Morgan Stanley Dean Witter Health
Sciences Trust (the "Fund"), formerly Dean Witter Health Sciences Trust, at
July 31, 1998, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended
and the financial highlights for each of the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at July 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
September 10, 1998
1998 FEDERAL TAX NOTICE (unaudited)
During the year ended July 31, 1998, the Fund paid to its shareholders
$1.00 per share from long-term capital gains. Of this $1.00 distribution,
$0.34 is taxable as 28% rate gain and $0.66 is taxable as 20% rate gain.
18
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Ronald J. Worobel
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and trustees,
fees, expenses and other pertinent information, please see the prospectus of
the Fund.
This report is not authorized for distribution to prospective investors
in the Fund unless preceded or accompanied by an effective prospectus.
MORGAN STANLEY
DEAN WITTER
HEALTH SCIENCES
TRUST
ANNUAL REPORT
JULY 31, 1998
