<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND TWO WORLD TRADE CENTER,
LETTER TO THE SHAREHOLDERS APRIL 30, 1999 NEW YORK, NEW YORK 10048
DEAR SHAREHOLDER:
During the twelve-months period ended April 30, 1999, fixed-income markets
reaped the benefits of low inflation and solid economic news. For the first half
of the period, fallout from Asian economic concerns translated into lower prices
for goods and services as well as lower borrowing costs at home. During the
summer and early fall, interest rates on Treasuries with maturities from one to
five years fell below 4 percent, driven lower by serious concerns over Russia,
Latin America and the near collapse of a major hedge fund. These events,
combined with a correction in the stock market, caused a divergence of
corporate, mortgage and even agency yields from Treasury yields. Beginning in
August and continuing for the remainder of calendar year 1998, a flight to
quality spurred investors out of other investments and into Treasuries,
prompting a rapid evaporation of liquidity and a rise in yield for virtually all
corporate bonds. With credit harder to obtain and fears that the "Asian
contagion" would finally put stress on our domestic economy, the Federal Reserve
reduced the federal-funds rate in three steps from 5.50 percent to 4.75 percent.
Subsequently, credit availability improved and interest rates on Treasuries rose
as monetary policy shifted from an emphasis on fighting inflation to averting
recession.
As 1999 began, renewed confidence in the economy's vitality, coupled with an
improving international environment, paved the way for a reversal of the earlier
flight to quality. Higher-yielding fixed-income investments, including
corporates and mortgage-backed issues, reclaimed ground against Treasuries,
reversing much of the yield disparity experienced in 1998. Continued economic
expansion at home and abroad influenced commodity prices. Once again the specter
of a Fed tightening took hold as investors pondered the prospect of rising
inflation in such an environment. On April 30, 1999, two- and five-year
Treasuries yielded 5.06 percent and 5.21 percent, respectively. Although
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
LETTER TO THE SHAREHOLDERS APRIL 30, 1999, CONTINUED
these rates were close to 0.50 percentage points lower in yield than one year
earlier, they were more than 0.50 percentage points higher than they were on
December 31, 1998.
PERFORMANCE
For the fiscal year ended April 30, 1999, Morgan Stanley Dean Witter Short-Term
Bond Fund returned 6.00 percent versus 5.15 percent for the Lipper Short
Investment-Grade Debt Funds Index and 6.56 percent for the Lehman Brothers
Mutual Fund Short (one- to five-year) Investment Grade Debt Index. The Fund's
performance during the period was primarily driven by the decline in interest
rates over the twelve-month period. Also contributing to performance was the
Fund's ability to invest in higher-yielding fixed-income market sectors. Please
note that through December 31, 1998, the Fund's investment manager assumed all
expenses except brokerage fees. The accompanying chart illustrates the growth of
a $10,000 investment in the Fund from its inception on January 10, 1994, through
the fiscal year ended April 30, 1999, versus similar investments in the Lipper
and Lehman Brothers indexes.
PORTFOLIO
On April 30, 1999, approximately 52.2 percent of the Fund's portfolio was
invested in corporate securities, 33.6 percent in U.S. agencies, and 9.1 percent
in mortgage-backed securities. The remaining 5.1 percent was held in temporary
reserves. During the fiscal year, assets grew by more than 70 percent, to
approximately $186 million. Beginning in late 1998, historically large yield
incentives for corporate bonds over U.S. government issues encouraged the Fund
to shift its allocation in favor of these securities over other asset classes.
As a result, additional reserves were committed to this sector while funds for
redemptions were primarily raised through sales of U.S. Treasuries and agencies.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
Growth of $10,000
($ in Thousands)
<S> <C> <C> <C>
Fund Lehman(3) Lipper(4)
January-1994 $10,000 $10,000 $10,000
April-1994 $9,799 $9,726 $9,830
April-1995 $10,265 $10,412 $10,238
April-1996 $11,018 $11,268 $10,976
April-1997 $11,666 $12,026 $11,667
April-1998 $12,484 $13,008 $12,473
April-1999 $13,234(2) $13,864 $13,115
Average Annual Total Re-
turns
Since Inception
1 Year 5 Years (1/10/94)
6.00 (1) 6.19 (1) 5.43 (1)
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS
(1) Figure shown assumes reinvestment of all distributions. There is no sales
charge.
(2) Closing value assuming a complete redemption on April 30, 1999.
(3) The Lehman Brothers Mutual Fund Short (1-5) Investment Grade Debt Index
measures all investment-grade corporate debt securities with maturities of
one to five years. The Index does not include any expenses, fees or charges.
The Index is unmanaged and should not be considered an investment.
(4) The Lipper Short Investment Grade Debt Funds Index is an equally-weighted
performance index of the largest qualifying funds (based on net assets) in
the Lipper Short Investment Grade Debt 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 30 funds
represented in this Index.
2
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
LETTER TO THE SHAREHOLDERS APRIL 30, 1999, CONTINUED
To provide for liquidity needs, cash reserves are being allowed to accumulate to
as much as 5 percent of assets.
With the recent market environment favoring stable to higher interest rates, the
Fund has reduced the average maturity for bonds held in the portfolio from 2.37
years on April 30, 1998, to 1.93 years at April 30, 1999. We expect that this
average maturity will remain below two years until the potential for lower
interest rates improves. The Fund's average maturity, including temporary
reserves, declined from 2.16 years on April 30, 1998, to 1.83 years on April 30,
1999.
CORPORATE SECURITIES
Within the corporate sector, the average maturity was reduced to 1.94 years as
of April 30, 1999, from 2.05 years twelve months earlier. Ample supplies of
fresh corporates, followed by the flight to quality in the second half of 1998,
created numerous opportunities for the Fund to invest new subscriptions in
attractively priced corporate bonds. During the period the Fund was continuously
on the alert for value among out-of-favor credits, adding Lehman, Capital One
Bank, Equistar, Petroleum Geo-Services, Ikon Capital and Service Corp. prior to
their gaining wider sponsorship.
While purchases throughout the period were made among all corporate sectors, the
Fund's allocations to telephones, banks and yankee bonds (dollar-denominated
bonds issued in the U.S. by foreign entities) increased while finance and
industrials declined. On April 30, 1999, the Fund held 55 investment-grade
corporate issues with an average credit rating of Baa1.
U.S. GOVERNMENT SECURITIES
As of April 30, 1999, the U.S. government component of the Fund was diversified
with 59 percent in U.S. agency securities, 19.8 percent in strips (Treasury
bonds whose two components, interest and repayment of principal, are separated
and sold individually as zero-coupon bonds) and 21.2 percent in mortgage-backed
securities. As short-term interest rates started to rise in late 1998 the Fund
began to reallocate out of U.S. Treasuries into agencies and mortgage-backed
securities because of the substantial yield incentives available in them.
GLOBAL BONDS
During the twelve-months period ended April 30, 1999, 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 other world currencies.
3
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
LETTER TO THE SHAREHOLDERS APRIL 30, 1999, CONTINUED
LOOKING AHEAD
Corporate America admirably weathered the international economic turmoil that
occurred during the latter half of 1998, largely due to the Federal Reserve
Board's accommodative monetary policy. Now, as the Fund enters a new fiscal
year, we believe that the fundamentally sound U.S. economy and the relative calm
on the international economic front require no further assistance from lower
interest rates. As a result, short and intermediate interest rates have returned
to a more traditional relationship with overnight rates.
With a strong equity market and the economy at virtually full employment,
investors are once again on an inflation watch. While commodity prices have
recently increased, productivity improvements have suppressed inflation to date.
However, the beginnings of a worldwide recovery could stimulate pricing pressure
in consumer goods. For the time being, economic uncertainty still pervades much
of the global marketplace. And while unrelenting growth in the U.S. economy may
make Federal Reserve officials more cautious, we do not anticipate a reversal of
current policy in the near future.
On May 1, 1999, Mitchell M. Merin was named President of the Morgan Stanley Dean
Witter Funds. Mr. Merin is also the President and Chief Operating Officer of
Asset Management of Morgan Stanley Dean Witter & Co. and President, Chief
Executive Officer and Director of Morgan Stanley Dean Witter Advisors Inc., the
Fund's Investment Manager. He also serves as Chairman, Chief Executive Officer
and Director of Morgan Stanley Dean Witter Distributors Inc. and Morgan Stanley
Dean Witter Trust FSB.
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,
[SIGNATURE] [SIGNATURE]
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
CHAIRMAN OF THE BOARD PRESIDENT
4
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS APRIL 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (52.2%)
CABLE TELEVISION (2.0%)
$ 1,000 Century Communications Corp........................................... 9.75% 02/15/02 $ 1,055,000
2,000 Cox Communications, Inc............................................... 6.375 06/15/00 2,015,680
800 Rogers Cablesystems, Ltd.............................................. 9.625 08/01/02 858,000
------------
3,928,680
------------
CASINO/GAMBLING (0.6%)
1,000 Circus Circus Enterprises, Inc........................................ 9.25 12/01/05 1,043,520
------------
CELLULAR TELEPHONE (1.1%)
2,000 AirTouch Communications, Inc.......................................... 7.125 07/15/01 2,054,800
------------
DEPARTMENT STORES (1.5%)
3,000 Dillard's Inc......................................................... 5.79 11/15/01 2,980,500
------------
DIVERSIFIED MANUFACTURING (1.1%)
2,290 Tyco International Group SA (Luxembourg).............................. 6.125 06/15/01 2,304,725
------------
DRUGSTORE CHAINS (1.1%)
2,000 Rite Aid Corp. - 144A*................................................ 5.50 12/15/00 1,982,340
------------
ELECTRIC UTILITIES (6.9%)
1,000 Cinergy Corp. - 144A*................................................. 6.125 04/15/04 992,380
1,500 Commonwealth Edison Co................................................ 6.50 04/15/00 1,511,265
1,000 Consolidated Edison Co.
New York, Inc....................................................... 7.375 09/15/00 1,022,700
370 Consumers Energy Co................................................... 8.875 11/15/99 376,801
3,000 CSW Investments - 144A* (United Kingdom).............................. 6.95 08/01/01 3,057,120
1,000 Detroit Edison Co..................................................... 5.93 02/01/01 1,003,650
1,000 Illinois Power Co..................................................... 5.625 04/15/00 999,120
1,000 Niagara Mohawk Power Co............................................... 7.125 07/01/01 1,012,800
1,000 Ohio Edison Co........................................................ 6.875 09/15/99 1,005,440
2,000 Texas Utilities Electric Co........................................... 8.125 02/01/02 2,109,340
------------
13,090,616
------------
ENGINEERING & CONSTRUCTION (0.5%)
1,000 Korea Development Bank................................................ 6.50 11/15/02 973,190
------------
ENVIRONMENTAL SERVICES (1.2%)
2,370 USA Waste Services, Inc............................................... 6.125 07/15/01 2,375,664
------------
FINANCE - AUTOMOTIVE (1.2%)
2,100 General Motors Acceptance Corp........................................ 6.875 07/15/01 2,148,111
------------
FINANCE COMPANIES (1.1%)
2,000 Bombardier Capital Inc. - 144A*....................................... 6.00 01/15/02 1,986,720
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS APRIL 30, 1999, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FOOD CHAINS (1.1%)
$ 2,000 Kroger Co............................................................. 6.00% 07/01/00 $ 2,006,860
------------
FOOD DISTRIBUTORS (1.1%)
2,000 Supervalu, Inc........................................................ 7.25 07/15/99 2,006,780
------------
INDUSTRIAL SPECIALTIES (1.1%)
2,000 Brascan Ltd........................................................... 7.375 10/01/02 2,011,080
------------
INVESTMENT BANKERS/BROKERS/SERVICES (3.7%)
2,000 Donaldson, Lufkin & Jenrette, Inc..................................... 5.875 04/01/02 1,993,260
1,000 Lehman Brothers Holdings, Inc......................................... 7.625 07/15/99 1,003,660
2,000 Lehman Brothers Holdings, Inc......................................... 6.00 02/26/01 1,992,140
2,000 Salomon, Inc.......................................................... 6.50 03/01/00 2,015,120
------------
7,004,180
------------
LIFE INSURANCE (1.1%)
2,000 Conseco, Inc.......................................................... 6.40 06/15/01 1,981,500
------------
MAJOR BANKS (3.8%)
2,000 BankAmerica Corp...................................................... 6.65 05/01/01 2,035,180
2,000 Capital One Bank...................................................... 7.20 07/19/99 2,006,260
1,000 Republic New York Corp................................................ 8.25 11/01/01 1,056,010
2,000 Wells Fargo & Co...................................................... 6.875 05/10/01 2,045,180
------------
7,142,630
------------
MAJOR U.S. TELECOMMUNICATIONS (3.1%)
2,000 AT&T Corp............................................................. 5.625 03/15/04 1,976,480
2,000 MCI WorldCom, Inc..................................................... 6.125 08/15/01 2,009,980
2,000 Sprint Capital Corp................................................... 5.875 05/01/04 1,976,720
------------
5,963,180
------------
MEDIA CONGLOMERATES (1.1%)
2,000 News American Holdings, Inc........................................... 7.45 06/01/00 2,033,520
------------
MID - SIZED BANKS (1.1%)
2,000 Long Island Savings Bank.............................................. 6.20 04/02/01 2,004,980
------------
MILITARY/GOV'T/TECHNICAL (1.1%)
2,000 Raytheon Co........................................................... 6.30 08/15/00 2,014,980
------------
NATURAL GAS DISTRIBUTION (1.0%)
1,836 Enserch Corp.......................................................... 7.00 08/15/99 1,845,584
------------
OIL & GAS PRODUCTION (0.6%)
1,000 Occidental Petroleum Corp............................................. 8.50 11/09/01 1,042,390
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS APRIL 30, 1999, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
OIL/GAS TRANSMISSION (2.2%)
$ 2,000 Columbia Energy Group (Series A)...................................... 6.39% 11/28/00 $ 2,017,120
2,000 The Williams Companies, Inc........................................... 7.50 09/15/99 2,012,040
------------
4,029,160
------------
OILFIELD SERVICES/EQUIPMENT (0.9%)
1,500 Petroleum Geo-Services ASA (Norway)................................... 6.25 11/19/03 1,478,040
------------
OTHER CONSUMER SERVICES (1.1%)
2,000 Service Corp. International........................................... 6.375 10/01/00 2,001,520
------------
PAPER (1.1%)
2,000 James River Corp...................................................... 6.75 10/01/99 2,009,000
------------
PROPERTY - CASUALTY INSURERS (0.6%)
1,000 NAC Re Corp........................................................... 8.00 06/15/99 1,002,470
------------
RAILROADS (1.7%)
2,000 Norfolk Southern Corp................................................. 6.875 05/01/01 2,040,700
1,000 Union Pac Corp........................................................ 7.375 05/15/01 1,026,640
------------
3,067,340
------------
RENTAL/LEASING COMPANIES (4.4%)
2,000 AT&T Capital Co....................................................... 6.25 05/15/01 2,012,720
1,270 Comdisco, Inc......................................................... 6.50 06/15/00 1,278,928
2,000 Comdisco, Inc......................................................... 6.13 08/01/01 2,004,240
2,000 Gatx Capital Corp..................................................... 6.50 11/01/00 2,009,240
1,000 Hertz Corp............................................................ 7.375 06/15/01 1,027,330
------------
8,332,458
------------
SAVINGS & LOAN ASSOCIATIONS (0.9%)
1,500 Golden West Financial Corp............................................ 7.875 01/15/02 1,568,130
------------
WHOLESALE DISTRIBUTORS (1.1%)
2,000 Ikon Capital Inc...................................................... 6.73 06/15/01 1,994,260
------------
TOTAL CORPORATE BONDS
(IDENTIFIED COST $97,699,138)..................................................................... 97,408,908
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS APRIL 30, 1999, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS (42.7%)
DIVERSIFIED FINANCIAL SERVICES (2.2%)
$ 2,000 California Infrastructure & Economic Development Bank Special Purpose
Trust
SCE - 1 Class A-3................................................... 6.17% 03/25/03 $ 2,019,320
2,000 California Infrastructure & Economic Development Bank
Special Purpose Trust PG&E - 1 Class A-5............................ 6.25 06/25/04 2,025,160
------------
4,044,480
------------
MORTGAGE PASS-THROUGH SECURITIES (9.1%)
3,450 Federal Home Loan Mortgage Corp. PC Gold.............................. 5.50 04/01/03 3,402,408
6,564 Federal Home Loan Mortgage Corp. PC Gold.............................. 6.00 09/01/01-09/01/03 6,583,899
3,045 Federal Home Loan Mortgage Corp. PC Gold.............................. 6.50 05/01/99-09/01/02 3,080,921
3,810 Federal National Mortgage Assoc....................................... 6.00 10/01/00-12/01/02 3,808,523
------------
16,875,751
------------
U.S. GOVERNMENT AGENCIES (31.4%)
17,000 Federal Home Loan Banks............................................... 4.66-5.80 12/22/99-10/22/01 16,959,400
4,000 Federal Home Loan Mortgage Corp....................................... 4.75-5.865 07/16/01-12/14/01 3,962,130
22,000 Federal National Mortgage Assoc....................................... 4.90-6.22 07/23/99-12/20/01 21,947,215
12,000 Federal National Mortgage Assoc. Strips............................... 0.00 08/15/01-02/01/02 10,567,840
4,000 Resolution Funding Corp. Strips....................................... 0.00 10/15/01 3,526,720
2,000 Tennessee Valley Authority Strips..................................... 0.00 05/01/02 1,696,340
------------
58,659,645
------------
TOTAL U.S. GOVERNMENT & AGENCIES OBLIGATIONS
(IDENTIFIED COST $79,760,275)..................................................................... 79,579,876
------------
SHORT-TERM INVESTMENTS (5.4%)
U.S. GOVERNMENT AGENCY (a) (5.1)
9,500 Student Loan Marketing Assoc. (AMORTIZED COST $9,497,467)............. 4.80 05/03/99 9,497,467
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS APRIL 30, 1999, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
REPURCHASE AGREEMENT (0.3%)
$ 526 The Bank of New York (dated 04/30/99; proceeds $526,054) (b)
(IDENTIFIED COST $525,840).......................................... 4.875% 05/03/99 $ 525,840
------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST $10,023,307)..................................................................... 10,023,307
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $187,482,720) (C)........................................................ 100.3 % 187,012,091
OTHER ASSETS IN EXCESS OF LIABILITIES..................................................... (0.3) (570,497)
------ -------------
NET ASSETS................................................................................ 100.0 % $ 186,441,594
------ -------------
------ -------------
</TABLE>
- ---------------------
* Resale is restricted to qualified institutional investors.
(a) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(b) Collateralized by $355,837 U.S. Treasury Bond 10.625% due 08/15/15 valued
at $540,984.
(c) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $411,099, and the
aggregate gross unrealized depreciation is $881,728, resulting in net
unrealized depreciation of $470,629.
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1999
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $187,482,720).............................................................. $187,012,091
Receivable for:
Interest.................................................................................. 2,475,604
Shares of beneficial interest sold........................................................ 1,589,848
Receivable from affiliate..................................................................... 82,245
Prepaid expenses and other assets............................................................. 34,460
------------
TOTAL ASSETS............................................................................. 191,194,248
------------
LIABILITIES:
Payable for:
Shares of beneficial interest repurchased................................................. 2,536,139
Investments purchased..................................................................... 1,990,060
Investment management fee................................................................. 82,589
Dividends to shareholders................................................................. 55,352
Payable to bank............................................................................... 13,854
Accrued expenses and other payables........................................................... 74,660
------------
TOTAL LIABILITIES........................................................................ 4,752,654
------------
NET ASSETS............................................................................... $186,441,594
------------
------------
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $188,908,616
Net unrealized depreciation................................................................... (470,629)
Accumulated net realized loss................................................................. (1,996,393)
------------
NET ASSETS............................................................................... $186,441,594
------------
------------
NET ASSET VALUE PER SHARE,
19,651,001 SHARES OUTSTANDING (UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE)............... $9.49
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1999
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME................................................................................ $10,361,991
-----------
EXPENSES
Investment management fee...................................................................... 1,212,106
Transfer agent fees and expenses............................................................... 71,996
Professional fees.............................................................................. 67,793
Shareholder reports and notices................................................................ 53,763
Registration fees.............................................................................. 44,180
Organizational expenses........................................................................ 24,174
Custodian fees................................................................................. 23,266
Trustees' fees and expenses.................................................................... 12,239
Other.......................................................................................... 11,671
-----------
TOTAL EXPENSES............................................................................ 1,521,188
Less: amounts waived/reimbursed................................................................ (991,041)
-----------
NET EXPENSES.............................................................................. 530,147
-----------
NET INVESTMENT INCOME..................................................................... 9,831,844
-----------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss.............................................................................. (415,018)
Net change in unrealized depreciation.......................................................... (202,190)
-----------
NET LOSS.................................................................................. (617,208)
-----------
NET INCREASE................................................................................... $ 9,214,636
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
APRIL 30, APRIL 30,
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income........................................................... $ 9,831,844 $ 4,134,905
Net realized loss............................................................... (415,018) (421,092)
Net change in unrealized depreciation........................................... (202,190) 353,108
------------ ------------
NET INCREASE............................................................... 9,214,636 4,066,921
Dividends from net investment income............................................ (9,831,922) (4,191,003)
Net increase from transactions in shares of beneficial interest................. 79,359,646 65,571,237
------------ ------------
NET INCREASE............................................................... 78,742,360 65,447,155
NET ASSETS:
Beginning of period............................................................. 107,699,234 42,252,079
------------ ------------
END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $0 AND $78,
RESPECTIVELY)............................................................... $186,441,594 $107,699,234
------------ ------------
------------ ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS APRIL 30, 1999
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.
13
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS APRIL 30, 1999, CONTINUED
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. 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 were fully amortized as of January 9, 1999.
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
14
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS APRIL 30, 1999, CONTINUED
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.
For the period May 1, 1998 through December 31, 1998, the Investment Manager
waived its compensation and reimbursed all operating expenses without
limitation. For the period January 1, 1999 through December 31, 1999, the
Investment Manager will continue to waive its fee and reimburse expenses to the
extent they exceed 0.80% of the daily net assets of the Fund. At April 30, 1999,
included in the Statement of Assets and Liabilities is a receivable from an
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 year ended April 30, 1999
were $173,739,070, and $92,176,851, respectively. Included in the aforementioned
are purchases and sales/prepayments of U.S. Government securities of $81,530,726
and $49,111,126, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager, is
the Fund's transfer agent. At April 30, 1999, the Fund had transfer agent fees
and expenses payable of approximately $1,400.
4. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
APRIL 30, 1999 APRIL 30, 1998
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Sold............................................................. 63,700,556 $ 606,779,742 15,691,994 $149,203,263
Reinvestment of dividends........................................ 796,095 7,583,175 323,662 3,075,757
----------- -------------- ----------- ------------
64,496,651 614,362,917 16,015,656 152,279,020
Repurchased...................................................... (56,192,124) (535,003,271) (9,118,681) (86,707,783)
----------- -------------- ----------- ------------
Net increase..................................................... 8,304,527 $ 79,359,646 6,896,975 $ 65,571,237
----------- -------------- ----------- ------------
----------- -------------- ----------- ------------
</TABLE>
15
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS APRIL 30, 1999, CONTINUED
5. FEDERAL INCOME TAX STATUS
At April 30, 1999, the Fund had a net capital loss carryover of approximately
$1,935,000, 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 2007
- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
$ 378 $ 501 $ 186 $ 359 $ 511
- --------- --------- --------- --------- ---------
- --------- --------- --------- --------- ---------
</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 $61,000, during fiscal 1999.
As of April 30, 1999, the Fund had temporary book/tax differences primarily
attributable to post-October losses.
16
<PAGE>
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 YEAR ENDED APRIL 30,
-------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------
<S> <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
----- --------- --------- ----- ---------
Income from
investment
operations:
Net investment
income........ 0.56 0.65 0.61 0.63 0.77
Net realized
and unrealized
gain (loss)... -- -- (0.06) 0.05 (0.33)
----- --------- --------- ----- ---------
Total income from
investment
operations...... 0.56 0.65 0.55 0.68 0.44
----- --------- --------- ----- ---------
Less dividends
and
distributions
from:
Net investment
income........ (0.56) (0.66) (0.59) (0.45) (0.59)
Paid-in-capital... -- -- -- (0.15) (0.01)
----- --------- --------- ----- ---------
Total dividends
and
distributions... (0.56) (0.66) (0.59) (0.60) (0.60)
----- --------- --------- ----- ---------
Net asset value,
end of period... $ 9.49 $ 9.49 $ 9.50 $ 9.54 $ 9.46
----- --------- --------- ----- ---------
----- --------- --------- ----- ---------
TOTAL RETURN+.... 6.00% 7.02% 5.88% 7.33% 4.76%
RATIOS TO AVERAGE
NET ASSETS (1):
Expenses......... 0.31% -- 0.64% 0.37% --
Net investment
income.......... 5.68% 6.52% 6.25% 6.54% 7.64%
SUPPLEMENTAL
DATA:
Net assets, end
of period, in
thousands....... $186,442 $107,699 $42,252 $33,178 $29,818
Portfolio
turnover rate... 58% 55% 67% 64% 74%
</TABLE>
- ---------------------
+ Calculated based on the net asset value as of the last business day of the
period.
(1) 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 0.88% and 5.11%, respectively, for the year ended April
30, 1999; 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; and
1.08% and 6.56%, respectively, for the year ended April 30, 1995.
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
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
Short-Term Bond Fund (the "Fund"), formerly Dean Witter Short-Term Bond Fund, at
April 30, 1999, 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 five years in the period then ended, 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 April 30, 1999 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
JUNE 9, 1999
18
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
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
Mitchell M. Merin
President
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
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]
ANNUAL REPORT
APRIL 30, 1999
