<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND TWO WORLD TRADE CENTER,
LETTER TO THE SHAREHOLDERS APRIL 30, 2000 NEW YORK, NEW YORK 10048
DEAR SHAREHOLDER:
During the 12-month period ended April 30, 2000, interest rates rose as the U.S.
economy displayed considerable vigor and the unemployment rate fell to a 30-year
low of 4 percent. Y2K concerns early in the period gradually abated, giving way
to escalating business and consumer spending that culminated in a fourth-quarter
1999 GDP rate of 7.4 percent and projections for a strong first quarter in 2000.
The ongoing technological revolution allowed productivity to soar and wages and
salaries to outpace the still relatively tame inflation rate.
In this environment, the Federal Reserve Board remained vigilant, fighting the
threat of inflation by raising the federal funds rate to 6.00 percent and
intimating that further increases were to come. While long-term U.S. Treasury
yields rose, the upward pressure was lessened by expectations for a decrease in
new Treasury note and bond sales because of the Treasury's burgeoning tax
receipts and attendant growing budget surplus. Expectations for future declines
in availability of longer-maturity bonds versus shorter-maturity notes were
sufficient to invert the yield relationship between 30-year bonds and shorter
maturities to the degree that at the end of April, yields on one- and two-year
Treasuries were higher than for 30-year bonds.
Corporate yields were less affected by supply factors than by stock market
volatility and a general tiering of the market that valued liquidity at a
particularly high premium. Flights to both quality and liquidity sent investors
rushing for the safety of Treasuries. As a result, yield differentials between
the two types of securities widened to near-historic levels, causing corporates
to underperform Treasuries significantly.
PERFORMANCE
For the 12-month period ended April 30, 2000, Morgan Stanley Dean Witter
Short-Term Bond Fund returned 2.36 percent compared with 2.10 percent for the
Lehman Brothers Mutual Fund Short (one- to five-year) Investment Grade Debt
Index.
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
LETTER TO THE SHAREHOLDERS APRIL 30, 2000, CONTINUED
The Fund's performance was reflective of a dramatic surge in short- and
intermediate-term interest rates and of a reduction in liquidity for corporate
bonds that caused these securities to underperform comparable U.S. Treasury and
agency debt.
PORTFOLIO STRATEGY
On April 30, 2000 the Fund was invested 56.4 percent in corporate bonds, 26.9
percent in U.S. government bonds, 10.4 percent in mortgage-backed securities,
3.4 percent in asset backed securities and 2.9 percent in cash equivalents. The
average quality rating for the entire portfolio was A1. During the period under
review, the Fund used proceeds from maturing debt and security sales to meet
cash outflow needs. While corporate securities were sold when attractive bids
became available, most of the Fund's cash needs were met with sales of
Treasuries and lower-coupon agencies. During periods of cash inflows, the Fund
purchased additional corporate securities at compelling yields relative to other
fixed-income securities, including debt of IBM Credit, Ford Motor Credit,
Raytheon, DaimlerChrysler, U.S. West Capital Funding, Commercial Credit
Corporation and Cox Enterprises. Throughout much of the fiscal year, however,
the Fund concentrated its investments on Treasury securities and U.S. agencies,
because of their liquidity characteristics.
As interest rates rose, the Fund acted to shorten duration to lessen the rates'
impact on the net asset value. At the end of April, the average maturity was
1.73 years, compared to 1.83 years a year earlier. As higher-coupon bonds
matured and share redemptions inhibited the Fund's ability to reinvest most of
these proceeds, the Fund's income stream failed to keep pace with rising
interest rates. Beginning in 2000, the Fund focused on increasing its earning
potential by selling lower-coupon issues and purchasing ones with higher yields.
LOOKING AHEAD
Despite efforts by the Fed to subdue economic growth by raising short-term
interest rates, domestic production and consumer demand remain robust. Ongoing
tight labor markets and insatiable consumer demand suggest that further rate
increases may be in store. Until such time as interest rates check corporate
profits and individuals' stock market gains, we can expect yields for fixed-
income securities to rise.
Given today's inverted yield curve, higher interest rates and record yield
spreads, corporate bonds and U.S. government agencies are beginning to look
compelling for the long term. While many of the near-term expectations for
additional action by the Federal Reserve are currently reflected in today's
2
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
LETTER TO THE SHAREHOLDERS APRIL 30, 2000, CONTINUED
yield levels, should rates continue their upward move, a more aggressive stance
may be in order. Should interim volatility serve to reduce yield differentials
between corporate securities and U.S. governments, we will look to increase
Treasury allocations.
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 /s/ MITCHELL M. MERIN
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
CHAIRMAN OF THE BOARD PRESIDENT
3
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
FUND PERFORMANCE APRIL 30, 2000
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
FUND LEHMAN(3)
<S> <C> <C>
GROWTH OF $10,000 -- CLASS B SHARES
($ in Thousands)
January,
1994 10,000 10,000
April, 1994 9,799 9,726
April, 1995 10,265 10,412
April, 1996 11,018 11,268
April, 1997 11,666 12,026
April, 1998 12,484 13,008
April, 1999 13,234 13,864
April, 2000 13546(2) 14,154
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
-------------------------------------
<S> <C>
1 Year 2.36%(1)
5 Year 5.70%(1)
Since Inception (1/10/94) 4.93%(1)
</TABLE>
------------------------
(1) Figure shown assumes reinvestment of all distributions. There is no sales
charge.
(2) Closing value assuming a complete redemption on April 30, 2000.
(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
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS APRIL 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (55.4%)
CABLE TELEVISION (2.3%)
$ 1,000 Century Communications
Corp..................... 9.75 % 02/15/02 $ 997,500
1,000 Cox Enterprises Inc. -
144A*.................... 6.625 06/14/02 968,430
800 Rogers Cablesystems,
Ltd...................... 9.625 08/01/02 810,000
------------
2,775,930
------------
CASINO/GAMBLING (0.8%)
1,000 Circus Circus
Enterprises, Inc......... 9.25 12/01/05 965,000
------------
CELLULAR TELEPHONE (1.7%)
2,000 AirTouch
Communications, Inc...... 7.125 07/15/01 1,992,940
------------
DEPARTMENT STORES (2.4%)
3,000 Dillard's Inc.............. 5.79 11/15/01 2,847,030
------------
DIVERSIFIED FINANCIAL SERVICES (1.1%)
2,000 Conseco, Inc............... 6.40 06/15/01 1,340,000
------------
DRUGSTORE CHAINS (1.3%)
2,000 Rite Aid Corp. - 144A*..... 6.00 12/15/00 1,590,000
------------
ELECTRIC UTILITIES (6.6%)
1,000 Cinergy Corp............... 6.125 04/15/04 934,810
1,000 Consolidated Edison Co. New
York, Inc................ 7.375 09/15/00 1,001,400
3,000 CSW Investments - 144A*
(United Kingdom)......... 6.95 08/01/01 2,977,680
972 Niagara Mohawk Power Co.... 7.125 07/01/01 964,716
2,000 Texas Utilities Electric
Co....................... 8.125 02/01/02 2,008,880
------------
7,887,486
------------
ENVIRONMENTAL SERVICES (1.9%)
2,370 USA Waste
Services, Inc............ 6.125 07/15/01 2,264,962
------------
FINANCE COMPANIES (9.3%)
1,000 Associates Corp. of North
America.................. 6.70 05/29/01 992,320
2,000 Bombardier Capital Inc. -
144A* (Canada)........... 6.00 01/15/02 1,941,720
2,000 Commercial Credit
Group, Inc............... 8.25 11/01/01 2,022,320
1,100 Daimlerchrysler North
America Holding.......... 6.46 12/07/01 1,084,039
2,000 Ford Motor Credit Corp..... 7.25 01/15/03 1,979,280
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS APRIL 30, 2000, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 2,000 General Motors Acceptance
Corp..................... 6.375% 12/01/01 $ 1,973,140
1,000 IBM Credit Corp............ 7.00 01/28/02 992,080
------------
10,984,899
------------
FOOD CHAINS (1.7%)
2,000 Kroger Co.................. 6.00 07/01/00 1,997,780
------------
INVESTMENT BANKERS/BROKERS/SERVICES (1.6%)
2,000 Lehman Brothers
Holdings, Inc............ 6.50 10/01/02 1,940,900
------------
MAJOR BANKS (0.9%)
1,000 Republic New York Corp..... 8.25 11/01/01 1,010,040
------------
MAJOR U.S. TELECOMMUNICATIONS (2.4%)
1,000 AT&T Corp.................. 5.625 03/15/04 938,200
2,000 Sprint Capital Corp........ 5.875 05/01/04 1,879,600
------------
2,817,800
------------
MEDIA CONGLOMERATES (1.7%)
2,000 News American
Holdings, Inc............ 7.45 06/01/00 2,001,600
------------
MID-SIZED BANKS (1.7%)
2,000 Long Island Savings Bank... 6.20 04/02/01 1,971,800
------------
MILITARY/GOV'T/TECHNICAL (1.7%)
2,000 Raytheon Co................ 7.90 03/01/03 1,985,080
------------
MULTI-SECTOR COMPANIES (2.1%)
2,600 Brascan Ltd. (Canada)...... 7.375 10/01/02 2,536,300
------------
OIL & GAS PRODUCTION (0.8%)
1,000 Occidental Petroleum
Corp..................... 8.50 11/09/01 1,007,720
------------
OIL REFINING/MARKETING (1.7%)
2,000 Tosco Corp................. 7.00 07/15/00 2,000,700
------------
OIL/GAS TRANSMISSION (1.7%)
2,000 Columbia Energy Group
(Series A)............... 6.39 11/28/00 1,990,140
------------
OTHER CONSUMER SERVICES (1.6%)
2,000 Service Corp.
International............ 6.375 10/01/00 1,950,000
------------
OTHER TELECOMMUNICATIONS (1.7%)
2,000 US West Capital
Funding, Inc............. 6.875 08/15/01 1,984,180
------------
RAILROADS (1.0%)
1,200 Union Pac Corp............. 7.375 05/15/01 1,196,628
------------
RENTAL/LEASING COMPANIES (4.4%)
1,270 Comdisco, Inc.............. 6.50 06/15/00 1,269,454
2,000 Comdisco, Inc.............. 6.13 08/01/01 1,957,280
2,000 Gatx Capital Corp.......... 6.50 11/01/00 1,988,080
------------
5,214,814
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS APRIL 30, 2000, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SAVINGS & LOAN ASSOCIATIONS (1.3%)
$ 1,500 Golden West Financial
Corp..................... 7.875% 01/15/02 $ 1,502,295
------------
TOTAL CORPORATE BONDS
(IDENTIFIED COST $68,587,279)................................. 65,756,024
------------
ASSET BACKED SECURITIES (3.3%)
UTILITIES
California
Infrastructure & Economic
Development Bank
2,000 Special Purpose Trust
SCE-1 Class A-3........ 6.17 03/25/03 1,997,160
2,000 Special Purpose Trust
PG&E-1 Class A-5....... 6.25 06/25/04 1,970,460
------------
TOTAL ASSET BACKED SECURITIES
(IDENTIFIED COST $4,046,602).................................. 3,967,620
------------
U.S. GOVERNMENT & AGENCIES OBLIGATIONS (36.6%)
MORTGAGE PASS-THROUGH SECURITIES (10.2%)
2,774 Federal Home Loan Mortgage
Corp. PC Gold............ 5.50 04/01/03 2,596,947
5,371 Federal Home Loan Mortgage 11/01/01-
Corp. PC Gold............ 6.00 09/01/03 5,155,821
2,039 Federal Home Loan Mortgage
Corp. PC Gold............ 6.50 07/01/00 1,989,486
2,511 Federal National Mortgage
Assoc.................... 6.00 10/01/00 2,389,209
------------
12,131,463
------------
U.S. GOVERNMENT AGENCIES & OBLIGATIONS (26.4%)
8,600 Federal Home Loan Banks.... 6.00- 11/15/01-
6.75 02/15/02 8,532,480
1,000 Federal Home Loan Mortgage
Corp..................... 5.865 07/16/01 986,040
5,500 Federal National Mortgage 5.81- 08/27/01-
Assoc.................... 6.625 07/17/02 5,420,390
4,000 Federal National Mortgage
Assoc. Strips............ 0.00 08/15/01 3,644,000
2,000 Tennessee Valley Authority
Strips................... 0.00 05/01/02 1,746,220
11,000 U.S. Treasury Notes........ 6.25- 04/30/01-
6.625 08/15/02 10,950,340
------------
31,279,470
------------
TOTAL U.S. GOVERNMENT & AGENCIES OBLIGATIONS
(IDENTIFIED COST $44,241,015)................................. 43,410,933
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS APRIL 30, 2000, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENT (2.8%)
REPURCHASE AGREEMENT
$ 3,358 The Bank of New York (dated
04/28/00; proceeds
$3,359,605) (a)
(IDENTIFIED COST
$3,357,978).............. 5.813% 05/01/00 $ 3,357,978
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $120,232,874) (b)........................................................ 98.1% 116,492,555
OTHER ASSETS IN EXCESS OF LIABILITIES..................................................... 1.9 2,201,598
----- -------------
NET ASSETS................................................................................ 100.0% $ 118,694,153
----- -------------
----- -------------
</TABLE>
---------------------
* Resale is restricted to qualified institutional investors.
(a) Collateralized by $3,489,069 U.S. Treasury Bill 5.75% due 08/17/00 valued
at $3,427,795.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $420 and the aggregate
gross unrealized depreciation is $3,740,739, resulting in net unrealized
depreciation of $3,740,319.
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2000
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $120,232,874).............................................................. $116,492,555
Receivable for:
Interest.................................................................................. 2,046,092
Shares of beneficial interest sold........................................................ 361,765
Prepaid expenses and other assets............................................................. 35,473
------------
TOTAL ASSETS............................................................................. 118,935,885
------------
LIABILITIES:
Payable for:
Dividends to shareholders................................................................. 75,583
Investment management fee................................................................. 68,082
Shares of beneficial interest repurchased................................................. 42,772
Accrued expenses and other payables........................................................... 55,295
------------
TOTAL LIABILITIES........................................................................ 241,732
------------
NET ASSETS............................................................................... $118,694,153
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $126,048,389
Net unrealized depreciation................................................................... (3,740,319)
Accumulated undistributed net investment income............................................... 15,610
Accumulated net realized loss................................................................. (3,629,527)
------------
NET ASSETS............................................................................... $118,694,153
============
NET ASSET VALUE PER SHARE,
12,907,210 SHARES OUTSTANDING
(UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE)............................................. $9.20
============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 2000
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME................................................................................ $ 9,603,498
-----------
EXPENSES
Investment management fee...................................................................... 1,076,475
Professional fees.............................................................................. 74,179
Transfer agent fees and expenses............................................................... 72,666
Shareholder reports and notices................................................................ 64,548
Registration fees.............................................................................. 61,020
Custodian fees................................................................................. 14,772
Trustees' fees and expenses.................................................................... 13,350
Other.......................................................................................... 9,036
-----------
TOTAL EXPENSES............................................................................ 1,386,046
Less: amounts waived/reimbursed................................................................ (155,789)
-----------
NET EXPENSES.............................................................................. 1,230,257
-----------
NET INVESTMENT INCOME..................................................................... 8,373,241
-----------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss.............................................................................. (1,637,726)
Net change in unrealized depreciation.......................................................... (3,269,690)
-----------
NET LOSS.................................................................................. (4,907,416)
-----------
NET INCREASE................................................................................... $ 3,465,825
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<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, 2000 APRIL 30, 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income........................................................... $ 8,373,241 $ 9,831,844
Net realized loss............................................................... (1,637,726) (415,018)
Net change in unrealized depreciation........................................... (3,269,690) (202,190)
------------ ------------
NET INCREASE............................................................... 3,465,825 9,214,636
Dividends from net investment income............................................ (8,353,039) (9,831,922)
Net increase (decrease) from transactions in shares of beneficial interest...... (62,860,227) 79,359,646
------------ ------------
NET INCREASE (DECREASE).................................................... (67,747,441) 78,742,360
NET ASSETS:
Beginning of period............................................................. 186,441,594 107,699,234
------------ ------------
END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $15,610 AND $0,
RESPECTIVELY.).............................................................. $118,694,153 $186,441,594
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS APRIL 30, 2000
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Short-Term Bond Fund (the "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") 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.
11
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS APRIL 30, 2000, 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.
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.
For the period May 1, 1999 through December 31, 2000, the Investment Manager has
agreed to waive its fee and reimburse expenses to the extent they exceed 0.80%
of the daily net assets of the Fund.
12
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS APRIL 30, 2000, CONTINUED
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, 2000
were $106,320,759 and $165,876,116, respectively. Included in the aforementioned
are purchases and sales/prepayments of U.S. Government securities of $78,688,052
and $109,443,795, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager, is
the Fund's transfer agent.
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, 2000 APRIL 30, 1999
--------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Sold............................................................. 54,714,865 $ 510,668,353 63,700,556 $ 606,779,742
Reinvestment of dividends........................................ 667,268 6,222,631 796,095 7,583,175
----------- ------------- ----------- -------------
55,382,133 516,890,984 64,496,651 614,362,917
Repurchased...................................................... (62,125,924) (579,751,211) (56,192,124) (535,003,271)
----------- ------------- ----------- -------------
Net increase (decrease).......................................... (6,743,791) $ (62,860,227) 8,304,527 $ 79,359,646
=========== ============= =========== =============
</TABLE>
5. FEDERAL INCOME TAX STATUS
At April 30, 2000, the Fund had a net capital loss carryover of approximately
$2,482,000 which may be used to offset future capital gains to the extent
provided by regulations, which is available through April 30 of the following
years:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
-----------------------------------------------------------
2003 2004 2005 2006 2007 2008
---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$378 $501 $186 $359 $509 $549
==== ==== ==== ==== ==== ====
</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 $1,148,000 during fiscal 2000.
As of April 30, 2000, the Fund had temporary book/tax differences primarily
attributable to post-October losses and permanent book/tax differences
attributable to gains on paydowns. To reflect reclassifications arising from the
permanent differences, accumulated undistributed net investment income was
charged and accumulated net realized loss was credited $4,592.
13
<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,
---------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 9.49 $ 9.49 $ 9.50 $ 9.54 $ 9.46
--------- -------- -------- --------- --------
Income (loss) from investment operations:
Net investment income.................................... 0.51 0.56 0.65 0.61 0.63
Net realized and unrealized gain (loss).................. (0.29) -- -- (0.06) 0.05
--------- -------- -------- --------- --------
Total income from investment operations..................... 0.22 0.56 0.65 0.55 0.68
--------- -------- -------- --------- --------
Less dividends and distributions from:
Net investment income.................................... (0.51) (0.56) (0.66) (0.59) (0.45)
Paid-in-capital.......................................... -- -- -- -- (0.15)
--------- -------- -------- --------- --------
Total dividends and distributions........................... (0.51) (0.56) (0.66) (0.59) (0.60)
--------- -------- -------- --------- --------
Net asset value, end of period.............................. $ 9.20 $ 9.49 $ 9.49 $ 9.50 $ 9.54
========= ======== ======== ========= ========
TOTAL RETURN+............................................... 2.36% 6.00% 7.02% 5.88% 7.33%
RATIOS TO AVERAGE NET ASSETS (1):
Expenses.................................................... 0.80% 0.31% -- 0.64% 0.37%
Net investment income....................................... 5.43% 5.68% 6.52% 6.25% 6.54%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $118,694 $186,442 $107,699 $42,252 $33,178
Portfolio turnover rate..................................... 71% 58% 55% 67% 64%
</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 0.90% and 5.33%, respectively, for the year ended
April 30, 2000; 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; and 1.29% and 5.61%, respectively, for the year ended April 30,
1996.
SEE NOTES TO FINANCIAL STATEMENTS
14
<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") at April 30, 2000, 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 accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States, 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,
2000 by correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
MAY 12, 2000
15
<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.
Read the prospectus carefully before investing.
Morgan Stanley Dean Witter Distributors Inc., member NASD.
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND
[GRAPHIC]
ANNUAL REPORT
APRIL 30, 2000
