<PAGE>
PROSPECTUS - AUGUST 30, 1999
Morgan Stanley Dean Witter
INTERNATIONAL SMALLCAP FUND
[COVER PHOTO]
A MUTUAL FUND THAT SEEKS LONG-TERM GROWTH OF CAPITAL
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon
the adequacy of this Prospectus. Any representation to the contrary is a
criminal offense.
<PAGE>
CONTENTS
<TABLE>
<S> <C> <C>
The Fund Investment Objective.................................. 1
Principal Investment Strategies....................... 1
Principal Risks....................................... 2
Past Performance...................................... 4
Fees and Expenses..................................... 5
Additional Investment Strategy Information............ 6
Additional Risk Information........................... 7
Fund Management....................................... 8
Shareholder Information Pricing Fund Shares................................... 10
How to Buy Shares..................................... 10
How to Exchange Shares................................ 12
How to Sell Shares.................................... 13
Distributions......................................... 15
Tax Consequences...................................... 16
Share Class Arrangements.............................. 16
Financial Highlights ...................................................... 24
Our Family of Funds ...................................................... Inside Back Cover
THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE FUND.
PLEASE READ IT CAREFULLY AND KEEP IT FOR FUTURE REFERENCE.
</TABLE>
<PAGE>
[Sidebar]
CAPITAL GROWTH
AN INVESTMENT OBJECTIVE HAVING THE GOAL OF SELECTING SECURITIES WITH THE
POTENTIAL TO RISE IN PRICE RATHER THAN PAY OUT INCOME.
[End Sidebar]
THE FUND
[ICON] INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
Morgan Stanley Dean Witter International SmallCap Fund seeks
long-term growth of capital.
[ICON] PRINCIPAL INVESTMENT STRATEGIES
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The Fund will normally invest at least 65% of its total assets in
common stocks and other equity securities (including depository
receipts) of "small capitalization" companies located outside the
United States. A company is considered to be a "small capitalization"
company if, at the time of purchase, it is among the smaller
capitalized companies in the country in which the company is located,
i.e., among the companies comprising no more than 35% of the total
market capitalization of that country. The Fund will invest in at
least three countries located outside the United States, and
currently may invest more than 25% of total assets in securities of
companies located in each of the United Kingdom and Japan. A company
is considered to be located in a particular country if it (a) is
organized under the laws of the country, (b) has securities which are
principally traded on a stock exchange in the country, (c) derives at
least 50% of its revenues from goods produced or sold, investments
made, or services performed in the country, or (d) maintains at least
50% of its assets in the country.
The Fund's "Sub-Advisor," Morgan Stanley Dean Witter Investment
Management Inc., utilizes an investment strategy that primarily
emphasizes stock research and selection, in combination with
quantitative analysis. The Sub-Advisor seeks securities of companies
with long-term growth prospects, attractive valuation comparisons and
adequate market liquidity. The stocks the Sub-Advisor finds
attractive generally have valuations lower than the Sub-Advisor's
perception of their fundamental value, as reflected in price-to-cash
flow, price-to-book ratios or other stock valuation measures.
Common stock is a share ownership or equity interest in a
corporation. It may or may not pay dividends, as some companies
reinvest all of their profits back into their businesses, while
others pay out some of their profits to shareholders as dividends. A
depository receipt is generally issued by a bank or financial
institution and represents an ownership interest in the common stock
or other equity securities of a foreign company.
In addition, the Fund may invest in equity securities of companies
that have medium or large market capitalizations, fixed-income
securities issued or guaranteed by foreign governments, lower-rated
convertible securities and forward currency contracts.
In pursuing the Fund's investment objective, the Sub-Advisor has
considerable leeway in deciding which investments it buys, holds or
sells on a day-to-day basis -- and which trading strategies it uses.
For example, the Sub-Advisor in its discretion may determine to use
some permitted trading strategies while not using others.
1
<PAGE>
[ICON] PRINCIPAL RISKS
- --------------------------------------------------------------------------------
There is no assurance that the Fund will achieve its investment
objective. The Fund's share price will fluctuate with changes in the
market value of the Fund's portfolio securities. When you sell Fund
shares, they may be worth less than what you paid for them and,
accordingly, you can lose money investing in this Fund.
A principal risk of investing in the Fund is associated with its
foreign small-cap securities. In general, stock and other equity
securities values fluctuate in response to activities specific to the
company as well as general market, economic and political conditions.
These prices can fluctuate widely in response to these factors.
FOREIGN SECURITIES. The Fund's investments in foreign securities
(including depository receipts) involve risks that are in addition to
the risks associated with domestic securities. One additional risk is
currency risk. While the price of Fund shares is quoted in U.S.
dollars, the Fund generally converts U.S. dollars to a foreign
market's local currency to purchase a security in that market. If the
value of that local currency falls relative to the U.S. dollar, the
U.S. dollar value of the foreign security will decrease. This is true
even if the foreign security's local price remains unchanged.
Foreign securities also have risks related to economic and political
developments abroad, including expropriations, confiscatory taxation,
exchange control regulation, limitations on the use or transfer of
Fund assets and any effects of foreign social, economic or political
instability. Foreign companies, in general, are not subject to the
regulatory requirements of U.S. companies and, as such, there may be
less publicly available information about these companies. Moreover,
foreign accounting, auditing and financial reporting standards
generally are different from those applicable to U.S. companies.
Finally, in the event of a default of any foreign debt obligations,
it may be more difficult for the Fund to obtain or enforce a judgment
against the issuers of the securities.
Securities of foreign issuers may be less liquid than comparable
securities of U.S. issuers and, as such, their price changes may be
more volatile. Furthermore, foreign exchanges and broker-dealers are
generally subject to less government and exchange scrutiny and
regulation than their U.S. counterparts.
The Fund's ability to concentrate investments in Japanese and United
Kingdom companies will subject the Fund to the risks of adverse
social, political or economic events which occur in those countries.
Specifically, investments in the Japanese stock market may entail a
higher degree of risk than investments in other markets. The prices
of securities traded on the Japanese markets may be more volatile
than many other markets. In addition, political and economic
developments occurring in Europe, especially as they relate to
changes in the structure of the European Economic Community, may
affect the Fund's investments in the United Kingdom.
Many European countries have adopted or are in the process of
adopting a single European currency, referred to as the "euro." The
long-term consequences of the euro
2
<PAGE>
conversion for foreign exchange rates, interest rates and the value
of European securities the Fund may purchase are unclear. The
consequences may adversely affect the value and/or increase the
volatility of European securities held by the Fund.
SMALL-CAP COMPANIES. In general, stock and other equity securities
values fluctuate in response to activities specific to the company as
well as general market, economic and political conditions. These
prices can fluctuate widely in response to these factors.
Investing in lesser-known, smaller capitalized companies may involve
greater risk of volatility of the Fund's share price than is
customarily associated with investing in larger, more established
companies. There is typically less publicly available information
concerning smaller companies than for larger, more established
companies. Some small companies have limited product lines,
distribution channels and financial and managerial resources and tend
to concentrate on fewer geographic markets than do larger companies.
Also, because smaller companies normally have fewer shares
outstanding than larger companies and trade less frequently, it may
be more difficult for the Fund to buy and sell significant amounts of
shares without an unfavorable impact on prevailing market prices.
Some of the companies in which the Fund may invest may distribute,
sell or produce products which have recently been brought to market
and may be dependent on key personnel with varying degrees of
experience.
OTHER RISKS. The performance of the Fund also will depend on whether
the Sub-Advisor is successful in pursuing the Fund's investment
strategy. The Fund is subject to other risks from its permissible
investments including the risks associated with its investment in
other equity securities, fixed-income securities and forward currency
contracts. For more information about these risks, see the
"Additional Risk Information" section.
Shares of the Fund are not bank deposits and are not guaranteed or
insured by the FDIC or any other government agency.
3
<PAGE>
[Sidebar]
ANNUAL TOTAL RETURNS
THIS CHART SHOWS HOW THE PERFORMANCE OF THE FUND'S CLASS B SHARES HAS VARIED
FROM YEAR TO YEAR OVER THE PAST 4 CALENDAR YEARS.
AVERAGE ANNUAL
TOTAL RETURNS
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL RETURNS WITH THOSE OF A BROAD
MEASURE OF MARKET PERFORMANCE OVER TIME, AS WELL AS WITH INDICES OF FUNDS WITH
SIMILAR INVESTMENT OBJECTIVES. THE FUND'S RETURNS INCLUDE THE MAXIMUM APPLICABLE
SALES CHARGE FOR EACH CLASS AND ASSUME YOU SOLD YOUR SHARES AT THE END OF EACH
PERIOD.
[End Sidebar]
[ICON] PAST PERFORMANCE
- --------------------------------------------------------------------------------
The bar chart and table below provide some indication of the risks of
investing in the Fund. The Fund's past performance does not indicate
how the Fund will perform in the future.
ANNUAL TOTAL RETURNS - CALENDAR YEARS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1995 2.90%
96 1.01%
97 -16.98%
98 4.04%
</TABLE>
The bar chart reflects the performance of Class B shares; the performance of the
other Classes will differ because the Classes have different ongoing fees. The
performance information in the bar chart does not reflect the deduction of sales
charges; if these amounts were reflected, returns would be less than shown.
Year-to-date total return as of June 30, 1999 was 25.61%.
During the periods shown in the bar chart, the highest return for a
calendar quarter was 11.17% (quarter ended March 31, 1998) and the
lowest return for a calendar quarter was -16.51% (quarter ended
September 30, 1998).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 1998)
- -----------------------------------------------------------------------
PAST 1 YEAR LIFE OF FUND
(SINCE 7/29/94)
<S> <C> <C>
- -----------------------------------------------------------------------
Class A(1) -0.54% --
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Class B -0.96% -5.17
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Class C(1) 3.04% --
- -----------------------------------------------------------------------
Class D(1) 4.55% --
- -----------------------------------------------------------------------
MSCI EAFE Index(2) 20.33% 8.45
- -----------------------------------------------------------------------
EAFESC Index(3) 5.44% -2.72
- -----------------------------------------------------------------------
Lipper International Small-Cap Fund
Average(4) 13.11% 5.83
- -----------------------------------------------------------------------
</TABLE>
1 Classes A, C and D commenced operations on July 28, 1997.
2 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.
3 The index return labeled EAFESC Index 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 the 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.
4 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.
4
<PAGE>
[Sidebar]
SHAREHOLDER FEES
THESE FEES ARE PAID DIRECTLY FROM YOUR INVESTMENT.
ANNUAL FUND
OPERATING EXPENSES
THESE EXPENSES ARE DEDUCTED FROM THE FUND'S ASSETS AND ARE BASED ON EXPENSES
PAID FOR THE FISCAL YEAR ENDED MAY 31, 1999.
[End Sidebar]
[ICON] FEES AND EXPENSES
- --------------------------------------------------------------------------------
The table below briefly describes the fees and expenses that you may
pay if you buy and hold shares of the Fund. The Fund offers four
Classes of shares: Classes A, B, C and D. Each Class has a different
combination of fees, expenses and other features. The Fund does not
charge account or exchange fees. See the "Share Class Arrangements"
section for further fee and expense information.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
<S> <C> <C> <C> <C>
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SHAREHOLDER FEES
- ---------------------------------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.25%(1) None None None
- ---------------------------------------------------------------------------------------------------------
Maximum deferred sales charge (load) (as a percentage based
on the lesser of the offering price or net asset value at
redemption) None(2) 5.00%(3) 1.00%(4) None
- ---------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
- ---------------------------------------------------------------------------------------------------------
Management Fee 1.15% 1.15% 1.15% 1.15%
- ---------------------------------------------------------------------------------------------------------
Distribution and service (12b-1) fees 0.24% 1.00% 0.78% None
- ---------------------------------------------------------------------------------------------------------
Other expenses 0.97% 0.97% 0.97% 0.97%
- ---------------------------------------------------------------------------------------------------------
Total annual Fund operating expenses 2.36% 3.12% 2.90% 2.12%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
1 Reduced for purchases of $25,000 and over.
2 Investments that are not subject to any sales charge at the time of
purchase are subject to a contingent deferred sales charge ("CDSC") of
1.00% that will be imposed if you sell your shares within one year after
purchase, except for certain specific circumstances.
3 The CDSC is scaled down to 1.00% during the sixth year, reaching zero
thereafter. See "Share Class Arrangements" for a complete discussion of the
CDSC.
4 Only applicable if you sell your shares within one year after purchase.
EXAMPLE
This example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund, your
investment has a 5% return each year, and the Fund's operating
expenses remain the same. Although your actual costs may be higher or
lower, the tables below show your costs at the end of each period
based on these assumptions depending upon whether or not you sell
your shares at the end of each period.
<TABLE>
<CAPTION>
IF YOU SOLD YOUR SHARES IF YOU HELD YOUR SHARES
----------------------------------------- -----------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------- -----------------------------------------
CLASS A $752 $1223 $1719 $3079 $752 $1223 $1719 $3079
- ---------------------------------------------------------- -----------------------------------------
CLASS B $815 $1262 $1833 $3426 $315 $ 962 $1633 $3426
- ---------------------------------------------------------- -----------------------------------------
CLASS C $393 $ 897 $1527 $3221 $293 $ 897 $1527 $3221
- ---------------------------------------------------------- -----------------------------------------
CLASS D $215 $ 663 $1137 $2448 $215 $ 663 $1137 $2448
- ---------------------------------------------------------- -----------------------------------------
</TABLE>
5
<PAGE>
Long-term shareholders of Class B and Class C may pay more in sales
charges, including distribution fees, than the economic equivalent of
the maximum front-end sales charges permitted by the National
Association of Securities Dealers.
[ICON] ADDITIONAL INVESTMENT STRATEGY INFORMATION
- --------------------------------------------------------------------------------
This section provides additional information relating to the Fund's
principal strategies.
OTHER INVESTMENTS. The Fund may invest up to 35% of its total assets
in equity securities of medium- and large-cap companies and in
fixed-income securities issued or guaranteed by foreign governments.
Additionally, this portion of the Fund may be invested in other
financial instruments such as forward foreign exchange contracts,
futures contracts and options.
LOWER RATED CONVERTIBLE SECURITIES. The Fund may also invest up to
35% of its assets in convertible securities rated below investment
grade. Securities below investment grade are commonly known as "junk
bonds."
FORWARD CURRENCY CONTRACTS. The Fund's investments also may include
forward currency contracts, which involve the purchase or sale of a
specific amount of foreign currency at the current price with
delivery at a specified future date. The Fund may use these contracts
to hedge against adverse price movements in its portfolio securities
or securities it may purchase and the currencies in which they are
denominated or to gain exposure to currencies underlying various
securities or financial instruments.
DEFENSIVE INVESTING. The Fund may take temporary "defensive"
positions in attempting to respond to adverse market conditions. The
Fund may invest any amount of its assets in cash or money market
instruments in a defensive posture when the Sub-Advisor believes it
is advisable to do so. Although taking a defensive posture is
designed to protect the Fund from an anticipated market downturn, it
could have the effect of reducing the benefit from any upswing in the
market. When the Fund takes a defensive position, it may not achieve
its investment objective.
PORTFOLIO TURNOVER. The Fund may engage in active and frequent
trading of portfolio securities to achieve its principal investment
strategies. The portfolio turnover rate is not expected to exceed
250% annually under normal circumstances. A high turnover rate, such
as 250%, will increase Fund brokerage costs. It also may increase the
Fund's capital gains, which are passed along to Fund shareholders as
distributions. This, in turn, may increase your tax liability as a
Fund shareholder. See the sections on "Distributions" and "Tax
Consequences."
The percentage limitations relating to the composition of the Fund's
portfolio apply at the time the Fund acquires an investment and refer
to the Fund's net assets, unless otherwise noted. Subsequent
percentage changes that result from market fluctuations
6
<PAGE>
will not require the Fund to sell any portfolio security. The Fund
may change its principal investment strategies without shareholder
approval; however, you would be notified of any changes.
[ICON] ADDITIONAL RISK INFORMATION
- --------------------------------------------------------------------------------
This section provides additional information relating to the
principal risks of investing in the Fund.
MEDIUM AND LARGE-CAP EQUITY SECURITIES. Any Fund investments in
medium- and large-cap companies involve substantially similar risk to
that of common stock generally. In general, equity security values
fluctuate in response to activities specific to the company as well
as general market, economic and political conditions. These prices
can fluctuate widely in response to these factors.
FIXED-INCOME SECURITIES. Any Fund investments in fixed-income
securities involve risk. All fixed-income securities are subject to
two types of risk: credit risk and interest rate risk. Credit risk
refers to the possibility that the issuer of a security will be
unable to make interest payments and repay the principal on its debt.
Interest rate risk refers to fluctuations in the value of a
fixed-income security resulting from changes in the general level of
interest rates. When the general level of interest rates goes up, the
price of most fixed-income securities goes down. When the general
level of interest rates goes down, the price of most fixed-income
securities goes up.
LOWER RATED CONVERTIBLE SECURITIES. Any Fund investments in lower
rated convertible securities, known as "junk bonds," pose significant
risks. The prices of these securities are likely to be more sensitive
to adverse economic changes or individual corporate developments than
higher rated securities. During an economic downturn or substantial
period of rising interest rates, junk bond issuers and, in
particular, highly leveraged issuers may experience financial stress
that would adversely affect their ability to service their principal
and interest payment obligations, to meet their projected business
goals or to obtain additional financing. In the event of a default,
the Fund may incur additional expenses to seek recovery. The
illiquidity of the junk bond market may also adversely affect the
ability of the Fund's Trustees to arrive at a fair value for certain
junk bonds at certain times and could make it difficult for the Funds
to sell certain securities. In addition, periods of economic
uncertainty and change probably would result in an increased
volatility of market prices of high yield securities and a
corresponding volatility in a Fund's net asset value.
FORWARD CURRENCY CONTRACTS. The Fund's participation in forward
currency contracts also involves risks. If the Sub-Advisor employs a
strategy that does not correlate well with the Fund's investments or
the currencies in which the investments are denominated, currency
contracts could result in a loss. The contracts also may increase the
Fund's volatility and may involve a significant risk.
7
<PAGE>
[Sidebar]
MORGAN STANLEY DEAN WITTER ADVISORS INC.
THE INVESTMENT MANAGER IS WIDELY RECOGNIZED AS A LEADER IN THE MUTUAL FUND
INDUSTRY AND TOGETHER WITH MORGAN STANLEY DEAN WITTER SERVICES COMPANY INC., ITS
WHOLLY-OWNED SUBSIDIARY, HAD MORE THAN $137 BILLION IN ASSETS UNDER MANAGEMENT
OR ADMINISTRATION AS OF JULY 31, 1999.
[End Sidebar]
YEAR 2000. The Fund could be adversely affected if the computer
systems necessary for the efficient operation of the Fund's
"Investment Manager" -- Morgan Stanley Dean Witter Advisors Inc., the
Sub-Advisor, the Fund's other service providers and the markets and
corporate and governmental issuers in which the Fund invests do not
properly process and calculate date-related information from and
after January 1, 2000. While year 2000-related computer problems
could have a negative effect on the Fund, the Investment Manager, the
Sub-Advisor and their affiliates are working hard to avoid any
problems and to obtain assurances from their service providers that
they are taking similar steps.
In addition, it is possible that the markets for securities in which
the Fund invests may be detrimentally affected by computer failures
throughout the financial services industry beginning January 1, 2000.
Improperly functioning trading systems may result in settlement
problems and liquidity issues. In addition, corporate and
governmental data processing errors also may result in production
problems for individual companies and overall economic uncertainties.
Earnings of individual issuers will be affected by remediation costs,
which may be substantial and may be reported inconsistently in U.S.
and foreign financial statements. Accordingly, the Fund's investments
may be adversely affected.
[ICON] FUND MANAGEMENT
- --------------------------------------------------------------------------------
The Fund has retained the Investment Manager -- Morgan Stanley Dean
Witter Advisors Inc. -- to provide administrative services and manage
its business affairs. The Investment Manager has, in turn, contracted
with the Sub-Advisor - Morgan Stanley Dean Witter Investment
Management Inc. - to invest the Fund's assets, including the placing
of orders for the purchase and sale of portfolio securities. Morgan
Stanley Dean Witter Investment Management Inc. has been the
Sub-Advisor of the Fund since December 1, 1997. The Investment
Manager is a wholly-owned subsidiary of Morgan Stanley Dean Witter &
Co., a preeminent global financial services firm that maintains
leading market positions in each of its three primary businesses:
securities, asset management and credit services. Its main business
office is located at Two World Trade Center, New York, NY 10048.
The Sub-Advisor, together with its institutional investment
management affiliates, manages assets of approximately $137 billion
as of July 31, 1999, for U.S. corporate and public employee benefit
plans, investment companies, endowments, foundations and wealthy
individuals. The Sub-Advisor is also a wholly-owned subsidiary of
Morgan Stanley Dean Witter & Co. Its main business office is located
at 1221 Avenue of the Americas, New York, New York 10020.
8
<PAGE>
The Fund's portfolio is managed by a team of portfolio managers
located in the Sub-Advisor's offices in London, Amsterdam, Singapore
and Tokyo. The Sub-Advisor's portfolio mangement team has been
responsible for managing the Fund since December 1, 1997.
The Fund pays the Investment Manager a monthly management fee as full
compensation for the services and facilities furnished to the Fund,
and for Fund expenses assumed by the Investment Manager. The fee is
based on the Fund's average daily net assets. For the fiscal year
ended May 31, 1999 the Fund accrued total compensation to the
Investment Manager amounting to 1.15% of the Fund's average daily net
assets. The Investment Manager pays the Sub-Advisor compensation
equal to 40% of its compensation.
9
<PAGE>
[Sidebar]
CONTACTING A
FINANCIAL ADVISOR
IF YOU ARE NEW TO THE
MORGAN STANLEY DEAN
WITTER FAMILY OF FUNDS AND
WOULD LIKE TO CONTACT A
FINANCIAL ADVISOR, CALL
(800) THE-DEAN FOR THE
TELEPHONE NUMBER OF THE
MORGAN STANLEY DEAN
WITTER OFFICE NEAREST YOU.
YOU MAY ALSO ACCESS OUR
OFFICE LOCATOR ON OUR
INTERNET SITE AT: www.msdw.com/individual/funds
[End Sidebar]
SHAREHOLDER INFORMATION
[ICON] PRICING FUND SHARES
- --------------------------------------------------------------------------------
The price of Fund shares (excluding sales charges), called "net asset
value," is based on the value of the Fund's portfolio securities.
While the assets of each Class are invested in a single portfolio of
securities, the net asset value of each Class will differ because the
Classes have different ongoing distribution fees.
The net asset value per share of the Fund is determined once daily at
4:00 p.m. Eastern time on each day that the New York Stock Exchange
is open (or, on days when the New York Stock Exchange closes prior to
4:00 p.m., at such earlier time). Shares will not be priced on days
that the New York Stock Exchange is closed.
The value of the Fund's portfolio securities is based on the
securities' market price when available. When a market price is not
readily available, including circumstances under which the Investment
Manager and/or Sub-Advisor determine that a security's market price
is not accurate, a portfolio security is valued at its fair value, as
determined under procedures established by the Fund's Board of
Trustees. In these cases, the Fund's net asset value will reflect
certain portfolio securities' fair value rather than their market
price. In addition, if the Fund holds securities primarily listed on
foreign exchanges, the value of the Fund's portfolio securities may
change on days when you will not be able to purchase or sell your
shares.
An exception to the Fund's general policy of using market prices
concerns its short-term debt portfolio securities. Debt securities
with remaining maturities of sixty days or less at the time of
purchase are valued at amortized cost. However, if the cost does not
reflect the securities' market value, these securities will be valued
at their fair value.
[ICON] HOW TO BUY SHARES
- --------------------------------------------------------------------------------
You may open a new account to buy Fund shares or buy additional
Fund shares for an existing account by contacting your Morgan
Stanley Dean Witter Financial Advisor or other authorized financial
representative. Your Financial Advisor will assist you,
step-by-step, with the procedures to invest in the Fund. You may
also purchase shares directly by calling the Fund's transfer agent
and requesting an application.
Because every investor has different immediate financial needs and
long-term investment goals, the Fund offers investors four Classes
of shares: Classes A, B, C and D. Class D shares are only offered
to a limited group of investors. Each Class of shares offers a
distinct structure of sales charges, distribution and service fees,
and other features that are designed to address a variety of needs.
Your Financial Advisor or other authorized financial representative
can help you decide which Class may be most appropriate for you.
When purchasing Fund shares, you must specify which Class of shares
you wish to purchase.
10
<PAGE>
[Sidebar]
EASYINVEST-SM-
A PURCHASE PLAN THAT ALLOWS YOU TO TRANSFER MONEY AUTOMATICALLY FROM YOUR
CHECKING OR SAVINGS ACCOUNT OR FROM A MONEY MARKET FUND ON A SEMI-MONTHLY,
MONTHLY OR QUARTERLY BASIS. CONTACT YOUR MORGAN STANLEY DEAN WITTER FINANCIAL
ADVISOR FOR FURTHER INFORMATION ABOUT THIS SERVICE.
[End Sidebar]
When you buy Fund shares, the shares are purchased at the next share
price calculated (less any applicable front-end sales charge for
Class A shares) after we receive your purchase order. Your payment is
due on the third business day after you place your purchase order. We
reserve the right to reject any order for the purchase of Fund
shares.
<TABLE>
<CAPTION>
MINIMUM INVESTMENT AMOUNTS
- ------------------------------------------------------------------------------------------------
MINIMUM INVESTMENT
----------------------
INVESTMENT OPTIONS INITIAL ADDITIONAL
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Regular Accounts $ 1,000 $ 100
- ------------------------------------------------------------------------------------------------
Individual Retirement Accounts: Regular IRAs $ 1,000 $ 100
Education IRAs $500 $ 100
- ------------------------------------------------------------------------------------------------
EASYINVEST-SM- (Automatically from your checking
or savings account or Money Market
Fund) $100* $ 100*
- ------------------------------------------------------------------------------------------------
</TABLE>
* Provided your schedule of investments totals $1,000 in twelve months.
There is no minimum investment amount if you purchase Fund shares
through: (1) the Investment Manager's mutual fund asset allocation
plan, (2) a program, approved by the Fund's distributor, in which you
pay an asset-based fee for advisory, administrative and/ or brokerage
services, or (3) employer-sponsored employee benefit plan accounts.
INVESTMENT OPTIONS FOR CERTAIN INSTITUTIONAL AND OTHER
INVESTORS/CLASS D SHARES. To be eligible to purchase Class D shares,
you must qualify under one of the investor categories specified in
the "Share Class Arrangements" section of this PROSPECTUS.
SUBSEQUENT INVESTMENTS SENT DIRECTLY TO THE FUND. In addition to
buying additional Fund shares for an existing account by contacting
your Morgan Stanley Dean Witter Financial Advisor or other authorized
financial representative, you may send a check directly to the Fund.
To buy additional shares in this manner:
- Write a "letter of instruction" to the Fund specifying the name(s)
on the account, the account number, the social security or tax
identification number, the Class of shares you wish to purchase and
the investment amount (which would include any applicable front-end
sales charge). The letter must be signed by the account owner(s).
- Make out a check for the total amount payable to: Morgan Stanley
Dean Witter International SmallCap Fund.
- Mail the letter and check to Morgan Stanley Dean Witter Trust FSB
at P.O. Box 1040, Jersey City, NJ 07303.
11
<PAGE>
[ICON] HOW TO EXCHANGE SHARES
- --------------------------------------------------------------------------------
PERMISSIBLE FUND EXCHANGES. You may exchange shares of any Class of
the Fund for the same Class of any other continuously offered
Multi-Class Fund, or for shares of a No-Load Fund, a Money Market
Fund, North American Government Income Trust or Short-Term U.S.
Treasury Trust, without the imposition of an exchange fee. See the
inside back cover of this PROSPECTUS for each Morgan Stanley Dean
Witter Fund's designation as a Multi-Class Fund, No-Load Fund or
Money Market Fund. If a Morgan Stanley Dean Witter Fund is not
listed, consult the inside back cover of that Fund's PROSPECTUS for
its designation. For purposes of exchanges, shares of FSC Funds
(subject to a front-end sales charge) are treated as Class A shares
of a Multi-Class Fund.
Exchanges may be made after shares of the Fund acquired by purchase
have been held for thirty days. There is no waiting period for
exchanges of shares acquired by exchange or dividend reinvestment.
The current PROSPECTUS for each fund describes its investment
objective(s), policies and investment minimums, and should be read
before investment. Since exchanges are available only into
continuously offered Morgan Stanley Dean Witter Funds, exchanges are
not available into any new Morgan Stanley Dean Witter Fund during its
initial offering period, or when shares of a particular Morgan
Stanley Dean Witter Fund are not being offered for purchase.
EXCHANGE PROCEDURES. You can process an exchange by contacting your
Morgan Stanley Dean Witter Financial Advisor or other authorized
financial representative. Otherwise, you must forward an exchange
privilege authorization form to the Fund's transfer agent -- Morgan
Stanley Dean Witter Trust FSB -- and then write the transfer agent or
call (800) 869-NEWS to place an exchange order. You can obtain an
exchange privilege authorization form by contacting your Financial
Advisor or other authorized financial representative, or by calling
(800) 869-NEWS. If you hold share certificates, no exchanges may be
processed until we have received all applicable share certificates.
An exchange to any Morgan Stanley Dean Witter Fund (except a Money
Market Fund) is made on the basis of the next calculated net asset
values of the Funds involved after the exchange instructions are
accepted. When exchanging into a Money Market Fund, the Fund's shares
are sold at their next calculated net asset value and the Money
Market Fund's shares are purchased at their net asset value on the
following business day.
The Fund may terminate or revise the exchange privilege upon required
notice. The check writing privilege is not available for Money Market
Fund shares you acquire in an exchange.
TELEPHONE EXCHANGES. For your protection when calling Morgan Stanley
Dean Witter Trust FSB, we will employ reasonable procedures to
confirm that exchange instructions communicated over the telephone
are genuine. These procedures may include requiring various forms of
personal identification such as name, mailing address, social
security or other tax identification number. Telephone instructions
also may be recorded.
Telephone instructions will be accepted if received by the Fund's
transfer agent between 9:00 a.m. and 4:00 p.m. Eastern time on any
day the New York Stock Exchange is open
12
<PAGE>
for business. During periods of drastic economic or market changes,
it is possible that the telephone exchange procedures may be
difficult to implement, although this has not been the case with the
Fund in the past.
MARGIN ACCOUNTS. If you have pledged your Fund shares in a margin
account, contact your Morgan Stanley Dean Witter Financial Advisor or
other authorized financial representative regarding restrictions on
the exchange of such shares.
TAX CONSIDERATIONS OF EXCHANGES. If you exchange shares of the Fund
for shares of another Morgan Stanley Dean Witter Fund, there are
important tax considerations. For tax purposes, the exchange out of
the Fund is considered a sale of Fund shares -- and the exchange into
the other Fund is considered a purchase. As a result, you may realize
a capital gain or loss.
You should review the "Tax Consequences" section and consult your own
tax professional about the tax consequences of an exchange.
FREQUENT EXCHANGES. A pattern of frequent exchanges may result in the
Fund limiting or prohibiting, at its discretion, additional purchases
and/or exchanges. The Fund will notify you in advance of limiting
your exchange privileges.
CDSC CALCULATIONS ON EXCHANGES. See the "Share Class Arrangements"
section of this PROSPECTUS for a further discussion of how applicable
contingent deferred sales charges (CDSCs) are calculated for shares
of one Morgan Stanley Dean Witter Fund that are exchanged for shares
of another.
For further information regarding exchange privileges, you should
contact your Morgan Stanley Dean Witter Financial Advisor, or call
(800) 869-NEWS.
[ICON] HOW TO SELL SHARES
- --------------------------------------------------------------------------------
You can sell some or all of your Fund shares at any time. If you sell
Class A, Class B or Class C shares, your net sale proceeds are
reduced by the amount of any applicable CDSC. Your shares will be
sold at the next price calculated after we receive your order to sell
as described below.
<TABLE>
<CAPTION>
OPTIONS PROCEDURES
<S> <C>
- --------------------------------------------------------------------------------
Contact Your To sell your shares, simply call your Morgan Stanley Dean
Financial Advisor Witter Financial Advisor or other authorized financial
representative.
------------------------------------------------------------
[ICON]
Payment will be sent to the address to which the account is
registered or deposited in your brokerage account.
- --------------------------------------------------------------------------------
By Letter You can also sell your shares by writing a "letter of
instruction" that includes:
[ICON]
- your account number;
- the dollar amount or the number of shares you wish to
sell;
- the Class of shares you wish to sell; and
- the signature of each owner as it appears on the account.
------------------------------------------------------------
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
OPTIONS PROCEDURES
- --------------------------------------------------------------------------------
<S> <C>
By Letter, If you are requesting payment to anyone other than the
continued registered owner(s) or that payment be sent to any address
other than the address of the registered owner(s) or
pre-designated bank account, you will need a signature
guarantee. You can obtain a signature guarantee from an
eligible guarantor acceptable to Morgan Stanley Dean Witter
Trust FSB. (You should contact Morgan Stanley Dean Witter
Trust FSB at (800) 869-NEWS for a determination as to
whether a particular institution is an eligible guarantor.)
A notary public CANNOT provide a signature guarantee.
Additional documentation may be required for shares held by
a corporation, partnership, trustee or executor.
------------------------------------------------------------
Mail the letter to Morgan Stanley Dean Witter Trust FSB at
P.O. Box 983, Jersey City, NJ 07303. If you hold share
certificates, you must return the certificates, along with
the letter and any required additional documentation.
------------------------------------------------------------
A check will be mailed to the name(s) and address in which
the account is registered, or otherwise according to your
instructions.
- --------------------------------------------------------------------------------
Systematic If your investment in all of the Morgan Stanley Dean Witter
Withdrawal Plan Family of Funds has a total market value of at least
$10,000, you may elect to withdraw amounts of $25 or more,
or in any whole percentage of a Fund's balance (provided the
amount is at least $25), on a monthly, quarterly,
semi-annual or annual basis, from any Fund with a balance of
$1,000. Each time you add a Fund to the plan, you must meet
the plan requirements.
------------------------------------------------------------
[ICON]
Amounts withdrawn are subject to any applicable CDSC. A CDSC
may be waived under certain circumstances. See the Class B
waiver categories listed in the "Share Class Arrangements"
section of this PROSPECTUS.
------------------------------------------------------------
To sign up for the Systematic Withdrawal Plan, contact your
Morgan Stanley Dean Witter Financial Advisor or other
authorized financial representative, or call (800) 869-NEWS.
You may terminate or suspend your plan at any time. Please
remember that withdrawals from the plan are sales of shares,
not Fund "distributions," and ultimately may exhaust your
account balance. The Fund may terminate or revise the plan
at any time.
- --------------------------------------------------------------------------------
</TABLE>
PAYMENT FOR SOLD SHARES. After we receive your complete instructions
to sell as described above, a check will be mailed to you within
seven days, although we will attempt to make payment within one
business day. Payment may also be sent to your brokerage account.
Payment may be postponed or the right to sell your shares suspended
under unusual circumstances. If you request to sell shares that were
recently purchased by check, payment of the sale proceeds may be
delayed for the minimum time needed to verify that the check has been
honored (not more than fifteen days from the time we receive the
check).
TAX CONSIDERATIONS. Normally, your sale of Fund shares is subject to
federal and state income tax. You should review the "Tax
Consequences" section of this PROSPECTUS and consult your own tax
professional about the tax consequences of a sale.
REINSTATEMENT PRIVILEGE. If you sell Fund shares and have not
previously exercised the reinstatement privilege, you may, within 35
days after the date of sale, invest any portion of the proceeds in
the same Class of Fund shares at their net asset value and receive a
pro rata credit for any CDSC paid in connection with the sale.
14
<PAGE>
[Sidebar]
TARGETED DIVIDENDS-SM-
YOU MAY SELECT TO HAVE YOUR FUND DISTRIBUTIONS AUTOMATICALLY INVESTED IN OTHER
CLASSES OF FUND SHARES OR CLASSES OF ANOTHER MORGAN STANLEY DEAN WITTER FUND
THAT YOU OWN. CONTACT YOUR MORGAN STANLEY DEAN WITTER FINANCIAL ADVISOR FOR
FURTHER INFORMATION ABOUT THIS SERVICE.
[End Sidebar]
INVOLUNTARY SALES. The Fund reserves the right, on sixty days'
notice, to sell the shares of any shareholder (other than shares held
in an IRA or 403(b) Custodial Account) whose shares, due to sales by
the shareholder, have a value below $100, or in the case of an
account opened through EASYINVEST-SM-, if after 12 months the
shareholder has invested less than $1,000 in the account.
However, before the Fund sells your shares in this manner, we will
notify you and allow you sixty days to make an additional investment
in an amount that will increase the value of your account to at least
the required amount before the sale is processed. No CDSC will be
imposed on any involuntary sale.
MARGIN ACCOUNTS. If you have pledged your Fund shares in a margin
account, contact your Morgan Stanley Dean Witter Financial Advisor or
other authorized financial representative regarding restrictions on
the sale of such shares.
[ICON] DISTRIBUTIONS
- --------------------------------------------------------------------------------
The Fund passes substantially all of its earnings from income and
capital gains along to its investors as "distributions." The Fund
earns income from stocks and interest from fixed-income investments.
These amounts are passed along to Fund shareholders as "income
dividend distributions." The Fund realizes capital gains whenever it
sells securities for a higher price than it paid for them. These
amounts may be passed along as "capital gain distributions."
The Fund declares income dividends separately for each Class.
Distributions paid on Class A and Class D shares usually will be
higher than for Class B and Class C because distribution fees that
Class B and Class C pay are higher. Normally, income dividends are
distributed to shareholders annually. Capital gains, if any, are
usually distributed in December. The Fund, however, may retain and
reinvest any long-term capital gains. The Fund may at times make
payments from sources other than income or capital gains that
represent a return of a portion of your investment.
Distributions are reinvested automatically in additional shares of
the same Class and automatically credited to your account, unless you
request in writing that all distributions be paid in cash. If you
elect the cash option, the Fund will mail a check to you no later
than seven business days after the distribution is declared. No
interest will accrue on uncashed checks. If you wish to change how
your distributions are paid, your request should be received by the
Fund's transfer agent, Morgan Stanley Dean Witter Trust FSB, at least
five business days prior to the record date of the distributions.
15
<PAGE>
[ICON] TAX CONSEQUENCES
- --------------------------------------------------------------------------------
As with any investment, you should consider how your Fund investment
will be taxed. The tax information in this PROSPECTUS is provided as
general information. You should consult your own tax professional
about the tax consequences of an investment in the Fund.
Unless your investment in the Fund is through a tax-deferred
retirement account, such as a 401(k) plan or IRA, you need to be
aware of the possible tax consequences when:
- The Fund makes distributions; and
- You sell Fund shares, including an exchange to another Morgan
Stanley Dean Witter Fund.
TAXES ON DISTRIBUTIONS. Your distributions are normally subject to
federal and state income tax when they are paid, whether you take
them in cash or reinvest them in Fund shares. A distribution also may
be subject to local income tax. Any income dividend distributions and
any short-term capital gain distributions are taxable to you as
ordinary income. Any long-term capital gain distributions are taxable
as long-term capital gains, no matter how long you have owned shares
in the Fund.
Every January, you will be sent a statement (IRS Form 1099-DIV)
showing the taxable distributions paid to you in the previous year.
The statement provides full information on your dividends and capital
gains for tax purposes.
TAXES ON SALES. Your sale of Fund shares normally is subject to
federal and state income tax and may result in a taxable gain or loss
to you. A sale also may be subject to local income tax. Your exchange
of Fund shares for shares of another Morgan Stanley Dean Witter Fund
is treated for tax purposes like a sale of your original shares and a
purchase of your new shares. Thus, the exchange may, like a sale,
result in a taxable gain or loss to you and will give you a new tax
basis for your new shares.
When you open your Fund account, you should provide your social
security or tax identification number on your investment application.
By providing this information, you will avoid being subject to a
federal backup withholding tax of 31% on taxable distributions and
redemption proceeds. Any withheld amount would be sent to the IRS as
an advance tax payment.
[ICON] SHARE CLASS ARRANGEMENTS
- --------------------------------------------------------------------------------
The Fund offers several Classes of shares having different
distribution arrangements designed to provide you with different
purchase options according to your investment needs. Your Morgan
Stanley Dean Witter Financial Advisor or other authorized financial
representative can help you decide which Class may be appropriate for
you.
16
<PAGE>
[Sidebar]
FRONT-END SALES CHARGE
OR FSC
AN INITIAL SALES CHARGE YOU PAY WHEN PURCHASING CLASS A SHARES THAT IS BASED ON
A PERCENTAGE OF THE OFFERING PRICE. THE PERCENTAGE DECLINES BASED UPON THE
DOLLAR VALUE OF CLASS A SHARES YOU PURCHASE. WE OFFER THREE WAYS TO REDUCE YOUR
CLASS A SALES CHARGES - THE COMBINED PURCHASE PRIVILEGE, RIGHT OF ACCUMULATION
AND LETTER OF INTENT.
[End Sidebar]
The general public is offered three Classes: Class A shares, Class B
shares and Class C shares, which differ principally in terms of sales
charges and ongoing expenses. A fourth Class, Class D shares, is
offered only to a limited category of investors. Shares that you
acquire through reinvested distributions will not be subject to any
front-end sales charge or CDSC -- contingent deferred sales charge.
Sales personnel may receive different compensation for selling each
Class of shares. The sales charges applicable to each Class provide
for the distribution financing of shares of that Class.
The chart below compares the sales charge and maximum annual 12b-1
fee applicable to each Class:
<TABLE>
<CAPTION>
MAXIMUM
CLASS SALES CHARGE ANNUAL 12b-1 FEE
<S> <C> <C>
- ------------------------------------------------------------------
A Maximum 5.25% initial sales charge
reduced for purchase of $25,000 or more;
shares sold without an initial sales
charge are generally subject to a 1.0%
CDSC during the first year 0.25%
- ------------------------------------------------------------------
B Maximum 5.0% CDSC during the first year
decreasing to 0% after six years 1.0%
- ------------------------------------------------------------------
C 1.0% CDSC during the first year 1.0%
- ------------------------------------------------------------------
D None None
- ------------------------------------------------------------------
</TABLE>
CLASS A SHARES Class A shares are sold at net asset value plus an
initial sales charge of up to 5.25%. The initial sales charge is
reduced for purchases of $25,000 or more according to the schedule
below. Investments of $1 million or more are not subject to an initial
sales charge, but are generally subject to a contingent deferred sales
charge, or CDSC, of 1.0% on sales made within one year after the last
day of the month of purchase. The CDSC will be assessed in the same
manner and with the same CDSC waivers as with Class B shares. Class A
shares are also subject to a distribution (12b-1) fee of up to 0.25% of
the average daily net assets of the Class.
The offering price of Class A shares includes a sales charge (expressed as a
percentage of the offering price) on a single transaction as shown in the
following table:
<TABLE>
<CAPTION>
FRONT-END SALES CHARGE
------------------------------------------------
AMOUNT OF PERCENTAGE OF PUBLIC APPROXIMATE PERCENTAGE OF
SINGLE TRANSACTION OFFERING PRICE AMOUNT INVESTED
<S> <C> <C>
- ------------------------------------------------------------------------------------------
Less than $25,000 5.25% 5.54%
- ------------------------------------------------------------------------------------------
$25,000 but less than $50,000 4.75% 4.99%
- ------------------------------------------------------------------------------------------
$50,000 but less than $100,000 4.00% 4.17%
- ------------------------------------------------------------------------------------------
$100,000 but less than $250,000 3.00% 3.09%
- ------------------------------------------------------------------------------------------
$250,000 but less than $1 million 2.00% 2.04%
- ------------------------------------------------------------------------------------------
$1 million and over 0.00% 0.00%
- ------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
The reduced sales charge schedule is applicable to purchases of Class
A shares in a single transaction by:
- A single account (including an individual, trust or fiduciary
account).
- Family member accounts (limited to husband, wife and children under
the age of 21).
- Pension, profit sharing or other employee benefit plans of
companies and their affiliates.
- Tax-exempt organizations.
- Groups organized for a purpose other than to buy mutual fund
shares.
COMBINED PURCHASE PRIVILEGE. You also will have the benefit of
reduced sales charges by combining purchases of Class A shares of the
Fund in a single transaction with purchases of Class A shares of
other Multi-Class Funds and shares of FSC Funds.
RIGHT OF ACCUMULATION. You also may benefit from a reduction of sales
charges if the cumulative net asset value of Class A shares of the
Fund purchased in a single transaction, together with shares of other
Funds you currently own which were previously purchased at a price
including a front-end sales charge (including shares acquired through
reinvestment of distributions), amounts to $25,000 or more. Also, if
you have a cumulative net asset value of all your Class A and Class D
shares equal to at least $5 million (or $25 million for certain
employee benefit plans), you are eligible to purchase Class D shares
of any Fund subject to the Fund's minimum initial investment
requirement.
You must notify your Morgan Stanley Dean Witter Financial Advisor or
other authorized financial representative (or Morgan Stanley Dean
Witter Trust FSB if you purchase directly through the Fund), at the
time a purchase order is placed, that the purchase qualifies for the
reduced charge under the Right of Accumulation. Similar notification
must be made in writing when an order is placed by mail. The reduced
sales charge will not be granted if: (i) notification is not
furnished at the time of the order; or (ii) a review of the records
of Dean Witter Reynolds or other authorized dealer of Fund shares or
the Fund's transfer agent does not confirm your represented holdings.
LETTER OF INTENT. The schedule of reduced sales charges for larger
purchases also will be available to you if you enter into a written
"letter of intent." A letter of intent provides for the purchase of
Class A shares of the Fund or other Multi-Class Funds or shares of
FSC Funds within a thirteen-month period. The initial purchase under
a letter of intent must be at least 5% of the stated investment goal.
To determine the applicable sales charge reduction, you may also
include: (1) the cost of shares of other Morgan Stanley Dean Witter
Funds which were previously purchased at a price including a
front-end sales charge during the 90-day period prior to the
distributor receiving the letter of intent, and (2) the cost of
shares of other Funds you currently own acquired in exchange for
shares of Funds purchased during that period at a price including a
front-end sales
18
<PAGE>
charge. You can obtain a letter of intent by contacting your Morgan
Stanley Dean Witter Financial Advisor or other authorized financial
representative, or by calling (800) 869-NEWS. If you do not achieve
the stated investment goal within the thirteen-month period, you are
required to pay the difference between the sales charges otherwise
applicable and sales charges actually paid, which may be deducted
from your investment.
OTHER SALES CHARGE WAIVERS. In addition to investments of $1 million
or more, your purchase of Class A shares is not subject to a
front-end sales charge (or a CDSC upon sale) if your account
qualifies under one of the following categories:
- A trust for which Morgan Stanley Dean Witter Trust FSB provides
discretionary trustee services.
- Persons participating in a fee-based investment program (subject to
all of its terms and conditions, including mandatory sale or
transfer restrictions on termination) approved by the Fund's
distributor pursuant to which they pay an asset-based fee for
investment advisory, administrative and/or brokerage services.
- Employer-sponsored employee benefit plans, whether or not qualified
under the Internal Revenue Code, for which Morgan Stanley Dean
Witter Trust FSB serves as trustee or Dean Witter Reynolds'
Retirement Plan Services serves as recordkeeper under a written
Recordkeeping Services Agreement ("MSDW Eligible Plans") which have
at least 200 eligible employees.
- An MSDW Eligible Plan whose Class B shares have converted to Class
A shares, regardless of the plan's asset size or number of eligible
employees.
- A client of a Morgan Stanley Dean Witter Financial Advisor who
joined us from another investment firm within six months prior to
the date of purchase of Fund shares, and you used the proceeds from
the sale of shares of a proprietary mutual fund of that Financial
Advisor's previous firm that imposed either a front-end or deferred
sales charge to purchase Class A shares, provided that: (1) you
sold the shares not more than 60 days prior to the purchase of Fund
shares, and (2) the sale proceeds were maintained in the interim in
cash or a money market fund.
- Current or retired Directors/Trustees of the Morgan Stanley Dean
Witter Funds, such persons' spouses and children under the age of
21, and trust accounts for which any of such persons is a
beneficiary.
- Current or retired directors, officers and employees of Morgan
Stanley Dean Witter & Co. and any of its subsidiaries, such
persons' spouses and children under the age of 21, and trust
accounts for which any of such persons is a beneficiary.
19
<PAGE>
[Sidebar]
CONTINGENT DEFERRED SALES
CHARGE OR CDSC
A FEE YOU PAY WHEN YOU SELL SHARES OF CERTAIN MORGAN STANLEY DEAN WITTER FUNDS
PURCHASED WITHOUT AN INITIAL SALES CHARGE. THIS FEE DECLINES THE LONGER YOU HOLD
YOUR SHARES AS SET FORTH IN THE TABLE.
[End Sidebar]
CLASS B SHARES Class B shares are offered at net asset value with no
initial sales charge but are subject to a contingent deferred sales
charge, or CDSC, as set forth in the table below. For the purpose of
calculating the CDSC, shares are deemed to have been purchased on the
last day of the month during which they were purchased.
<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE
YEAR SINCE PURCHASE PAYMENT MADE OF AMOUNT REDEEMED
<S> <C>
- --------------------------------------------------------------
First 5.0%
- --------------------------------------------------------------
Second 4.0%
- --------------------------------------------------------------
Third 3.0%
- --------------------------------------------------------------
Fourth 2.0%
- --------------------------------------------------------------
Fifth 2.0%
- --------------------------------------------------------------
Sixth 1.0%
- --------------------------------------------------------------
Seventh and thereafter None
- --------------------------------------------------------------
</TABLE>
Each time you place an order to sell or exchange shares, shares with
no CDSC will be sold or exchanged first, then shares with the lowest
CDSC will be sold or exchanged next. For any shares subject to a
CDSC, the CDSC will be assessed on an amount equal to the lesser of
the current market value or the cost of the shares being sold.
CDSC WAIVERS. A CDSC, if otherwise applicable, will be waived in the
case of:
- Sales of shares held at the time you die or become disabled (within
the definition in Section 72(m)(7) of the Internal Revenue Code
which relates to the ability to engage in gainful employment), if
the shares are: (i) registered either in your name (not a trust) or
in the names of you and your spouse as joint tenants with right of
survivorship; or (ii) held in a qualified corporate or
self-employed retirement plan, IRA or 403(b) Custodial Account,
provided in either case that the sale is requested within one year
of your death or initial determination of disability.
- Sales in connection with the following retirement plan
"distributions:" (i) lump-sum or other distributions from a
qualified corporate or self-employed retirement plan following
retirement (or, in the case of a "key employee" of a "top heavy"
plan, following attainment of age 59 1/2); (ii) distributions from
an IRA or 403(b) Custodial Account following attainment of age 59
1/2; or (iii) a tax-free return of an excess IRA contribution (a
"distribution" does not include a direct transfer of IRA, 403(b)
Custodial Account or retirement plan assets to a successor
custodian or trustee).
- Sales of shares held for you as a participant in a MSDW Eligible
Plan.
- Sales of shares in connection with the Systematic Withdrawal Plan
of up to 12% annually of the value of each Fund from which plan
sales are made. The percentage is determined on the date you
establish the Systematic Withdrawal Plan and based on the next
calculated share price. You may have this CDSC waiver applied in
amounts up to
20
<PAGE>
1% per month, 3% per quarter, 6% semi-annually or 12% annually.
Shares with no CDSC will be sold first, followed by those with the
lowest CDSC. As such, the waiver benefit will be reduced by the
amount of your shares that are not subject to a CDSC. If you
suspend your participation in the plan, you may later resume plan
payments without requiring a new determination of the account value
for the 12% CDSC waiver.
All waivers will be granted only following the Fund's Distributor
receiving confirmation of your entitlement. If you believe you are
eligible for a CDSC waiver, please contact your Financial Advisor or
call (800) 869-NEWS.
DISTRIBUTION FEE. Class B shares are subject to an annual 12b-1 fee
of 1.0% of the lesser of: (a) the average daily aggregate gross
purchases by all shareholders of the Fund's Class B shares since the
inception of the Fund (not including reinvestments of dividends or
capital gains distributions), less the average daily aggregate net
asset value of the Fund's Class B shares sold by all shareholders
since the Fund's inception upon which a CDSC has been imposed or
waived, or (b) the average daily net assets of Class B.
CONVERSION FEATURE. After ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund with no initial sales
charge. The ten year period runs from the last day of the month in
which the shares were purchased, or in the case of Class B shares
acquired through an exchange, from the last day of the month in which
the original Class B shares were purchased; the shares will convert
to Class A shares based on their relative net asset values in the
month following the ten year period. At the same time, an equal
proportion of Class B shares acquired through automatically
reinvested distributions will convert to Class A shares on the same
basis. (Class B shares held before May 1, 1997, however, will convert
to Class A shares in May 2007.)
In the case of Class B shares held in a MSDW Eligible Plan, the plan
is treated as a single investor and all Class B shares will convert
to Class A shares on the conversion date of the Class B shares of a
Morgan Stanley Dean Witter Fund purchased by that plan.
Currently, the Class B share conversion is not a taxable event; the
conversion feature may be cancelled if it is deemed a taxable event
in the future by the Internal Revenue Service.
If you exchange your Class B shares for shares of a Money Market
Fund, a No-Load Fund, North American Government Income Trust or
Short-Term U.S. Treasury Trust, the holding period for conversion is
frozen as of the last day of the month of the exchange and resumes on
the last day of the month you exchange back into Class B shares.
EXCHANGING SHARES SUBJECT TO A CDSC. There are special considerations
when you exchange Fund shares that are subject to a CDSC. When
determining the length of time you held the shares and the
corresponding CDSC rate, any period (starting at the end of
21
<PAGE>
the month) during which you held shares of a fund that does NOT
charge a CDSC WILL NOT BE COUNTED. Thus, in effect the "holding
period" for purposes of calculating the CDSC is frozen upon
exchanging into a fund that does not charge a CDSC.
For example, if you held Class B shares of the Fund for one year,
exchanged to Class B of another Morgan Stanley Dean Witter
Multi-Class Fund for another year, then sold your shares, a CDSC rate
of 4% would be imposed on the shares based on a two year holding
period -- one year for each Fund. However, if you had exchanged the
shares of the Fund for a Money Market Fund (which does not charge a
CDSC) instead of the Multi-Class Fund, then sold your shares, a CDSC
rate of 5% would be imposed on the shares based on a one year holding
period. The one year in the Money Market Fund would not be counted.
Nevertheless, if shares subject to a CDSC are exchanged for a Fund
that does not charge a CDSC, you will receive a credit when you sell
the shares equal to the distribution (12b-1) fees you paid on those
shares while in that Fund up to the amount of any applicable CDSC.
In addition, shares that are exchanged into or from a Morgan Stanley
Dean Witter Fund subject to a higher CDSC rate will be subject to the
higher rate, even if the shares are re-exchanged into a Fund with a
lower CDSC rate.
CLASS C SHARES Class C shares are sold at net asset value with no
initial sales charge but are subject to a CDSC of 1.0% on sales made
within one year after the last day of the month of purchase. The CDSC
will be assessed in the same manner and with the same CDSC waivers as
with Class B shares.
DISTRIBUTION FEE. Class C shares are subject to an annual
distribution (12b-1) fee of up to 1.0% of the average daily net
assets of that Class. The Class C shares' distribution fee may cause
that Class to have higher expenses and pay lower dividends than Class
A or Class D shares. Unlike Class B shares, Class C shares have no
conversion feature and, accordingly, an investor that purchases Class
C shares may be subject to distribution (12b-1) fees applicable to
Class C shares for an indefinite period.
CLASS D SHARES Class D shares are offered without any sales charge on
purchases or sales and without any distribution (12b-1) fee. Class D
shares are offered only to investors meeting an initial investment
minimum of $5 million ($25 million for MSDW Eligible Plans) and the
following investor categories:
- Investors participating in the Investment Manager's mutual fund
asset allocation program (subject to all of its terms and
conditions, including mandatory sale or transfer restrictions on
termination) pursuant to which they pay an asset-based fee.
22
<PAGE>
- Persons participating in a fee-based investment program (subject to
all of its terms and conditions, including mandatory sale or
transfer restrictions on termination) approved by the Fund's
distributor pursuant to which they pay an asset-based fee for
investment advisory, administrative and/or brokerage services.
- Employee benefit plans maintained by Morgan Stanley Dean Witter &
Co. or any of its subsidiaries for the benefit of certain employees
of Morgan Stanley Dean Witter & Co. and its subsidiaries.
- Certain unit investment trusts sponsored by Dean Witter Reynolds.
- Certain other open-end investment companies whose shares are
distributed by the Fund's distributor.
- Investors who were shareholders of the Dean Witter Retirement
Series on September 11, 1998 for additional purchases for their
former Dean Witter Retirement Series accounts.
MEETING CLASS D ELIGIBILITY MINIMUMS. To meet the $5 million ($25
million for MSDW Eligible Plans) initial investment to qualify to
purchase Class D shares you may combine: (1) purchases in a single
transaction of Class D shares of the Fund and other Morgan Stanley
Dean Witter Multi-Class Funds and/or (2) previous purchases of Class
A and Class D shares of Multi-Class Funds and shares of FSC Funds you
currently own, along with shares of Morgan Stanley Dean Witter Funds
you currently own that you acquired in exchange for those shares.
NO SALES CHARGES FOR REINVESTED CASH DISTRIBUTIONS If you receive a
cash payment representing an income dividend or capital gain and you
reinvest that amount in the applicable Class of shares by returning the
check within 30 days of the payment date, the purchased shares would
not be subject to an initial sales charge or CDSC.
PLAN OF DISTRIBUTION (RULE 12B-1 FEES) The Fund has adopted a Plan of
Distribution in accordance with Rule 12b-1 under the Investment Company
Act of 1940 with respect to the distribution of Class A, Class B and
Class C shares. The Plan allows the Fund to pay distribution fees for
the sale and distribution of these shares. It also allows the Fund to
pay for services to shareholders of Class A, Class B and Class C
shares. Because these fees are paid out of the Fund's assets on an
ongoing basis, over time these fees will increase the cost of your
investment in these Classes and may cost you more than paying other
types of sales charges.
23
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 fiscal years of the Fund. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate an investor would have earned or lost on
an investment in the Fund (assuming reinvestment of all dividends and
distributions).
This information has been audited by PricewaterhouseCoopers LLP, Independent
Accountants whose report, along with the Fund's financial statements, is
included in the annual report, which is available upon request.
<TABLE>
<CAPTION>
CLASS B SHARES
- -------------------------------------------------------------------------------------------------------------------
FOR
THE
PERIOD
JULY
29,
1994*
THROUGH
MAY
31,
FOR THE YEAR ENDED MAY 31 1999++ 1998++ 1997**++ 1996++ 1995
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
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.
24
<PAGE>
<TABLE>
<CAPTION>
CLASS A SHARES++
- ------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD JULY 28, 1997*
SELECTED PER SHARE DATA: MAY 31, 1999 THROUGH MAY 31, 1998++
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
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>
* 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 charges. 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.
25
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES++
- ------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD JULY 28, 1997*
SELECTED PER SHARE DATA: MAY 31, 1999 THROUGH MAY 31, 1998++
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
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 charges. 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.
26
<PAGE>
<TABLE>
<CAPTION>
CLASS D SHARES++
- ---------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD JULY 28, 1997*
SELECTED PER SHARE DATA: MAY 31, 1999 THROUGH MAY 31, 1998++
<S> <C> <C>
- ---------------------------------------------------------------------------------------------
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.
27
<PAGE>
NOTES
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28
<PAGE>
MORGAN STANLEY DEAN WITTER
FAMILY OF FUNDS
The Morgan Stanley Dean Witter Family of Funds offers
investors a wide range of investment choices. Come on
in and meet the family!
- --------------------------------------------------------------------------------
GROWTH FUNDS
- ---------------------------------
GROWTH FUNDS
Aggressive Equity Fund
American Opportunities Fund
Capital Growth Securities
Developing Growth Securities
Equity Fund
Growth Fund
Market Leader Trust
Mid-Cap Equity Trust
Small Cap Growth Fund
Special Value Fund
Value Fund
THEME FUNDS
Financial Services Trust
Health Sciences Trust
Information Fund
Natural Resource Development Securities
Precious Metals and Minerals Trust
GLOBAL/INTERNATIONAL FUNDS
Competitive Edge Fund - "Best Ideas"
Portfolio
European Growth Fund
Fund of Funds - International Portfolio
International Fund
International SmallCap Fund
Japan Fund
Latin American Growth Fund
Pacific Growth Fund
- --------------------------------------------------------------------------------
GROWTH AND INCOME FUNDS
- ---------------------------------
Balanced Growth Fund
Balanced Income Fund
Convertible Securities Trust
Dividend Growth Securities
Fund of Funds - Domestic Portfolio
Income Builder Fund
Mid-Cap Dividend Growth Securities
S&P 500 Index Fund
S&P 500 Select Fund
Strategist Fund
Total Market Index Fund
Total Return Trust
Value-Added Market Series/Equity Portfolio
THEME FUNDS
Global Utilities Fund
Real Estate Fund
Utilities Fund
GLOBAL FUNDS
Global Dividend Growth Securities
- --------------------------------------------------------------------------------
INCOME FUNDS
- ---------------------------------
GOVERNMENT INCOME FUNDS
Federal Securities Trust
Short-Term U.S. Treasury Trust
U.S. Government Securities Trust
DIVERSIFIED INCOME FUNDS
Diversified Income Trust
CORPORATE INCOME FUNDS
High Yield Securities
Intermediate Income Securities
Short-Term Bond Fund (NL)
GLOBAL INCOME FUNDS
North American Government Income Trust
World Wide Income Trust
TAX-FREE INCOME FUNDS
California Tax-Free Income Fund
Hawaii Municipal Trust (FSC)
Limited Term Municipal Trust (NL)
Multi-State Municipal Series Trust (FSC)
New York Tax-Free Income Fund
Tax-Exempt Securities Trust
- --------------------------------------------------------------------------------
MONEY MARKET FUNDS
- ---------------------------------
TAXABLE MONEY MARKET FUNDS
Liquid Asset Fund (MM)
U.S. Government Money Market Trust (MM)
TAX-FREE MONEY MARKET FUNDS
California Tax-Free Daily Income Trust (MM)
N.Y. Municipal Money Market Trust (MM)
Tax-Free Daily Income Trust (MM)
There may be Funds created after this PROSPECTUS was published. Please consult
the inside back cover of a new Fund's PROSPECTUS for its designation, e.g.,
Multi-Class Fund or Money Market Fund.
Unless otherwise noted, each listed Morgan Stanley Dean Witter Fund, except for
North American Government Income Trust and Short-Term U.S. Treasury Trust, is a
Multi-Class Fund. A Multi-Class Fund is a mutual fund offering multiple Classes
of shares. The other types of Funds are: NL - No-Load (Mutual) Fund; MM - Money
Market Fund; FSC - A mutual fund sold with a front-end sales charge and a
distribution (12b-1) fee.
<PAGE>
PROSPECTUS - AUGUST 30, 1999
Additional information about the Fund's investments is available in the Fund's
ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS. In the Fund's ANNUAL REPORT, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. The
Fund's STATEMENT OF ADDITIONAL INFORMATION also provides additional information
about the Fund. The STATEMENT OF ADDITIONAL INFORMATION is incorporated herein
by reference (legally is part of this PROSPECTUS). For a free copy of any of
these documents, to request other information about the Fund, or to make
shareholder inquiries, please call:
(800) 869-NEWS
You also may obtain information about the Fund by calling your Morgan Stanley
Dean Witter Financial Advisor or by visiting our Internet site at:
www.msdw.com/individual/funds
Information about the Fund (including the STATEMENT OF ADDITIONAL INFORMATION)
can be viewed and copied at the Securities and Exchange Commission's Public
Reference Room in Washington, DC. Information about the Reference Room's
operations may be obtained by calling the SEC at (800) SEC-0330. Reports and
other information about the Fund are available on the SEC's Internet site
(www.sec.gov), and copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Section of the SEC, Washington,
DC 20549-6009.
TICKER SYMBOLS:
CLASS A: ISMAX CLASS C: ISMCX
- -------------------- --------------------
CLASS B: ISMBX CLASS D: ISMDX
- -------------------- --------------------
(THE FUND'S INVESTMENT COMPANY ACT FILE NO. IS 811-7169)
Morgan Stanley Dean Witter
INTERNATIONAL SMALLCAP FUND
[BACK COVER PHOTO]
A MUTUAL FUND THAT SEEKS
LONG-TERM GROWTH OF CAPITAL
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION MORGAN STANLEY
AUGUST 30, 1999 DEAN WITTER
INTERNATIONAL
SMALLCAP FUND
- --------------------------------------------------------------------------------
This STATEMENT OF ADDITIONAL INFORMATION is not a PROSPECTUS. The PROSPECTUS
(dated August 30, 1999) for the Morgan Stanley Dean Witter International
SmallCap Fund may be obtained without charge from the Fund at its address or
telephone number listed below or from Dean Witter Reynolds at any of its branch
offices.
Morgan Stanley Dean Witter
International SmallCap Fund
Two World Trade Center
New York, New York 10048
(800) 869-NEWS
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
I. Fund History........................................................................ 4
II. Description of the Fund and Its Investments and Risks.............................. 4
A. Classification.................................................................... 4
B. Investment Strategies and Risks................................................... 4
C. Fund Policies/Investment Restrictions............................................. 14
III. Management of the Fund............................................................ 15
A. Board of Trustees................................................................. 15
B. Management Information............................................................ 15
C. Compensation...................................................................... 20
IV. Control Persons and Principal Holders of Securities................................ 21
V. Investment Management and Other Services............................................ 22
A. Investment Manager and Sub-Advisor................................................ 22
B. Principal Underwriter............................................................. 22
C. Services Provided by the Investment Manager and the Sub-Advisor and Fund Expenses
Paid by Third Parties............................................................. 23
D. Dealer Reallowances............................................................... 24
E. Rule 12b-1 Plan................................................................... 24
F. Other Service Providers........................................................... 28
VI. Brokerage Allocation and Other Practices........................................... 28
A. Brokerage Transactions............................................................ 28
B. Commissions....................................................................... 29
C. Brokerage Selection............................................................... 29
D. Directed Brokerage................................................................ 30
E. Regular Broker-Dealers............................................................ 30
VII. Capital Stock and Other Securities................................................ 30
VIII. Purchase, Redemption and Pricing of Shares....................................... 31
A. Purchase/Redemption of Shares..................................................... 31
B. Offering Price.................................................................... 32
IX. Taxation of the Fund and Shareholders.............................................. 33
X. Underwriters........................................................................ 35
XI. Calculation of Performance Data.................................................... 35
XII. Financial Statements.............................................................. 36
</TABLE>
2
<PAGE>
GLOSSARY OF SELECTED DEFINED TERMS
- --------------------------------------------------------------------------------
The terms defined in this glossary are frequently used in this STATEMENT OF
ADDITIONAL INFORMATION (other terms used occasionally are defined in the text of
the document).
"CUSTODIAN"--The Chase Manhattan Bank.
"DEAN WITTER REYNOLDS"--Dean Witter Reynolds Inc., a wholly-owned broker-dealer
subsidiary of MSDW.
"DISTRIBUTOR"--Morgan Stanley Dean Witter Distributors Inc., a wholly-owned
broker-dealer subsidiary of MSDW.
"FINANCIAL ADVISORS"--Morgan Stanley Dean Witter authorized financial services
representatives.
"FUND"--Morgan Stanley Dean Witter International SmallCap Fund, a registered
open-end investment company.
"INVESTMENT MANAGER"--Morgan Stanley Dean Witter Advisors Inc., a wholly-owned
investment advisor subsidiary of MSDW.
"INDEPENDENT TRUSTEES"--Trustees who are not "interested persons" (as defined by
the Investment Company Act) of the Fund.
"MORGAN STANLEY & CO."--Morgan Stanley & Co. Incorporated, a wholly-owned
broker-dealer subsidiary of MSDW.
"MORGAN STANLEY DEAN WITTER FUNDS"--Registered investment companies (i) for
which the Investment Manager serves as the investment advisor and (ii) that hold
themselves out to investors as related companies for investment and investor
services.
"MSDW"--Morgan Stanley Dean Witter & Co., a preeminent global financial services
firm.
"MSDW SERVICES COMPANY"--Morgan Stanley Dean Witter Services Company Inc., a
wholly-owned fund services subsidiary of the Investment Manager.
"SUB-ADVISOR"--Morgan Stanley Dean Witter Investment Management Inc., a
wholly-owned subsidiary of MSDW.
"TRANSFER AGENT"--Morgan Stanley Dean Witter Trust FSB, a wholly-owned transfer
agent subsidiary of MSDW.
"TRUSTEES"--The Board of Trustees of the Fund.
3
<PAGE>
I. FUND HISTORY
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust, under a
Declaration of Trust, on April 21, 1994, with the name Dean Witter International
SmallCap Fund. Effective June 22, 1998, the Fund's name was changed to Morgan
Stanley Dean Witter International SmallCap Fund.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
- --------------------------------------------------------------------------------
A. CLASSIFICATION
The Fund is an open-end management investment company whose investment
objective is to seek long-term growth of capital.
The Fund is a "non-diversified" mutual fund and, as such, its investments
are not required to meet certain diversification requirements under federal
securities law. Compared with "diversified" funds, the Fund may invest a greater
percentage of its assets in the securities of an individual corporation or
governmental entity. Thus, the Fund's assets may be concentrated in fewer
securities than other funds. A decline in the value of those investments would
cause the Fund's overall value to decline to a greater degree. The Fund's
investments, however, are currently diversified and may remain diversified in
the future.
B. INVESTMENT STRATEGIES AND RISKS
The following discussion of the Fund's investment strategies and risks
should be read with the sections of the Fund's PROSPECTUS titled "Principal
Investment Strategies," "Principal Risks," "Additional Investment Strategy
Information," and "Additional Risk Information."
The Fund is currently managed as a diversified management company.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may enter into
forward foreign currency exchange contracts ("forward contracts") as a hedge
against fluctuations in future foreign exchange rates. The Fund may conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. A
forward contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
These contracts are traded in the interbank market conducted directly between
currency traders (usually large, commercial and investment banks) and their
customers. Forward contracts only will be entered into with United States banks
and their foreign branches, insurance companies and other dealers or foreign
banks whose assets total $1 billion or more. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades.
The Fund may enter into forward contracts under various circumstances. The
typical use of a forward contract is to "lock in" the price of a security in
U.S. dollars or some other foreign currency which the Fund is holding in its
portfolio. By entering into a forward contract for the purchase or sale, for a
fixed amount of dollars or other currency, of the amount of foreign currency
involved in the underlying security transactions, the Fund may be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar or other currency which is being used for
the security purchase and the foreign currency in which the security is
denominated during the period between the date on which the security is
purchased or sold and the date on which payment is made or received.
The Sub-Advisor also may from time to time utilize forward contracts for
other purposes. For example, they may be used to hedge a foreign security held
in the portfolio or a security which pays out principal tied to an exchange rate
between the U.S. dollar and a foreign currency, against a decline in value of
the applicable foreign currency. They also may be used to lock in the current
exchange rate of the currency in which those securities anticipated to be
purchased are denominated. At times, the Fund may enter into "cross-currency"
hedging transactions involving currencies other than those in which securities
are held or proposed to be purchased are denominated.
4
<PAGE>
The Fund will not enter into forward currency contracts or maintain a net
exposure to these contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. It will, however, do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the spread
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
The Fund may be limited in its ability to enter into hedging transactions
involving forward contracts by the Internal Revenue Code requirements relating
to qualification as a regulated investment company.
Forward currency contracts may limit gains on portfolio securities that
could otherwise be realized had they not been utilized and could result in
losses. The contracts also may increase the Fund's volatility and may involve a
significant amount of risk relative to the investment of cash.
OPTIONS AND FUTURES TRANSACTIONS. The Fund may engage in transactions in
listed and OTC options on eligible portfolio securities and stock indexes.
Listed options are issued or guaranteed by the exchange on which they are traded
or by a clearing corporation such as the Options Clearing Corporation ("OCC").
Ownership of a listed call option gives the Fund the right to buy from the OCC
(in the U.S.) or other clearing corporation or exchange, the underlying security
or currency covered by the option at the stated exercise price (the price per
unit of the underlying security) by filing an exercise notice prior to the
expiration date of the option. The writer (seller) of the option would then have
the obligation to sell to the OCC (in the U.S.) or other clearing corporation or
exchange, the underlying security or currency at that exercise price prior to
the expiration date of the option, regardless of its then current market price.
Ownership of a listed put option would give the Fund the right to sell the
underlying security or currency to the OCC (in the U.S.) or other clearing
corporation or exchange, at the stated exercise price. Upon notice of exercise
of the put option, the writer of the put would have the obligation to purchase
the underlying security or currency from the OCC (in the U.S.) or other clearing
corporation or exchange, at the exercise price.
COVERED CALL WRITING. The Fund is permitted to write covered call options
on portfolio securities and on the U.S. dollar and foreign currencies in which
they are denominated, without limit.
The Fund will receive from the purchaser, in return for a call it has
written, a "premium;" i.e., the price of the option. Receipt of these premiums
may better enable the Fund to earn a higher level of current income than it
would earn from holding the underlying securities (or currencies) alone.
Moreover, the premium received will offset a portion of the potential loss
incurred by the Fund if the securities (or currencies) underlying the option
decline in value.
The Fund may be required, at any time during the option period, to deliver
the underlying security (or currency) against payment of the exercise price on
any calls it has written. This obligation is terminated upon the expiration of
the option period or at such earlier time when the writer effects a closing
purchase transaction. A closing purchase transaction is accomplished by
purchasing an option of the same series as the option previously written.
However, once the Fund has been assigned an exercise notice, the Fund will be
unable to effect a closing purchase transaction.
A call option is "covered" if the Fund owns the underlying security subject
to the option or has an absolute and immediate right to acquire that security
without additional cash consideration (or for additional consideration (in cash,
Treasury bills or other liquid portfolio securities) held in a segregated
account on the Fund's books) upon conversion or exchange of other securities
held in its portfolio. A call option is also covered if the Fund holds a call on
the same security as the call written where the exercise
5
<PAGE>
price of the call held is (i) equal to or less than the exercise price of the
call written or (ii) greater than the exercise price of the call written if the
difference is maintained by the Fund in cash, Treasury bills or other liquid
portfolio securities in a segregated account on the Fund's books.
Options written by the Fund normally have expiration dates of from up to
eighteen months from the date written. The exercise price of a call option may
be below, equal to or above the current market value of the underlying security
at the time the option is written.
COVERED PUT WRITING. A writer of a covered put option Fund incurs an
obligation to buy the security underlying the option from the purchaser of the
put, at the option's exercise price at any time during the option period, at the
purchaser's election. Through the writing of a put option, the Fund would
receive income from the premium paid by purchasers. The potential gain on a
covered put option is limited to the premium received on the option (less the
commissions paid on the transaction). During the option period, the Fund may be
required, at any time, to make payment of the exercise price against delivery of
the underlying security. A put option is "covered" if the Fund maintains cash,
Treasury bills or other liquid portfolio securities with a value equal to the
exercise price in a segregated account on the Fund's books, or holds a put on
the same security as the put written where the exercise price of the put held is
equal to or greater than the exercise price of the put written. The operation of
and limitations on covered put options in other respects are substantially
identical to those of call options.
PURCHASING CALL AND PUT OPTIONS. The Fund may purchase listed and OTC call
and put options in amounts equaling up to 10% of its total assets. The purchase
of a call option would enable the Fund, in return for the premium paid to lock
in a purchase price for a security or currency during the term of the option.
The purchase of a put option would enable the Fund, in return for a premium
paid, to lock in a price at which it may sell a security or currency during the
term of the option.
OPTIONS ON FOREIGN CURRENCIES. The Fund may purchase and write options on
foreign currencies for purposes similar to those involved with investing in
forward foreign currency exchange contracts.
OTC OPTIONS. OTC options are purchased from or sold (written) to dealers or
financial institutions which have entered into direct agreements with the Fund.
With OTC options, such variables as expiration date, exercise price and premium
will be agreed upon between the Fund and the transacting dealer, without the
intermediation of a third party such as the OCC. The Fund will engage in OTC
option transactions only with member banks of the Federal Reserve Bank System or
primary dealers in U.S. Government securities or with affiliates of such banks
or dealers.
RISKS OF OPTIONS TRANSACTIONS. The successful use of options depends on the
ability of the Sub-Advisor to forecast correctly interest rates, currency
exchange rates and/or market movements. If the market value of the portfolio
securities (or the currencies in which they are denominated) upon which call
options have been written increases, the Fund may receive a lower total return
from the portion of its portfolio upon which calls have been written than it
would have had such calls not been written. During the option period, the
covered call writer has, in return for the premium on the option, given up the
opportunity for capital appreciation above the exercise price should the market
price of the underlying security (or the value of its denominated currency)
increase, but has retained the risk of loss should the price of the underlying
security (or the value of its denominated currency) decline. The covered put
writer also retains the risk of loss should the market value of the underlying
security decline below the exercise price of the option less the premium
received on the sale of the option. In both cases, the writer has no control
over the time when it may be required to fulfill its obligation as a writer of
the option. Prior to exercise or expiration, an option position can only be
terminated by entering into a closing purchase or sale transaction. Once an
option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver or receive the underlying securities at the exercise price.
The Fund's ability to close out its position as a writer of an option is
dependent upon the existence of a liquid secondary market on option exchanges.
There is no assurance that such a market will exist, particularly in the case of
OTC options.
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In the event of the bankruptcy of a broker through which the Fund engages in
transactions in options, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. In the case of OTC
options, if the transacting dealer fails to make or take delivery of the
securities underlying an option it has written, in accordance with the terms of
that option, due to insolvency or otherwise, the Fund would lose the premium
paid for the option as well as any anticipated benefit of the transaction.
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security which may be
written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). An exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
The markets in foreign currency options are relatively new and the Fund's
ability to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market.
There can be no assurance that a liquid secondary market will exist for a
particular option at any specific time.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and have no relationship to the investment merits of a foreign security. Because
foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that are not reflected in the options market.
STOCK INDEX OPTIONS. The Fund may invest in options on broadly based
indexes. Options on stock indexes are similar to options on stock except that,
rather than the right to take or make delivery of stock at a specified price, an
option on a stock index gives the holder the right to receive, upon exercise of
the option, an amount of cash if the closing level of the stock index upon which
the option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. This amount of cash is equal to
such difference between the closing price of the index and the exercise price of
the option expressed in dollars times a specified multiple. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount.
RISKS OF OPTIONS ON INDEXES. Because exercises of stock index options are
settled in cash, the Fund could not, if it wrote a call option, provide in
advance for its potential settlement obligations by acquiring and holding the
underlying securities. A call writer can offset some of the risk of its writing
position by holding a diversified portfolio of stocks similar to those on which
the underlying index is based. However, most investors cannot, as a practical
matter, acquire and hold a portfolio containing
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exactly the same stocks as the underlying index, and, as a result, bear a risk
that the value of the securities held will vary from the value of the index.
Even if an index call writer could assemble a stock portfolio that exactly
reproduced the composition of the underlying index, the writer still would not
be fully covered from a risk standpoint because of the "timing risk" inherent in
writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the writer will not learn that it had been assigned
until the next business day, at the earliest. The time lag between exercise and
notice of assignment poses no risk for the writer of a covered call on a
specific underlying security, such as a common stock, because there the writer's
obligation is to deliver the underlying security, not to pay its value as of a
fixed time in the past. So long as the writer already owns the underlying
security, it can satisfy its settlement obligations by simply delivering it, and
the risk that its value may have declined since the exercise date is borne by
the exercising holder. In contrast, even if the writer of an index call holds
stocks that exactly match the composition of the underlying index, it will not
be able to satisfy its assignment obligations by delivering those stocks against
payment of the exercise price. Instead, it will be required to pay cash in an
amount based on the closing index value on the exercise date; and by the time it
learns that it has been assigned, the index may have declined, with a
corresponding decrease in the value of its stock portfolio. This "timing risk"
is an inherent limitation on the ability of index call writers to cover their
risk exposure by holding stock positions.
A holder of an index option who exercises it before the closing index value
for that day is available runs the risk that the level of the underlying index
may subsequently change. If a change causes the exercised option to fall
out-of-the-money, the exercising holder will be required to pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
If dissemination of the current level of an underlying index is interrupted,
or if trading is interrupted in stocks accounting for a substantial portion of
the value of an index, the trading of options on that index will ordinarily be
halted. If the trading of options on an underlying index is halted, an exchange
may impose restrictions prohibiting the exercise of such options.
FUTURES CONTRACTS. The Fund may purchase and sell interest rate, currency
and index futures contracts that are traded on U.S. and foreign commodity
exchanges on such underlying securities as U.S. Treasury bonds, notes, bills and
GNMA Certificates and/or any foreign government fixed-income security, on
various currencies and on such indexes of U.S. and foreign securities as may
exist or come into existence.
A futures contract purchaser incurs an obligation to take delivery of a
specified amount of the obligation underlying the contract at a specified time
in the future for a specified price. A seller of a futures contract incurs an
obligation to deliver the specified amount of the underlying obligation at a
specified time in return for an agreed upon price. The purchase of a futures
contract enables the Fund, during the term of the contract, to lock in a price
at which it may purchase a security or currency and protect against a rise in
prices pending purchase of portfolio securities. The sale of a futures contract
enables the Fund to lock in a price at which it may sell a security or currency
and protect against declines in the value of portfolio securities.
Although most futures contracts call for actual delivery or acceptance of
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. Index futures contracts provide for
the delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value at the open or close of the last trading day
of the contract and the futures contract price. A futures contract sale is
closed out by effecting a futures contract purchase for the same aggregate
amount of the specific type of security (currency) and the same delivery date.
If the sale price exceeds the offsetting purchase price, the seller would be
paid the difference and would realize a gain. If the offsetting purchase price
exceeds the sale price, the seller would pay the difference and would realize a
loss. Similarly, a futures contract purchase is closed out by effecting a
futures
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contract sale for the same aggregate amount of the specific type of security
(currency) and the same delivery date. If the offsetting sale price exceeds the
purchase price, the purchaser would realize a gain, whereas if the purchase
price exceeds the offsetting sale price, the purchaser would realize a loss.
There is no assurance that the Fund will be able to enter into a closing
transaction.
MARGIN. If the Fund enters into a futures contract, it is initially
required to deposit an "initial margin" of cash or U.S. Government securities or
other liquid portfolio securities ranging from approximately 2% to 5% of the
contract amount. Initial margin requirements are established by the exchanges on
which futures contracts trade and may, from time to time, change. In addition,
brokers may establish margin deposit requirements in excess of those required by
the exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a broker's client but is, rather, a good faith deposit on the futures
contract which will be returned to the Fund upon the proper termination of the
futures contract. The margin deposits made are marked to market daily and the
Fund may be required to make subsequent deposits of cash or U.S. Government
securities, called "variation margin," which are reflective of price
fluctuations in the futures contract.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write call and put
options on futures contracts and enter into closing transactions with respect to
such options to terminate an existing position. An option on a futures contract
gives the purchaser the right (in return for the premium paid), and the writer
the obligation, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option is accompanied by delivery of the accumulated balance in
the writer's futures margin account, which represents the amount by which the
market price of the futures contract at the time of exercise exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.
The writer of an option on a futures contract is required to deposit initial
and variation margin pursuant to requirements similar to those applicable to
futures contracts. Premiums received from the writing of an option on a futures
contract are included in initial margin deposits.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Fund may not
enter into futures contracts or purchase related options thereon if, immediately
thereafter, the amount committed to margin plus the amount paid for premiums for
unexpired options on futures contracts exceeds 5% of the value of the Fund's
total assets, after taking into account unrealized gains and unrealized losses
on such contracts it has entered into, provided, however, that in the case of an
option that is in-the-money (the exercise price of the call (put) option is less
(more) than the market price of the underlying security) at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%.
However, there is no overall limitation on the percentage of the Fund's net
assets which may be subject to a hedge position.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. The prices
of securities and indexes subject to futures contracts (and thereby the futures
contract prices) may correlate imperfectly with the behavior of the cash prices
of the Fund's portfolio securities (and the currencies in which they are
denominated). Also, prices of futures contracts may not move in tandem with the
changes in prevailing interest rates, market movements and/or currency exchange
rates against which the Fund seeks a hedge. A correlation may also be distorted
(a) temporarily, by short-term traders' seeking to profit from the difference
between a contract or security price objective and their cost of borrowed funds;
(b) by investors in futures contracts electing to close out their contracts
through offsetting transactions rather than meet margin deposit requirements;
(c) by investors in futures contracts opting to make or take delivery of
underlying securities rather than engage in closing transactions, thereby
reducing liquidity of the futures market; and (d) temporarily, by speculators
who view the deposit requirements in the futures markets as less onerous than
margin requirements in the cash market. Due to the possibility of price
distortion in the futures market and because of the possible imperfect
correlation between
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movements in the prices of securities and movements in the prices of futures
contracts, a correct forecast of interest rate, currency exchange rate and/or
market movement trends by the Sub-Advisor may still not result in a successful
hedging transaction.
There is no assurance that a liquid secondary market will exist for futures
contracts and related options in which the Fund may invest. In the event a
liquid market does not exist, it may not be possible to close out a futures
position and, in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin. The absence of a
liquid market in futures contracts might cause the Fund to make or take delivery
of the underlying securities (currencies) at a time when it may be
disadvantageous to do so.
Exchanges also limit the amount by which the price of a futures contract may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased. In the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin on open
futures positions. In these situations, if the Fund has insufficient cash, it
may have to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In addition, the
Fund may be required to take or make delivery of the instruments underlying
interest rate futures contracts it holds at a time when it is disadvantageous to
do so. The inability to close out options and futures positions could also have
an adverse impact on the Fund's ability to effectively hedge its portfolio.
Futures contracts and options thereon which are purchased or sold on foreign
commodities exchanges may have greater price volatility than their U.S.
counterparts. Furthermore, foreign commodities exchanges may be less regulated
and under less governmental scrutiny than U.S. exchanges. Brokerage commissions,
clearing costs and other transaction costs may be higher on foreign exchanges.
Greater margin requirements may limit the Fund's ability to enter into certain
commodity transactions on foreign exchanges. Moreover, differences in clearance
and delivery requirements on foreign exchanges may occasion delays in the
settlement of the Fund's transactions effected on foreign exchanges.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
If the Fund maintains a short position in a futures contract or has sold a
call option in a futures contract, it will cover this position by holding, in a
segregated account maintained on the books of the Fund, cash, U.S. government
securities or other liquid portfolio securities equal in value (when added to
any initial or variation margin on deposit) to the market value of the
securities underlying the futures contract or the exercise price of the option.
Such a position may also be covered by owning the securities underlying the
futures contract (in the case of a stock index futures contract a portfolio of
securities substantially replicating the relevant index), or by holding a call
option permitting the Fund to purchase the same contract at a price no higher
than the price at which the short position was established.
In addition, if the Fund holds a long position in a futures contract or has
sold a put option on a futures contract, it will hold cash, U.S. government
securities or other liquid portfolio securities equal to the purchase price of
the contract or the exercise price of the put option (less the amount of initial
or variation margin on deposit) in a segregated account maintained on the books
of the Fund. Alternatively, the Fund could cover its long position by purchasing
a put option on the same futures contract with an exercise price as high or
higher than the price of the contract held by the Fund.
MONEY MARKET SECURITIES. The Fund may invest in various money market
securities for cash management purposes or when assuming a temporary defensive
position, which among others may
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include commercial paper, bank acceptances, bank obligations, corporate debt
securities, certificates of deposit, U.S. Government securities, obligations of
savings institutions, and repurchase agreements. Such securities are limited to:
U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed as to
principal and interest by the United States or its agencies (such as the
Export-Import Bank of the United States, Federal Housing Administration and
Government National Mortgage Association) or its instrumentalities (such as the
Federal Home Loan Bank), including Treasury bills, notes and bonds;
BANK OBLIGATIONS. Obligations (including certificates of deposit, time
deposits and bankers' acceptances) of banks subject to regulation by the U.S.
Government and having total assets of $1 billion or more, and instruments
secured by such obligations, not including obligations of foreign branches of
domestic banks except to the extent below;
EURODOLLAR CERTIFICATES OF DEPOSIT. Eurodollar certificates of deposit
issued by foreign branches of domestic banks having total assets of $1 billion
or more;
OBLIGATIONS OF SAVINGS INSTITUTIONS. Certificates of deposit of savings
banks and savings and loan associations, having total assets of $1 billion or
more;
FULLY INSURED CERTIFICATES OF DEPOSIT. Certificates of deposit of banks and
savings institutions, having total assets of less than $1 billion, if the
principal amount of the obligation is federally insured by the Bank Insurance
Fund or the Savings Association Insurance Fund (each of which is administered by
the FDIC), limited to $100,000 principal amount per certificate and to 10% or
less of the Fund's total assets in all such obligations and in all illiquid
assets, in the aggregate;
COMMERCIAL PAPER. Commercial paper rated within the two highest grades by
Standard & Poor's Corporation ("S&P") or the two highest grades by Moody's
Investors Service, Inc. ("Moody's") or, if not rated, issued by a company having
an outstanding debt issue rated at least AA by S&P or Aa by Moody's; and
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements. When
cash may be available for only a few days, it may be invested by the Fund in
repurchase agreements until such time as it may otherwise be invested or used
for payments of obligations of the Fund. These agreements, which may be viewed
as a type of secured lending by the Fund, typically involve the acquisition by
the Fund of debt securities from a selling financial institution such as a bank,
savings and loan association or broker-dealer. The agreement provides that the
Fund will sell back to the institution, and that the institution will
repurchase, the underlying security serving as collateral at a specified price
and at a fixed time in the future, usually not more than seven days from the
date of purchase. The collateral will be marked-to-market daily to determine
that the value of the collateral, as specified in the agreement, does not
decrease below the purchase price plus accrued interest. If such decrease
occurs, additional collateral will be requested and, when received, added to the
account to maintain full collateralization. The Fund will accrue interest from
the institution until the time when the repurchase is to occur. Although this
date is deemed by the Fund to be the maturity date of a repurchase agreement,
the maturities of securities subject to repurchase agreements are not subject to
any limits.
While repurchase agreements involve certain risks not associated with direct
investments in debt securities, the Fund follows procedures designed to minimize
such risks. These procedures include effecting repurchase transactions only with
large, well-capitalized and well-established financial institutions whose
financial condition will be continually monitored by the Sub-Advisor subject to
procedures established by the Trustees. In addition, as described above, the
value of the collateral underlying the repurchase agreement will be at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. In the event of a default or bankruptcy by a selling
financial institution, the Fund will seek to liquidate such collateral. However,
the exercising of the Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price, the
Fund could suffer a loss.
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REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. The Fund may use reverse
repurchase agreements and dollar rolls as part of its investment strategy.
Reverse repurchase agreements and dollar rolls are speculative techniques
involving leverage and are considered borrowings by the Fund.
Reverse repurchase agreements involve sales by the Fund of assets
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. Reverse repurchase agreements involve the risk that
the market value of the securities the Fund is obligated to purchase under the
agreement may decline below the repurchase price. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the agreement may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Fund's obligation to repurchase the securities.
Dollar rolls involve the Fund selling securities for delivery in the current
month and simultaneously contracting to repurchase substantially similar (same
type and coupon) securities on a specified future date. During the roll period,
the Fund will forgo principal and interest paid on the securities. The Fund is
compensated by the difference between the current sales price and the lower
forward price for the future purchase (often referred to as the "drop") as well
as by the interest earned on the cash proceeds of the initial sale.
LENDING PORTFOLIO SECURITIES. The Fund may lend its portfolio securities in
an amount not to exceed 25% of the value of its total assets. The Fund may lend
its portfolio securities to brokers, dealers and other financial institutions,
provided that the loans are callable at any time by the Fund, and are at all
times secured by cash or cash equivalents, which are maintained in a segregated
account pursuant to applicable regulations and that are equal to at least 100%
of the market value, determined daily, of the loaned securities. The advantage
of these loans is that the Fund continues to receive the income on the loaned
securities while at the same time earning interest on the cash amounts deposited
as collateral, which will be invested in short-term obligations.
As with any extensions of credit, there are risks of delay in recovery and,
in some cases, even loss of rights in the collateral should the borrower of the
securities fail financially. However, these loans of portfolio securities will
only be made to firms deemed by the Fund's management to be creditworthy and
when the income which can be earned from such loans justifies the attendant
risks. Upon termination of the loan, the borrower is required to return the
securities to the Fund. Any gain or loss in the market price during the loan
period would inure to the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of the rights
if the matters involved would have a material effect on the Fund's investment in
the loaned securities. The Fund will pay reasonable finder's, administrative and
custodial fees in connection with a loan of its securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From
time to time the Fund may purchase securities, without limit, on a when-issued
or delayed delivery basis or may purchase or sell securities on a forward
commitment basis. When these transactions are negotiated, the price is fixed at
the time of the commitment, but delivery and payment can take place a month or
more after the date of commitment. While the Fund will only purchase securities
on a when-issued, delayed delivery or forward commitment basis with the
intention of acquiring the securities, the Fund may sell the securities before
the settlement date, if it is deemed advisable. The securities so purchased or
sold are subject to market fluctuation and no interest or dividends accrue to
the purchaser prior to the settlement date.
At the time the Fund makes the commitment to purchase or sell securities on
a when-issued, delayed delivery or forward commitment basis, it will record the
transaction and thereafter reflect the value, each day, of such security
purchased, or if a sale, the proceeds to be received, in determining its net
asset value. At the time of delivery of the securities, their value may be more
or less than the purchase or sale price. An increase in the percentage of the
Fund's assets committed to the purchase of securities
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on a when-issued, delayed delivery or forward commitment basis may increase the
volatility of its net asset value. The Fund will also establish a segregated
account on the Fund's books in which it will continually maintain cash or cash
equivalents or other liquid portfolio securities equal in value to commitments
to purchase securities on a when-issued, delayed delivery or forward commitment
basis.
WHEN, AS AND IF ISSUED SECURITIES. The Fund may purchase securities,
without limit, on a "when, as and if issued" basis under which the issuance of
the security depends upon the occurrence of a subsequent event, such as approval
of a merger, corporate reorganization or debt restructuring. The commitment for
the purchase of any such security will not be recognized in the portfolio of the
Fund until the Sub-Advisor Manager determines that issuance of the security is
probable. At that time, the Fund will record the transaction and, in determining
its net asset value, will reflect the value of the security daily. At that time,
the Fund will also establish a segregated account on the Fund's books in which
it will maintain cash or cash equivalents or other liquid portfolio securities
equal in value to recognized commitments for such securities.
The value of the Fund's commitments to purchase the securities of any one
issuer, together with the value of all securities of such issuer owned by the
Fund, may not exceed 5% of the value of the Fund's total assets at the time the
initial commitment to purchase such securities is made. An increase in the
percentage of the Fund's assets committed to the purchase of securities on a
"when, as and if issued" basis may increase the volatility of its net asset
value. The Fund may also sell securities on a "when, as and if issued" basis
provided that the issuance of the security will result automatically from the
exchange or conversion of a security owned by the Fund at the time of sale.
PRIVATE PLACEMENTS. The Fund may invest up to 15% of its net assets in
securities which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933 (the "Securities Act"), or
which are otherwise not readily marketable. (Securities eligible for resale
pursuant to Rule 144A under the Securities Act, and determined to be liquid
pursuant to the procedures discussed in the following paragraph, are not subject
to the foregoing restriction.) These securities are generally referred to as
private placements or restricted securities. Limitations on the resale of these
securities may have an adverse effect on their marketability, and may prevent
the Fund from disposing of them promptly at reasonable prices. The Fund may have
to bear the expense of registering the securities for resale and the risk of
substantial delays in effecting the registration.
Rule 144A permits the Fund to sell restricted securities to qualified
institutional buyers without limitation. The Sub-Advisor, pursuant to procedures
adopted by the Trustees, will make a determination as to the liquidity of each
restricted security purchased by the Fund. If a restricted security is
determined to be "liquid," the security will not be included within the category
"illiquid securities," which may not exceed 15% of the Fund's net assets.
However, investing in Rule 144A securities could have the effect of increasing
the level of Fund illiquidity to the extent the Fund, at a particular point in
time, may be unable to find qualified institutional buyers interested in
purchasing such securities.
WARRANTS AND SUBSCRIPTION RIGHTS. The Fund may acquire warrants and
subscription rights attached to other securities. A warrant is, in effect, an
option to purchase equity securities at a specific price, generally valid for a
specific period of time, and has no voting rights, pays no dividends and has no
rights with respect to the corporation issuing it.
A subscription right is a privilege granted to existing shareholders of a
corporation to subscribe to shares of a new issue of common stock before it is
offered to the public. A subscription right normally has a life of two to four
weeks and a subscription price lower than the current market value of the common
stock. A subscription right is freely transferable.
YEAR 2000. The investment management services provided to the Fund by the
Investment Manager and Sub-Advisor and the services provided to shareholders by
the Distributor and the Transfer Agent depend on the smooth functioning of their
computer systems. Many computer software systems in use today cannot recognize
the year 2000, but revert to 1900 or some other date, due to the manner in which
dates were encoded and calculated. That failure could have a negative impact on
the handling of
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securities trades, pricing and account services. The Investment Manager, the
Sub-Advisor, the Distributor and the Transfer Agent have been actively working
on necessary changes to their own computer systems to prepare for the year 2000
and expect that their systems will be adapted before that date, but there can be
no assurance that they will be successful, or that interaction with other
non-complying computer systems will not impair their services at that time.
In addition, it is possible that the markets for securities in which the
Fund invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues. In
addition, corporate and governmental data processing errors may result in
production problems for individual companies and overall economic uncertainties.
Earnings of individual issuers will be affected by remediation costs, which may
be substantial and may be reported inconsistently in U.S. and foreign financial
statements. Accordingly, the Fund's investments may be adversely affected.
C. FUND POLICIES/INVESTMENT RESTRICTIONS
The investment objective, policies and restrictions listed below have been
adopted by the Fund as fundamental policies. Under the Investment Company Act of
1940 (the "Investment Company Act"), a fundamental policy may not be changed
without the vote of a majority of the outstanding voting securities of the Fund.
The Investment Company Act defines a majority as the lesser of (a) 67% or more
of the shares present at a meeting of shareholders, if the holders of 50% of the
outstanding shares of the Fund are present or represented by proxy; or (b) more
than 50% of the outstanding shares of the Fund. For purposes of the following
restrictions: (i) all percentage limitations apply immediately after a purchase
or initial investment; and (ii) any subsequent change in any applicable
percentage resulting from market fluctuations or other changes in total or net
assets does not require elimination of any security from the portfolio.
The Fund will:
1. Seek long-term growth of capital.
The Fund may not:
1. Invest 25% or more of the value of its total assets in securities
of issuers in any one industry (other than obligations issued or guaranteed
by the United States government, its agencies or instrumentalities).
2. Invest more than 5% of the value of its total assets in securities
of issuers having a record, together with predecessors, of less than three
years of continuous operation. This restriction shall not apply to any
obligation of the United States government, its agencies or
instrumentalities.
3. Purchase or sell real estate or interests therein, although the
Fund may purchase securities of issuers which engage in real estate
operations and securities secured by real estate or interests therein.
4. Purchase oil, gas or other mineral leases, rights or royalty
contracts or exploration or development programs, except that the Fund may
invest in the securities of companies which operate, invest in, or sponsor
such programs.
5. Borrow money, except that the Fund, (i) may borrow from a bank for
temporary or emergency purposes and (ii) may engage in reverse repurchase
agreements and dollar rolls, in amounts not exceeding 5% (taken at the lower
of cost or current value) of its total assets (not including the amount
borrowed).
6. Pledge its assets or assign or otherwise encumber them except to
secure permitted borrowings. For the purpose of this restriction, collateral
arrangements with respect to the writing of options and collateral
arrangements with respect to initial or variation margin for futures are not
deemed to be pledges of assets.
14
<PAGE>
7. Issue senior securities as defined in the Investment Company Act,
except insofar as the Fund may be deemed to have issued a senior security by
reason of (a) entering into any repurchase or reverse repurchase agreement;
(b) purchasing any securities on a when-issued or delayed delivery basis;
(c) purchasing or selling futures contracts, forward foreign exchange
contracts or options; (d) borrowing money; or (e) lending portfolio
securities.
8. Make loans of money or securities, except: (a) by the purchase of
publicly distributed debt obligations; (b) by investment in repurchase
agreements; or (c) by lending its portfolio securities.
9. Make short sales of securities.
10. Purchase securities on margin, except for such short-term loans as
are necessary for the clearance of portfolio securities. The deposit or
payment by the Fund of initial or variation margin in connection with
futures contracts or related options thereon is not considered the purchase
of a security on margin.
11. Engage in the underwriting of securities, except insofar as the
Fund may be deemed an underwriter under the Securities Act in disposing of a
portfolio security.
12. Invest for the purpose of exercising control or management of any
other issuer.
13. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets or in accordance with the provisions of Section 12(d) of the
Investment Company Act and any Rules promulgated thereunder.
14. Purchase or sell commodities or commodities contracts except that
the Fund may purchase or sell futures contracts or options on futures.
In addition, as a non-fundamental policy, the Fund may not invest in other
investment companies in reliance on Sections 12(d)(1)(F), 12(d)(1)(G) or
12(d)(1)(J) of the Investment Company Act. Further, as a non-fundamental policy,
the Fund may not, as to 75% of its total assets, purchase more than 10% of the
voting securities of any issuer.
Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objective by investing all or substantially all
of its assets in another investment company having substantially the same
investment objective and policies as the Fund.
III. MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
A. BOARD OF TRUSTEES
The Board of Trustees of the Fund oversees the management of the Fund but
does not itself manage the Fund. The Trustees review various services provided
by or under the direction of the Investment Manager to ensure that the Fund's
general investment policies and programs are properly carried out. The Trustees
also conduct their review to ensure that administrative services are provided to
the Fund in a satisfactory manner.
Under state law, the duties of the Trustees are generally characterized as a
duty of loyalty and a duty of care. The duty of loyalty requires a Trustee to
exercise his or her powers in the interest of the Fund and not the Trustee's own
interest or the interest of another person or organization. A Trustee satisfies
his or her duty of care by acting in good faith with the care of an ordinarily
prudent person and in a manner the Trustee reasonably believes to be in the best
interest of the Fund and its shareholders.
B. MANAGEMENT INFORMATION
TRUSTEES AND OFFICERS. The Board of the Fund consists of eight (8)
Trustees. These same individuals also serve as directors or trustees for all of
the Morgan Stanley Dean Witter Funds. Six Trustees (75% of the total number)
have no affiliation or business connection with the Investment Manager or any of
its affiliated persons and do not own any stock or other securities issued by
the Investment Manager's
15
<PAGE>
parent company, MSDW. These are the "non-interested" or "independent" Trustees.
The other two Trustees (the "management Trustees") are affiliated with the
Investment Manager. All of the Trustees also serve as Trustees of "Discover
Brokerage Index Series," a mutual fund for which the Investment Manager is the
investment advisor.
The Trustees and executive officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with the
Investment Manager, and with the 91 Morgan Stanley Dean Witter Funds and
Discover Brokerage Index Series, are shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
<S> <C>
Michael Bozic (58) ................................... Vice Chairman of Kmart Corporation (since December, 1998);
Trustee Director or Trustee of the Morgan Stanley Dean Witter
c/o Kmart Corporation Funds and Trustee of Discover Brokerage Index Series;
3100 West Big Beaver Road formerly Chairman and Chief Executive Officer of Levitz
Troy, Michigan Furniture Corporation (November, 1995-November, 1998) and
President and Chief Executive Officer of Hills Department
Stores (May, 1991-July, 1995); formerly variously
Chairman, Chief Executive Officer, President and Chief
Operating Officer (1987-1991) of the Sears Merchandise
Group of Sears, Roebuck and Co.; Director of Eaglemark
Financial Services, Inc. and Weirton Steel Corporation.
Charles A. Fiumefreddo* (66) ......................... Chairman, Director or Trustee and Chief Executive Officer
Chairman of the Board, of the Morgan Stanley Dean Witter Funds and Discover
Chief Executive Officer and Trustee Brokerage Index Series; formerly Chairman, Chief Executive
Two World Trade Center Officer and Director of the Investment Manager, the
New York, New York Distributor and MSDW Services Company; Executive Vice
President and Director of Dean Witter Reynolds; Chairman
and Director of the Transfer Agent; formerly Director
and/or officer of various MSDW subsidiaries (until June
1998).
Edwin J. Garn (66) ................................... Director or Trustee of the Morgan Stanley Dean Witter
Trustee Funds and Discover Brokerage Index Series; formerly United
c/o Huntsman Corporation States Senator (R-Utah)(1974-1992) and Chairman, Senate
500 Huntsman Way Banking Committee (1980-1986); formerly Mayor of Salt Lake
Salt Lake City, Utah City, Utah (1971-1974); formerly Astronaut, Space Shuttle
Discovery (April 12-19, 1985); Vice Chairman, Huntsman
Corporation (chemical company); Director of Franklin Covey
(time management systems), BMW Bank of North America, Inc.
(industrial loan corporation); United Space Alliance
(joint venture between Lockheed Martin and the Boeing
Company) and Nuskin Asia Pacific (multilevel marketing);
member of the board of various civic and charitable
organizations.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
<S> <C>
Wayne E. Hedien (65) ................................. Retired; Director or Trustee of the Morgan Stanley Dean
Trustee Witter Funds and Discover Brokerage Index Series; Director
c/o Mayer, Brown & Platt of The PMI Group, Inc. (private mortgage insurance);
Counsel to the Independent Trustees Trustee and Vice Chairman of The Field Museum of Natural
1675 Broadway History; formerly associated with the Allstate Companies
New York, New York (1966-1994), most recently as Chairman of The Allstate
Corporation (March, 1993-December, 1994) and Chairman and
Chief Executive Officer of its wholly-owned subsidiary,
Allstate Insurance Company (July, 1989-December, 1994);
director of various other business and charitable
organizations.
Dr. Manuel H. Johnson (50) ........................... Senior Partner, Johnson Smick International, Inc., a
Trustee consulting firm; Co-Chairman and a founder of the Group of
c/o Johnson Smick International, Inc. Seven Council (G7C), an international economic commission;
1133 Connecticut Avenue, N.W. Chairman of the Audit Committee and Director or Trustee of
Washington, D.C. the Morgan Stanley Dean Witter Funds and Discover
Brokerage Index Series; Director of Greenwich Capital
Markets, Inc. (broker-dealer) and NVR, Inc. (home
construction); Chairman and Trustee of the Financial
Accounting Foundation (oversight organization of the
Financial Accounting Standards Board); formerly Vice
Chairman of the Board of Governors of the Federal Reserve
System (1986-1990) and Assistant Secretary of the U.S.
Treasury.
Michael E. Nugent (63) ............................... General Partner, Triumph Capital, L.P., a private
Trustee investment partnership; Chairman of the Insurance
c/o Triumph Capital, L.P. Committee and Director or Trustee of the Morgan Stanley
237 Park Avenue Dean Witter Funds and Discover Brokerage Index Series;
New York, New York formerly Vice President, Bankers Trust Company and BT
Capital Corporation (1984-1988); director of various
business organizations.
Philip J. Purcell* (55) .............................. Chairman of the Board of Directors and Chief Executive
Trustee Officer of MSDW, Dean Witter Reynolds and Novus Credit
1585 Broadway Services Inc.; Director of the Distributor; Director or
New York, New York Trustee of the Morgan Stanley Dean Witter Funds and
Discover Brokerage Index Series; Director and/or officer
of various MSDW subsidiaries.
John L. Schroeder (69) ............................... Retired; Chairman of the Derivatives Committee and
Trustee Director or Trustee of the Morgan Stanley Dean Witter
c/o Mayer, Brown & Platt Funds and Discover Brokerage Index Series; Director of
Counsel to the Independent Trustees Citizens Utilities Company (telecommunications, gas,
1675 Broadway electric and water utilities company); formerly Executive
New York, New York Vice President and Chief Investment Officer of the Home
Insurance Company (August, 1991-September, 1995).
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
<S> <C>
Mitchell M. Merin (46) ............................... President and Chief Operating Officer of Asset Management
President of MSDW (since December, 1998); President and Director
Two World Trade Center (since April, 1997) and Chief Executive Officer (since
New York, New York June, 1998) of the Investment Manager and MSDW Services
Company; Chairman, Chief Executive Officer and Director of
the Distributor (since June, 1998); Chairman and Chief
Executive Officer (since June, 1998) and Director (since
January, 1998) of the Transfer Agent; Director of various
MSDW subsidiaries; President of the Morgan Stanley Dean
Witter Funds and Discover Brokerage Index Series (since
May, 1999); previously Chief Strategic Officer of the
Investment Manager and MSDW Services Company and Executive
Vice President of the Distributor (April, 1997-June,
1998), Vice President of the Morgan Stanley Dean Witter
Funds and Discover Brokerage Index Series (May 1997-April,
1999), and Executive Vice President of Dean Witter,
Discover & Co.
Barry Fink (44) ...................................... Senior Vice President (since March, 1997) and Secretary
Vice President, and General Counsel (since February, 1997) and Director
Secretary and General Counsel (since July, 1998) of the Investment Manager and MSDW
Two World Trade Center Services Company; Senior Vice President (since March,
New York, New York 1997) and Assistant Secretary and Assistant General
Counsel (since February, 1997) of the Distributor;
Assistant Secretary of Dean Witter Reynolds (since August,
1996); Vice President, Secretary and General Counsel of
the Morgan Stanley Dean Witter Funds (since February,
1997); Vice President, Secretary and General Counsel of
Discover Brokerage Index Series; previously First Vice
President (June, 1993-February, 1997), Vice President and
Assistant Secretary and Assistant General Counsel of the
Investment Manager and MSDW Services Company and Assistant
Secretary of the Morgan Stanley Dean Witter Funds.
Thomas F. Caloia (53) ................................ First Vice President and Assistant Treasurer of the
Treasurer Investment Manager, the Distributor and MSDW Services
Two World Trade Center Company; Treasurer of the Morgan Stanley Dean Witter Funds
New York, New York and Discover Brokerage Index Series.
</TABLE>
- ------------------------
*Denotes Trustees who are "interested persons" of the Fund as defined by the
Investment Company Act.
In addition, RONALD E. ROBISON, Executive Vice President, Chief
Administrative Officer and Director of the Investment Manager and MSDW Services
Company, ROBERT S. GIAMBRONE, Senior Vice President of the Investment Manager,
MSDW Services Company, the Distributor and the Transfer Agent and Director of
the Transfer Agent, JOSEPH J. MCALINDEN, Executive Vice President and Chief
Investment Officer of the Investment Manager and Director of the Transfer Agent,
Mark Barioso, Senior Vice President of the Investment Manager, Kenton J.
Hinchliffe, Senior Vice President of the Investment Manager, Ira N. Ross, Senior
Vice President of the Investment Manager and Paul D. Vance, Senior Vice
President of the Investment Manager, are Vice Presidents of the Fund.
18
<PAGE>
In addition, FRANK BRUTTOMESSO, MARILYN K. CRANNEY, LOU ANNE D. MCINNIS,
CARSTEN OTTO and RUTH ROSSI, First Vice Presidents and Assistant General
Counsels of the Investment Manager and MSDW Services Company, TODD LEBO, Vice
President and Assistant General Counsel of the Investment Manager and MSDW
Services Company and NATASHA KASSIAN, a staff attorney with the Investment
Manager, are Assistant Secretaries of the Fund.
INDEPENDENT TRUSTEES AND THE COMMITTEES. Law and regulation establish both
general guidelines and specific duties for the Independent Trustees. The Morgan
Stanley Dean Witter Funds seek as Independent Trustees individuals of
distinction and experience in business and finance, government service or
academia; these are people whose advice and counsel are in demand by others and
for whom there is often competition. To accept a position on the Funds' Boards,
such individuals may reject other attractive assignments because the Funds make
substantial demands on their time. All of the Independent Trustees serve as
members of the Audit Committee. Three of them also serve as members of the
Derivatives Committee. In addition, three of the Trustees, including two
Independent Trustees, serve as members of the Insurance Committee.
The Independent Trustees are charged with recommending to the full Board
approval of management, advisory and administration contracts, Rule 12b-1 plans
and distribution and underwriting agreements; continually reviewing Fund
performance; checking on the pricing of portfolio securities, brokerage
commissions, transfer agent costs and performance, and trading among Funds in
the same complex; and approving fidelity bond and related insurance coverage and
allocations, as well as other matters that arise from time to time. The
Independent Trustees are required to select and nominate individuals to fill any
Independent Trustee vacancy on the Board of any Fund that has a Rule 12b-1 plan
of distribution. Most of the Morgan Stanley Dean Witter Funds have a Rule 12b-1
plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of the services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; reviewing the adequacy of the Fund's system of internal
controls; and preparing and submitting Committee meeting minutes to the full
Board.
The Board of each Fund has a Derivatives Committee to approve parameters for
and monitor the activities of the Fund with respect to derivative investments,
if any, made by the Fund.
Finally, the Board of each Fund has formed an Insurance Committee to review
and monitor the insurance coverage maintained by the Fund.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL MORGAN
STANLEY DEAN WITTER FUNDS. The Independent Trustees and the Funds' management
believe that having the same Independent Trustees for each of the Morgan Stanley
Dean Witter Funds avoids the duplication of effort that would arise from having
different groups of individuals serving as Independent Trustees for each of the
Funds or even of sub-groups of Funds. They believe that having the same
individuals serve as Independent Trustees of all the Funds tends to increase
their knowledge and expertise regarding matters which affect the Fund complex
generally and enhances their ability to negotiate on behalf of each Fund with
the Fund's service providers. This arrangement also precludes the possibility of
separate groups of Independent Trustees arriving at conflicting decisions
regarding operations and management of the Funds and avoids the cost and
confusion that would likely ensue. Finally, having the same Independent Trustees
serve on all Fund Boards enhances the ability of each Fund to obtain, at modest
cost to each separate Fund, the services of Independent Trustees, of the
caliber, experience and business acumen of the individuals who serve as
Independent Trustees of the Morgan Stanley Dean Witter Funds.
TRUSTEE AND OFFICER INDEMNIFICATION. The Fund's Declaration of Trust
provides that no Trustee, officer, employee or agent of the Fund is liable to
the Fund or to a shareholder, nor is any Trustee, officer,
19
<PAGE>
employee or agent liable to any third persons in connection with the affairs of
the Fund, except as such liability may arise from his/her or its own bad faith,
willful misfeasance, gross negligence or reckless disregard of his/her or its
duties. It also provides that all third persons shall look solely to the Fund
property for satisfaction of claims arising in connection with the affairs of
the Fund. With the exceptions stated, the Declaration of Trust provides that a
Trustee, officer, employee or agent is entitled to be indemnified against all
liability in connection with the affairs of the Fund.
C. COMPENSATION
The Fund pays each Independent Trustee an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Trustees, the Independent
Trustees or Committees of the Board of Trustees attended by the Trustee (the
Fund pays the Chairman of the Audit Committee an additional annual fee of $750,
and the Chairmen of the Derivatives and Insurance Committees additional annual
fees of $500). If a Board meeting and a meeting of the Independent Trustees or a
Committee meeting, or a meeting of the Independent Trustees and/or more than one
Committee meeting, take place on a single day, the Trustees are paid a single
meeting fee by the Fund. The Fund also reimburses such Trustees for travel and
other out-of-pocket expenses incurred by them in connection with attending such
meetings. Trustees and officers of the Fund who are or have been employed by the
Investment Manager or an affiliated company receive no compensation or expense
reimbursement from the Fund for their services as Trustee.
The following table illustrates the compensation that the Fund paid to its
Independent Trustees for the fiscal year ended May 31, 1999.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- -------------------------------------------------------------- ---------------
<S> <C>
Michael Bozic................................................. $1,400
Edwin J. Garn................................................. 1,600
Wayne E. Hedien............................................... 1,650
Dr. Manuel H. Johnson......................................... 1,600
Michael E. Nugent............................................. 1,600
John L. Schroeder............................................. 1,600
</TABLE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1998 for services
to the 90 Morgan Stanley Dean Witter Funds that were in operation at December
31, 1998. No compensation was paid to the Fund's Independent Trustees by
Discover Brokerage Index Series for the calendar year ended December 31, 1998.
CASH COMPENSATION FROM MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
TOTAL CASH
COMPENSATION
FOR SERVICES
TO
90 MORGAN
STANLEY
NAME OF DEAN WITTER
INDEPENDENT TRUSTEE FUNDS
- --------------------------- -------------
<S> <C>
Michael Bozic.............. $120,150
Edwin J. Garn.............. 132,450
Wayne E. Hedien............ 132,350
Dr. Manuel H. Johnson...... 155,681
Michael E. Nugent.......... 159,731
John L. Schroeder.......... 160,731
</TABLE>
As of the date of this STATEMENT OF ADDITIONAL INFORMATION, 55 of the Morgan
Stanley Dean Witter Funds, not including the Fund, have adopted a retirement
program under which an Independent Trustee who retires after serving for at
least five years (or such lesser period as may be determined by the Board)
20
<PAGE>
as an Independent Director or Trustee of any Morgan Stanley Dean Witter Fund
that has adopted the retirement program (each such Fund referred to as an
"Adopting Fund" and each such Trustee referred to as an "Eligible Trustee") is
entitled to retirement payments upon reaching the eligible retirement age
(normally, after attaining age 72). Annual payments are based upon length of
service.
Currently, upon retirement, each Eligible Trustee is entitled to receive
from the Adopting Fund, commencing as of his or her retirement date and
continuing for the remainder of his or her life, an annual retirement benefit
(the "Regular Benefit") equal to 30.22% of his or her Eligible Compensation plus
0.5036667% of such Eligible Compensation for each full month of service as an
Independent Director or Trustee of any Adopting Fund in excess of five years up
to a maximum of 60.44% after ten years of service. The foregoing percentages may
be changed by the Board.(1) "Eligible Compensation" is one-fifth of the total
compensation earned by such Eligible Trustee for service to the Adopting Fund in
the five year period prior to the date of the Eligible Trustee's retirement.
Benefits under the retirement program are accrued as expenses on the books of
the Adopting Funds. Such benefits are accrued as expenses by the Adopting Funds
but are not secured or funded by the Adopting Funds.
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the 55 Morgan Stanley Dean Witter Funds (not
including the Fund) for the fiscal year ended May 31, 1999, and the estimated
retirement benefits for the Independent Trustees, to commence upon their
retirement, from the 55 Morgan Stanley Dean Witter Funds as of May 31, 1999.
RETIREMENT BENEFITS FROM THE MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
ESTIMATED
FOR ALL ADOPTING FUNDS RETIREMENT ANNUAL
--------------------------------- BENEFITS BENEFITS
ESTIMATED ACCRUED AS UPON
CREDITED YEARS ESTIMATED EXPENSES RETIREMENT
OF SERVICE AT PERCENTAGE OF BY ALL FROM ALL
RETIREMENT ELIGIBLE ADOPTING ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUNDS FUNDS(2)
- ------------------------------------------------------ --------------- --------------- ------------ --------
<S> <C> <C> <C> <C>
Michael Bozic......................................... 10 60.44% $ 22,377 $52,250
Edwin J. Garn......................................... 10 60.44 35,225 52,250
Wayne E. Hedien....................................... 9 51.37 41,979 44,413
Dr. Manuel H. Johnson................................. 10 60.44 14,047 52,250
Michael E. Nugent..................................... 10 60.44 25,336 52,250
John L. Schroeder..................................... 8 50.37 45,117 44,343
</TABLE>
- ------------------------
1 An Eligible Trustee may elect alternative payments of his or her retirement
benefits based upon the combined life expectancy of the Eligible Trustee
and his or her spouse on the date of such Eligible Trustee's retirement. In
addition, the Eligible Trustee may elect that the surviving spouse's
periodic payment of benefits will be equal to a lower percentage of the
periodic amount when both spouses were alive. The amount estimated to be
payable under this method, through the remainder of the later of the lives
of the Eligible Trustee and spouse, will be the actuarial equivalent of the
Regular Benefit.
2 Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1)
above.
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
- --------------------------------------------------------------------------------
The following persons owned 5% or more of the outstanding Class A shares of
the Fund as of August 5, 1999: Insulation & Refractories Svc. Inc., P/S/T U/A
DTD 3/1/79, J.G. Whitsett, J.W. Whitsett, Freddie Veteto, Mary Harri, Carl W.
Lovell TTEES, 462 Decatur, Memphis, TN 38105--24.04%; W.B. Davis Electric Supply
Co. P/S/T DTD 1/1/76, 527 N. Hollywood, Memphis, TN 38112-2598--16.74%; Roger J.
Benjamin, 1145 Lilac Ave., Owatonna, MN 55060-3743--6.27%; Dean Witter Reynolds
Inc. Custodian for Michael C. Brown, IRA STD DTD 4-7-83, 2215 Oliver Ave. So.,
Minneapolis, MN 55405-2444--6.22% and Ronald P. Mysel & Lynn J. Mysel, TTEES O/T
Mysel Family Trust, DTD 11/19/92, 12440 E. Altadena Ave., Scottsdale, AZ
85259-3467--5.44%. The following persons owned 5% or more of the outstanding
Class C shares of the Fund as of August 5, 1999: Scott A. Read, LIV TR, DTD
2-3-95,
21
<PAGE>
Scott A. & Barbara D. Read TTEES, 7695 Ensley Court, Fishers, IN
46038-1121--20.46%; George J. O'Neil TTEE, O'Neil Associates Inc., Profit
Sharing Plan DTD 11-01-81, 1302 Franklin Ave., STE 2800, Normal, IL
61761-3551--8.44%; George N. Funderburk, 9 Tindal Avenue, Greenville, SC
29605-3903-- 7.79%; Heather A. Frost, 13679 W. Tara Ln., Surprise, AZ
85374-5318--6.89%; W. Jerome Hall, P.O. Box 68, Bayfield, WI 54814-0068--5.03%.
The following persons owned 5% or more of the outstanding Class D shares of the
Fund as of August 5, 1999: Hare & Co., c/o The Bank of New York, P.O. Box 11203,
New York, NY 10286-1203--85.70%; Morgan Stanley Dean Witter Advisors Inc., Attn:
Maurice Bendrihem, 2 World Trade Center, 70(th) Fl., New York, NY
10048-0203--6.85%; Dean Witter Reynolds Inc. Custodian for GEO David Hanna Jr.,
IRA Rollover Dated 08/09/91, 1400 Maple, Newton, KS 67114-6309--6.58%.
As of the date of this STATEMENT OF ADDITIONAL INFORMATION, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's officers
and Trustees as a group was less than 1% of the Fund's shares of beneficial
interest outstanding.
V. INVESTMENT MANAGEMENT AND OTHER SERVICES
- --------------------------------------------------------------------------------
A. INVESTMENT MANAGER AND SUB-ADVISOR
The Investment Manager to the Fund is Morgan Stanley Dean Witter Advisors
Inc., a Delaware corporation, whose address is Two World Trade Center, New York,
New York 10048. The Investment Manager is a wholly-owned subsidiary of MSDW, a
Delaware corporation. MSDW is a preeminent global financial services firm that
maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services.
The Sub-Advisor is Morgan Stanley Dean Witter Investment Management Inc., a
subsidiary of MSDW and an affiliate of the Investment Manager, whose address is
1221 Avenue of the Americas, New York New York 10020.
Pursuant to an Investment Management Agreement (the "Management Agreement")
with the Investment Manager, the Fund has retained the Investment Manager to
provide administrative services and supervise the investment of the Fund's
assets. The Fund pays the Investment Manager monthly compensation calculated
daily at the annual rate of 1.15% of the daily net assets of the Fund. The
management fee is allocated among the Classes pro rata based on the net assets
of the Fund attributable to each Class. For the fiscal years ended May 31, 1997,
1998 and 1999, the Investment Manager accrued total compensation under the
Management Agreement in the amounts of $1,584,086, $985,364 and $618,986,
respectively.
Pursuant to a sub-advisory agreement (the "Sub-Advisory Agreement") between
the Investment Manager and the Sub-Advisor, the Sub-Advisor has been retained,
subject to the overall supervision of the Investment Manager and the Trustees of
the Fund, to continuously furnish investment advice concerning individual
security selections, asset allocations and overall economic trends with respect
to international small-cap issuers and to manage the Fund's portfolio. As
compensation for its service, the Investment Manager pays the Sub-Advisor
monthly compensation equal to 40% of the Investment Manager's monthly
compensation. For the period November 1, 1997 through May 31, 1998 and for the
fiscal year ended May 31, 1999, the Sub-Advisor accrued total compensation under
the Sub-Advisory Agreement in the amounts of $159,791 and $247,595,
respectively. For the fiscal year ended May 31, 1997 and for the period June 1,
1997 through October 31, 1997, compensation of $633,634 and $234,354,
respectively, was paid to a former Sub-Advisor.
The Investment Manager has retained its wholly-owned subsidiary, MSDW
Services Company, to perform administrative services for the Fund.
B. PRINCIPAL UNDERWRITER
The Fund's principal underwriter is the Distributor (which has the same
address as the Investment Manager). In this capacity, the Fund's shares are
distributed by the Distributor. The Distributor has entered into a selected
dealer agreement with Dean Witter Reynolds, which through its own sales
22
<PAGE>
organization sells shares of the Fund. In addition, the Distributor may enter
into similar agreements with other selected broker-dealers. The Distributor, a
Delaware corporation, is a wholly-owned subsidiary of MSDW.
The Distributor bears all expenses it may incur in providing services under
the Distribution Agreement. These expenses include the payment of commissions
for sales of the Fund's shares and incentive compensation to Financial Advisors.
The Distributor also pays certain expenses in connection with the distribution
of the Fund's shares, including the costs of preparing, printing and
distributing advertising or promotional materials, and the costs of printing and
distributing prospectuses and supplements thereto used in connection with the
offering and sale of the Fund's shares. The Fund bears the costs of initial
typesetting, printing and distribution of prospectuses and supplements thereto
to shareholders. The Fund also bears the costs of registering the Fund and its
shares under federal and state securities laws and pays filing fees in
accordance with state securities laws.
The Fund and the Distributor have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act. Under the
Distribution Agreement, the Distributor uses its best efforts in rendering
services to the Fund, but in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations, the Distributor is
not liable to the Fund or any of its shareholders for any error of judgment or
mistake of law or for any act or omission or for any losses sustained by the
Fund or its shareholders.
C. SERVICES PROVIDED BY THE INVESTMENT MANAGER AND SUB-ADVISOR AND FUND EXPENSES
PAID BY THIRD PARTIES
The Investment Manager manages the Fund's business affairs and supervises
the investment of the Fund's assets. The Sub-Advisor manages the investment of
the Fund's assets, including the placing of orders for the purchase and sale of
portfolio securities. The Sub-Advisor obtains and evaluates the information and
advice relating to the economy, securities markets, and specific securities as
it considers necessary or useful to continuously manage the assets of the Fund
in a manner consistent with its investment objective.
Under the terms of the Management Agreement, the Investment Manager
maintains certain of the Fund's books and records and furnishes, at its own
expense, the office space, facilities, equipment, clerical help, bookkeeping and
certain legal services as the Fund may reasonably require in the conduct of its
business, including the preparation of prospectuses, proxy statements and
reports required to be filed with federal and state securities commissions
(except insofar as the participation or assistance of independent accountants
and attorneys is, in the opinion of the Investment Manager, necessary or
desirable). In addition, the Investment Manager 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 service, heat,
light, power and other utilities provided to the Fund.
Expenses not expressly assumed by the Investment Manager under the
Management Agreement, the Sub-Advisor under the Sub-Advisory Agreement or by the
Distributor, will be paid by the Fund. These expenses will be allocated among
the four Classes of shares pro rata based on the net assets of the Fund
attributable to each Class, except as described below. Such expenses include,
but are not limited to: expenses of the Plan of Distribution pursuant to Rule
12b-1; charges and expenses of any registrar, custodian, stock transfer and
dividend disbursing agent; brokerage commissions; taxes; engraving and printing
share certificates; registration costs of the Fund and its shares under federal
and state securities laws; the cost and expense of printing, including
typesetting, and distributing prospectuses of the Fund and supplements thereto
to the Fund's shareholders; all expenses of shareholders' and Trustees' meetings
and of preparing, printing and mailing of proxy statements and reports to
shareholders; fees and travel expenses of Trustees or members of any advisory
board or committee who are not employees of the Investment Manager or any
corporate affiliate of the Investment Manager; all expenses incident to any
dividend, withdrawal or redemption options; charges and expenses of any outside
service used for pricing of the Fund's shares; fees and expenses of legal
counsel, including counsel to the Trustees who are not interested persons of the
Fund or of the Investment Manager or the Sub-Advisor (not including compensation
or expenses of attorneys who are employees of the Investment Manager or the Sub-
23
<PAGE>
Advisor); fees and expenses of the Fund's independent accountants; membership
dues of industry associations; interest on Fund borrowings; postage; insurance
premiums on property or personnel (including officers and Trustees) of the Fund
which inure to its benefit; extraordinary expenses (including, but not limited
to, legal claims and liabilities and litigation costs and any indemnification
relating thereto); and all other costs of the Fund's operation. The 12b-1 fees
relating to a particular Class will be allocated directly to that Class. In
addition, other expenses associated with a particular Class (except advisory or
custodial fees) may be allocated directly to that Class, provided that such
expenses are reasonably identified as specifically attributable to that Class
and the direct allocation to that Class is approved by the Trustees.
The Management Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Investment Manager is not liable to the Fund or any
of its investors for any act or omission by the Investment Manager or for any
losses sustained by the Fund or its investors.
The Management Agreement remain in effect from year to year, provided
continuance of the Management Agreement is approved at least annually by the
vote of the holders of a majority, as defined in the Investment Company Act, of
the outstanding shares of the Fund, or by the Trustees; provided that in either
event such continuance is approved annually by the vote of a majority of the
Trustees.
D. DEALER REALLOWANCES
Upon notice to selected broker-dealers, the Distributor may reallow up to
the full applicable front-end sales charge during periods specified in such
notice. During periods when 90% or more of the sales charge is reallowed, such
selected broker-dealers may be deemed to be underwriters as that term is defined
in the Securities Act.
E. RULE 12b-1 PLAN
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Investment Company Act (the "Plan") pursuant to which each Class, other than
Class D, pays the Distributor compensation accrued daily and payable monthly at
the following annual rates: 0.25% and 1.0% of the average daily net assets of
Class A and Class C, respectively, and, with respect to Class B, 1.0% of the
lesser of: (a) the average daily aggregate gross sales of the Fund's Class B
shares since the inception of the Fund (not including reinvestment of dividends
or capital gains distributions), less the average daily aggregate net asset
value of the Fund's Class B shares redeemed since the Fund's inception upon
which a contingent deferred sales charge has been imposed or upon which such
charge has been waived, or (b) the average daily net assets of Class B.
The Distributor also receives the proceeds of front-end sales charges
("FSCs") and of contingent deferred sales charges ("CDSCs") imposed on certain
redemptions of shares, which are separate and apart from payments made pursuant
to the Plan. The Distributor has informed the Fund that it and/or Dean Witter
Reynolds received the proceeds of CDSCs and FSCs, for the last three fiscal
years ended May 31, in approximate amounts as provided in the table below (the
Distributor did not retain any of these amounts).
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Class A............................... FSCs:(1) $ 6,012 FSCs: $ 3,572 FSCS: N/A(2)
CDSCs: $ 41 CDSCs: $ 0 CDSC: N/A(2)
Class B............................... CDSCs: $ 198,443 CDSCs: $ 365,257 CDSCs: $ 441,738
Class C............................... CDSCs: $ 286 CDSCs: $ 96 CDSC: N/A(2)
</TABLE>
- ------------------------
(1) FSCs apply to Class A only.
(2) This Class commenced operations on July 28, 1997.
The Distributor has informed the Fund that the entire fee payable by Class A
and a portion of the fees payable by each of Class B and Class C each year
pursuant to the Plan equal to 0.25% of such Class' average daily net assets are
currently each characterized as a "service fee" under the Rules of the National
Association of Securities Dealers, Inc. (of which the Distributor is a member).
The "service fee"
24
<PAGE>
is a payment made for personal service and/or the maintenance of shareholder
accounts. The remaining portion of the Plan fees payable by a Class, if any, is
characterized as an "asset-based sales charge" as such is defined by the Rules
of the Association.
Under the Plan and as required by Rule 12b-1, the Trustees receive and
review promptly after the end of each calendar quarter a written report provided
by the Distributor of the amounts expended under the Plan and the purpose for
which such expenditures were made. Class B shares of the Fund accrued amounts
payable to the Distributor under the Plan, during the fiscal year ended May 31,
1999, of $529,067. This amount is equal to 1.00% of the average daily net assets
of Class B for the fiscal year and was calculated pursuant to clause (b) of the
compensation formula under the Plan. For the fiscal year ended May 31, 1999,
Class A and Class C shares of the Fund accrued payments under the Plan amounting
to $1,091 and $1,095, respectively, which amounts are equal to 0.24% and 0.78%
of the average daily net assets of Class A and Class C, respectively, for the
fiscal year.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method the Fund offers four
Classes, each with a different distribution arrangement.
With respect to Class A shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from proceeds of the FSC, commissions for the
sale of Class A shares, currently a gross sales credit of up to 5.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.25% of the current value of
the respective accounts for which they are the Financial Advisors or dealers of
record in all cases. On orders of $1 million or more (for which no sales charge
was paid) or net asset value purchases by employer-sponsored employee benefit
plans, whether or not qualified under the Internal Revenue Code, for which the
Transfer Agent serves as Trustee or Dean Witter Reynolds Retirement Plan
Services serves as recordkeeper pursuant to a written Recordkeeping Services
Agreement ("MSDW Eligible Plans"), the Investment Manager compensates Financial
Advisors by paying them, from its own funds, a gross sales credit of 1.0% of the
amount sold.
With respect to Class B shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class B shares, currently a gross sales credit of up to 5.0% of the amount
sold (except as provided in the following sentence) and an annual residual
commission, currently a residual of up to 0.25% of the current value (not
including reinvested dividends or distributions) of the amount sold in all
cases. In the case of Class B shares purchased by MSDW Eligible Plans, Dean
Witter Reynolds compensates its Financial Advisors by paying them, from its own
funds, a gross sales credit of 3.0% of the amount sold.
With respect to Class C shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class C shares, currently a gross sales credit of up to 1.0% of the amount
sold and an annual residual commission, currently up to 1.0% of the current
value of the respective accounts for which they are the Financial Advisors of
record.
With respect to Class D shares other than shares held by participants in the
Investment Manager's mutual fund asset allocation program, the Investment
Manager compensates Dean Witter Reynolds's Financial Advisors by paying them,
from its own funds, commissions for the sale of Class D shares, currently a
gross sales credit of up to 1.0% of the amount sold. There is a chargeback of
100% of the amount paid if the Class D shares are redeemed in the first year and
a chargeback of 50% of the amount paid if the Class D shares are redeemed in the
second year after purchase. The Investment Manager also compensates Dean Witter
Reynolds's Financial Advisors by paying them, from its own funds, an annual
residual commission, currently up to 0.10% of the current value of the
respective accounts for which they are the Financial Advisors of record (not
including accounts of participants in the Investment Manager's mutual fund asset
allocation program).
The gross sales credit is a charge which reflects commissions paid by Dean
Witter Reynolds to its Financial Advisors and Dean Witter Reynolds's
Fund-associated distribution-related expenses, including sales compensation, and
overhead and other branch office distribution-related expenses including
25
<PAGE>
(a) the expenses of operating Dean Witter Reynolds's branch offices in
connection with the sale of Fund shares, including lease costs, the salaries and
employee benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies, (b) the costs of
client sales seminars, (c) travel expenses of mutual fund sales coordinators to
promote the sale of Fund shares and (d) other expenses relating to branch
promotion of Fund sales.
The distribution fee that the Distributor receives from the Fund under the
Plan, in effect, offsets distribution expenses incurred under the Plan on behalf
of the Fund and, in the case of Class B shares, opportunity costs, such as the
gross sales credit and an assumed interest charge thereon ("carrying charge").
In the Distributor's reporting of the distribution expenses to the Fund, in the
case of Class B shares, such assumed interest (computed at the "broker's call
rate") has been calculated on the gross credit as it is reduced by amounts
received by the Distributor under the Plan and any contingent deferred sales
charges received by the Distributor upon redemption of shares of the Fund. No
other interest charge is included as a distribution expense in the Distributor's
calculation of its distribution costs for this purpose. The broker's call rate
is the interest rate charged to securities brokers on loans secured by
exchange-listed securities.
The Fund is authorized to reimburse expenses incurred or to be incurred in
promoting the distribution of the Fund's Class A and Class C shares and in
servicing shareholder accounts. Reimbursement will be made through payments at
the end of each month. The amount of each monthly payment may in no event exceed
an amount equal to a payment at the annual rate of 0.25%, in the case of Class
A, and 1.0%, in the case of Class C, of the average net assets of the respective
Class during the month. No interest or other financing charges, if any, incurred
on any distribution expenses on behalf of Class A and Class C will be
reimbursable under the Plan. With respect to Class A, in the case of all
expenses other than expenses representing the service fee, and, with respect to
Class C, in the case of all expenses other than expenses representing a gross
sales credit or a residual to Financial Advisors and other authorized financial
representatives, such amounts shall be determined at the beginning of each
calendar quarter by the Trustees, including, a majority of the Independent
Trustees. Expenses representing the service fee (for Class A) or a gross sales
credit or a residual to Financial Advisors and other authorized financial
representatives (for Class C) may be reimbursed without prior determination. In
the event that the Distributor proposes that monies shall be reimbursed for
other than such expenses, then in making quarterly determinations of the amounts
that may be reimbursed by the Fund, the Distributor will provide and the
Trustees will review a quarterly budget of projected distribution expenses to be
incurred on behalf of the Fund, together with a report explaining the purposes
and anticipated benefits of incurring such expenses. The Trustees will determine
which particular expenses, and the portions thereof, that may be borne by the
Fund, and in making such a determination shall consider the scope of the
Distributor's commitment to promoting the distribution of the Fund's Class A and
Class C shares.
Each Class paid 100% of the amounts accrued under the Plan with respect to
that Class for the fiscal year ended May 31, 1999 to the Distributor. The
Distributor and Dean Witter Reynolds estimate that they have spent, pursuant to
the Plan, $14,565,779 on behalf of Class B since the inception of the Plan. It
is estimated that this amount was spent in approximately the following ways: (i)
23.69% ($3,450,572)-- advertising and promotional expenses; (ii) 1.64%
($239,472)--printing of prospectuses for distribution to other than current
shareholders; and (iii) 74.67% ($10,875,735)--other expenses, including the
gross sales credit and the carrying charge, of which 12.31% ($1,339,731)
represents carrying charges, 36.30% ($3,948,153) represents commission credits
to Dean Witter Reynolds branch offices and other selected broker-dealers for
payments of commissions to Financial Advisors and other authorized financial
representatives, and 51.39% ($5,588,448) represents overhead and other branch
office distribution-related expenses. The amounts accrued by Class A and a
portion of the amounts accrued by Class C under the Plan were service fees
during the fiscal year ended May 31, 1999. The remainder of the amounts accrued
by Class C were for expenses which relate to compensation of sales personnel and
associated overhead expenses.
In the case of Class B shares, at any given time, the expenses of
distributing shares of the Fund may be more or less than the total of (i) the
payments made by the Fund pursuant to the Plan; and (ii) the proceeds of CDSCs
paid by investors upon redemption of shares. For example, if $1 million in
expenses
26
<PAGE>
in distributing Class B shares of the Fund had been incurred and $750,000 had
been received as described in (i) and (ii) above, the excess expense would
amount to $250,000. The Distributor has advised the Fund that in the case of
Class B shares the excess distribution expenses, including the carrying charge
designed to approximate the opportunity costs incurred by Dean Witter Reynolds
which arise from it having advanced monies without having received the amount of
any sales charges imposed at the time of sale of the Fund's Class B shares,
totaled $8,284,681 as of May 31, 1999 (the end of the Fund's fiscal year), which
was equal to 17.01% of the net assets of Class B on such date. Because there is
no requirement under the Plan that the Distributor be reimbursed for all
distribution expenses with respect to Class B shares or any requirement that the
Plan be continued from year to year, this excess amount does not constitute a
liability of the Fund. 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 CDSCs 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. Any cumulative expenses incurred, but
not yet recovered through distribution fees or CDSCs, may or may not be
recovered through future distribution fees or CDSCs.
In the case of Class A 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 commission credited to Morgan Stanley Dean Witter Financial Advisors
and other authorized financial representatives at the time of sale may be
reimbursed in the subsequent calendar year. The Distributor has advised the Fund
that unreimbursed expenses representing a gross sales commission credited to
Morgan Stanley Dean Witter Financial Advisors and other authorized financial
representatives at the time of sale totaled $658 in the case of Class C at
December 31, 1998 (the end of the calendar year), and that there were no such
expenses that may be reimbursed in the subsequent year in the case of Class A on
such date. No interest or other financing charges will be incurred on any Class
A or Class C distribution expenses incurred by the Distributor under the Plan or
on any unreimbursed expenses due to the Distributor pursuant to the Plan.
No interested person of the Fund nor any Independent Trustee has any direct
financial interest in the operation of the Plan except to the extent that the
Distributor, the Investment Manager, Dean Witter Reynolds, MSDW Services Company
or certain of their employees may be deemed to have such an interest as a result
of benefits derived from the successful operation of the Plan or as a result of
receiving a portion of the amounts expended thereunder by the Fund.
On an annual basis the Trustees, including a majority of the Independent
Trustees, consider whether the Plan should be continued. Prior to approving the
last continuation of the Plan, the Trustees requested and received from the
Distributor and reviewed all the information which they deemed necessary to
arrive at an informed determination. In making their determination to continue
the Plan, the Trustees considered: (1) the Fund's experience under the Plan and
whether such experience indicates that the Plan is operating as anticipated; (2)
the benefits the Fund had obtained, was obtaining and would be likely to obtain
under the Plan, including that: (a) the Plan is essential in order to give Fund
investors a choice of alternatives for payment of distribution and service
charges and to enable the Fund to continue to grow and avoid a pattern of net
redemptions which, in turn, are essential for effective investment management;
and (b) without the compensation to individual brokers and the reimbursement of
distribution and account maintenance expenses of Dean Witter Reynolds's branch
offices made possible by the 12b-1 fees, Dean Witter Reynolds could not
establish and maintain an effective system for distribution, servicing of Fund
shareholders and maintenance of shareholder accounts; and (3) what services had
been provided and were continuing to be provided under the Plan to the Fund and
its shareholders. Based upon their review, the Trustees, including each of the
Independent Trustees, determined that continuation of the Plan would be in the
best interest of the Fund and would have a reasonable likelihood of continuing
to benefit the Fund and its shareholders. In the Trustees' quarterly review of
the Plan, they will consider its continued appropriateness and the level of
compensation provided therein.
27
<PAGE>
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of the
affected Class or Classes of the Fund, and all material amendments to the Plan
must also be approved by the Trustees in the manner described above. The Plan
may be terminated at any time, without payment of any penalty, by vote of a
majority of the Independent Trustees or by a vote of a majority of the
outstanding voting securities of the Fund (as defined in the Investment Company
Act) on not more than thirty days' written notice to any other party to the
Plan. So long as the Plan is in effect, the election and nomination of
Independent Trustees shall be committed to the discretion of the Independent
Trustees.
F. OTHER SERVICE PROVIDERS
(1) TRANSFER AGENT/DIVIDEND-PAYING AGENT
Morgan Stanley Dean Witter Trust FSB is the Transfer Agent for the Fund's
shares and the Dividend Disbursing Agent for payment of dividends and
distributions on Fund shares and Agent for shareholders under various investment
plans. The principal business address of the Transfer Agent is Harborside
Financial Center, Plaza Two, Jersey City, New Jersey 07311.
(2) CUSTODIAN AND INDEPENDENT ACCOUNTANTS
The Chase Manhattan Bank, One Chase Plaza, New York, New York 10005 is the
Custodian of the Fund's assets. The Custodian has contracted with various
foreign banks and depositaries to hold portfolio securities of non-U.S. issuers
on behalf of the Fund. Any of the Fund's cash balances with the Custodian in
excess of $100,000 are unprotected by federal deposit insurance. These balances
may, at times, be substantial.
PricewaterhouseCoopers LLP, serves as the independent accountants of the
Fund. The independent accountants are responsible for auditing the annual
financial statements of the Fund.
(3) AFFILIATED PERSONS
The Transfer Agent is an affiliate of the Investment Manager, the
Sub-Advisor and of the Distributor. As Transfer Agent and Dividend Disbursing
Agent, the Transfer Agent's responsibilities include maintaining shareholder
accounts, disbursing cash dividends and reinvesting dividends, processing
account registration changes, handling purchase and redemption transactions,
mailing prospectuses and reports, mailing and tabulating proxies, processing
share certificate transactions, and maintaining shareholder records and lists.
For these services, the Transfer Agent receives a per shareholder account fee
from the Fund and is reimbursed for its out-of-pocket expenses in connection
with such services.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
- --------------------------------------------------------------------------------
A. BROKERAGE TRANSACTIONS
Subject to the general supervision of the Trustees, the Investment Manager
and the Sub-Advisor are responsible for decisions to buy and sell securities for
the Fund, the selection of brokers and dealers to effect the transactions, and
the negotiation of brokerage commissions, if any. Purchases and sales of
securities on a stock exchange are effected through brokers who charge a
commission for their services. In the over-the-counter market, securities are
generally traded on a "net" basis with dealers acting as principal for their own
accounts without a stated commission, although the price of the security usually
includes a profit to the dealer. The Fund also expects that securities will be
purchased at times in underwritten offerings where the price includes a fixed
amount of compensation, generally referred to as the underwriter's concession or
discount. Options and futures transactions will usually be effected through a
broker and a commission will be charged. On occasion, the Fund may also purchase
certain money market instruments directly from an issuer, in which case no
commissions or discounts are paid.
For the fiscal years ended May 31, 1997, 1998 and 1999, the Fund paid a
total of $481,984, $441,172 and $153,717, respectively, in brokerage
commissions.
28
<PAGE>
B. COMMISSIONS
Pursuant to an order of the SEC, the Fund may effect principal transactions
in certain money market instruments with Dean Witter Reynolds. The Fund will
limit its transactions with Dean Witter Reynolds to U.S. Government and
government agency securities, bank money instruments (i.e., certificates of
deposit and bankers' acceptances) and commercial paper. The transactions will be
effected with Dean Witter Reynolds only when the price available from Dean
Witter Reynolds is better than that available from other dealers.
During the fiscal years ended May 31, 1997, 1998 and 1999, the Fund did not
effect any principal transactions with Dean Witter Reynolds.
Brokerage transactions in securities listed on exchanges or admitted to
unlisted trading privileges may be effected through Dean Witter Reynolds, Morgan
Stanley & Co. and other affiliated brokers and dealers. In order for an
affiliated broker or dealer to effect any portfolio transactions on an exchange
for the Fund, the commissions, fees or other remuneration received by the
affiliated broker or dealer must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
an exchange during a comparable period of time. This standard would allow the
affiliated broker or dealer to receive no more than the remuneration which would
be expected to be received by an unaffiliated broker in a commensurate
arm's-length transaction. Furthermore, the Trustees, including the Independent
Trustees, have adopted procedures which are reasonably designed to provide that
any commissions, fees or other remuneration paid to an affiliated broker or
dealer are consistent with the foregoing standard. The Fund does not reduce the
management fee it pays to the Investment Manager by any amount of the brokerage
commissions it may pay to an affiliated broker or dealer.
During the fiscal years ended May 31, 1998 and 1999, the Fund paid a total
of $15,696 and $0, respectively, in brokerage commissions to Morgan Stanley &
Co., which broker-dealer became an affiliate of the Investment Manager on May
31, 1997 upon consummation of the merger of Dean Witter, Discover & Co. with
Morgan Stanley Group Inc.
C. BROKERAGE SELECTION
The policy of the Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid in
all circumstances. The Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Investment Manager and/or the Sub-Advisor from
obtaining a high quality of brokerage and research services. In seeking to
determine the reasonableness of brokerage commissions paid in any transaction,
the Investment Manager and/or the Sub-Advisor rely upon its experience and
knowledge regarding commissions generally charged by various brokers and on its
judgment in evaluating the brokerage and research services received from the
broker effecting the transaction. These determinations are necessarily
subjective and imprecise, as in most cases an exact dollar value for those
services is not ascertainable.
The Fund anticipates that certain of its transactions involving foreign
securities will be effected on
securities exchanges. Fixed commissions on such transactions are generally
higher than negotiated commissions on domestic transactions. There is also
generally less government supervision and regulation of foreign securities
exchanges and brokers than in the United States.
In seeking to implement the Fund's policies, the Investment Manager and/or
the Sub-Advisor effect transactions with those brokers and dealers who the
Investment Manager and/or the Sub-Advisor believe provide the most favorable
prices and are capable of providing efficient executions. If the Investment
Manager and/or the Sub-Advisor believe the prices and executions are obtainable
from more than one broker or dealer, it may give consideration to placing
portfolio transactions with those brokers and dealers who also furnish research
and other services to the Fund, the Investment Manager or the
29
<PAGE>
Sub-Advisor. The services may include, but are not limited to, any one or more
of the following: information as to the availability of securities for purchase
or sale; statistical or factual information or opinions pertaining to
investment; wire services; and appraisals or evaluations of portfolio
securities. The information and services received by the Investment Manager
and/or the Sub-Advisor from brokers and dealers may be of benefit them in the
management of accounts of some of their other clients and may not in all cases
benefit the Fund directly.
The Investment Manager and the Sub-Advisor currently serve as investment
manager to a number of clients, including other investment companies, and may in
the future act as investment manager or advisor to others. It is the practice of
the Investment Manager and the Sub-Advisor to cause purchase and sale
transactions to be allocated among the Fund and others whose assets they manage
in such manner as they deem equitable. In making such allocations among the Fund
and other client accounts, various factors may be considered, including the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the Fund and other client accounts.
In the case of certain initial and secondary public offerings, the Investment
Manager and the Sub-Advisor utilize a pro rata allocation process based on the
size of the Morgan Stanley Dean Witter Funds involved and the number of shares
available from the public offering.
D. DIRECTED BROKERAGE
During the fiscal year ended May 31, 1999, the Fund did not pay any
brokerage commissions in connection with transactions because of research
services provided.
E. REGULAR BROKER-DEALERS
During the fiscal year ended May 31, 1999, the Fund did not purchase
securities issued by brokers or dealers that were among the ten brokers or the
ten dealers that executed transactions for or with the Fund in the largest
dollar amounts during the year. As of May 31, 1999, the Fund did not own any
securities issued by any of these issuers.
VII. CAPITAL STOCK AND OTHER SECURITIES
- --------------------------------------------------------------------------------
The shareholders of the Fund are entitled to a full vote for each full share
of beneficial interest held. The Fund is authorized to issue an unlimited number
of shares of beneficial interest. All shares of beneficial interest of the Fund
are of $0.01 par value and are equal as to earnings, assets and voting
privileges except that each Class will have exclusive voting privileges with
respect to matters relating to distribution expenses borne solely by such Class
or any other matter in which the interests of one Class differ from the
interests of any other Class. In addition, Class B shareholders will have the
right to vote on any proposed material increase in Class A's expenses, if such
proposal is submitted separately to Class A shareholders. Also, Class A, Class B
and Class C bear expenses related to the distribution of their respective
shares.
The Fund's Declaration of Trust permits the Trustees to authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios) and additional Classes of shares
within any series. The Trustees have not presently authorized any such
additional series or Classes of shares other than as set forth in the
PROSPECTUS.
The Fund is not required to hold annual meetings of shareholders and in
ordinary circumstances the Fund does not intend to hold such meetings. The
Trustees may call special meetings of shareholders for action by shareholder
vote as may be required by the Investment Company Act or the Declaration of
Trust. Under certain circumstances the Trustees may be removed by action of the
Trustees. In addition, under certain circumstances the shareholders may call a
meeting to remove Trustees and the Fund is required to provide assistance in
communicating with shareholders about such a meeting. The voting
30
<PAGE>
rights of shareholders are not cumulative, so that holders of more than 50
percent of the shares voting can, if they choose, elect all Trustees being
selected, while the holders of the remaining shares would be unable to elect any
Trustees.
Under Massachusetts law, shareholders of a business trust may, under certain
limited circumstances, be held personally liable as partners for the obligations
of the Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that notice
of such Fund obligations include such disclaimer, and provides for
indemnification out of the Fund's property for any shareholder held personally
liable for the obligations of the Fund. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations.
Given the above limitations on shareholder personal liability, and the nature of
the Fund's assets and operations, the possibility of the Fund being unable to
meet its obligations is remote and thus, in the opinion of Massachusetts counsel
to the Fund, the risk to Fund shareholders of personal liability is remote.
All of the Trustees have been elected by the shareholders of the Fund, most
recently at a Special Meeting of Shareholders held on May 21, 1997. The Trustees
themselves have the power to alter the number and the terms of office of the
Trustees (as provided for in the Declaration of Trust), and they may at any time
lengthen or shorten their own terms or make their terms of unlimited duration
and appoint their own successors, provided that always at least a majority of
the Trustees has been elected by the shareholders of the Fund.
VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
- --------------------------------------------------------------------------------
A. PURCHASE/REDEMPTION OF SHARES
Information concerning how Fund shares are offered to the public (and how
they are redeemed and exchanged) is provided in the Fund's PROSPECTUS.
TRANSFER AGENT AS AGENT. With respect to the redemption or repurchase of
Fund shares, the application of proceeds to the purchase of new shares in the
Fund or any other Morgan Stanley Dean Witter Funds and the general
administration of the exchange privilege, the Transfer Agent acts as agent for
the Distributor and for the shareholder's authorized broker-dealer, if any, in
the performance of such functions. With respect to exchanges, redemptions or
repurchases, the Transfer Agent shall be liable for its own negligence and not
for the default or negligence of its correspondents or for losses in transit.
The Fund shall not be liable for any default or negligence of the Transfer
Agent, the Distributor or any authorized broker-dealer.
The Distributor and any authorized broker-dealer have appointed the Transfer
Agent to act as their agent in connection with the application of proceeds of
any redemption of Fund shares to the purchase of shares of any other Morgan
Stanley Dean Witter Fund and the general administration of the exchange
privilege. No commission or discounts will be paid to the Distributor or any
authorized broker-dealer for any transaction pursuant to the exchange privilege.
TRANSFERS OF SHARES. In the event a shareholder requests a transfer of Fund
shares to a new registration, the shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the CDSC or free of such charge (and with regard to the length
of time shares subject to the charge have been held), any transfer involving
less than all of the shares in an account will be made on a pro rata basis (that
is, by transferring shares in the same proportion that the transferred shares
bear to the total shares in the account immediately prior to the transfer). The
transferred shares will continue to be subject to any applicable CDSC as if they
had not been so transferred.
31
<PAGE>
B. OFFERING PRICE
The Fund's Class B, Class C and Class D shares are offered at net asset
value per share and the Class A shares are offered at net asset value per share
plus any applicable FSC which is distributed among the Fund's Distributor, Dean
Witter Reynolds and other authorized dealers as described in the section "V.
Investment Management and Other Services -- E. Rule 12b-1 Plan."
The price of Fund shares, called "net asset value," is based on the value of
the Fund's portfolio securities. Net asset value per share of each Class is
calculated by dividing the value of the portion of the Fund's securities and
other assets attributable to that Class, less the liabilities attributable to
that Class, by the number of shares of that Class outstanding. The assets of
each Class of shares are invested in a single portfolio. The net asset value of
each Class, however, will differ because the Classes have different ongoing
fees.
In the calculation of the Fund's net asset value: (1) an equity portfolio
security listed or traded on the New York or American Stock Exchange or other
stock exchange is valued at its latest sale price on that exchange, prior to the
time when assets are valued; if there were no sales that day, the security is
valued at the latest bid price (in cases where a security is traded on more than
one exchange, the security is valued on the exchange designated as the primary
market pursuant to procedures adopted by the Trustees); and (2) all other
portfolio securities for which over-the-counter market quotations are readily
available are valued at the latest bid price. When market quotations are not
readily available, including circumstances under which it is determined by the
Investment Manager and/or the Sub-Advisor that sale or bid prices are not
reflective of a security's market value, portfolio securities are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Fund's Trustees. For valuation purposes,
quotations of foreign portfolio securities, other assets and liabilities and
forward contracts stated in foreign currency are translated into U.S. dollar
equivalents at the prevailing market rates prior to the close of the New York
Stock Exchange.
Short-term debt securities with remaining maturities of sixty days or less
at the time of purchase are valued at amortized cost, unless the Trustees
determine such does not reflect the securities' market value, in which case
these securities will be valued at their fair value as determined by the
Trustees.
Certain of the Fund's portfolio securities may be valued by an outside
pricing service approved by the Fund's Trustees. The pricing service may utilize
a matrix system incorporating security quality, maturity and coupon as the
evaluation model parameters, and/or research evaluations by its staff, including
review of broker-dealer market price quotations in determining what it believes
is the fair valuation of the portfolio securities valued by such pricing
service.
Listed options on debt securities 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 prices. Unlisted options on debt securities and all options
on equity securities are valued at the mean between their latest bid and asked
prices. Futures are valued at the latest sale price on the commodities exchange
on which they trade unless the Trustees determine such price does not reflect
their market value, in which case they will be valued at their fair value as
determined in good faith under procedures established by and under the
supervision of the Trustees.
Generally, trading in foreign securities, as well as corporate bonds, U.S.
Government securities and money market instruments, is substantially completed
each day at various times prior to the close of the New York Stock Exchange. The
values of such securities used in computing the net asset value of the Fund's
shares are determined as of such times. Foreign currency exchange rates are also
generally determined prior to the close of the New York Stock Exchange.
Occasionally, events which may affect the values of such securities and such
exchange rates may occur between the times at which they are determined and the
close of the New York Stock Exchange and will therefore not be reflected in the
computation of the Fund's net asset value. If events that may affect the value
of such securities occur during such period, then these securities may be valued
at their fair value as determined in good faith under procedures established by
and under the supervision of the Trustees.
32
<PAGE>
IX. TAXATION OF THE FUND AND SHAREHOLDERS
- --------------------------------------------------------------------------------
The Fund generally will make two basic types of distributions: ordinary
dividends and long-term capital gain distributions. These two types of
distributions are reported differently on a shareholder's income tax return and
they are also subject to different rates of tax. The tax treatment of the
investment activities of the Fund will affect the amount and timing and
character of the distributions made by the Fund. Tax issues relating to the Fund
are not generally a consideration for shareholders such as tax exempt entities
and tax-advantaged retirement vehicles such as an IRA or 401(k) plan.
Shareholders are urged to consult their own tax professionals regarding specific
questions as to federal, state or local taxes.
INVESTMENT COMPANY TAXATION. The Fund intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986. As such, the Fund will not be subject to federal income tax on its net
investment income and capital gains, if any, to the extent that it distributes
such income and capital gains to its shareholders.
The Fund generally intends to distribute sufficient income and gains so that
the Fund will not pay corporate income tax on its earnings. The Fund also
generally intends to distribute to its shareholders in each calendar year a
sufficient amount of ordinary income and capital gains to avoid the imposition
of a 4% excise tax. However, the Fund may instead determine to retain all or
part of any net long-term capital gains in any year for reinvestment. In such
event, the Fund will pay federal income tax (and possibly excise tax) on such
retained gains.
Gains or losses on sales of securities by the Fund will be long-term capital
gains or losses if the securities have a tax holding period of more than one
year. Gains or losses on the sale of securities with a tax holding period of one
year or less will be short-term gains or losses.
Gains or losses on the Fund's transactions in listed non-equity options,
futures and options on futures generally are treated as 60% long-term and 40%
short-term. When the Fund engages in options and futures transactions, various
tax rules may accelerate or defer recognition of certain gains and losses,
change the character of certain gains or losses, or alter the holding period of
other investments held by the Fund. The application of these rules would
therefore also affect the amount, timing and character of distributions made by
the Fund. Under certain tax rules, the Fund may be required to accrue a portion
of any discount at which certain securities are purchased as income each year
even though the Fund receives no payments in cash on the security during the
year. To the extent that the Fund invests in such securities, it would be
required to pay out such accrued discount as an income distribution in each year
in order to avoid taxation at the Fund level. Such distributions will be made
from the available cash of the Fund or by liquidation of portfolio securities if
necessary. If a distribution of cash necessitates the liquidation of portfolio
securities, the Investment Manager will select which securities to sell. The
Fund may realize a gain or loss from such sales. In the event the Fund realizes
net capital gains from such transactions, its shareholders may receive a larger
capital gain distribution, if any, than they would in the absence of such
transactions.
TAXATION OF DIVIDENDS AND DISTRIBUTIONS. Shareholders normally will have to
pay federal income taxes, and any state and/or local income taxes, on the
dividends and other distributions they receive from the Fund. Such dividends and
distributions, to the extent that they are derived from net investment income or
short-term capital gains, are taxable to the shareholder as ordinary income
regardless of whether the shareholder receives such payments in additional
shares or in cash.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder has
held the Fund's shares and regardless of whether the distribution is received in
additional shares or in cash. The maximum tax on long-term capital gains
applicable to individuals is 20%.
Shareholders are generally taxed on any ordinary dividend or capital gain
distributions from the Fund in the year they are actually distributed. However,
if any such dividends or distributions are
33
<PAGE>
declared in October, November or December and paid in January then such amounts
will be treated for tax purposes as received by the shareholders on December 31,
to shareholders of record of such month.
Shareholders who are not citizens or residents of the United States and
certain foreign entities may be subject to withholding of United States tax on
distributions made by the Fund of investment income and short term capital
gains.
Subject to certain exceptions, a corporate shareholder may be eligible for a
70% dividends received deduction to the extent that the Fund earns and
distributes qualifying dividends from its investments in United States
corporations. Distributions of net capital gains by the Fund will not be
eligible for the dividends received deduction.
After the end of each calendar year, shareholders will be sent full
information on their dividends and capital gain distributions for tax purposes,
including the portion taxable as ordinary income and the portion taxable as
long-term capital gains.
PURCHASES AND REDEMPTIONS AND EXCHANGES OF FUND SHARES. Any dividend or
capital gains distribution received by a shareholder from any investment company
will have the effect of reducing the net asset value of the shareholder's stock
in that company by the exact amount of the dividend or capital gains
distribution. Furthermore, such dividends and capital gains distributions are
subject to federal income taxes. If the net asset value of the shares should be
reduced below a shareholder's cost as a result of the payment of dividends or
the distribution of realized long-term capital gains, such payment or
distribution would be in part a return of the shareholder's investment but
nonetheless would be taxable to the shareholder. Therefore, an investor should
consider the tax implications of purchasing Fund shares immediately prior to a
distribution record date.
In general, a sale of shares results in capital gain or loss, and for
individual shareholders, is taxable at a federal rate dependent upon the length
of time the shares were held. A redemption of a shareholder's Fund shares is
normally treated as a sale for tax purposes. Fund shares held for a period of
one year or less will, for tax purposes, generally result in short-term gains or
losses and those held for more than one year generally result in long-term gain
or loss. Under current law, the maximum tax on long-term capital gains is 20%.
Any loss realized by shareholders upon a sale or redemption of shares within six
months of the date of their purchase will be treated as a long-term capital loss
to the extent of any distributions of net long-term capital gains with respect
to such shares during the six-month period.
Gain or loss on the sale or redemption of shares in the Fund is measured by
the difference between the amount received and the tax basis of the shares.
Shareholders should keep records of investments made (including shares acquired
through reinvestment of dividends and distributions) so they can compute the tax
basis of their shares. Under certain circumstances a shareholder may compute and
use an average cost basis in determining the gain or loss on the sale or
redemption of shares.
Exchanges of Fund shares for shares of another fund, including shares of
other Morgan Stanley Dean Witter Funds, are also subject to similar tax
treatment. Such an exchange is treated for tax purposes as a sale of the
original shares in the first fund, followed by the purchase of shares in the
second fund.
If a shareholder realizes a loss on the redemption or exchange of a fund's
shares and reinvests in that fund's shares within 30 days before or after the
redemption or exchange, the transactions may be subject to the "wash sale"
rules, resulting in a postponement of the recognition of such loss for tax
purposes.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS. In general, gains
from foreign currencies and from foreign currency options, foreign currency
futures and forward foreign exchange contracts relating to investments in stock,
securities or foreign currencies are currently considered to be qualifying
income for purposes of determining whether the Fund qualifies as a regulated
investment company. It is currently unclear, however, who will be treated as the
issuer of certain foreign currency instruments or how foreign currency options,
futures, or forward foreign currency contracts will be
34
<PAGE>
valued for purposes of the regulated investment company diversification
requirements applicable to the Fund. The Fund may request a private letter
ruling from the Internal Revenue Service on some or all of these issues.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (I.E.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from forward contracts, from futures
contracts that are not "regulated futures contracts", and from unlisted options
will be treated as ordinary income or loss under Code Section 988. Also, certain
foreign exchange gains or losses derived with respect to foreign fixed-income
securities are also subject to Section 988 treatment. In general, therefore,
Code Section 988 gains or losses will increase or decrease the amount of the
Fund's investment company taxable income available to be distributed to
shareholders as ordinary income, rather than increasing or decreasing the amount
of the Fund's net capital gain. Additionally, if Code Section 988 losses exceed
other investment company taxable income during a taxable year, the Fund would
not be able to make any ordinary dividend distributions.
If the Fund invests in an entity which is classified as a "passive foreign
investment company" ("PFIC") for U.S. tax purposes, the application of certain
technical tax provisions applying to such companies could result in the
imposition of federal income tax with respect to such investments at the Fund
level which could not be eliminated by distributions to shareholders. The U.S.
Treasury has established a mark-to-market regime which allows investment
companies investing in PFICs to avoid most, if not all, of the difficulties
posed by the PFIC rules. In any event, it is not anticipated that any taxes on
the Fund with respect to investments in PFICs would be significant.
X. UNDERWRITERS
- --------------------------------------------------------------------------------
The Fund's shares are offered to the public on a continuous basis. The
Distributor, as the principal underwriter of the shares, has certain obligations
under the Distribution Agreement concerning the distribution of the shares.
These obligations and the compensation the Distributor receives are described
above in the sections titled "Principal Underwriter" and "Rule 12b-1 Plans."
XI. CALCULATION OF PERFORMANCE DATA
- --------------------------------------------------------------------------------
From time to time, the Fund may quote its "total return" in advertisements
and sales literature. These figures are computed separately for Class A, Class
B, Class C and Class D shares. The Fund's "average annual total return"
represents an annualization of the Fund's total return over a particular period
and is computed by finding the annual percentage rate which will result in the
ending redeemable value of a hypothetical $1,000 investment made at the
beginning of a one, five or ten year period, or for the period from the date of
commencement of operations, if shorter than any of the foregoing. The ending
redeemable value is reduced by any contingent deferred sales charge ("CDSC") at
the end of the one, five, ten year or other period. For the purpose of this
calculation, it is assumed that all dividends and distributions are reinvested.
The formula for computing the average annual total return involves a percentage
obtained by dividing the ending redeemable value by the amount of the initial
investment (which in the case of Class A shares is reduced by the Class A
initial sales charge), taking a root of the quotient (where the root is
equivalent to the number of years in the period) and subtracting 1 from the
result. Based on this calculation, the average annual total returns for Class B
for the one year and life of the Fund periods July 29, 1994 (commencement of
operations) and ended May 31, 1999 were -5.00% and -2.15%, respectively. The
average annual total returns of Class A for the fiscal year ended May 31, 1999
and for the period July 28, 1997 (inception of the class) through May 31, 1999
were -4.61% and -3.18%, respectively. The average annual total returns of Class
C for the fiscal year ended May 31, 1999 and for the period July 28, 1997
(inception of the class) through May 31, 1999 were -0.77% and -0.85%,
respectively. The average annual total returns of Class D for the fiscal year
ended May 31, 1999 and for the period July 28, 1997 (inception of the class)
through May 31, 1999 were 0.56% and -0.24%, respectively.
35
<PAGE>
In addition, the Fund may advertise its total return for each Class over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. These calculations may or may not reflect the
imposition of the maximum front-end sales charge for Class A or the deduction of
the CDSC for each of Class B and Class C which, if reflected, would reduce the
performance quoted. For example, the average annual total return of the Fund may
be calculated in the manner described above, but without deduction for any
applicable sales charge. Based on this calculation, the average annual total
returns for Class B for the one year and life of the Fund periods ended May 31,
1999 were 0.00% and -1.76%, respectively. The average annual total returns of
Class A for the fiscal year ended May 31, 1999 and for the period July 28, 1997
through May 31, 1999 were 0.68% and -0.30%, respectively. The average annual
total returns of Class C for the fiscal year ended May 31, 1999 and for the
period July 28, 1997 through May 31, 1999 were 0.23% and -0.85%, respectively.
The average annual total returns of Class D for the fiscal year ended May 31,
1999 and for the period July 28, 1997 through May 31, 1999 were 0.56% and
- -0.24%, respectively.
In addition, the Fund may compute its aggregate total return for each Class
for specified periods by determining the aggregate percentage rate which will
result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is assumed that
all dividends and distributions are reinvested. The formula for computing
aggregate total return involves a percentage obtained by dividing the ending
value (without reduction for any sales charge) by the initial $1,000 investment
and subtracting 1 from the result. Based on this calculation, the total returns
for Class B for the one year and life of the Fund periods ended May 31, 1999
were 0.00% and -8.23%, respectively. The total returns of Class A for the fiscal
year ended May 31, 1999 and for the period July 28, 1997 through May 31, 1999
were 0.68% and -0.56%, respectively. The total returns of Class C for the fiscal
year ended May 31, 1999 and for the period July 28, 1997 through May 31, 1999
were 0.23% and -1.56%, respectively. The total returns of Class D for the fiscal
year ended May 31, 1999 and for the period July 28, 1997 through May 31, 1999
were 0.56% and -0.45%, respectively.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in each Class of shares of the Fund by adding 1 to
the Fund's aggregate total return to date (expressed as a decimal and without
taking into account the effect of any applicable CDSC) and multiplying by
$9,475, $48,000 and $97,000 in the case of Class A (investments of $10,000,
$50,000 and $100,000 adjusted for the initial sales charge) or by $10,000,
$50,000 and $100,000 in the case of each of Class B, Class C and Class D, as the
case may be. Investments of $10,000, $50,000 and $100,000 in each Class at
inception of the Class would have declined to the following amounts at May 31,
1999:
<TABLE>
<CAPTION>
INVESTMENT AT INCEPTION OF:
INCEPTION -------------------------------
CLASS DATE: $10,000 $50,000 $100,000
- ------------------------------------------------------------------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Class A............................................................ 07/28/97 $ 9,422 $ 47,731 $ 96,457
Class B............................................................ 07/29/94 9,177 45,885 91,770
Class C............................................................ 07/28/97 9,844 49,220 98,440
Class D............................................................ 07/28/97 9,955 49,775 99,550
</TABLE>
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by recognized organizations.
XII. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
EXPERTS. The financial statements of the Fund for the fiscal year ended May
31, 1999 included in this STATEMENT OF ADDITIONAL INFORMATION and incorporated
by reference in the PROSPECTUS have been so included and incorporated in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
*****
This STATEMENT OF ADDITIONAL INFORMATION and the PROSPECTUS do not contain
all of the information set forth in the REGISTRATION STATEMENT the Fund has
filed with the SEC. The complete REGISTRATION STATEMENT may be obtained from the
SEC.
36
<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
37
<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
38
<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
39
<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
40
<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
41
<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
42
<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
43
<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
44
<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
45
<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
46
<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
47
<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
48
<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.
49
<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.
50
<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.
51
<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,
FOR THE YEAR ENDED MAY 31, 1994*
------------------------------------------------------------ THROUGH
1999++ 1998**++ 1997 1996 MAY 31, 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
52
<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
53
<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
54
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP 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
55
