<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALL- TWO WORLD TRADE CENTER,
CAP FUND NEW YORK, NEW YORK 10048
LETTER TO THE SHAREHOLDERS MAY 31, 2000
DEAR SHAREHOLDER:
International small-cap stocks underperformed their large-cap counterparts for
the 12-month period ended May 31, 2000. For much of 1999, however, small-cap
stocks outperformed large caps as investors sought opportunity in the relatively
inexpensive valuations offered by small-cap stocks. Other positive influences on
the international small-cap market included a rise in initial public offerings,
an increase in merger and acquisition activity and an improving macroeconomic
environment outside the United States. As a result, small caps outperformed
large caps for the first nine months of 1999. In the fourth quarter, however,
this trend reversed as investors embarked on a buying frenzy of technology and
telecommunications stocks, predominately large caps, which continued into the
first two months of 2000. Small caps have seen mixed performance so far this
year, with the technology and telecommunications sectors declining after an
initial rise.
PERFORMANCE AND PORTFOLIO STRATEGY
For the 12-month period ended May 31, 2000, Morgan Stanley Dean Witter
International SmallCap Fund's Class B shares posted a total return of 27.27
percent compared to 17.14 percent for the Morgan Stanley Capital International
Europe, Australia and Far East (MSCI EAFE) Index. For the same period, the
Fund's Class A, C and D shares returned 28.40 percent, 27.21 percent and
28.48 percent, respectively. The performance of the Fund's four share classes
varies because each class has different expenses. The total return figures given
assume the reinvestment of all distributions but do not reflect the deduction of
any applicable sales charges. The accompanying chart compares the Fund's
performance to that of the MSCI EAFE Index.
The Fund's stock selection in Japan bolstered its performance, especially among
its technology holdings. Within Europe the stock selection was also
advantageous, particularly in Finland, Italy and the
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
LETTER TO THE SHAREHOLDERS MAY 31, 2000, CONTINUED
United Kingdom. In Finland, the Fund's participation in the telecommunications
sector was a key driver of its performance. U.K. holdings in media and
advertising, such as Capital Radio, were strong performers in 1999. Defensive
consumer staple names like Reckitt Benkiser and Matthews Bernard also
contributed positively as investors refocused their attention on old-economy
companies early in 2000. The most significant negative factor influencing the
Fund's return was its exposure to Hong Kong's technology sector, which suffered
a severe decline.
Relative to the MSCI EAFE, its benchmark index, the Fund was overweighted at the
end of the period in consumer staples, a sector that offers exposure to
companies with strong consistent cash flows and new products at reasonable
valuations. The Fund is underweighted in materials (chemicals and mining),
because Morgan Stanley Dean Witter Investment Management Inc., the Fund's sub-
advisor, believes that companies in this sector must be large to compete
successfully in the global marketplace. As of May 31, the Fund had an
11.2 percent weighting in information technology, with the largest portion of
that in software.
LOOKING AHEAD
Morgan Stanley Dean Witter Investment Management believes that economic changes
now occurring in Europe and Japan should benefit small-cap companies. The
European market is developing a more pro-market equity culture, with an increase
in venture capital, a shift away from family ownership of businesses and the
creation of new markets. In Japan the sub-advisor sees evidence of catalysts to
generate value with the start of an economic recovery and more convincing
corporate restructuring. Finally, the sub-advisor believes that the small-cap
universe offers attractive opportunities to participate in new businesses
offering innovative products or services.
2
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
LETTER TO THE SHAREHOLDERS MAY 31, 2000, CONTINUED
We appreciate your ongoing support of Morgan Stanley Dean Witter International
SmallCap Fund and look forward to continuing to serve your investment needs.
Very truly yours,
[/S/ CHARLES A. FIUMEFREDDO] [/S/ MITCHELL M. MERIN]
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
CHAIRMAN OF THE BOARD PRESIDENT
3
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
FUND PERFORMANCE MAY 31, 2000
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GROWTH OF $10,000 -- CLASS B SHARES
($ IN THOUSANDS) FUND MSCI EAFE(4)
<S> <C> <C>
Jul-94 10,000 10,000
May-95 8,540 10,248
May-96 10,280 11,342
May-97 9,302 12,197
May-98 9,177 13,552
May-99 9,177 14,143
May-00 11,579(3) 16,568
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. PERFORMANCE FOR CLASS A, CLASS C, AND
CLASS D SHARES WILL VARY FROM THE PERFORMANCE OF CLASS B SHARES SHOWN ABOVE
DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
-------------------------------------------------------------------------------------------------------
CLASS A SHARES* CLASS B SHARES**
----------------------------------------------- ---------------------------------------------------
PERIOD ENDED 5/31/00 PERIOD ENDED 5/31/00
------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
1 Year 28.40%(1) 21.65%(2) 1 Year 27.27%(1) 22.27%(2)
Since Inception (7/28/97) 8.98 (1) 6.93 (2) 5 Years 6.46 (1) 6.15 (2)
Since Inception (7/29/94) 2.69 (1) 2.54 (2)
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES+ CLASS D SHARES#
----------------------------------------------- ---------------------------------------------------
PERIOD ENDED 5/31/00 PERIOD ENDED 5/31/00
------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
1 Year 27.21%(1) 26.21%(2) 1 Year 28.48%(1)
Since Inception (7/28/97) 8.24 (1) 8.24 (2) Since Inception (7/28/97) 9.05 (1)
</TABLE>
------------------------
(1) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable sales charge. See the Fund's current prospectus for
complete details on fees and sales charges.
(3) Closing value after the deduction of a 1% CDSC, assuming a complete
redemption on May 31, 2000.
(4) The Morgan Stanley Capital International World Index (MSCI) measures
performance from a diverse range of global stock markets including the
U.S., Canada, Europe, Australia, New Zealand, and the Far East. The
performance of the Index is listed in U.S. dollars and assumes reinvestment
of net dividends. "Net dividends" reflects a reduction in dividends after
taking into account withholding of taxes by certain foreign countries
represented in the index. The index does not take into account the Fund's
expenses, fees, or charges. The index is unmanaged and should not be
considered an investment.
* The maximum front-end sales charge for Class A is 5.25%.
** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%.
The CDSC declines to 0% after six years.
+ The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of purchase.
# Class D shares have no sales charge.
4
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
PORTFOLIO OF INVESTMENTS MAY 31, 2000
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON AND PREFERRED STOCKS AND RIGHTS (94.6%)
AUSTRALIA (2.8%)
ALCOHOLIC BEVERAGES
72,180 BRL Hardy Ltd...................................................... $ 282,089
-----------
DIVERSIFIED COMMERCIAL SERVICES
361,501 Ausdoc Group Ltd................................................... 415,770
-----------
HOSPITAL/NURSING MANAGEMENT
600,300 Ramsay Health Care Ltd............................................. 298,838
-----------
OFFICE/PLANT AUTOMATION
126,749 E.R.G. Ltd......................................................... 600,586
-----------
WATER SUPPLY
214,700 Neverfail Springwater Ltd.......................................... 393,124
-----------
TOTAL AUSTRALIA.................................................... 1,990,407
-----------
DENMARK (1.0%)
INTERNATIONAL BANKS
20,700 Sydbank A/S........................................................ 690,762
-----------
FINLAND (6.6%)
BUILDING PRODUCTS
14,950 Kone Corp. (B Shares).............................................. 910,378
33,380 Uponor Oyj......................................................... 619,088
-----------
1,529,466
-----------
CONSTRUCTION/AGRICULTURAL EQUIPMENT/TRUCKS
23,705 KCI Konecranes International PLC................................... 706,102
-----------
ELECTRONIC COMPONENTS
20,640 Perlos Oyj......................................................... 744,339
2,150 Teleste Oyj........................................................ 54,375
-----------
798,714
-----------
INDUSTRIAL MACHINERY/COMPONENTS
48,720 Metso Oyj.......................................................... 638,904
117,149 Rapala Normark Corp.*.............................................. 680,348
-----------
1,319,252
-----------
PAPER
24,910 Metsa Tissue Corp.................................................. 331,331
-----------
TOTAL FINLAND...................................................... 4,684,865
-----------
FRANCE (4.9%)
CONSUMER SPECIALTIES
24,553 L'Europeenne d'Extincteurs......................................... 687,664
-----------
ENVIRONMENTAL SERVICES
10,359 Alliance et Gestion Commerciale.................................... 718,042
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
FLUID CONTROLS
16,780 Groupe Legris Industries S.A....................................... $ 693,156
-----------
INDUSTRIAL MACHINERY/COMPONENTS
5,580 De Dietrich et Compagnie S.A....................................... 332,162
-----------
OFFICE EQUIPMENT/SUPPLIES
18,397 Neopost S.A.*...................................................... 588,661
-----------
SPECIALTY INSURERS
1,100 Coface............................................................. 103,037
-----------
TEXTILES
6,560 Chargeurs S.A...................................................... 375,752
-----------
TOTAL FRANCE....................................................... 3,498,474
-----------
GERMANY (5.8%)
APPAREL
128 Escada AG.......................................................... 13,069
-----------
AUTO PARTS: O.E.M.
23,076 Beru AG............................................................ 691,689
-----------
BUILDING MATERIALS
23,752 Dyckerhoff AG (Pref.).............................................. 631,857
-----------
DIVERSIFIED COMMERCIAL SERVICES
11,568 Techem AG.......................................................... 270,894
-----------
HOME FURNISHINGS
15,916 WMF-Wuerttembergische Metallwarenfabrik AG (Pref.)................. 210,209
-----------
INDUSTRIAL MACHINERY/COMPONENTS
80,259 Sartorius AG (Pref.)............................................... 714,197
17,999 Winkler & Duennebier............................................... 288,300
-----------
1,002,497
-----------
MEDICAL/NURSING SERVICES
29,019 Marseille-Kliniken AG.............................................. 233,766
-----------
METALS FABRICATIONS
77,130 FAG Kugelfischer Georg Schaefer AG................................. 570,757
-----------
MISCELLANEOUS
2,902 SCS Standard Computersysteme....................................... --
-----------
OTHER SPECIALTY STORES
36,917 Moebel Walther AG - Vorzugsakt..................................... 458,187
-----------
TOTAL GERMANY...................................................... 4,082,925
-----------
HONG KONG (2.7%)
OTHER TELECOMMUNICATIONS
206,800 Asia Satellite Telecommunications Holdings Ltd..................... 581,175
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
PORTFOLIO OF INVESTMENTS MAY 31, 2000, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
REAL ESTATE
277,446 Hysan Development Co., Ltd......................................... $ 304,408
-----------
RECREATIONAL PRODUCTS/TOYS
5,532,000 E-New Media Co., Ltd.*............................................. 653,104
-----------
SPECIALTY FOODS/CANDY
1,751,000 Vitasoy International Holdings Ltd................................. 366,257
-----------
TOTAL HONG KONG.................................................... 1,904,944
-----------
IRELAND (0.9%)
INTERNATIONAL BANKS
290,070 Anglo Irish Bank Corp. PLC......................................... 643,311
-----------
ITALY (0.2%)
INTERNATIONAL BANKS
9,610 Banca Popolare di Bergamo Credito Varesino SpA..................... 170,586
-----------
JAPAN (34.5%)
AIR FREIGHT/DELIVERY SERVICES
8,600 Yusen Air & Sea Service Co., Ltd................................... 159,555
-----------
AIRLINES
7,000 H.I.S. Co., Ltd.................................................... 344,805
-----------
APPAREL
12,000 Nagaileben Co., Ltd................................................ 367,347
-----------
BEVERAGES - NON-ALCOHOLIC
5,700 Itoen, Ltd......................................................... 386,521
-----------
BOOKS/MAGAZINES
4,300 Shobunsha Publications, Inc........................................ 151,577
-----------
BUILDING PRODUCTS
15,000 Taikisha Ltd....................................................... 111,317
-----------
CLOTHING/SHOE/ACCESSORY STORES
1,000 Fast Retailing Co., Ltd............................................ 426,252
30 Kyoto Kimono Yuzen Co., Ltd........................................ 194,249
6,500 Ryohin Keikaku Co., Ltd............................................ 946,058
-----------
1,566,559
-----------
COMPUTER SOFTWARE
1,500 Alpha Systems Inc.................................................. 193,553
5,000 CAC Corp........................................................... 298,237
4,600 Fuji Soft ABC Inc.................................................. 225,306
8,000 Jastec Co., Ltd.................................................... 222,634
5,000 Justsystem Corp.*.................................................. 169,295
3,500 Trend Micro Inc.*.................................................. 477,273
-----------
1,586,298
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
CONSUMER ELECTRONICS/APPLIANCES
10,000 Bodysonic Co., Ltd.*............................................... $ 102,968
10,000 Rinnai Corp........................................................ 216,141
11,000 Shinwa Co., Ltd.................................................... 91,837
12,000 Yokowo Co., Ltd.................................................... 336,178
-----------
747,124
-----------
CONSUMER SPECIALTIES
33,000 Combi Corp......................................................... 251,020
-----------
CONSUMER SUNDRIES
7,500 Aderans Co., Ltd................................................... 299,165
-----------
CONTAINERS/PACKAGING
4,800 FP Corp............................................................ 189,239
7,300 Fuji Seal, Inc..................................................... 399,536
-----------
588,775
-----------
DIVERSIFIED COMMERCIAL SERVICES
1,200 Bellsystem 24, Inc................................................. 683,488
20 Goodwill Group, Inc................................................ 122,449
-----------
805,937
-----------
DIVERSIFIED ELECTRONIC PRODUCTS
800 Funai Electric Co., Ltd............................................ 369,573
-----------
DRUGSTORE CHAINS
5,200 Matsumotokiyoshi Co................................................ 472,727
5,200 Tsuruha Co., Ltd................................................... 265,306
-----------
738,033
-----------
E.D.P. PERIPHERALS
10,000 Tokki Corp.*....................................................... 172,542
-----------
E.D.P. SERVICES
2 Acces Co., Ltd..................................................... 139,147
4,600 Fujitsu Support & Services Inc..................................... 430,557
15,000 MKC-Stat Corp...................................................... 260,204
-----------
829,908
-----------
ELECTRICAL PRODUCTS
13,500 Cosel Co., Ltd..................................................... 474,629
10,000 Hosiden Corp....................................................... 440,631
7,600 Nidec Corp......................................................... 583,748
27,000 Ushio Inc.......................................................... 611,132
-----------
2,110,140
-----------
ELECTRONIC COMPONENTS
12,000 Zuken Inc.......................................................... 244,341
-----------
ELECTRONIC DISTRIBUTORS
10,000 Toyo Corp.......................................................... 308,905
-----------
ELECTRONIC PRODUCTION EQUIPMENT
8,500 Fujimi Inc......................................................... 268,089
2,600 Tokyo Seimitsu Co., Ltd............................................ 292,078
-----------
560,167
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
PORTFOLIO OF INVESTMENTS MAY 31, 2000, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
FARMING/SEEDS/MILLING
35,000 Fuji Oil Co., Ltd.................................................. $ 298,377
-----------
FINANCE COMPANIES
8,300 Aeon Credit Service Co., Ltd....................................... 523,562
-----------
FOOD CHAINS
8,000 Circle K Japan Co., Ltd............................................ 311,688
9,000 Matsuya Foods Co., Ltd............................................. 254,638
-----------
566,326
-----------
HOME BUILDING
500 Higashi Nihon House Co............................................. 1,860
-----------
INDUSTRIAL MACHINERY/COMPONENTS
7,000 Arrk Corp.......................................................... 233,766
25,000 Daifuku Co., Ltd................................................... 218,460
7,700 Fuji Machine Manufacturing Co., Ltd................................ 371,429
11,000 THK Co., Ltd....................................................... 503,061
4,900 Union Tool Co...................................................... 470,455
-----------
1,797,171
-----------
INDUSTRIAL SPECIALTIES
15,000 Lintec Corp........................................................ 147,913
3,600 Taiyo Ink Manufacturing Co., Ltd................................... 170,315
-----------
318,228
-----------
MAJOR CHEMICALS
3,000 Stella Chemifa Corp................................................ 200,371
-----------
MEAT/POULTRY/FISH
25,000 Yonekyu Corp....................................................... 287,570
-----------
OTHER SPECIALTY STORES
11,000 Nitori Co.......................................................... 413,265
2,200 Otsuka Kagu Ltd.................................................... 502,041
15,000 Tsutsumi Jewelry Co., Ltd.......................................... 341,605
-----------
1,256,911
-----------
PACKAGE GOODS/COSMETICS
1,950 Fancl Corp......................................................... 179,082
2,000 Milbon Co. Ltd..................................................... 129,870
-----------
308,952
-----------
PRECISION INSTRUMENTS
13,000 Horiba, Ltd........................................................ 138,442
-----------
REAL ESTATE
700 Chubu Sekiwa Real Estate, Ltd...................................... 3,669
7,000 Meiwa Estate Co., Ltd.............................................. 220,130
<CAPTION>
NUMBER OF
SHARES VALUE
----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
32,000 Sekiwa Real Estate, Ltd............................................ $ 119,629
20,000 Toc Co., Ltd....................................................... 124,304
-----------
467,732
-----------
RECREATIONAL PRODUCTS/TOYS
6,750 Tomy Co., Ltd...................................................... 243,576
-----------
RESTAURANTS
10,000 Doutor Coffee Co., Ltd............................................. 732,839
15,000 Ichibanya Co., Ltd.*............................................... 225,417
10,000 Origin Toshu Co., Ltd.............................................. 157,699
3,000 Plenus Co., Ltd.................................................... 137,477
16,500 Saint Marc Co., Ltd................................................ 577,041
3,700 Saizeriya Co., Ltd................................................. 281,447
12,000 Watami Food Service Co., Ltd....................................... 889,425
-----------
3,001,345
-----------
SERVICES TO THE HEALTH INDUSTRY
6,400 Nichii Gakkan Co................................................... 384,119
-----------
SPECIALTY CHEMICALS
20,000 Shin-Etsu Polymer Co., Ltd......................................... 130,798
-----------
SPECIALTY FOODS/CANDY
7,000 Ariake Japan Co., Ltd.............................................. 449,351
20,000 Fujicco Co., Ltd................................................... 314,657
8,500 Rock Field Co., Ltd................................................ 423,423
-----------
1,187,431
-----------
TELECOMMUNICATIONS EQUIPMENT
23,000 Denki Kogyo Co., Ltd............................................... 204,610
-----------
WHOLESALE DISTRIBUTORS
4,400 Misumi Corp........................................................ 394,286
-----------
TOTAL JAPAN........................................................ 24,411,276
-----------
NETHERLANDS (7.3%)
CONTAINERS/PACKAGING
10,535 IFCO Systems NV*................................................... 236,835
-----------
ENGINEERING & CONSTRUCTION
17,789 Hollandsche Beton Groep NV......................................... 234,115
-----------
FARMING/SEEDS/MILLING
17,282 Nutreco Holding NV................................................. 674,232
-----------
MEDICAL/DENTAL DISTRIBUTORS
20,300 Apothekers Cooperatie OPG NV....................................... 503,898
-----------
MULTI-SECTOR COMPANIES
28,550 Internatio-Muller NV............................................... 528,170
-----------
OFFICE EQUIPMENT/SUPPLIES
33,353 Samas Groep NV..................................................... 479,561
-----------
OILFIELD SERVICES/EQUIPMENT
18,690 IHC Caland NV...................................................... 846,460
-----------
SPECIALTY FOODS/CANDY
29,390 CSM NV............................................................. 619,416
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
PORTFOLIO OF INVESTMENTS MAY 31, 2000, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
WHOLESALE DISTRIBUTORS
34,423 Buhrmann NV........................................................ $ 1,052,767
-----------
TOTAL NETHERLANDS.................................................. 5,175,454
-----------
NEW ZEALAND (2.7%)
CASINO/GAMBLING
107,333 Sky City Ltd....................................................... 300,850
-----------
ENGINEERING & CONSTRUCTION
717,044 Fletcher Challenge Building........................................ 709,357
-----------
OTHER TRANSPORTATION
252,000 Auckland Intl Airport Ltd.......................................... 305,852
-----------
WHOLESALE DISTRIBUTORS
211,450 Fisher & Paykel Industries Ltd..................................... 629,487
-----------
TOTAL NEW ZEALAND.................................................. 1,945,546
-----------
NORWAY (1.2%)
CONSTRUCTION/AGRICULTURAL EQUIPMENT/TRUCKS
21,460 Kverneland ASA..................................................... 331,296
-----------
INTERNATIONAL BANKS
28,340 Sparebanken NOR.................................................... 550,877
-----------
TOTAL NORWAY....................................................... 882,173
-----------
SINGAPORE (0.9%)
PRECISION INSTRUMENTS
98,000 Avimo Group Ltd.................................................... 180,958
-----------
SPECIALTY CHEMICALS
234,000 Natsteel Broadway Ltd.............................................. 317,311
-----------
SPECIALTY FOODS/CANDY
120,000 Want Want Holdings Ltd............................................. 130,800
-----------
TOTAL SINGAPORE.................................................... 629,069
-----------
SPAIN (2.0%)
OTHER CONSUMER SERVICES
60,350 Amadeus Global Travel Distribution S.A. (A Shares)*................ 563,603
-----------
PAPER
38,839 Miquel y Costas & Miquel, S.A...................................... 834,932
-----------
TOTAL SPAIN........................................................ 1,398,535
-----------
SWEDEN (3.8%)
HOTELS/RESORTS
66,540 Scandic Hotels AB.................................................. 698,450
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
INDUSTRIAL MACHINERY/COMPONENTS
40,930 Haldex AB.......................................................... $ 429,630
-----------
MEDICAL/NURSING SERVICES
36,140 Nobel Biocare AB................................................... 774,844
-----------
TOBACCO
239,190 Swedish Match AB................................................... 745,198
239,190 Swedish Match AB (Rights)*......................................... 13,544
-----------
758,742
-----------
TOTAL SWEDEN....................................................... 2,661,666
-----------
SWITZERLAND (6.0%)
ADVERTISING
455 Publigroupe S.A.................................................... 321,832
-----------
BUILDING PRODUCTS
960 Zehnder Holdings AG................................................ 604,279
-----------
E.D.P. PERIPHERALS
495 Logitech International S.A. (Registered Shares)*................... 289,809
-----------
INDUSTRIAL MACHINERY/COMPONENTS
490 Bobst AG (Bearer Shares)........................................... 701,914
725 Saurer AG (Registered Shares)...................................... 413,695
-----------
1,115,609
-----------
MEDICAL SPECIALTIES
3,140 Sulzer Medica AG (Registered Shares)............................... 703,626
-----------
OTHER SPECIALTY STORES
2,110 Valora Holding AG.................................................. 579,422
-----------
PRINTING/FORMS
1,565 Edipresse S.A. (Bearer Shares)..................................... 641,851
-----------
TOTAL SWITZERLAND.................................................. 4,256,428
-----------
UNITED KINGDOM (11.3%)
BROADCASTING
38,390 Scottish Media Group PLC........................................... 583,903
-----------
BUILDING PRODUCTS
183,960 SIG PLC............................................................ 620,244
-----------
FLUID CONTROLS
93,000 Spirax-Sarco Engineering PLC....................................... 555,770
-----------
INDUSTRIAL MACHINERY/COMPONENTS
349,900 The Six Hundred Group PLC.......................................... 251,676
-----------
MEAT/POULTRY/FISH
749,500 Bernard Matthews PLC............................................... 1,707,151
-----------
MEDICAL/DENTAL DISTRIBUTORS
112,430 Alliance Unichem PLC............................................... 735,399
-----------
METALS FABRICATIONS
32,500 Glynwed International PLC.......................................... 113,961
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
PORTFOLIO OF INVESTMENTS MAY 31, 2000, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
OTHER CONSUMER SERVICES
150,100 Northern Leisure PLC............................................... $ 347,509
-----------
OTHER PHARMACEUTICALS
134,990 Seton Scholl Healthcare PLC........................................ 1,504,230
-----------
PACKAGE GOODS/COSMETICS
97,055 Reckitt & Colman PLC............................................... 1,066,053
-----------
REAL ESTATE
218,430 NHP PLC............................................................ 141,974
-----------
SPECIALTY CHEMICALS
32,000 British Vita PLC................................................... 123,716
-----------
SPECIALTY FOODS/CANDY
348,400 Devro PLC.......................................................... 261,039
-----------
TOTAL UNITED KINGDOM............................................... 8,012,625
-----------
TOTAL COMMON AND PREFERRED STOCKS AND RIGHTS
(IDENTIFIED COST $63,580,679)...................................... 67,039,046
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (a) (2.1%)
U.S. GOVERNMENT AGENCY
$ 1,500 Federal Home Loan Banks 6.30% due 06/01/00 (AMORTIZED COST
$1,500,000)...................................................... $ 1,500,000
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $65,080,679) (b).......................................................... 96.7% 68,539,046
OTHER ASSETS IN EXCESS OF LIABILITIES...................................................... 3.3 2,304,958
----- ------------
NET ASSETS................................................................................. 100.0% $ 70,844,004
----- ------------
----- ------------
</TABLE>
---------------------
* Non-income producing security.
(a) Purchased on a discount basis. The interest rate shown has been adjusted to
reflect a money market equivalent yield.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $12,147,681 and the
aggregate gross unrealized depreciation is $8,689,314, resulting in net
unrealized appreciation of $3,458,367.
FORWARD FOREIGN CURRENCY CONTRACT OPEN AT MAY 31, 2000.
<TABLE>
<CAPTION>
CONTRACT TO IN DELIVERY UNREALIZED
DELIVER EXCHANGE FOR DATE DEPRECIATION
----------------------------------------------------
<S> <C> <C> <C>
NOK 722,360 $80,688 06/02/00 $(711)
=====
</TABLE>
CURRENCY ABBREVIATION:
<TABLE>
<S> <C>
NOK Norwegian Krone.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
SUMMARY OF INVESTMENTS MAY 31, 2000
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Advertising........................................................................ $ 321,832 0.5%
Air Freight/Delivery Services...................................................... 159,555 0.2
Airlines........................................................................... 344,805 0.5
Alcoholic Beverages................................................................ 282,089 0.4
Apparel............................................................................ 380,416 0.5
Auto Parts: O.E.M.................................................................. 691,689 1.0
Beverages - Non-Alcoholic.......................................................... 386,521 0.5
Books/Magazines.................................................................... 151,577 0.2
Broadcasting....................................................................... 583,903 0.8
Building Materials................................................................. 631,857 0.9
Building Products.................................................................. 2,865,307 4.0
Casino/Gambling.................................................................... 300,850 0.4
Clothing/Shoe/Accessory Stores..................................................... 1,566,559 2.2
Computer Software.................................................................. 1,586,299 2.2
Construction/Agricultural Equipment/Trucks......................................... 1,037,398 1.5
Consumer Electronics/Appliances.................................................... 747,124 1.1
Consumer Specialties............................................................... 938,684 1.3
Consumer Sundries.................................................................. 299,165 0.4
Containers/Packaging............................................................... 825,611 1.2
Diversified Commercial Services.................................................... 1,492,601 2.2
Diversified Electronic Products.................................................... 369,573 0.5
Drugstore Chains................................................................... 738,033 1.0
E.D.P. Peripherals................................................................. 462,351 0.7
E.D.P. Services.................................................................... 829,907 1.2
Electrical Products................................................................ 2,110,139 3.1
Electronic Components.............................................................. 1,043,055 1.5
Electronic Distributors............................................................ 308,905 0.4
Electronic Production Equipment.................................................... 560,167 0.8
Engineering & Construction......................................................... 943,472 1.3
Environmental Services............................................................. 718,042 1.0
Farming/Seeds/Milling.............................................................. 972,609 1.4
Finance Companies.................................................................. 523,562 0.8
Fluid Controls..................................................................... 1,248,927 1.8
Food Chains........................................................................ 566,327 0.8
Home Building...................................................................... 1,860 0.0
Home Furnishings................................................................... 210,209 0.3
Hospital/Nursing Management........................................................ 298,838 0.4
Hotels/Resorts..................................................................... 698,450 1.0
Industrial Machinery/Components.................................................... 6,247,996 8.9
Industrial Specialties............................................................. 318,228 0.4
International Banks................................................................ 2,055,537 3.0
Major Chemicals.................................................................... 200,371 0.3
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Meat/Poultry/Fish.................................................................. $ 1,994,721 2.8%
Medical Specialties................................................................ 703,626 1.0
Medical/Dental Distributors........................................................ 1,239,297 1.7
Medical/Nursing Services........................................................... 1,008,610 1.4
Metals Fabrications................................................................ 684,718 1.0
Multi-Sector Companies............................................................. 528,170 0.7
Office Equipment/Supplies.......................................................... 1,068,222 1.5
Office/Plant Automation............................................................ 600,586 0.8
Oilfield Services/Equipment........................................................ 846,460 1.2
Other Consumer Services............................................................ 911,112 1.3
Other Pharmaceuticals.............................................................. 1,504,229 2.1
Other Specialty Stores............................................................. 2,294,520 3.2
Other Telecommunications........................................................... 581,175 0.8
Other Transportation............................................................... 305,852 0.4
Package Goods/Cosmetics............................................................ 1,375,004 1.9
Paper.............................................................................. 1,166,263 1.6
Precision Instruments.............................................................. 319,399 0.5
Printing/Forms..................................................................... 641,851 0.9
Real Estate........................................................................ 914,114 1.3
Recreational Products/Toys......................................................... 896,680 1.3
Restaurants........................................................................ 3,001,345 4.2
Services To The Health Industry.................................................... 384,119 0.5
Specialty Chemicals................................................................ 571,825 0.8
Specialty Foods/Candy.............................................................. 2,564,942 3.6
Specialty Insurers................................................................. 103,037 0.1
Telecommunications Equipment....................................................... 204,610 0.3
Textiles........................................................................... 375,752 0.5
Tobacco............................................................................ 758,743 1.1
U.S. Government Agency............................................................. 1,500,000 2.1
Water Supply....................................................................... 393,124 0.6
Wholesale Distributors............................................................. 2,076,540 2.9
----------- -----
$68,539,046 96.7%
----------- -----
----------- -----
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
TYPE OF INVESTMENT VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks...................................................................... $65,469,239 92.4%
Preferred Stocks................................................................... 1,556,263 2.2
Rights............................................................................. 13,544 0.0
Short-Term Investment.............................................................. 1,500,000 2.1
----------- -----
$68,539,046 96.7%
----------- -----
----------- -----
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2000
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $65,080,679)................................................................ $68,539,046
Cash (including $1,173,806 in foreign currency)................................................ 1,650,557
Receivable for:
Investments sold........................................................................... 2,266,121
Dividends.................................................................................. 107,409
Foreign withholding taxes reclaimed........................................................ 53,649
Shares of beneficial interest sold......................................................... 19,152
Interest................................................................................... 9,859
Prepaid expenses and other assets.............................................................. 50,548
-----------
TOTAL ASSETS.............................................................................. 72,696,341
-----------
LIABILITIES:
Payable for:
Shares of beneficial interest repurchased.................................................. 1,453,945
Investments purchased...................................................................... 154,640
Investment management fee.................................................................. 74,514
Plan of distribution fee................................................................... 60,488
Accrued expenses and other payables............................................................ 108,750
-----------
TOTAL LIABILITIES......................................................................... 1,852,337
-----------
NET ASSETS................................................................................ $70,844,004
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital................................................................................ $70,975,967
Net unrealized appreciation.................................................................... 3,462,365
Accumulated net investment loss................................................................ (264,553)
Accumulated net realized loss.................................................................. (3,329,775)
-----------
NET ASSETS................................................................................ $70,844,004
===========
CLASS A SHARES:
Net Assets..................................................................................... $1,950,026
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)...................................... 170,712
NET ASSET VALUE PER SHARE................................................................. $11.42
===========
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE)........................................... $12.06
===========
CLASS B SHARES:
Net Assets..................................................................................... $66,038,161
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)...................................... 5,899,788
NET ASSET VALUE PER SHARE................................................................. $11.19
===========
CLASS C SHARES:
Net Assets..................................................................................... $1,042,493
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)...................................... 93,002
NET ASSET VALUE PER SHARE................................................................. $11.21
===========
CLASS D SHARES:
Net Assets..................................................................................... $1,813,324
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)...................................... 158,431
NET ASSET VALUE PER SHARE................................................................. $11.45
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 2000
<TABLE>
<S> <C>
NET INVESTMENT LOSS:
INCOME
Dividends (net of $175,635 foreign withholding tax)............................................ $ 1,367,389
Interest....................................................................................... 142,463
-----------
TOTAL INCOME.............................................................................. 1,509,852
-----------
EXPENSES
Investment management fee...................................................................... 826,418
Plan of distribution fee (Class A shares)...................................................... 4,823
Plan of distribution fee (Class B shares)...................................................... 678,966
Plan of distribution fee (Class C shares)...................................................... 7,918
Transfer agent fees and expenses............................................................... 131,989
Professional fees.............................................................................. 113,320
Custodian fees................................................................................. 102,029
Registration fees.............................................................................. 71,688
Shareholder reports and notices................................................................ 60,712
Trustees' fees and expenses.................................................................... 12,233
Organizational expenses........................................................................ 5,389
Other.......................................................................................... 15,032
-----------
TOTAL EXPENSES............................................................................ 2,030,517
-----------
NET INVESTMENT LOSS....................................................................... (520,665)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................ 18,894,849
Foreign exchange transactions.............................................................. (82,816)
-----------
NET GAIN.................................................................................. 18,812,033
-----------
Net change in unrealized appreciation/depreciation on:
Investments................................................................................ (2,482,360)
Translation of forward foreign currency contracts and other assets and liabilities
denominated in foreign currencies........................................................ (47,776)
-----------
NET DEPRECIATION.......................................................................... (2,530,136)
-----------
NET GAIN.................................................................................. 16,281,897
-----------
NET INCREASE................................................................................... $15,761,232
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<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, 2000 MAY 31, 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss............................................................. $ (520,665) $ (462,452)
Net realized gain (loss)........................................................ 18,812,033 (11,470)
Net change in unrealized appreciation........................................... (2,530,136) (1,640,939)
----------- ------------
NET INCREASE (DECREASE).................................................... 15,761,232 (2,114,861)
Net increase (decrease) from transactions in shares of beneficial interest...... 5,162,098 (19,169,987)
----------- ------------
NET INCREASE (DECREASE).................................................... 20,923,330 (21,284,848)
NET ASSETS:
Beginning of period............................................................. 49,920,674 71,205,522
----------- ------------
END OF PERIOD
(INCLUDING ACCUMULATED NET INVESTMENT LOSSES OF $264,553 AND $316,635,
RESPECTIVELY)............................................................... $70,844,004 $ 49,920,674
=========== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 2000
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 converted to a multiple class share
structure.
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 Investment Manager, that sale and bid prices
are not reflective of a security's market value, portfolio
14
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 2000, CONTINUED
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. 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.
E. 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
15
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 2000, CONTINUED
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.
F. 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.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the ex-dividend date. The amounts of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
H. 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 were deferred and fully amortized as
of July 29, 1999.
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 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
16
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 2000, CONTINUED
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
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 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, totaled
$9,159,634 at May 31, 2000.
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, 2000, the distribution fee was accrued
for Class A shares and Class C shares at the annual rate of 0.24% and 1.00%,
respectively.
17
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 2000, CONTINUED
The Distributor has informed the Fund that for the year ended May 31, 2000, it
received contingent deferred sales charges from certain redemptions of the
Fund's Class A, Class B and Class C shares of $15,000, $89,258 and $903,
respectively and received $17,095 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, 2000 aggregated $65,115,969
and $63,354,230, respectively.
For the year ended May 31, 2000, the Fund incurred brokerage commissions of $144
with Morgan Stanley & Co., an affililate of the Investment Manager and
Distributor, for portfolio transactions executed on behalf of the Fund.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager,
Sub-Advisor and Distributor, is the Fund's transfer agent.
5. FEDERAL INCOME TAX STATUS
During the year ended May 31, 2000, the Fund utilized approximately $18,044,000
of its net capital loss carryover. At May 31, 2000, the Fund had a net capital
loss carryover of approximately $3,237,000 which will be available through May
31, 2006 to offset future capital gains to the extent provided by regulations.
As of May 31, 2000, the Fund had temporary book/tax differences primarily
attributable to income from the the mark-to-market of passive foreign investment
companies ("PFICs") and permanent book/tax differences primarily attributable to
foreign currency losses and tax adjustments on PFICs sold by the Fund. To
reflect reclassifications arising from the permanent differences, accumulated
net realized loss was charged and net investment loss was credited $572,747.
18
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 2000, CONTINUED
6. 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, 2000 MAY 31, 1999
--------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold............................................................. 4,905,335 $ 55,329,299 817,915 $ 6,762,506
Redeemed......................................................... (4,789,580) (54,516,059) (798,885) (6,671,991)
----------- ------------- ---------- ------------
Net increase - Class A........................................... 115,755 813,240 19,030 90,515
----------- ------------- ---------- ------------
CLASS B SHARES
Sold............................................................. 10,940,212 123,323,575 1,186,270 10,200,450
Redeemed......................................................... (10,566,342) (120,926,855) (3,614,395) (29,188,640)
----------- ------------- ---------- ------------
Net increase (decrease) - Class B................................ 373,870 2,396,720 (2,428,125) (18,988,190)
----------- ------------- ---------- ------------
CLASS C SHARES
Sold............................................................. 365,030 4,282,268 37,809 310,537
Redeemed......................................................... (293,395) (3,490,392) (25,250) (216,451)
----------- ------------- ---------- ------------
Net increase - Class C........................................... 71,635 791,876 12,559 94,086
----------- ------------- ---------- ------------
CLASS D SHARES
Sold............................................................. 1,801,148 22,041,069 161,889 1,219,122
Redeemed......................................................... (1,702,051) (20,880,807) (198,378) (1,585,520)
----------- ------------- ---------- ------------
Net increase (decrease) - Class D................................ 99,097 1,160,262 (36,489) (366,398)
----------- ------------- ---------- ------------
Net increase (decrease) in Fund.................................. 660,357 $ 5,162,098 (2,433,025) $(19,169,987)
=========== ============= ========== ============
</TABLE>
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.
Forward contracts 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 from the
potential inability of the counterparties to meet the terms of their contracts.
At May 31, 2000, there was an outstanding forward contract.
At May 31, 2000 the Fund's cash balance consisted principally of interest
bearing deposits with Chase Manhattan Bank N.A., the Fund's custodian.
19
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
MAY 31, 2000 MAY 31, 1999 MAY 31, 1998
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS A SHARES ++
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................................. $ 8.93 $ 8.85 $ 8.96
------ ------ ------
Income (loss) from investment operations:
Net investment income.............................................. 0.02 -- --
Net realized and unrealized gain (loss)............................ 2.47 0.08 (0.11)
------ ------ ------
Total income (loss) from investment operations........................ 2.49 0.08 (0.11)
------ ------ ------
Net asset value, end of period........................................ $11.42 $ 8.93 $ 8.85
====== ====== ======
TOTAL RETURN+......................................................... 28.40% 0.68 % (1.23)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 2.10%(3) 2.36 %(3) 2.52 %(2)
Net investment income (loss).......................................... 0.00%(3) (0.12)%(3) 0.03 %(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $1,950 $491 $318
Portfolio turnover rate............................................... 94% 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
20
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
----------------------------------------------------------------------
2000++ 1999++ 1998*++ 1997 1996
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period..................... $ 8.82 $ 8.80 $ 8.92 $ 10.28 $ 8.54
------- ----------- -------- ----------- --------
Income (loss) from investment operations:
Net investment loss................................... (0.09) (0.09) (0.11) (0.16) (0.08)
Net realized and unrealized gain (loss)............... 2.46 0.11 (0.01) (0.88) 1.82
------- ----------- -------- ----------- --------
Total income (loss) from investment operations........... 2.37 0.02 (0.12) (1.04) 1.74
------- ----------- -------- ----------- --------
Dividends from net investment income..................... -- -- -- (0.38) --
------- ----------- -------- ----------- --------
Capital contribution..................................... -- -- -- 0.06 --
------- ----------- -------- ----------- --------
Net asset value, end of period........................... $ 11.19 $ 8.82 $ 8.80 $ 8.92 $ 10.28
======= =========== ======== =========== ========
TOTAL RETURN+............................................ 27.27 % 0.00 % (1.35)% (9.52)%(1) 20.37 %
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................. 2.86 %(2) 3.12 %(2) 3.06 % 2.89 % 2.85 %
Net investment loss...................................... (0.76)%(2) (0.88)%(2) (1.24)% (1.34)% (1.09)%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.................. $66,038 $48,711 $69,960 $105,308 $145,254
Portfolio turnover rate.................................. 94 % 31 % 178 % 46 % 44 %
</TABLE>
---------------------
* 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) 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%.
(2) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
21
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
MAY 31, 2000 MAY 31, 1999 MAY 31, 1998
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS C SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................................. $ 8.83 $ 8.80 $ 8.96
------ ------ ------
Income (loss) from investment operations:
Net investment loss................................................ (0.07) (0.06) (0.09)
Net realized and unrealized gain (loss)............................ 2.45 0.09 (0.07)
------ ------ ------
Total income (loss) from investment operations........................ 2.38 0.03 (0.16)
------ ------ ------
Net asset value, end of period........................................ $11.21 $ 8.83 $ 8.80
====== ====== ======
TOTAL RETURN+......................................................... 27.21 % 0.23 % (1.79)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 2.86 %(3) 2.90 %(3) 3.16 %(2)
Net investment loss................................................... (0.76)%(3) (0.66)%(3) (1.37)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $1,042 $189 $77
Portfolio turnover rate............................................... 94 % 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
22
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
MAY 31, 2000 MAY 31, 1999 MAY 31, 1998
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS D SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................................. $ 8.94 $ 8.87 $ 8.96
------ ------ ------
Income (loss) from investment operations:
Net investment income.............................................. 0.03 0.04 --
Net realized and unrealized gain (loss)............................ 2.48 0.03 (0.09)
------ ------ ------
Total income (loss) from investment operations........................ 2.51 0.07 (0.09)
------ ------ ------
Net asset value, end of period........................................ $11.45 $ 8.94 $ 8.87
====== ====== ======
TOTAL RETURN+......................................................... 28.48% 0.56% (1.00)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.86%(3) 2.12%(3) 2.31 %(2)
Net investment income (loss).......................................... 0.24%(3) 0.12%(3) (0.02)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $1,813 $530 $850
Portfolio turnover rate............................................... 94% 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
23
<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, 2000, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the periods indicated, in conformity with accounting principles generally
accepted in the United States. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at May 31,
2000 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
JUNE 30, 2000
24
<PAGE>
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND
CHANGE IN INDEPENDENT ACCOUNTANTS
On July 1, 2000, PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.
The reports of PricewaterhouseCoopers LLP on the financial statements of the
Fund for the past two fiscal years contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle.
In connection with its audits for the two most recent fiscal years and through
July 1, 2000, there have been no disagreements with PricewaterhouseCoopers LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make
reference thereto in their report on the financial statements for such years.
The Fund, with the approval of its Board of Trustees and its Audit Committee,
engaged Deloitte & Touche LLP as its new independent accountants as of July 1,
2000.
25
