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MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND Two World Trade Center New York, New York 10048
LETTER TO THE SHAREHOLDERS October 31, 1998
</TABLE>
DEAR SHAREHOLDER:
During the six-month period ended October 31, 1998, the fixed-income markets
benefited from solid economic news in the United States that was fueled by lower
interest rates. A contributing factor was fallout from Asian economic concerns,
which translated into lower prices for goods and services as well as lower
borrowing costs at home. The resulting robust spending on the part of both
business and consumers drove performance for most of the period. Meanwhile,
unemployment held below 5 percent, dropping to a low of 4.3 percent, while wages
began to escalate, but without prices for goods and services rising.
During the summer, interest rates on Treasuries continued to fall. However, the
ongoing Asian crisis and its affect on Russia and Latin America combined with a
correctional move in the stock market to cause a divergence of corporate yields
from Treasury yields. By August the beginnings of a flight to quality were
spurring investors out of corporate securities into Treasuries. This movement
prompted a rapid evaporation of liquidity and a rise in yields for the corporate
sector, even for issuers with little or no foreign exposure. With credit
becoming harder to obtain and concerns over the Asian situation finally putting
stress on the domestic economy, the Federal Reserve Board cut the federal-funds
rate by 25 basis points (0.25 percent) once in September and then again in
October to 5.00 percent. After the second rate cut, credit availability improved
and interest rates on Treasuries rose as monetary policy shifted from an
emphasis on fighting inflation to one of averting recession.
From April 30, to October 31, 1998, yields on two- and five-year Treasuries
declined by 146 basis points (1.46 percent) and 140 basis points (1.40 percent)
to 4.11 percent and 4.23 percent, respectively.
PERFORMANCE
For the six-month period ended October 31, 1998, Morgan Stanley Dean Witter
Short-Term Bond Fund produced a total return of 4.12 percent. The Fund
outperformed its peer group, which returned 3.07 percent, as
<PAGE> 2
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
LETTER TO THE SHAREHOLDERS October 31, 1998, continued
measured by the Lipper Short Investment-Grade Debt Funds Index. Over the same
period, the Lehman Brothers Mutual Fund Short (one- to five-year) Investment
Grade Debt Index returned 4.39 percent. The Fund's performance was primarily due
to the decline in interest rates over the period. Also contributing to the
Fund's performance was its ability to invest in higher-yielding fixed-income
market sectors and longer-dated securities. We note that during the six-month
period under review, the Fund's investment manager assumed all expenses except
for brokerage fees.
During the six-month period under review, the Fund paid dividends from net
investment income of $0.29 per share. However, given the lower-interest-rate
environment, new investments are being purchased at lower yields than one year
ago. It also remains unlikely that the Fund will be able to invest any proceeds
from new subscriptions and maturing debt at the previously higher yields.
Although the Fund will continue to seek a competitive yield, it is becoming less
probable that the dividends of the past six months can be repeated in the
current low-rate environment.
PORTFOLIO STRATEGY
On October 31, 1998, approximately 45.1 percent of the Fund's assets were
invested in corporate securities, 36.8 percent in U.S. Treasuries and agencies
and 7.7 percent in mortgage-backed securities. The remaining 10.4 percent were
being held in temporary cash reserves. During the first half of its fiscal year
the Fund's net assets more than doubled, to approximately $214 million. This
increase was primarily attributable to the steady inflow of new subscriptions.
Proceeds from new subscriptions were invested in U.S. government and corporate
securities in line with existing asset allocations. These purchases emphasized
two- and three-year maturities.
Given the heavy inflow of cash and the falling interest rate environment, the
Fund's cash holdings were targeted to below 10 percent during the first half of
the fiscal year. However, cash reserves were allowed to increase modestly for
brief intervals when money market rates significantly exceeded those available
on longer-dated issues and during periods of corporate illiquidity. At the end
of the period under review, approximately 10.4 percent of the Fund's assets were
invested in cash equivalents.
The Fund began the period with an average maturity of 2.1 years. As interest
rates declined throughout the period, making longer-dated securities relatively
less attractive, the Fund's average maturity was reduced. On October 31, 1998,
the Fund's average maturity was 1.81 years.
CORPORATE BONDS
Within the corporate bond sector, the average maturity was held steady
throughout the six-month period ended October 31, 1998 at 2.04 years. An ample
new supply of two- and three-year corporate
2
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MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
LETTER TO THE SHAREHOLDERS October 31, 1998, continued
bonds enabled the Fund to invest new cash in a number of attractive issues.
Opportunities were further enhanced by the wider yield spreads created by the
increased issuance of bonds. These new issues enabled the Fund to invest at
yields in excess of 6 percent through early September, despite having U.S.
Treasury yields fall below 5 percent. By mid-October, with the flight to quality
at its peak, investment-grade corporate bonds were yielding 1.0 to 1.5 percent
above comparable U.S. Treasuries.
While purchases throughout the period were made among all the corporate sectors,
the Fund's allocations to industrials and banks were increased. New acquisitions
included debt of BankAmerica, CIT, Consolidated Edison, Cox Communication,
Dayton Hudson, Federated Department Stores, James River, Kroger, Merrill Lynch,
Raytheon, Texas Utilities, Tyco International, USA Waste, Wells Fargo and
WorldCom. On October 31, 1998, the Fund held 56 investment-grade corporate
issues, with an average credit rating of Baa1.
U.S. GOVERNMENT SECURITIES
As of October 31, 1998, this component of the Fund was diversified with 56
percent in U.S. agency securities, 20 percent in strips, 17 percent in
mortgage-backed securities and 7 percent in U.S. Treasuries. During the
six-month period under review, the Fund added five- and seven-year balloon
mortgages (with coupons of 6 percent), along with agency securities ranging from
two to three years in maturity. Also added were U.S. Treasury notes and agency
strips ranging in maturity from two to four years.
GLOBAL SECURITIES
During the six-month period ended October 31, 1998, the Fund's investments were
restricted to U.S.-dollar-denominated securities. The Fund currently anticipates
continuing this investment strategy because it holds a constructive outlook for
the U.S. dollar against most world currencies.
LOOKING AHEAD
As the Fund enters the fourth quarter of 1998, the economy still appears solid,
although signs of moderating growth are appearing. Inflation remains contained.
The greatest risk to the U.S. economy is from the negative impact of
international financial turmoil. As U.S. exports recede and the ability to raise
prices declines, profit margins may be squeezed sufficiently to reduce capital
spending. Should business expansion slow, layoffs may be precipitated and
consumer confidence could suffer. However,
3
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MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
LETTER TO THE SHAREHOLDERS October 31, 1998, continued
given the Federal Reserve's penchant for avoiding recession, it is likely that
monetary policy will remain favorable to the fixed-income markets for the near
term and the economy should continue to grow. Against this scenario, we
anticipate that the Fund will continue to operate within its current maturity
structure and asset allocation strategy.
We appreciate your ongoing support of Morgan Stanley Dean Witter Short-Term Bond
Fund and look forward to continuing to serve your investment needs.
Very truly yours,
/S/ CHARLES A. FIUMEFREDDO
CHARLES A. FIUMEFREDDO
Chairman of the Board
4
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MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS October 31, 1998 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (45.5%)
Accident & Health Insurance (0.9%)
$ 2,000 Conseco Inc. ........................ 6.40 % 06/15/01 $ 1,984,220
-----------
Aerospace & Defense (1.0%)
2,000 Raytheon Co. ........................ 6.30 08/15/00 2,040,800
-----------
Airlines (0.1%)
300 AMR Corp. ........................... 8.10 11/01/98 299,958
-----------
Automobile - Rentals (0.5%)
1,000 Hertz Corp. ......................... 7.375 06/15/01 1,040,550
-----------
Automotive - Finance (1.9%)
2,000 Ford Motor Credit Corp. ............. 5.125 10/15/01 1,989,560
2,100 General Motors Acceptance Corp. ..... 6.875 07/15/01 2,168,838
-----------
4,158,398
-----------
Cable & Telecommunication (1.4%)
3,000 Telecommunications, Inc. ............ 7.375 02/15/00 3,078,810
-----------
Cable Television (1.8%)
1,000 Century Communications Corp. ........ 9.75 02/15/02 1,065,000
2,000 Cox Communications, Inc. ............ 6.375 06/15/00 2,035,020
800 Rogers Cablesystems, Ltd. ........... 9.625 08/01/02 840,000
-----------
3,940,020
-----------
Cellular Telephone (1.0%)
2,000 Airtouch Communications Inc. ........ 7.125 07/15/01 2,096,680
-----------
Computers - Services (1.5%)
1,270 Comdisco, Inc. ...................... 6.50 06/15/00 1,284,503
2,000 Comdisco, Inc. ...................... 6.13 08/01/01 2,012,460
-----------
3,296,963
-----------
Credit Card (0.9%)
2,000 Capital One Bank..................... 7.20 07/19/99 2,015,080
-----------
Department Stores (3.3%)
2,000 Dayton Hudson Corp. ................. 5.95 06/15/00 2,023,600
3,000 Dillard's, Inc. ..................... 5.79 11/15/01 3,002,790
2,000 Federated Department Stores, Inc. ... 6.125 09/01/01 2,030,880
-----------
7,057,270
-----------
Diversified Financial Services (1.7%)
2,000 Aristar Inc. ........................ 6.00 08/01/01 2,026,160
1,500 Golden West Financial Corp. ......... 7.875 01/15/02 1,593,450
-----------
3,619,610
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</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
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MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS October 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Diversified Manufacturing (1.1%)
$ 2,290 Tyco International Group SA
(Luxembourg)........................ 6.125% 06/15/01 $ 2,333,716
-----------
Finance Companies (2.3%)
1,000 AT&T Capital Corp. .................. 6.65 04/30/99 1,005,210
2,000 AT&T Capital Corp. .................. 6.25 05/15/01 2,024,060
2,000 CIT Group Holdings Inc. ............. 5.50 10/15/01 1,998,960
-----------
5,028,230
-----------
Foods Chains (1.9%)
2,000 Kroger Co. .......................... 6.00 07/01/00 2,030,000
2,000 Supervalu, Inc. ..................... 7.25 07/15/99 2,027,760
-----------
4,057,760
-----------
Foreign Government & Agencies (0.8%)
2,000 Korea Development Bank............... 6.50 11/15/02 1,651,500
-----------
Gas Transmission (1.0%)
2,000 The Williams Companies, Inc. ........ 7.50 09/15/99 2,035,260
-----------
Investment Bankers/Brokers/Services (2.8%)
1,000 Lehman Brothers Holdings, Inc. ...... 7.625 07/15/99 1,005,510
2,000 Lehman Brothers Holdings, Inc. ...... 6.00 02/26/01 1,968,820
1,000 Merrill Lynch & Co., Inc. ........... 6.00 01/15/01 1,007,800
2,000 Salomon, Inc. ....................... 6.50 03/01/00 2,019,560
-----------
6,001,690
-----------
Major Banks (2.4%)
2,000 BankAmerica Corp. ................... 6.65 05/01/01 2,048,920
1,000 Republic New York Corp. ............. 8.25 11/01/01 1,073,590
2,000 Wells Fargo & Co. ................... 6.875 05/10/01 2,066,880
-----------
5,189,390
-----------
Major U.S. Telecommunications (1.0%)
2,000 MCI WorldCom, Inc. .................. 6.125 08/15/01 2,037,500
-----------
Media Conglomerates (1.0%)
2,000 News American Holdings, Inc. ........ 7.45 06/01/00 2,047,620
-----------
Natural Gas - Distribution (1.8%)
2,000 Columbia Energy Group (Series A) 6.39 11/28/00 2,040,840
1,836 Enserch Corp. ....................... 7.00 08/15/99 1,867,653
-----------
3,908,493
-----------
Oil Integrated - Domestic (0.5%)
1,000 Occidental Petroleum Corp. .......... 8.50 11/09/01 1,076,050
-----------
Paper (1.0%)
2,000 James River Corp. ................... 6.75 10/01/99 2,031,820
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
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MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS October 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Photographic Products (0.5%)
$ 1,000 Polaroid Corp. ...................... 8.00 % 03/15/99 $ 1,008,400
-----------
Property - Casualty Insurers (0.5%)
1,000 NAC Re Corp. ........................ 8.00 06/15/99 1,015,650
-----------
Railroads (1.5%)
2,000 Norfolk Southern Corp. .............. 6.875 05/01/01 2,071,080
1,000 Union Pac Corp. ..................... 7.375 05/15/01 1,034,610
-----------
3,105,690
-----------
Rental/Leasing Companies (1.0%)
2,000 GATX Capital Corp. .................. 6.50 11/01/00 2,034,760
-----------
Savings & Loan Associations (0.9%)
2,000 Long Island Savings Bank............. 6.20 04/02/01 2,024,260
-----------
Utilities - Electric (6.4%)
1,500 Commonwealth Edison Co. ............. 6.50 04/15/00 1,531,905
493 Commonwealth Edison Co. ............. 7.625 02/15/03 500,780
1,000 Consolidated Edison Co. of New York,
Inc. ............................... 7.375 09/15/00 1,044,850
370 Consumers Energy Co. ................ 8.875 11/15/99 384,874
2,000 CSW Investments - 144A* (United
Kingdom)............................ 6.95 08/01/01 2,073,900
1,000 Detroit Edison Co. .................. 5.93 02/01/01 1,019,720
1,000 Illinois Power Co. .................. 5.625 04/15/00 1,014,080
1,000 Niagara Mohawk Power Corp. .......... 7.125 07/01/01 1,019,090
1,000 Ohio Edison Co. ..................... 6.875 09/15/99 1,016,240
500 Pacific Gas & Electric Co. .......... 5.75 12/01/98 500,415
1,490 System Energy Resources Inc. ........ 7.625 04/01/99 1,505,198
2,000 Texas Utilities Electric Co. ........ 8.125 02/01/02 2,150,040
-----------
13,761,092
-----------
Waste Disposal (1.1%)
2,370 USA Waste Services, Inc. ............ 6.125 07/15/01 2,400,692
-----------
TOTAL CORPORATE BONDS
(Identified Cost $96,912,185)............................. 97,377,932
-----------
U.S. GOVERNMENT & AGENCY OBLIGATIONS (44.5%)
Diversified Financial Services (1.0%)
2,000 California Infrastructure & Economic
Development Bank Special Purpose
Trust SCE - 1 Class A - 3........... 6.17 03/25/03 2,047,900
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
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MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS October 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Mortgage Pass-Through Securities
(7.7%)
$ 7,681 Federal Home Loan Mortgage Corp. PC 02/01/99-
Gold................................ 6.00 % 09/01/03 $ 7,751,673
4,016 Federal Home Loan Mortgage Corp. PC 05/01/99-
Gold................................ 6.50 09/01/02 4,067,958
4,774 Federal National Mortgage Assoc. .... 10/01/00-
6.00 12/01/02 4,805,176
-----------
16,624,807
-----------
U.S. Government Agencies (30.8%)
4,000 Federal Farm Credit Banks............ 6.11- 11/06/00-
6.16 12/18/00 4,002,030
24,000 Federal Home Loan Banks.............. 4.66- 12/22/99-
6.165 10/22/01 24,197,614
5,000 Federal Home Loan Mortgage Corp. .... 5.04- 03/02/01-
5.97 10/29/01 5,005,580
17,000 Federal National Mortgage Assoc. .... 4.90- 07/23/99-
6.22 08/27/01 17,172,165
12,000 Federal National Mortgage Assoc. 08/15/01-
Strips.............................. 0.00 02/01/02 10,510,000
4,000 Resolution Funding Corp. Strips...... 0.00 10/15/01 3,505,880
2,000 Tennessee Valley Authority Strips.... 0.00 05/01/02 1,697,000
-----------
66,090,269
-----------
U.S. Government Obligations (5.0%)
4,000 U.S. Treasury Bond Strips............ 0.00 08/15/01 3,551,000
1,000 U.S. Treasury Note................... 5.875 08/31/99 1,011,250
1,000 U.S. Treasury Note................... 5.75 09/30/99 1,011,510
5,000 U.S. Treasury Note................... 5.125 08/31/00 5,072,700
-----------
10,646,460
-----------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Identified Cost $94,516,954)............................. 95,409,436
-----------
SHORT-TERM INVESTMENTS (10.7%)
U.S. GOVERNMENT AGENCIES (a) (10.5%)
15,000 Federal Home Loan Mortgage Corp. .... 5.10 11/06/98 14,989,375
7,500 Federal Home Loan Mortgage Corp. .... 5.42 11/02/98 7,498,871
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TOTAL U.S. GOVERNMENT AGENCIES
(Amortized Cost $22,488,246).............................. 22,488,246
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</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
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MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS October 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
REPURCHASE AGREEMENT (0.2%)
$ 498 The Bank of New York (dated 10/30/98;
proceeds $498,736 (b) (Identified
Cost $498,523)...................... 5.125% 11/02/98 $ 498,523
------------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $22,986,769)............................. 22,986,769
------------
TOTAL INVESTMENTS
(Identified Cost $214,415,908) (c)................ 100.7% 215,774,137
LIABILITIES IN EXCESS OF OTHER ASSETS............ (0.7) (1,393,563)
------ ------------
NET ASSETS........................................ 100.0% $214,380,574
====== ============
</TABLE>
- ---------------------
* Resale is restricted to qualified institutional investors.
(a) Securities were purchased on a discount basis. The interest rates shown
have been adjusted to reflect a money market equivalent yield.
(b) Collateralized by $434,562 U.S. Treasury Note 7.25% due 05/15/04 valued at
$508,494.
(c) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $1,830,896 and the
aggregate gross unrealized depreciation is $472,667, resulting in net
unrealized appreciation of $1,358,229.
SEE NOTES TO FINANCIAL STATEMENTS
9
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MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1998 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $214,415,908)............................. $215,774,137
Receivable for:
Shares of beneficial interest sold...................... 10,941,235
Interest................................................ 2,453,878
Deferred organizational expenses............................ 6,733
Receivable from affiliate................................... 158,669
Prepaid expenses and other assets........................... 2,148
-----------
TOTAL ASSETS............................................ 229,336,800
-----------
LIABILITIES:
Payable for:
Investments purchased................................... 14,078,767
Shares of beneficial interest repurchased............... 742,083
Dividends to shareholders............................... 66,040
Accrued expenses and other payables......................... 69,336
-----------
TOTAL LIABILITIES....................................... 14,956,226
-----------
NET ASSETS.............................................. $214,380,574
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $214,924,494
Net unrealized appreciation................................. 1,358,229
Accumulated undistributed net investment income............. 32,770
Accumulated net realized loss............................... (1,934,919)
-----------
NET ASSETS.............................................. $214,380,574
===========
NET ASSET VALUE PER SHARE,
22,385,560 shares outstanding
(unlimited shares authorized of $.01 par value)............ $9.58
=====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
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MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the six months ended October 31, 1998 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $4,305,086
----------
EXPENSES
Investment management fee................................... 502,342
Registration fees........................................... 39,562
Professional fees........................................... 26,167
Transfer agent fees and expenses............................ 26,085
Organizational expenses..................................... 17,441
Shareholder reports and notices............................. 15,288
Custodian fees.............................................. 7,672
Trustees' fees and expenses................................. 6,302
Other....................................................... 6,855
----------
TOTAL EXPENSES.......................................... 647,714
Less: amounts waived/reimbursed............................. (647,714)
----------
NET EXPENSES............................................ --
----------
NET INVESTMENT INCOME................................... 4,305,086
----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss........................................... (353,544)
Net change in unrealized depreciation....................... 1,626,668
----------
NET GAIN................................................ 1,273,124
----------
NET INCREASE................................................ $5,578,210
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 12
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
OCTOBER 31, 1998 APRIL 30, 1998
- -----------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................. $ 4,305,086 $ 4,134,905
Net realized loss..................................... (353,544) (421,092)
Net change in unrealized depreciation................. 1,626,668 353,108
------------ ------------
NET INCREASE...................................... 5,578,210 4,066,921
Dividends from net investment income.................. (4,272,394) (4,191,003)
Net increase from transactions in shares of beneficial
interest............................................. 105,375,524 65,571,237
------------ ------------
NET INCREASE...................................... 106,681,340 65,447,155
NET ASSETS:
Beginning of period................................... 107,699,234 42,252,079
------------ ------------
END OF PERIOD
(Including undistributed net investment income of
$32,770 and $78, respectively).................... $214,380,574 $107,699,234
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE> 13
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS October 31, 1998 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Short-Term Bond Fund (the "Fund"), formerly Dean
Witter Short-Term Bond Fund is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company. The
Fund's investment objective is to provide a high level of current income
consistent with the preservation of capital. The Fund seeks to achieve its
objective by investing in a diversified portfolio of short-term fixed income
securities. The Fund was organized as a Massachusetts business trust on October
22, 1993 and commenced operations on January 10, 1994.
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) all portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest available bid price prior to the time of valuation; (2) 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 and bid prices are
not reflective of a security's market value, portfolio securities are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Trustees (valuation of 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); (3) 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 (4) short-term
debt securities having a maturity date of more than sixty days at the 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
13
<PAGE> 14
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS October 31, 1998 (unaudited) continued
the identified cost method. Discounts are accreted over the life of the
respective securities. Interest income is accrued daily.
C. 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.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the record date. The amount of dividends
and distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and distributions which
exceed net investment income and net realized capital gains for financial
reporting purposes but not for tax purposes are reported as dividends in excess
of net investment income or distributions in excess of net realized capital
gains. To the extent they exceed net investment income and net realized capital
gains for tax purposes, they are reported as distributions of paid-in-capital.
E. ORGANIZATIONAL EXPENSES -- The Investment Manager paid the organizational
expenses of the Fund in the amount of approximately $173,000 which has been
reimbursed, exclusive of any amounts assumed. Such expenses have been deferred
and are being amortized on the straight-line method over a period not to exceed
five years from the commencement of operations.
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 0.70% to the net assets of the Fund determined as of the close of
each business day.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
14
<PAGE> 15
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS October 31, 1998 (unaudited) continued
For the period January 1, 1997 through December 31, 1998, the Investment Manager
is waiving its compensation and reimbursing all operating expenses without
limitation. At October 31, 1998, included in the Statement of Assets and
Liabilities is a receivable from affiliate which represents expense
reimbursements due to the Fund.
3. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales/prepayments of portfolio
securities, excluding short-term investments, for the six months ended October
31, 1998 were $117,636,014 and $21,642,293, respectively. Included in the
aforementioned are purchases and sales/prepayments of U.S. Government securities
of $57,797,868 and $10,272,068, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager, is
the Fund's transfer agent. At October 31, 1998, the Fund had transfer agent fees
and expenses payable of approximately $700.
4. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
OCTOBER 31, 1998 APRIL 30, 1998
--------------------------- -------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Sold........................................................ 34,922,632 $ 332,892,288 15,691,994 $149,203,263
Reinvestment of dividends................................... 335,573 3,200,644 323,662 3,075,757
---------- ------------- ---------- ------------
35,258,205 336,092,932 16,015,656 152,279,020
Repurchased................................................. (24,219,119) (230,717,408) (9,118,681) (86,707,783)
---------- ------------- ---------- ------------
Net increase................................................ 11,039,086 $ 105,375,524 6,896,975 $ 65,571,237
========== ============= ========== ============
</TABLE>
15
<PAGE> 16
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS October 31, 1998 (unaudited) continued
5. FEDERAL INCOME TAX STATUS
At April 30, 1998, the Fund had a net capital loss carryover of approximately
$1,424,000, to offset future capital gains to the extent provided by regulations
available through April 30 of the following years:
<TABLE>
<CAPTION>
AMOUNT IN THOUSANDS
- ------------------------------------------------------
2003 2004 2005 2006
---- -------- -------- --------
<S> <C> <C> <C> <C>
$378 $501 $186 $359
==== ==== ==== ====
</TABLE>
Capital losses incurred after October 31 ("post-October losses") within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $158,000 during fiscal 1998.
As of April 30, 1998, the Fund had temporary book/tax differences primarily
attributable to post-October losses.
16
<PAGE> 17
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
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 SIX FOR THE YEAR ENDED APRIL 30 JANUARY 10, 1994*
MONTHS ENDED ----------------------------------------- THROUGH
OCTOBER 31, 1998 1998 1997 1996 1995 APRIL 30, 1994
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period.... $ 9.49 $ 9.50 $ 9.54 $ 9.46 $ 9.62 $10.00
------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income.................. 0.29 0.65 0.61 0.63 0.77 0.21
Net realized and unrealized gain
(loss)............................... 0.09 -- (0.06) 0.05 (0.33) (0.40)
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations............................. 0.38 0.65 0.55 0.68 0.44 (0.19)
------ ------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income.................. (0.29) (0.66) (0.59) (0.45) (0.59) (0.19)
Paid-in-capital........................ -- -- -- (0.15) (0.01) --
------ ------ ------ ------ ------ ------
Total dividends and distributions....... (0.29) (0.66) (0.59) (0.60) (0.60) (0.19)
------ ------ ------ ------ ------ ------
Net asset value, end of period.......... $ 9.58 $ 9.49 $ 9.50 $ 9.54 $ 9.46 $ 9.62
====== ====== ====== ====== ====== ======
TOTAL RETURN+........................... 4.12%(1) 7.02% 5.88% 7.33% 4.76% (2.01)%(1)
RATIOS TO AVERAGE NET ASSETS(3):
Expenses................................ -- -- 0.64% 0.37% -- -- (2)
Net investment income................... 6.00%(2) 6.52% 6.25% 6.54% 7.64% 6.36%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands.............................. $214,381 $107,699 $42,252 $33,178 $29,818 $43,403
Portfolio turnover rate................. 31%(1) 55% 67% 64% 74% 9%(1)
</TABLE>
- ---------------------
* Commencement of operations.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) If the Fund had borne all expenses that were assumed or waived by the
Investment Manager, the annualized expense and net investment income ratios
would have been 0.90% and 5.10%, respectively, for the six months ended
October 31, 1998; 1.10% and 5.42%, respectively, for the year ended April
30, 1998; 1.30% and 5.59%, respectively, for the year ended April 30, 1997;
1.29% and 5.61%, respectively, for the year ended April 30, 1996; 1.08% and
6.56%, respectively, for the year ended April 30, 1995; and 1.55% and 4.81%,
respectively, for the period ended April 30, 1994.
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE> 18
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<PAGE> 19
(This Page Intentionally Left Blank)
<PAGE> 20
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Peter M. Avelar
Vice President
Rajesh K. Gupta
Vice President
Rochelle G. Siegel
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
The financial statements included herein have been taken from the records of the
Fund without examination by the independent accountants and accordingly they do
not express an opinion thereon.
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and trustees,
fees, expenses and other pertinent information, please see the prospectus of the
Fund.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective prospectus.
MORGAN STANLEY
DEAN WITTER
SHORT-TERM
BOND FUND
[GRAPHIC]
SEMIANNUAL REPORT
OCTOBER 31, 1998
