<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALL- TWO WORLD TRADE CENTER,
CAP FUND NEW YORK, NEW YORK 10048
LETTER TO THE SHAREHOLDERS MAY 31, 1999
DEAR SHAREHOLDER:
For the twelve-month period ended May 31, 1999, small-cap stocks worldwide
experienced a high degree of volatility. After a difficult start, however, these
companies experienced a rebound in performance in the first five months of 1999.
As measured by the Morgan Stanley Capital International (MSCI) Europe,
Australasia, Far East (EAFE) Small Cap Index, small-cap stocks returned 6.4
percent during those five months, compared to a return of -11.0 percent for the
final seven months of 1998.
MARKET OVERVIEW
During the fiscal year there was a sharp contrast in the performance of the
markets on a regional basis. The European markets continued to be burdened by
slower economic growth, the weak euro and political instability, and thus
declined 5.3 percent in U.S. dollars during the period. The Pacific Basin
rallied sharply in early 1999, driven by rising foreign interest in the region
following improved trade positions, as well as ongoing U.S. economic strength
and an apparent bottoming of the Japanese economy. The region's markets rose
19.7 percent, with Japan, the largest market represented in the MSCI EAFE Small
Cap Index, increasing 22.7 percent.
Early in the period, markets around the world suffered severe corrections, due
to concerns about Russia, Latin America and Asia and fears of a slowdown of the
U.S. and European economies. Markets rallied in October 1998, partly because of
initial measures taken by the Japanese government to restructure the banking
system and the three interest-rate cuts made by the U.S. Federal Reserve Board.
Moreover, the yen strengthened markedly against the U.S. dollar.
Smaller companies generally underperformed larger companies as investors focused
on larger, more liquid stocks. This flight to large-cap stocks created a
valuation gap between small and large companies that reached historically high
levels in early 1999, leading investors to take
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
LETTER TO THE SHAREHOLDERS MAY 31, 1999, CONTINUED
advantage of the opportunities found therein. As economic tensions eased around
the world because of the coordinated reduction in interest rates globally,
investors focused on the compelling valuations in small-cap companies. As a
result, small-cap companies returned 6.4 percent, compared to 0.1 percent for
large-cap companies, for the first five months of 1999.
PERFORMANCE
For the twelve-month period ended May 31, 1999, Morgan Stanley Dean Witter
International SmallCap Fund's Class B shares produced a total return of 0.0
percent compared to -5.31 percent for the Morgan Stanley Capital International
(MSCI) Europe, Australasia, Far East (EAFE) Small Cap Index, 4.66 percent for
the MSCI EAFE Index and 1.31 percent for the Lipper International Small Cap Fund
average. For the same time period, the fund's Class A, C and D shares returned
0.68 percent, 0.23 percent and 0.56 percent, respectively. The performance of
the Fund's four share classes varies because of different expenses. The
accompanying chart illustrates the growth of a $10,000 investment in the Fund
versus similar investments in the Lipper average and MSCI indexes.
The Fund underperformed the Lipper average for the full year, but has
outperformed it in the first five months of 1999. Underperformance against the
Lipper average occurred primarily in the volatile last seven months of 1998 when
uncertainty with respect to the Asian and hedge fund crises was at its peak. The
Fund significantly outperformed the benchmark MSCI EAFE Small Cap Index, mainly
because of its stock selection within countries.
PORTFOLIO
During the fiscal year, the Fund maintained a fairly neutral regional market
allocation, but its slight underweighting in Europe proved beneficial, as this
was the weakest region. Within Southeast Asia, Australia was a standout
contributor, with our holdings rising 69 percent versus the local small-cap
index's rise of 10 percent in U.S. dollars.
The Fund's sub-advisor, Morgan Stanley Dean Witter Investment Management Inc.,
remains concerned about the outlook for world economic growth and, in
particular, the sustainability of U.S. consumer confidence. While the Japanese
stock market has experienced a significant rebound, the sub-advisor believes
that there will not be a sustainable economic recovery in the short term due to
the significant restructuring that must be completed. The Fund's overweightings
in the consumer goods and services sectors make it defensively positioned, given
the resilient nature of cash flows in these sectors.
2
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
LETTER TO THE SHAREHOLDERS MAY 31, 1999, CONTINUED
LOOKING AHEAD
While small-cap stocks have finally started to enjoy some relative strength in
international markets, they have a lot of ground to regain, given their relative
underperformance versus large-cap stocks over the last few years. Valuations
remain at compelling levels relative to large caps. Global competition, the
introduction of the euro and a lack of pricing power has led to rising
merger-and-acquisition activity as companies seek synergies and scale from
industry consolidation. The sub-advisor believes that quality smaller companies
have benefited and will continue to benefit from this trend.
On May 1, 1999, Mitchell M. Merin was named President of the Morgan Stanley Dean
Witter Funds. Mr. Merin, who previously was Vice President of the Morgan Stanley
Dean Witter Funds, is the President and Chief Operating Officer of Asset
Management for 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 the Fund's distributor and transfer agent.
We appreciate your ongoing support of Morgan Stanley Dean Witter International
SmallCap Fund and look forward to continuing to serve your investment
objectives.
Very truly yours,
[SIGNATURE]
CHARLES A. FIUMEFREDDO
CHAIRMAN OF THE BOARD
[SIGNATURE]
MITCHELL M. MERIN
PRESIDENT
3
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALL-
CAP FUND
FUND PERFORMANCE MAY 31, 1999
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GROWTH OF $10,000 -- CLASS B SHARES
($ in Thousands)
Fund MSCI EAFE (4) EAFESC (5) Lipper(6)
<S> <C> <C> <C> <C>
Jul-94 $10,000 $10,000 $10,000 $10,000
May-95 $8,540 $10,273 $10,116 $9,361
May-96 $10,280 $11,404 $11,021 $11,202
May-97 $9,302 $12,300 $11,271 $12,312
May-98 $9,177 $13,703 $9,948 $14,223
May-99 $9001 (3) $14,341 $9,420 $14,410
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. PERFORMANCE FOR CLASS
A, CLASS C, AND CLASS D SHARES WILL VARY FROM THE PERFORMANCE OF CLASS B
SHARES SHOWN ABOVE DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
- ----------------------------------------------------------------------------------------------------------------------
CLASS B SHARES** CLASS A SHARES+
- ---------------------------------------------------------- ----------------------------------------------------------
PERIOD ENDED 5/31/99 PERIOD ENDED 5/31/99
- ------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year 0.00 %(1) (5.00)%(2) 1 Year 0.68 %(1) (4.61)%(2)
Since Inception (7/29/94) (1.76) (1) (2.15) (2) Since Inception (7/28/97) (0.30) (1) (3.18) (2)
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES++ CLASS D SHARES#
- ---------------------------------------------------------- ----------------------------------------------------------
PERIOD ENDED 5/31/99 PERIOD ENDED 5/31/99
- ------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year 0.23 %(1) (0.77)%(2) 1 Year 0.56 %(1)
Since Inception (7/28/97) (0.85) (1) (0.85) (2) Since Inception (7/28/97) (0.24) (1)
</TABLE>
- ------------------------
(1) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable sales charge. See the Fund's current prospectus for
complete details on fees and sales charges.
(3) Closing value after the deduction of a 2% CDSC, assuming a complete
redemption on May 31, 1999.
(4) The Morgan Stanley Capital International EAFE Index ("MSCI EAFE Index")
measures the performance for a diverse range of global stock markets within
Europe, Australia, and the Far East. The Index does not include any
expenses, fees or charges. The Index is unmanaged and should not be
considered an investment.
(5) The index return labeled EAFESC above actually represents a composite of
two indexes, the MSCI EAFE Index and the MSCI EAFE Small Cap Index.
Starting at inception up to December 31, 1996, we used MSCI EAFE Index
price-only return, and from December 31, 1996 up to May 31, 1999, we used
the MSCI EAFE Small Cap Index price-only return. The MSCI EAFE Small Cap
Index, which began on December 31, 1996, was specifically designed for use
as a benchmark for non-U.S. small-cap portfolios. Neither index includes
any expenses, fees, charges, or reinvestment of dividends. Both indexes are
unmanaged and should not be considered investments.
(6) The Lipper International Small-Cap Fund Average tracks the performance of
all funds which invest at least 65% of their assets in equity securities of
non-United States companies with market capitalization less than US $1
billion at time of purchase.
** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The
CDSC declines to 0% after six years.
+ The maximum front-end sales charge for Class A is 5.25%.
++ The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of purchase.
# Class D shares have no sales charge.
4
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
PORTFOLIO OF INVESTMENTS MAY 31, 1999
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON AND PREFERRED STOCKS AND RIGHTS (97.8%)
AUSTRALIA (4.8%)
BEVERAGES - NON-ALCOHOLIC
153,900 Neverfail Springwater Ltd.*........................................ $ 200,716
-----------
BUILDING PRODUCTS
1,377,214 Parbury Ltd........................................................ 273,915
-----------
DEPARTMENT STORES
228,700 David Jones Ltd.................................................... 226,686
-----------
ENGINEERING & CONSTRUCTION
279,702 Henry Walker Group Ltd............................................. 375,732
-----------
HOSPITAL/NURSING MANAGEMENT
579,200 Australian Hospital Care Ltd....................................... 358,811
-----------
OFFICE/PLANT AUTOMATION
580,569 E.R.G. Ltd......................................................... 984,331
-----------
TOTAL AUSTRALIA.................................................... 2,420,191
-----------
DENMARK (0.9%)
INTERNATIONAL BANKS
12,250 Sydbank A/S........................................................ 472,045
-----------
FINLAND (5.6%)
BUILDING PRODUCTS
5,900 Kone Corp. (B Shares).............................................. 765,989
-----------
CONSTRUCTION/AGRICULTURAL EQUIPMENT/TRUCKS
16,500 KCI Konecranes International PLC................................... 602,217
-----------
INDUSTRIAL MACHINERY/COMPONENTS
22,140 Rauma Group........................................................ 244,728
-----------
PAPER
52,100 Metsa Tissue Corp.................................................. 453,655
-----------
RECREATIONAL PRODUCTS/TOYS
61,406 Rapala Normark Corp.*.............................................. 480,256
-----------
TELECOMMUNICATIONS EQUIPMENT
25,000 Teleste Oyj*....................................................... 239,844
-----------
TOTAL FINLAND...................................................... 2,786,689
-----------
FRANCE (7.0%)
BROADCASTING
1,310 Societe Television Francaise 1..................................... 314,196
-----------
CONSUMER SPECIALTIES
17,525 Europeenne D'Extincteurs........................................... 922,891
-----------
DIVERSIFIED COMMERCIAL SERVICES
5,870 Alliance et Gestion Commerciale.................................... 463,071
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
ELECTRICAL PRODUCTS
24,600 Neopost SA*........................................................ $ 487,405
-----------
FLUID CONTROLS
11,908 Groupe Legris Industries S.A....................................... 490,498
-----------
INDUSTRIAL MACHINERY/COMPONENTS
4,246 De Dietrich et Compagnie S.A....................................... 255,480
-----------
LIFE INSURANCE
3,300 CNP Assurances..................................................... 82,899
-----------
NEWSPAPERS
3,200 SPIR Communication................................................. 233,588
-----------
TEXTILES
4,275 Chargeurs S.A...................................................... 228,471
-----------
TOTAL FRANCE....................................................... 3,478,499
-----------
GERMANY (6.5%)
AUTO PARTS: O.E.M.
12,149 Beru AG............................................................ 266,048
-----------
BUILDING MATERIALS
1,640 Dyckerhoff AG (Pref.).............................................. 487,405
-----------
ENGINEERING & CONSTRUCTION
2,748 Philipp Holzmann AG................................................ 431,275
-----------
INDUSTRIAL MACHINERY/COMPONENTS
3,210 Sartorius AG (Pref.)............................................... 632,656
19,304 Winkler & Duennebier............................................... 465,008
-----------
1,097,664
-----------
MEDICAL/NURSING SERVICES
16,600 Marseille-Kliniken AG.............................................. 249,271
-----------
OTHER SPECIALTY STORES
24,063 Moebel Walther AG - Vorzugsakt..................................... 491,821
-----------
SPECIALTY FOODS/CANDY
6,390 Kamps AG........................................................... 193,908
6,390 Kamps AG (Rights)*................................................. 10,995
-----------
204,903
-----------
TOTAL GERMANY...................................................... 3,228,387
-----------
HONG KONG (2.5%)
BROADCASTING
76,000 Television Broadcasts Ltd.......................................... 313,584
-----------
CLOTHING/SHOE/ACCESSORY STORES
492,000 Esprit Holdings Ltd................................................ 244,239
-----------
FOOD CHAINS
109,000 Dairy Farm International Holdings Ltd.............................. 128,620
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
PORTFOLIO OF INVESTMENTS MAY 31, 1999, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
MEDICAL SPECIALTIES
1,128,000 Moulin International Holdings Ltd.................................. $ 114,902
-----------
MEDICAL/DENTAL DISTRIBUTORS
2,706,000 Quality Healthcare Asia Ltd.*...................................... 383,805
-----------
OTHER TELECOMMUNICATIONS
23,500 Asia Satellite Telecommunications
Holdings Ltd..................................................... 49,694
-----------
TOTAL HONG KONG.................................................... 1,234,844
-----------
IRELAND (1.7%)
INTERNATIONAL BANKS
298,020 Anglo Irish Bank Corp. PLC......................................... 830,362
-----------
ITALY (3.5%)
AUTO PARTS: O.E.M.
96,700 Sogefi SpA......................................................... 239,996
-----------
INTERNATIONAL BANKS
21,786 Banca Popolare di Bergamo Credito Varesino SpA..................... 483,903
-----------
OFFICE EQUIPMENT/SUPPLIES
208,900 Buffetti SpA....................................................... 1,043,458
-----------
TOTAL ITALY........................................................ 1,767,357
-----------
JAPAN (31.3%)
AIRLINES
5,000 H.I.S. Co., Ltd.................................................... 126,593
-----------
APPAREL
5,000 Nagaileben Co., Ltd................................................ 123,305
-----------
AUTO PARTS: O.E.M.
15,000 NGK Spark Plug Co., Ltd............................................ 157,707
-----------
BEVERAGES - NON-ALCOHOLIC
12,300 Itoen Ltd.+........................................................ 702,713
-----------
CLOTHING/SHOE/ACCESSORY STORES
9,000 Ryohin Keikaku Co., Ltd.+.......................................... 1,760,049
-----------
COMPUTER SOFTWARE
7,800 Fuji Soft ABC Inc.................................................. 392,404
-----------
COMPUTER SOFTWARE & SERVICES
4,000 Fujitsu Support & Services Inc..................................... 460,337
-----------
CONSUMER ELECTRONICS/APPLIANCES
6,000 Aiwa Co., Ltd.+.................................................... 153,884
-----------
CONSUMER SUNDRIES
11,600 Aderans Co., Ltd................................................... 437,682
-----------
CONTAINERS/PACKAGING
3,400 Fuji Seal, Inc..................................................... 307,439
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
DIVERSIFIED COMMERCIAL SERVICES
2,400 Bellsystem 24, Inc.+............................................... $ 820,715
-----------
DRUGSTORE CHAINS
10,900 Matsumotokiyoshi Co................................................ 430,086
-----------
ELECTRICAL PRODUCTS
16,000 Hosiden Corp....................................................... 313,687
7,000 Nidec Corp.+....................................................... 1,009,864
27,000 Ushio Inc.......................................................... 268,113
-----------
1,591,664
-----------
ELECTRONIC PRODUCTION EQUIPMENT
7,000 Disco Corp......................................................... 362,515
5,000 Fujimi Inc......................................................... 193,177
6,000 Tokyo Seimitsu Co., Ltd.+.......................................... 289,026
-----------
844,718
-----------
FINANCE COMPANIES
9,000 Aeon Credit Service Co., Ltd.+..................................... 702,096
-----------
FOOD CHAINS
10,000 Circle K Japan Co., Ltd............................................ 404,439
7,600 Ministop Co., Ltd.................................................. 194,920
-----------
599,359
-----------
HOME BUILDING
500 Higashi Nihon House Co............................................. 2,507
-----------
INDUSTRIAL MACHINERY/COMPONENTS
10,000 Fuji Machine Manufacturing Co., Ltd................................ 296,753
10,000 Japan Cash Machine Co., Ltd........................................ 137,279
9,000 Union Tool Co...................................................... 569,667
-----------
1,003,699
-----------
METALS FABRICATIONS
5,000 Sumitomo Special Metals Co......................................... 68,640
-----------
OFFICE EQUIPMENT/SUPPLIES
12,000 Sato Corp.......................................................... 233,786
-----------
OTHER SPECIALTY STORES
3,000 Otsuka Kagu Ltd.................................................... 335,388
-----------
PACKAGE GOODS/COSMETICS
1,300 Fancl Corp......................................................... 152,816
-----------
REAL ESTATE
700 Chubu Sekiwa Real Estate, Ltd...................................... 4,661
-----------
RESTAURANTS
13,100 Doutor Coffee Co., Ltd.+........................................... 559,967
8,700 Saint Marc Co., Ltd................................................ 232,429
1,000 Saizeriya Co., Ltd................................................. 55,240
26,000 Watami Food Service Co., Ltd.+..................................... 897,657
-----------
1,745,293
-----------
SERVICES TO THE HEALTH INDUSTRY
9,200 Nichii Gakkan Co.+................................................. 722,236
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
PORTFOLIO OF INVESTMENTS MAY 31, 1999, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
SPECIALTY CHEMICALS
15,000 Nippon Soda Co., Ltd............................................... $ 61,775
13,000 Sony Chemicals Corp.+.............................................. 635,841
-----------
697,616
-----------
SPECIALTY FOODS/CANDY
11,000 Ariake Japan Co., Ltd.+............................................ 412,331
24,200 Rock Field Co., Ltd................................................ 491,361
-----------
903,692
-----------
WHOLESALE DISTRIBUTORS
5,000 Misumi Corp........................................................ 161,529
-----------
TOTAL JAPAN........................................................ 15,642,614
-----------
MALAYSIA (1.1%)
CASINO/GAMBLING
115,000 Tanjong PLC........................................................ 225,231
-----------
CATALOG/SPECIALTY DISTRIBUTION
72,000 Amway (Malaysia) Holdings Berhad................................... 129,401
-----------
MULTI-SECTOR COMPANIES
249,000 Hap Seng Consolidated Berhad....................................... 130,237
36,000 Oriental Holdings Berhad........................................... 72,166
-----------
202,403
-----------
TOTAL MALAYSIA..................................................... 557,035
-----------
NETHERLANDS (6.2%)
CONSUMER ELECTRONICS/APPLIANCES
10,345 Atag Group NV...................................................... 176,380
-----------
ENGINEERING & CONSTRUCTION
13,300 GTI Holding NV..................................................... 267,676
16,900 Hollandsche Beton Groep NV......................................... 216,767
-----------
484,443
-----------
FARMING/SEEDS/MILLING
13,300 Nutreco Holding NV................................................. 492,358
-----------
MEDICAL/DENTAL DISTRIBUTORS
17,020 Apothekers Cooperatie OPG NV....................................... 392,241
-----------
MULTI-SECTOR COMPANIES
11,700 Internatio-Muller NV............................................... 241,575
-----------
OFFICE EQUIPMENT/SUPPLIES
20,845 Samas Groep NV..................................................... 280,410
-----------
PACKAGE GOODS/COSMETICS
18,833 Benckiser NV (B Shares)............................................ 1,017,278
-----------
TOTAL NETHERLANDS.................................................. 3,084,685
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
NEW ZEALAND (1.9%)
DIVERSIFIED COMMERCIAL SERVICES
151,600 Auckland International Airport Ltd................................. $ 229,701
-----------
ENGINEERING & CONSTRUCTION
277,300 Fletcher Challenge Building........................................ 430,553
-----------
WHOLESALE DISTRIBUTORS
90,700 Fisher & Paykel Industries Ltd..................................... 290,879
-----------
TOTAL NEW ZEALAND.................................................. 951,133
-----------
NORWAY (2.0%)
CONSTRUCTION/AGRICULTURAL EQUIPMENT/TRUCKS
19,800 Kverneland ASA..................................................... 488,796
-----------
INTERNATIONAL BANKS
26,620 Sparebanken NOR.................................................... 503,822
-----------
TOTAL NORWAY....................................................... 992,618
-----------
SINGAPORE (2.2%)
ELECTRICAL PRODUCTS
40,000 GP Batteries International Ltd..................................... 63,426
-----------
ELECTRONIC COMPONENTS
34,000 Venture Manufacturing Ltd.......................................... 214,467
-----------
METALS FABRICATIONS
204,000 Natsteel Broadway Ltd.............................................. 303,960
-----------
OTHER CONSUMER SERVICES
233,000 Informatics Holdings Ltd........................................... 113,264
-----------
PRECISION INSTRUMENTS
98,000 Avimo Group Ltd.................................................... 145,752
-----------
SPECIALTY FOODS/CANDY
120,000 Want Want Holdings................................................. 146,400
-----------
TOBACCO
11,000 Rothmans Industries Ltd............................................ 87,211
-----------
TOTAL SINGAPORE.................................................... 1,074,480
-----------
SPAIN (1.2%)
PAPER
23,150 Miquel y Costas & Miquel, S.A...................................... 615,591
-----------
SWEDEN (2.6%)
HOTELS/RESORTS
47,700 Scandic Hotels AB.................................................. 462,999
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
PORTFOLIO OF INVESTMENTS MAY 31, 1999, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
INDUSTRIAL MACHINERY/COMPONENTS
17,700 Haldex AB.......................................................... $ 235,589
-----------
MEDICAL/NURSING SERVICES
41,510 Nobel Biocare AB................................................... 598,342
-----------
TOTAL SWEDEN....................................................... 1,296,930
-----------
SWITZERLAND (4.6%)
ADVERTISING
840 Publigroupe S.A. .................................................. 511,089
-----------
BUILDING PRODUCTS
1,030 Zehnder Holdings AG................................................ 497,985
-----------
CONSUMER SPECIALTIES
1,300 TAG Heuer International S.A........................................ 120,347
-----------
CONTAINERS/PACKAGING
825 SIG Schweizerische Industrie-Gesellschaft Holding AG (Registered
Shares).......................................................... 511,138
-----------
INDUSTRIAL MACHINERY/COMPONENTS
155 Bobst AG (Bearer Shares)........................................... 190,645
-----------
OTHER SPECIALTY STORES
1,955 Valora Holding AG.................................................. 447,661
-----------
TOTAL SWITZERLAND.................................................. 2,278,865
-----------
UNITED KINGDOM (12.2%)
ADVERTISING
184,300 Aegis Group PLC.................................................... 362,997
-----------
BROADCASTING
57,700 Capital Radio PLC.................................................. 814,924
-----------
BUILDING PRODUCTS
162,700 SIG PLC............................................................ 435,087
-----------
DEPARTMENT STORES
41,800 Le Riche Group Ltd................................................. 332,664
-----------
FOOD DISTRIBUTORS
334,400 Christian Salvesen PLC............................................. 535,475
-----------
INDUSTRIAL MACHINERY/COMPONENTS
174,300 Money Controls PLC................................................. 358,652
297,100 The Six Hundred Group PLC.......................................... 352,052
-----------
710,704
-----------
MEAT/POULTRY/FISH
536,800 Bernard Matthews PLC............................................... 1,177,622
-----------
OTHER PHARMACEUTICALS
46,702 Seton Scholl Healthcare PLC........................................ 591,914
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
PAPER
164,200 Bunzl PLC.......................................................... $ 778,283
-----------
WHOLESALE DISTRIBUTORS
216,100 Time Products PLC.................................................. 352,962
-----------
TOTAL UNITED KINGDOM............................................... 6,092,632
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $42,864,230) (A).......................................................... 97.8 % 48,804,957
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................................. 2.2 1,115,717
------ ------------
NET ASSETS................................................................................. 100.0 % $ 49,920,674
------ ------------
------ ------------
</TABLE>
- ---------------------
* Non-income producing security.
(a) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $10,850,303 and the
aggregate gross unrealized depreciation is $4,909,576, resulting in net
unrealized appreciation of $5,940,727.
+ Some or all of these securities are segregated in connection with open
forward foreign currency contracts.
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT MAY 31, 1999:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS TO IN DELIVERY APPRECIATION/
DELIVER EXCHANGE FOR DATE DEPRECIATION
- -----------------------------------------------------
<S> <C> <C> <C>
AUD 402,815 $ 262,394 06/01/99 $ (282)
GBP 48,287 $ 76,704 06/01/99 (618)
NOK 353,277 $ 44,645 06/01/99 (79)
NZD 244,970 $ 131,426 06/01/99 270
JPY 6,454,000 $ 56,507 06/28/99 3,231
JPY 382,850,000 $ 3,250,000 09/07/99 57,508
-------
Total unrealized
appreciation.................. $60,030
-------
-------
</TABLE>
CURRENCY ABBREVIATIONS:
<TABLE>
<S> <C>
AUD Australian Dollar.
GBP British Pound.
NOK Norwegian Krone.
NZD New Zealand Dollar.
JPY Japanese Yen.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
SUMMARY OF INVESTMENTS MAY 31, 1999
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Advertising........................................................................ $ 874,086 1.8 %
Airlines........................................................................... 126,593 0.3
Apparel............................................................................ 123,305 0.2
Auto Parts: O.E.M.................................................................. 663,752 1.3
Beverages - Non-Alcoholic.......................................................... 903,429 1.8
Broadcasting....................................................................... 1,442,704 2.9
Building Materials................................................................. 487,405 1.0
Building Products.................................................................. 1,972,976 4.0
Casino/Gambling.................................................................... 225,231 0.4
Catalog/Specialty Distribution..................................................... 129,401 0.2
Clothing/Shoe/Accessory Stores..................................................... 2,004,289 4.1
Computer Software.................................................................. 392,404 0.8
Computer Software & Services....................................................... 460,337 0.9
Construction/Agricultural Equipment/Trucks......................................... 1,091,013 2.2
Consumer Electronics/Appliances.................................................... 330,264 0.6
Consumer Specialties............................................................... 1,043,238 2.1
Consumer Sundries.................................................................. 437,682 0.9
Containers/Packaging............................................................... 818,578 1.6
Department Stores.................................................................. 559,349 1.1
Diversified Commercial Services.................................................... 1,513,488 3.1
Drugstore Chains................................................................... 430,086 0.8
Electrical Products................................................................ 2,142,495 4.3
Electronic Components.............................................................. 214,468 0.4
Electronic Production Equipment.................................................... 844,718 1.7
Engineering & Construction......................................................... 1,722,003 3.5
Farming/Seeds/Milling.............................................................. 492,358 1.0
Finance Companies.................................................................. 702,096 1.4
Fluid Controls..................................................................... 490,498 1.0
Food Chains........................................................................ 727,979 1.5
Food Distributors.................................................................. 535,475 1.1
Home Building...................................................................... 2,507 0.0
Hospital/Nursing Management........................................................ 358,811 0.7
Hotels/Resorts..................................................................... 462,999 0.9
Industrial Machinery/
Components....................................................................... 3,738,509 7.6
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
International Banks................................................................ $ 2,290,132 4.7 %
Life Insurance..................................................................... 82,899 0.1
Meat/Poultry/Fish.................................................................. 1,177,622 2.4
Medical Specialties................................................................ 114,902 0.2
Medical/Dental Distributors........................................................ 776,046 1.6
Medical/Nursing Services........................................................... 847,613 1.7
Metals Fabrications................................................................ 372,600 0.7
Multi-Sector Companies............................................................. 443,978 0.9
Newspapers......................................................................... 233,588 0.4
Office Equipment/Supplies.......................................................... 1,557,653 3.2
Office/Plant Automation............................................................ 984,331 2.0
Other Consumer Services............................................................ 113,264 0.2
Other Pharmaceuticals.............................................................. 591,914 1.2
Other Specialty Stores............................................................. 1,274,870 2.6
Other Telecommunications........................................................... 49,694 0.1
Package Goods/Cosmetics............................................................ 1,170,093 2.3
Paper.............................................................................. 1,847,528 3.7
Precision Instruments.............................................................. 145,752 0.3
Real Estate........................................................................ 4,661 0.0
Recreational Products/Toys......................................................... 480,256 0.9
Restaurants........................................................................ 1,745,294 3.5
Services To The Health Industry.................................................... 722,236 1.4
Specialty Chemicals................................................................ 697,616 1.4
Specialty Foods/Candy.............................................................. 1,254,993 2.5
Telecommunications Equipment....................................................... 239,844 0.5
Textiles........................................................................... 228,471 0.4
Tobacco............................................................................ 87,211 0.1
Wholesale Distributors............................................................. 805,370 1.6
----------- -----
$48,804,957 97.8 %
----------- -----
----------- -----
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
TYPE OF INVESTMENT VALUE NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Common Stocks...................................................................... $47,673,901 95.5 %
Preferred Stocks................................................................... 1,120,061 2.3
Rights............................................................................. 10,995 0.0
----------- -----
$48,804,957 97.8 %
----------- -----
----------- -----
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1999
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $42,864,230)............................................................... $ 48,804,957
Cash (including $890,193 in foreign currency)................................................. 1,924,788
Unrealized appreciation on open forward foreign currency contract............................. 60,030
Receivable for:
Dividends................................................................................. 115,249
Foreign withholding taxes reclaimed....................................................... 57,262
Shares of beneficial interest sold........................................................ 6,263
Interest.................................................................................. 4,665
Investments sold.......................................................................... 1,270
Deferred organizational expenses.............................................................. 5,388
Prepaid expenses and other assets............................................................. 43,452
------------
TOTAL ASSETS............................................................................. 51,023,324
------------
LIABILITIES:
Payable for:
Investments purchased..................................................................... 777,554
Shares of beneficial interest repurchased................................................. 79,190
Compensated forward foreign currency contracts............................................ 56,507
Investment management fee................................................................. 50,209
Plan of distribution fee.................................................................. 42,518
Accrued expenses and other payables........................................................... 96,672
------------
TOTAL LIABILITIES........................................................................ 1,102,650
------------
NET ASSETS............................................................................... $ 49,920,674
------------
------------
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $ 65,813,869
Net unrealized appreciation................................................................... 5,992,501
Net investment loss........................................................................... (316,635)
Accumulated net realized loss................................................................. (21,569,061)
------------
NET ASSETS............................................................................... $ 49,920,674
------------
------------
CLASS A SHARES:
Net Assets.................................................................................... $490,584
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 54,957
NET ASSET VALUE PER SHARE................................................................ $8.93
------------
------------
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE)........................................ $9.42
------------
------------
CLASS B SHARES:
Net Assets.................................................................................... $ 48,711,203
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 5,525,918
NET ASSET VALUE PER SHARE................................................................ $8.82
------------
------------
CLASS C SHARES:
Net Assets.................................................................................... $188,734
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 21,367
NET ASSET VALUE PER SHARE................................................................ $8.83
------------
------------
CLASS D SHARES:
Net Assets.................................................................................... $530,153
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 59,334
NET ASSET VALUE PER SHARE................................................................ $8.94
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1999
<TABLE>
<S> <C>
NET INVESTMENT LOSS:
INCOME
Dividends (net of $141,491 foreign withholding tax)............................................ $ 1,143,773
Interest....................................................................................... 64,112
-----------
TOTAL INCOME.............................................................................. 1,207,885
-----------
EXPENSES
Investment management fee...................................................................... 618,986
Plan of distribution fee (Class A shares)...................................................... 1,091
Plan of distribution fee (Class B shares)...................................................... 529,067
Plan of distribution fee (Class C shares)...................................................... 1,095
Transfer agent fees and expenses............................................................... 142,532
Professional fees.............................................................................. 108,694
Shareholder reports and notices................................................................ 101,985
Registration fees.............................................................................. 56,067
Custodian fees................................................................................. 46,449
Organizational expenses........................................................................ 33,580
Trustees' fees and expenses.................................................................... 10,927
Other.......................................................................................... 19,864
-----------
TOTAL EXPENSES............................................................................ 1,670,337
-----------
NET INVESTMENT LOSS....................................................................... (462,452)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................ 666,734
Foreign exchange transactions.............................................................. (678,204)
-----------
NET LOSS.................................................................................. (11,470)
-----------
Net change in unrealized appreciation/depreciation on:
Investments................................................................................ (1,698,261)
Translation of forward foreign currency contracts, other assets and liabilities denominated
in foreign currencies.................................................................... 57,322
-----------
NET DEPRECIATION.......................................................................... (1,640,939)
-----------
NET LOSS.................................................................................. (1,652,409)
-----------
NET DECREASE................................................................................... $(2,114,861)
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR
FOR THE YEAR ENDED
ENDED MAY 31,
MAY 31, 1999 1998*
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss............................................................. $ (462,452) $ (1,010,832)
Net realized gain (loss)........................................................ (11,470) 4,988,366
Net change in unrealized appreciation........................................... (1,640,939) (6,927,685)
------------ ------------
NET DECREASE............................................................... (2,114,861) (2,950,151)
Net decrease from transactions in shares of beneficial interest................. (19,169,987) (31,152,512)
------------ ------------
NET DECREASE............................................................... (21,284,848) (34,102,663)
NET ASSETS:
Beginning of period............................................................. 71,205,522 105,308,185
------------ ------------
END OF PERIOD
(INCLUDING A NET INVESTMENT LOSS OF $316,635 AND $0, RESPECTIVELY).......... $ 49,920,674 $ 71,205,522
------------ ------------
------------ ------------
</TABLE>
- ---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1999
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter International SmallCap Fund (the "Fund") is
registered under the Investment Company Act of 1940, as amended (the "Act"), as
a non-diversified, open-end management investment company. The Fund's investment
objective is long-term growth of capital. The Fund seeks to achieve its
objective by investing primarily in equity securities of "small capitalization"
companies located outside of the United States. The Fund was organized as a
Massachusetts business trust on April 21, 1994 and commenced operations on July
29, 1994. On July 28, 1997, the Fund commenced offering three additional classes
of shares, with the then current shares designated as Class B shares.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price (in
cases where securities are traded on more than one exchange, the securities are
valued on the exchange designated as the primary market pursuant to procedures
adopted by the Trustees); (2) listed options are valued at the latest sale price
on the exchange on which they are listed unless no sales of such options have
taken place that day, in which case they will be valued at the mean between
their latest bid and asked price; (3) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest available bid price prior to the time of valuation; (4) when market
quotations are not readily available, including circumstances under which it is
determined by Morgan Stanley Dean Witter Advisors Inc. (the "Investment
Manager") or Morgan Stanley Dean Witter Investment Management Inc. (the
"Sub-Advisor"), an affiliate of the
13
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1999, CONTINUED
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 debt securities for which market quotations are
not readily available may be based upon current market prices of securities
which are comparable in coupon, rating and maturity or an appropriate matrix
utilizing similar factors); and (5) short-term debt securities having a maturity
date of more than sixty days at time of purchase are valued on a mark-to-market
basis until sixty days prior to maturity and thereafter at amortized cost based
on their value on the 61st day. Short-term debt securities having a maturity
date of sixty days or less at the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date
except for certain dividends from foreign securities which are recorded as soon
as the Fund is informed after the ex-dividend date. Discounts are accreted over
the life of the respective securities. Interest income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. OPTION ACCOUNTING PRINCIPLES -- When the Fund writes a call option, an amount
equal to the premium received is included in the Fund's Statement of Assets and
Liabilities as a liability which is subsequently marked-to-market to reflect the
current market value of the option written. If a written option either expires
or the Fund enters into a closing purchase transaction, the Fund realizes a gain
or loss without regard to any unrealized gain or loss on the underlying security
or currency and the liability related to such option is extinguished. If a
written call option is exercised, the Fund realizes a gain or loss from the sale
of the underlying security or currency and the proceeds from such sale are
increased by the premium originally received.
When the Fund purchases a call or put option, the premium paid is recorded as an
investment which is subsequently marked-to-market to reflect the current market
value. If a purchased option expires, the Fund will realize a loss to the extent
of the premium paid. If the Fund enters into a closing sale transaction, a gain
or loss is realized for the difference between the proceeds from the sale and
the
14
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1999, CONTINUED
cost of the option. If a put option is exercised, the cost of the security or
currency sold upon exercise will be increased by the premium originally paid. If
a call option is exercised, the cost of the security purchased upon exercise
will be increased by the premium originally paid.
E. FOREIGN CURRENCY TRANSLATION -- The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, other assets and liabilities and forward foreign currency
contracts are translated at the exchange rates prevailing at the end of the
period; and (2) purchases, sales, income and expenses are translated at the
exchange rates prevailing on the respective dates of such transactions. The
resultant exchange gains and losses are included in the Statement of Operations
as realized and unrealized gain/loss on foreign exchange transactions. Pursuant
to U.S. Federal income tax regulations, certain foreign exchange gains/losses
included in realized and unrealized gain/loss are included in or are a reduction
of ordinary income for federal income tax purposes. The Fund does not isolate
that portion of the results of operations arising as a result of changes in the
foreign exchange rates from the changes in the market prices of the securities.
F. FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may enter into forward foreign
currency contracts which are valued daily at the appropriate exchange rates. The
resultant unrealized exchange gains and losses are included in the Statement of
Operations as unrealized foreign currency gain or loss. The Fund records
realized gains or losses on delivery of the currency or at the time the forward
contract is extinguished (compensated) by entering into a closing transaction
prior to delivery.
G. 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.
H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial
15
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1999, CONTINUED
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.
I. ORGANIZATIONAL EXPENSES -- The Investment Manager paid the organizational
expenses of the Fund in the amount of approximately $172,000 and was reimbursed
for the full amount thereof. 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 AND SUB-ADVISORY AGREEMENTS
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 1.15% 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.
Under a Sub-Advisory Agreement between the Sub-Advisor and the Investment
Manager, the Sub-Advisor provides the Fund with investment advice and portfolio
management relating to the Fund's investments in securities, subject to the
overall supervision of the Investment Manager. As compensation for its services
provided pursuant to the Sub-Advisory Agreement, the Investment Manager pays the
Sub-Advisor monthly compensation equal to 40% of its monthly compensation.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager and
Sub-Advisor. The Fund has adopted a Plan of Distribution (the "Plan") pursuant
to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the
Distributor a fee which is accrued daily and paid monthly at the following
annual rates: (i) Class A -- up to 0.25% of the average daily net assets of
Class A; (ii) Class B -- 1.0% of the lesser of: (a) the average daily aggregate
gross sales of the Class B shares since the inception of the Fund (not including
reinvestment of dividend or capital gain distributions) less the average daily
16
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1999, CONTINUED
aggregate net asset value of the Class B shares redeemed since the Fund's
inception upon which a contingent deferred sales charge has been imposed or
waived; or (b) the average daily net assets of Class B; and (iii) Class C -- up
to 1.0% of the average daily net assets of Class C. In the case of Class A
shares, amounts paid under the Plan are paid to the Distributor for services
provided. In the case of Class B and Class C shares, amounts paid under the Plan
are paid to the Distributor for (1) services provided and the expenses borne by
it and others in the distribution of the shares of these Classes, including the
payment of commissions for sales of these Classes and incentive compensation to,
and expenses of, Morgan Stanley Dean Witter Financial Advisors and others who
engage in or support distribution of the shares or who service shareholder
accounts, including overhead and telephone expenses; (2) printing and
distribution of prospectuses and reports used in connection with the offering of
these shares to other than current shareholders; and (3) preparation, printing
and distribution of sales literature and advertising materials. In addition, the
Distributor may utilize fees paid pursuant to the Plan, in the case of Class B
shares, to compensate Dean Witter Reynolds Inc. ("DWR"), an affiliate of the
Investment Manager and Distributor, and other selected broker-dealers for their
opportunity costs in advancing such amounts, which compensation would be in the
form of a carrying charge on any unreimbursed expenses.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts, including
carrying charges, totaled $8,284,681 at May 31, 1999.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the year ended May 31, 1999, the distribution fee was accrued
for Class A shares and Class C shares at the annual rate of 0.24% and 0.78%,
respectively.
17
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1999, CONTINUED
The Distributor has informed the Fund that for the year ended May 31, 1999, it
received contingent deferred sales charges from certain redemptions of the
Fund's Class A, Class B and Class C shares of $41, $198,443 and $286,
respectively and received $6,012 in front-end sales charges from sales of the
Fund's Class A shares. The respective shareholders pay such charges which are
not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended May 31, 1999 aggregated $16,460,384
and $33,832,445, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At May 31, 1999, the Fund had
transfer agent fees and expenses payable of approximately $2,600.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MAY 31, 1999 MAY 31, 1998*
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold............................................................. 817,915 $ 6,762,506 37,467 $ 315,275
Redeemed......................................................... (798,885) (6,671,991) (1,540) (12,809)
----------- -------------- ----------- ------------
Net increase - Class A........................................... 19,030 90,515 35,927 302,466
----------- -------------- ----------- ------------
CLASS B SHARES
Sold............................................................. 1,186,270 10,200,450 1,496,043 2,527,299
Redeemed......................................................... (3,614,395) (29,188,640) (5,352,008) (44,859,325)
----------- -------------- ----------- ------------
Net decrease - Class B........................................... (2,428,125) (18,988,190) (3,855,965) (32,332,026)
----------- -------------- ----------- ------------
CLASS C SHARES
Sold............................................................. 37,809 310,537 12,297 106,649
Redeemed......................................................... (25,250) (216,451) (3,489) (27,753)
----------- -------------- ----------- ------------
Net increase - Class C........................................... 12,559 94,086 8,808 78,896
----------- -------------- ----------- ------------
CLASS D SHARES
Sold............................................................. 161,889 1,219,122 95,823 798,152
Redeemed......................................................... (198,378) (1,585,520) -- --
----------- -------------- ----------- ------------
Net increase (decrease) - Class D................................ (36,489) (366,398) 95,823 798,152
----------- -------------- ----------- ------------
Net decrease in Fund............................................. (2,433,025) $ (19,169,987) (3,715,407) $(31,152,512)
----------- -------------- ----------- ------------
----------- -------------- ----------- ------------
</TABLE>
- ---------------------
* For Class A, C and D shares, for the period July 28, 1997 (issue date)
through May 31, 1998.
18
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1999, CONTINUED
6. FEDERAL INCOME TAX STATUS
During the year ended May 31, 1999, the Fund utilized approximately $663,000 of
its net capital loss carryover. At May 31, 1999, the Fund had a net capital loss
carryover of approximately $21,281,000, which may be used to offset future
capital gains to the extent provided by regulations, which is available through
May 31 of the following years:
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS
- ---------------------------------
2004 2005 2006
- --------- --------- -----------
<S> <C> <C>
$ 6,371 $ 1,455 $ 13,455
- --------- --------- -----------
- --------- --------- -----------
</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 $195,000 during fiscal 1999.
As of May 31, 1999, the Fund had temporary book/tax differences primarily
attributable to post-October losses and income from the mark-to-market of
passive foreign investment companies and permanent book/tax differences
primarily attributable to a net operating loss and foreign currency losses. To
reflect reclassifications arising from the permanent differences,
paid-in-capital was charged $778,210, accumulated net realized loss was credited
$632,393 and net investment loss was credited $145,817.
7. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward foreign currency contracts ("forward contracts")
to facilitate settlement of foreign currency denominated portfolio transactions
or to manage foreign currency exposure associated with foreign currency
denominated securities. The Fund may also purchase put options on foreign
currencies in which the securities are denominated to hedge against adverse
foreign currency and market risk.
Forward contracts and purchased put options on foreign currency involve elements
of market risk in excess of the amounts reflected in the Statement of Assets and
Liabilities. The Fund bears the risk of an unfavorable change in the foreign
exchange rates underlying the forward contracts. Risks may also arise upon
entering into these contracts and over-the-counter purchased put options from
the potential inability of the counterparties to meet the terms of their
contracts.
At May 31, 1999, there were outstanding forward contracts used to facilitate
settlement of foreign currency denominated portfolio transactions and manage
foreign currency exposure.
19
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE
PERIOD
JULY 29,
1994*
FOR THE YEAR ENDED MAY 31, THROUGH
-------------------------------------------------- MAY 31,
1999++ 1998**++ 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER
SHARE DATA:
Net asset value,
beginning of
period.......... $8.80 $8.92 $10.28 $8.54 $10.00
------ --------- ------ --------- ----------
Income (loss)
from investment
operations:
Net investment
loss.......... (0.09) (0.11) (0.16) (0.08) (0.08)
Net realized
and unrealized
gain (loss)... 0.11 (0.01) (0.88) 1.82 (1.38)
------ --------- ------ --------- ----------
Total income
(loss) from
investment
operations...... 0.02 (0.12) (1.04) 1.74 (1.46)
------ --------- ------ --------- ----------
Dividends from
net investment
income.......... -- -- (0.38) -- --
------ --------- ------ --------- ----------
Capital
contribution.... -- -- 0.06 -- --
------ --------- ------ --------- ----------
Net asset value,
end of period... $8.82 $8.80 $8.92 $10.28 $8.54
------ --------- ------ --------- ----------
------ --------- ------ --------- ----------
TOTAL RETURN+.... %0.00 (1.35)% (9.52)%(3) 20.37% (14.60)%(1)
RATIOS TO AVERAGE
NET ASSETS:
Expenses......... %3.12(4) 3.06% 2.89% 2.85% 2.90%(2)
Net investment
loss............ (0.88)%(4) (1.24)% (1.34)% (1.09)% (1.12)%(2)
SUPPLEMENTAL
DATA:
Net assets, end
of period, in
thousands....... $48,711 $69,960 $105,308 $145,254 $93,729
Portfolio
turnover rate... % 31 178% % 46 44% 41%(1)
</TABLE>
- ---------------------
* Commencement of operations.
** Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date have been designated Class B shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Includes voluntary capital contribution from Morgan Grenfell Investment
Services Limited, the former sub-advisor, the effect of which was to
increase total return by 0.59%.
(4) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
20
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
MAY 31, 1999 MAY 31, 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS A SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................................. $ 8.85 $ 8.96
Net realized and unrealized gain (loss)............................... 0.08 (0.11)
----- -----
Net asset value, end of period........................................ $ 8.93 $ 8.85
----- -----
----- -----
TOTAL RETURN+......................................................... 0.68% (1.23)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 2.36%(3) 2.52%(2)
Net investment income (loss).......................................... (0.12)%(3) 0.03%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $491 $318
Portfolio turnover rate............................................... 31% 178%
</TABLE>
<TABLE>
<S> <C> <C>
CLASS C SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................................. $ 8.80 $ 8.96
----- -----
Income (loss) from investment operations:
Net investment loss................................................ (0.06) (0.09)
Net realized and unrealized gain (loss)............................ 0.09 (0.07)
----- -----
Total income (loss) from investment operations........................ 0.03 (0.16)
----- -----
Net asset value, end of period........................................ $ 8.83 $ 8.80
----- -----
----- -----
TOTAL RETURN+......................................................... 0.23% (1.79)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 2.90%(3) 3.16%(2)
Net investment loss................................................... (0.66)%(3) (1.37)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $189 $77
Portfolio turnover rate............................................... 31% 178%
</TABLE>
- ---------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
21
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
MAY 31, 1999 MAY 31, 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS D SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................................. $8.87 $8.96
------ ------
Income (loss) from investment operations:
Net investment income.............................................. 0.04 --
Net realized and unrealized gain (loss)............................ 0.03 (0.09)
------ ------
Total income (loss) from investment operations........................ 0.07 (0.09)
------ ------
Net asset value, end of period........................................ $8.94 $8.87
------ ------
------ ------
TOTAL RETURN+......................................................... 0.56% (1.00)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 2.12%(3) 2.31%(2)
Net investment income (loss).......................................... 0.12%(3) (0.02)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $530 $850
Portfolio turnover rate............................................... 31% 178%
</TABLE>
- ---------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
22
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALL-
CAP FUND
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP 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
International SmallCap Fund (the "Fund") at May 31, 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 periods indicated, 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 May 31, 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
JULY 9, 1999
23
<PAGE>
TRUSTEES
Michael Bozic MORGAN STANLEY
Charles A. Fiumefreddo DEAN WITTER
Edwin J. Garn INTERNATIONAL
Wayne E. Hedien SMALLCAP FUND
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder [PHOTO]
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Mitchell M. Merin
President
Barry Fink
Vice President, Secretary and General Counsel
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
SUB-ADVISOR
Morgan Stanley Dean Witter
Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
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 ANNUAL REPORT
to prospective investors in the Fund unless MAY 31, 1999
preceded or accompanied by an effective prospectus.
