<PAGE>
Filed Pursuant to Rule 497(c)
Registration File No.: 33-56851
PROSPECTUS - MAY 28, 1999
MORGAN STANLEY DEAN WITTER
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BALANCED INCOME FUND
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A MUTUAL FUND THAT SEEKS TO PROVIDE CURRENT
INCOME AND MODERATE CAPITAL GROWTH
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>
<CAPTION>
<S> <C> <C>
The Fund Investment Objective ......................................... 1
Principal Investment Strategies .............................. 1
Principal Risks .............................................. 2
Past Performance ............................................. 5
Fees and Expenses ............................................ 6
Additional Investment Strategy Information ................... 7
Additional Risk Information .................................. 7
Fund Management .............................................. 8
Shareholder Information Pricing Fund Shares .......................................... 9
How to Buy Shares ............................................ 9
How to Exchange Shares ....................................... 10
How to Sell Shares ........................................... 13
Distributions ................................................ 14
Tax Consequences ............................................. 15
Share Class Arrangements ..................................... 15
Financial Highlights .............................................................. 22
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>
THE FUND
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INVESTMENT OBJECTIVE
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Morgan Stanley Dean Witter Balanced Income Fund is a mutual fund that seeks to
provide current income and moderate capital growth.
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PRINCIPAL INVESTMENT STRATEGIES
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The Fund will normally invest at least 65% of its total assets in
income-producing securities, consisting of (1) fixed-income securities and (2)
common stocks and securities convertible into common stocks. Within the
limitations detailed below, the Fund's "Investment Manager," Morgan Stanley
Dean Witter Advisors Inc., may invest in any proportion of these securities it
believes desirable based on its assessment of business, economic and investment
conditions.
(sidebar open)
INCOME & GROWTH
An investment objective having the goal of selecting securities that pay out
income and have the potential to rise in price.
(sidebar end)
The two groups of Fund investments in more detail are:
(1) FIXED-INCOME SECURITIES. The Fund will normally invest at least 60% of its
assets in fixed-income securities. The Fund's fixed-income securities
(including zero coupon securities) are limited to investment grade corporate
debt securities, bank obligations, investment grade mortgage-backed and
asset-backed securities, and U.S. Government securities. The U.S. Government
securities may include:
o U.S. Treasury bills, notes and bonds, all of which are direct obligations of
the U.S. Government.
o Securities (including mortgage-backed securities) issued by agencies and
instrumentalities of the U.S. Government which are backed by the full faith
and credit of the United States. Among the agencies and instrumentalities
issuing these obligations are the Government National Mortgage Association
and the Federal Housing Administration.
o Securities (including mortgage-backed securities) issued by agencies and
instrumentalities which are not backed by the full faith and credit of the
United States, but whose issuing agency or instrumentality has the right to
borrow, to meet its obligations, from the U.S. Treasury. Among these
agencies and instrumentalities are the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation.
o Securities issued by agencies and instrumentalities which are backed solely
by the credit of the issuing agency or instrumentality. Among these agencies
and instrumentalities is the Federal Home Loan Bank.
One type of mortgage-backed security, in which the Fund may invest, is a
mortgage pass-through security. These securities represent a participation
interest in a pool of residential mortgage loans originated by U.S.
governmental or private lenders such as banks. They differ from conventional
debt securities, which provide for periodic payment of interest in fixed
amounts and principal payments at maturity or on specified call dates. Mortgage
pass-through securities provide for monthly payments that are a "pass-through"
of the monthly interest and principal payments made by the individual borrowers
on the pooled mortgage loans. Mortgage pass-through securities may be
collateralized by mortgages with fixed rates of interest or adjustable rates.
1
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(2) COMMON STOCKS/CONVERTIBLE SECURITIES. The Fund will normally invest at
least 25% in dividend paying common stocks and securities convertible into
common stocks. The Fund invests in common stocks of companies that have a
record of paying dividends and, in the Investment Manager's opinion, have the
potential for increasing dividends. Investment grade securities convertible
into common stocks may also be Fund investments. These investments may include
foreign securities that are listed in the U.S. on a national securities
exchange.
* * *
Fixed-income securities are debt securities such as bonds, notes or commercial
paper. The issuer of the debt security borrows money from the investor who buys
the security. Most debt securities pay either fixed or adjustable rates of
interest at regular intervals until they mature, at which point investors get
their principal back. The Fund's fixed income investments may include zero
coupon securities, which are purchased at a discount and either (i) pay no
interest, or (ii) accrue interest, but make no payments until maturity.
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.
In addition to the securities discussed above, the Fund may invest in
asset-backed securities.
In pursuing the Fund's investment objective, the Investment Manager 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
Investment Manager in its discretion may determine to use some permitted
trading strategies while not using others.
[GRAPHIC OMITTED]
PRINCIPAL RISKS
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There is no assurance that the Fund will achieve its 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.
FIXED-INCOME SECURITIES. Principal risks of investing in the Fund are
associated with its fixed-income investments. All fixed-income securities, such
as bonds, 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/or repay the principal on its debt. While
the Fund invests in investment grade securities, certain of these securities
have speculative characteristics.
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 prices of most fixed-income
securities go down. When the general level of interest rates goes down, the
prices of most fixed-income securities go up. (Zero coupon securities are
typically subject to greater price fluctuations than
2
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comparable securities that pay interest.) As merely illustrative of the
relationship between fixed-income securities and interest rates, the following
table shows how interest rates affect bond prices.
HOW INTEREST RATES AFFECT BOND PRICES
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<TABLE>
<CAPTION>
PRICE PER $1,000 OF A BOND IF INTEREST RATES:
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INCREASE DECREASE
---------------------------------------------
<S> <C> <C> <C> <C> <C>
BOND MATURITY COUPON 1% 2% 1% 2%
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1 year N/A $1,000 $1,000 $1,000 $1,000
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5 years 4.25% $967 $934 $1,038 $1,076
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10 years 4.75% $930 $867 $1,074 $1,155
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30 years 5.25% $865 $756 $1,166 $1,376
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</TABLE>
Coupons reflect yields on Treasury securities as of December 31, 1998. The
table is not representative of price changes for mortgage-backed securities
principally because of prepayments. In addition, the table is an illustration
and does not represent expected yields or share price changes of any Morgan
Stanley Dean Witter mutual fund.
The Fund is not limited as to the maturities of the securities in which it may
invest. Thus, a rise in the general level of interest rates may cause the price
of the Fund's fixed-income securities to fall substantially.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities in which the Fund may
invest have different risk characteristics than traditional debt securities.
Although generally the value of fixed-income securities increases during
periods of falling interest rates and decreases during periods of rising rates,
this is not always the case with mortgage-backed securities. This is due to the
fact that principal on underlying mortgages may be prepaid at any time as well
as other factors. Generally, prepayments will increase during a period of
falling interest rates and decrease during a period of rising interest rates.
The rate of prepayments also may be influenced by economic and other factors.
Prepayment risk includes the possibility that, as interest rates fall,
securities with stated interest rates may have the principal prepaid earlier
than expected, requiring the Fund to invest the proceeds at generally lower
interest rates.
Investments in mortgage-backed securities are made based upon, among other
things, expectations regarding the rate of prepayments on underlying mortgage
pools. Rates of prepayment, faster or slower than expected by the Investment
Manager, could reduce the Fund's yield, increase the volatility of the Fund
and/or cause a decline in net asset value. Certain mortgage-backed securities
may be more volatile and less liquid than other traditional types of debt
securities.
COMMON STOCKS. A principal risk of investing in the Fund is associated with its
common stock investments. In general, stock values fluctuate in response to
activities specific to the company as well as general market, economic and
political conditions. These prices can fluctuate widely.
CONVERTIBLE SECURITIES. The Fund's investments in convertible securities
subject the Fund to the risks associated with both fixed-income securities and
common stocks. To the extent that a convertible security's investment value is
greater than its conversion value, its price will likely increase when interest
rates fall and decrease when interest rates rise, as with a fixed-income
security. If the conversion value exceeds the
3
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investment value, the price of the convertible security will tend to fluctuate
directly with the price of the underlying equity security.
OTHER RISKS. The performance of the Fund also will depend on whether the
Investment Manager is successful in pursuing the Fund's investment strategy.
The Fund is also subject to other risks from its permissible investments
including the risks associated with its foreign investments and asset-backed
securities.
Shares of the Fund are not bank deposits and are not guaranteed or insured by
the FDIC or any other governmental entity.
4
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PAST PERFORMANCE
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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.
(sidebar open)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Fund's Class C shares has varied
from year to year over the past 3 calendar years.
(sidebar end)
ANNUAL TOTAL RETURNS -- CALENDAR YEARS
[GRAPHIC OMITTED]
1996 8.63%
'97 15.57%
'98 9.38%
The bar chart reflects the performance of Class C 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.
(sidebar open)
AVERAGE ANNUAL
TOTAL RETURNS
This table compares the Fund's average annual returns with those of a broad
measure of market performance over time. 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.
(sidebar end)
During the periods shown in the bar chart, the highest return for a calendar
quarter was 8.34% (quarter ended June 30, 1997) and the lowest return for a
calendar quarter was -2.70% (quarter ended September 30, 1998). Year-to-date
total return as of March 31, 1999 was 0.84%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 1998)
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PAST 1 YEAR LIFE OF THE FUND (SINCE 3/28/95)
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<S> <C> <C>
Class A(1) 4.30% --
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Class B(1) 4.29% --
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Class C 8.38% 12.72%(5)
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Class D(1) 10.32% --
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S&P 500 Index(2) 28.58% 29.33%(5)
- --------------------------------------------------------------------------------------
Lehman Brothers 9.47% 9.48%(6)
Government/Corporate Bond Index(3)
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Lipper Income Funds Index(4) 8.12% 14.91%(6)
- --------------------------------------------------------------------------------------
</TABLE>
(1) Classes A, B and D commenced operations on July 28, 1997.
(2) The Standard & Poor's (Registered Trademark) 500 Stock Price Index is a
broad-based index, the performance of which is based on the average
performance of 500 widely held common stocks. The performance of the Index
does not include any expenses, fees or charges. The Index is unmanaged and
should not be considered an investment.
(3) The Lehman Brothers Government/Corporate Bond Index tracks the performance
of government and corporate obligations, including U.S. government agency
and U.S. Treasury securities and corporate and yankee bonds with maturities
of one to ten years. The Index does not include any expenses or fees. The
Index is unmanaged and should not be considered an investment.
(4) The Lipper Income Funds Index is an equally-weighted performance index of
the largest qualifying funds in the Lipper Income Funds objective. The
Index is unmanaged and should not be considered an investment.
(5) For the period March 28, 1995 to December 31, 1998.
(6) For the period March 31, 1995 to December 31, 1998.
5
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[GRAPHIC OMITTED]
FEES AND EXPENSES
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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.
(sidebar open)
SHAREHOLDER FEES
These fees are paid directly from your investment.
(sidebar end)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
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<S> <C> <C> <C> <C>
SHAREHOLDER FEES
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Maximum sales charge (load) imposed on 5.25%(1) None None None
purchases (as a percentage of offering price)
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Maximum deferred sales charge (load) (as a
percentage based on the lesser of the offering None(2) 5.00%(3) 1.00%(4) None
price or net asset value at redemption)
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ANNUAL FUND OPERATING EXPENSES
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Management Fee 0.60% 0.60% 0.60% 0.60%
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Distribution and service (12b-1) fees 0.24% 1.00% 0.95% None
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Other expenses 0.39% 0.39% 0.39% 0.39%
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Total annual Fund operating expenses 1.23% 1.99% 1.94% 0.99%
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</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 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.
Shares of the Fund held prior to July 28, 1997 that have been designated
Class C shares are not subject to the 1.00% CDSC.
(sidebar open)
ANNUAL FUND OPERATING EXPENSES
These expenses are deducted from the Fund's assets and are based on expenses
paid for the fiscal year ended January 31, 1999.
(sidebar end)
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:
- -------------------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------- -------------------------------------------
CLASS A $644 $895 $1,165 $1,935 $644 $895 $1,165 $1,935
- -------------------------------------------------------- -------------------------------------------
CLASS B $702 $924 $1,273 $2,317 $202 $624 $1,073 $2,317
- -------------------------------------------------------- -------------------------------------------
CLASS C $297 $609 $1,047 $2,264 $197 $609 $1,047 $2,264
- -------------------------------------------------------- -------------------------------------------
CLASS D $101 $315 $547 $1,213 $101 $315 $547 $1,213
- -------------------------------------------------------- -------------------------------------------
</TABLE>
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.
6
<PAGE>
[GRAPHIC OMITTED]
ADDITIONAL INVESTMENT STRATEGY INFORMATION
- ------------------------------------------
This section provides additional information relating to the Fund's principal
investment strategies.
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 Investment Manager 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.
The percentage limitations relating to the composition of the Fund's portfolio
apply at the time the Fund acquires an investment. Subsequent percentage
changes that result from market fluctuations 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.
[GRAPHIC OMITTED]
ADDITIONAL RISK INFORMATION
- ---------------------------
This section provides additional information relating to the principal risks of
investing in the Fund.
FOREIGN SECURITIES. The Fund's investments in foreign securities 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.
YEAR 2000. The Fund could be adversely affected if the computer systems
necessary for the efficient operation of the Investment Manager, the Fund's
other service providers and the markets and individual 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 and
its affiliates are working hard to avoid any problems and to obtain assurances
from their service providers that they are taking similar steps.
7
<PAGE>
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.
[GRAPHIC OMITTED]
FUND MANAGEMENT
- ---------------
The Fund has retained the Investment Manager -- Morgan Stanley Dean Witter
Advisors Inc. -- to provide administrative services, manage its business
affairs and invest its assets, including the placing of orders for the purchase
and sale of portfolio securities. 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, New York 10048.
(sidebar open)
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, has more than $132.5 billion in assets under
management or administration as of April 30, 1999.
(sidebar end)
The fixed-income portion of the Fund's portfolio is managed with in the
Investment Manager's Taxable Fixed-Income Group, and the equity portion is
managed within the Growth and Income Group. Rajesh K. Gupta and Paul D. Vance,
Senior Vice Presidents of the Investment Manager, have been the primary
portfolio managers of the Fund since its inception in March, 1995. Mr. Gupta
manages the Fund's fixed-income portion, and Mr. Vance manages the equity
portion. They have been portfolio managers with the Investment Manager for over
five years.
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 January 31, 1999, the Fund
accrued total compensation to the Investment Manager amounting to 0.60% of the
Fund's average daily net assets.
8
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SHAREHOLDER INFORMATION
[GRAPHIC OMITTED]
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 determines 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.
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.
[GRAPHIC OMITTED]
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.
(sidebar open)
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.deanwitter.com/funds
(sidebar end)
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.
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 in proper form. 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.
9
<PAGE>
<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.
(sidebar open)
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.
(sidebar end)
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, you may send a check directly to the
Fund. To buy additional shares in this manner:
o 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).
o Make out a check for the total amount payable to: Morgan Stanley Dean Witter
Balanced Income Fund.
o Mail the letter and check to Morgan Stanley Dean Witter Trust FSB at P.O. Box
1040, Jersey City, NJ 07303.
[GRAPHIC OMITTED]
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, Money Market Fund 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.
10
<PAGE>
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.
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.
Certain services normally available to shareholders of Money Market Funds,
including the check writing privilege, are 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 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.
11
<PAGE>
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.
12
<PAGE>
[GRAPHIC OMITTED]
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>
<S> <C>
OPTIONS PROCEDURES
- -------------------- -----------------------------------------------------------------------------------
Contact your To sell your shares, simply call your Morgan Stanley Dean Witter Financial
Financial Advisor Advisor or other authorized financial representative.
-----------------------------------------------------------------------------------
[GRAPHIC OMITTED] 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:
o your account number;
[GRAPHIC OMITTED] o the dollar amount or the number of shares you wish to sell;
o the Class of shares you wish to sell; and
o the signature of each owner as it appears on the account.
-----------------------------------------------------------------------------------
If you are requesting payment to anyone other than the 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 Family of Funds has
Withdrawal Plan 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
[GRAPHIC OMITTED] amount is at least $25), on a monthly, quarterly, semi-annual or annual basis,
from any Fund with a balance of at least $1,000. Each time you add a Fund to the
plan, you must meet the plan requirements.
-----------------------------------------------------------------------------------
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 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).
13
<PAGE>
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.
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 pledged your Fund shares in a margin account with Dean
Witter Reynolds or another authorized broker-dealer of Fund shares, please
contact your Morgan Stanley Dean Witter Financial Advisor or other authorized
financial representative regarding restrictions on the sale of such shares.
[GRAPHIC OMITTED]
DISTRIBUTIONS
- -------------
The Fund passes substantially all of its earnings from income and capital gains
along to its investors as "distributions." The Fund earns 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."
(sidebar open)
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.
(sidebar end)
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 quarterly and capital gains are
distributed annually 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,
processing of your dividend checks begins immediately following the monthly
payment date, and the Fund will mail a monthly dividend check to you normally
during the first seven days of the following month. 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.
14
<PAGE>
[GRAPHIC OMITTED]
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:
o The Fund makes distributions; and
o 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.
[GRAPHIC OMITTED]
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.
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.
15
<PAGE>
The chart below compares the sales charge and annual 12b-1 fee applicable to
each Class:
<TABLE>
<CAPTION>
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
---------------------------------------------------------
PERCENTAGE OF PUBLIC APPROXIMATE PERCENTAGE
AMOUNT OF SINGLE TRANSACTION OFFERING PRICE OF 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 0
- -------------------------------------------------------------------------------------------------
</TABLE>
(sidebar open)
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.
(sidebar end)
The reduced sales charge schedule is applicable to purchases of Class A shares
in a single transaction by:
o A single account (including an individual, trust or fiduciary account).
o Family member accounts (limited to husband, wife and children under the age
of 21).
o Pension, profit sharing or other employee benefit plans of companies and
their affiliates.
o Tax-exempt organizations.
o Groups organized for a purpose other than to buy mutual fund shares.
16
<PAGE>
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 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:
o A trust for which Morgan Stanley Dean Witter Trust FSB provides discretionary
trustee services.
o Persons participating in a fee-based investment program (subject to all of
its terms and conditions, including mandatory sale or transfer restrictions
on termination)
17
<PAGE>
approved by the Fund's distributor pursuant to which they pay an asset-based
fee for investment advisory, administrative and/or brokerage services.
o 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.
o A 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.
o 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.
o 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.
o 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.
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>
YEAR SINCE PURCHASE PAYMENT MADE CDSC AS A PERCENTAGE 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>
(sidebar open)
CONTINGENT DEFERREDSALES 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.
(sidebar end)
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.
SPECIAL CDSC CONSIDERATIONS FOR FUND SHARES HELD PRIOR TO JULY 28, 1997. If you
held Fund shares prior to July 28, 1997 that were acquired in exchange for
shares of Dean Witter Global Short-Term Income Fund, Dean Witter National
Municipal Trust or Dean Witter High Income Securities that have been designated
Class B shares, these
18
<PAGE>
Fund shares are subject to the other fund's lower CDSC schedule, with two
exceptions. First, if you subsequently exchange these Class B shares for shares
of a fund with a higher CDSC schedule, the higher CDSC schedule will apply.
Second, if you exchange the Class B shares for shares of a Morgan Stanley Dean
Witter Money Market Fund and re-exchange back into the Fund, the CDSC schedule
set forth in the above table will apply.
CDSC WAIVERS. A CDSC, if otherwise applicable, will be waived in the case of:
o 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.
o 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).
o Sales of shares held for you as a participant in a MSDW Eligible Plan.
o 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 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 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 also are subject to an annual 12b-1 fee of
1.00% of the average daily net asset of the Fund's Class B shares.
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
19
<PAGE>
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, No-Load
Fund 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 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, if any, 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 up to 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 1.00% 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.
20
<PAGE>
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:
o 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.
o 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.
o 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.
o Certain unit investment trusts sponsored by Dean Witter Reynolds.
o Certain other open-end investment companies whose shares are distributed by
the Fund's distributor.
o 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.
21
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the life 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, whose report,
along with the Fund's financial statements, is included in the annual report,
which is available upon request.
<TABLE>
<CAPTION>
CLASS C SHARES
- -----------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD MARCH 28, 1995*
FOR THE YEAR ENDED JANUARY 31 1999++ 1998**++ 1997 THROUGH JANUARY 31, 1996
<S> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.41 $11.57 $11.34 $10.00
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.38 0.42 0.36 0.38
Net realized and unrealized gain 0.85 1.23 0.50 1.30
------ ------ ------ ------
Total income from investment operations 1.23 1.65 0.86 1.68
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.38) (0.40) (0.38) (0.33)
Net realized gain (0.52) (0.41) (0.25) (0.01)
------ ------ ------ ------
Total dividends and distributions (0.90) (0.81) (0.63) (0.34)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $12.74 $12.41 $11.57 $11.34
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ 10.32% 14.42% 7.82% 16.93%(1)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- -----------------------------------------------------------------------------------------------------------------------------
Expenses 1.94%(4) 2.07% 1.88%(3) -- %(2)(3)
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 3.02%(4) 3.30% 3.49%(3) 5.27%(2)(3)
- -----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $35,291 $30,402 $48,284 $31,252
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 32% 21% 21% 3%(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, other than shares which were
acquired in exchange for shares of Funds for which Morgan Stanley Dean
Witter Advisors Inc. serves as Investment Manager ("Morgan Stanley Dean
Witter Funds") offered with either a front-end sales charge or a
contingent deferred sales charge ("CDSC") and shares acquired through
reinvestment of dividends and distributions thereon, have been
designated Class C shares. Shares held prior to July 28, 1997 which were
acquired in exchange for shares of a Morgan Stanley Dean Witter Fund
sold with a front-end sales charge, including shares acquired through
reinvestment of dividends and distributions thereon, have been
designated Class A shares and shares held prior to July 28, 1997 which
were acquired in exchange for shares of a Morgan Stanley Dean Witter
Fund sold with a CDSC, including shares acquired through reinvestment of
dividends and distributions thereon, 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) If the Investment Manager had not reimbursed expenses and waived the
management fee, the annualized expense and net investment income ratios
would have been 2.19% and 3.18%, respectively, for the year ended
January 31, 1997 and 2.69% and 2.58%, respectively, for the period ended
January 31, 1996.
(4) Reflects overall Fund ratios for investment income and non-class
specific expenses.
22
<PAGE>
<TABLE>
<CAPTION>
CLASS A SHARES++
- ----------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD JULY 28, 1997*
JANUARY 31, 1999 THROUGH JANUARY 31, 1998
<S> <C> <C>
SELECTED PER SHARE DATA:
- ----------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.41 $12.42
- ----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.46 0.25
Net realized and unrealized gain 0.87 0.32
------ ------
Total income from investment operations 1.33 0.57
- ----------------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.47) (0.26)
Net realized gain (0.52) (0.32)
------ -------
Total dividends and distributions (0.99) (0.58)
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $12.75 $12.41
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN+ 11.11% 4.60%(1)
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ----------------------------------------------------------------------------------------------------
Expenses 1.23%(3) 1.43%(2)
- ----------------------------------------------------------------------------------------------------
Net investment income 3.73%(3) 3.92%(2)
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $5,448 $903
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate 32% 21%
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES++
- ----------------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA:
<S> <C> <C>
Net asset value, beginning of period $12.41 $12.42
- ----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.38 0.20
Net realized and unrealized gain 0.85 0.33
------ ------
Total income from investment operations 1.23 0.53
- ----------------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.38) (0.22)
Net realized gain (0.52) (0.32)
------ -------
Total dividends and distributions (0.90) (0.54)
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $12.74 $12.41
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN+ 10.32% 4.19%(1)
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ----------------------------------------------------------------------------------------------------
Expenses 1.99%(3) 2.16%(2)
- ----------------------------------------------------------------------------------------------------
Net investment income 2.97%(3) 3.15%(2)
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $56,919 $34,021
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate 32% 21%
- ----------------------------------------------------------------------------------------------------
</TABLE>
* The date shares were first issued. Shareholders who held shares of the
Fund prior to July 28, 1997 (the date the Fund converted to a multiple
class share structure) should refer to the Financial Highlights of Class
C to obtain the historical per share data and ratio information of their
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) Reflects overall Fund ratios for investment income and non-class
specific expenses.
23
<PAGE>
<TABLE>
<CAPTION>
CLASS D SHARES++
- ----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD JULY 28, 1997*
JANUARY 31, 1999 THROUGH JANUARY 31, 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period $12.42 $12.42
- ----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.48 0.26
Net realized and unrealized gain 0.87 0.33
------ ------
Total income from investment operations 1.35 0.59
- ----------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.50) (0.27)
Net realized gain (0.52) (0.32)
------ ------
Total dividends and distributions (1.02) (0.59)
- ----------------------------------------------------------------------------------------------
Net asset value, end of period $12.75 $12.42
- ----------------------------------------------------------------------------------------------
TOTAL RETURN+ 11.27% 4.79%(1)
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ----------------------------------------------------------------------------------------------
Expenses 0.99%(3) 1.16%(2)
- ----------------------------------------------------------------------------------------------
Net investment income 3.97%(3) 4.15%(2)
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $1,679 $10
- ----------------------------------------------------------------------------------------------
Portfolio turnover rate 32% 21%
- ----------------------------------------------------------------------------------------------
</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
expenses.
24
<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 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
Real Estate Fund
GLOBAL/INTERNATIONAL FUNDS
Competitive Edge Fund - "Best Ideas" Portfolio
European Growth Fund
Fund of Funds - International Portfolio
Global Dividend Growth Securities
International Fund
International SmallCap Fund
Japan Fund
Pacific Growth Fund
- --------------------------------------------------------------------------------
GROWTH & 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
Value/Added Market Series/Equity Portfolio
THEME FUNDS
Global Utilities Fund
Utilities Fund
- --------------------------------------------------------------------------------
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
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)
New York 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 front 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
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>
MORGAN STANLEY DEAN WITTER
BALANCED INCOME FUND
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.DEANWITTER.COM/FUNDS
(sidebar open)
TICKER SYMBOLS:
Class A: BINAX
- ------------------
Class B: BINBX
- ------------------
Class C: BINCX
- ------------------
Class D: BINDX
- ------------------
(sidebar end)
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.
(THE FUND'S INVESTMENT COMPANY ACT FILE NO. IS 811-7243)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MORGAN STANLEY DEAN WITTER
BALANCED INCOME FUND
MAY 28, 1999
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a Prospectus. The
Prospectus (dated May 28, 1999) for the Morgan Stanley Dean Witter Balanced
Income 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
Balanced Income Fund
Two World Trade Center
New York, New York 10048
(800) 869-NEWS
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<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 ..................................... 11
III. Management of the Fund ....................................................... 12
A. Board of Trustees ......................................................... 12
B. Management Information .................................................... 12
C. Compensation .............................................................. 16
IV. Control Persons and Principal Holders of Securities .......................... 18
V. Investment Management and Other Services ..................................... 18
A. Investment Manager ........................................................ 18
B. Principal Underwriter ..................................................... 19
C. Services Provided by the Investment Manager and Fund Expenses Paid by
Third Parties ........................................................... 19
D. Dealer Reallowances ....................................................... 20
E. Rule 12b-1 Plan ........................................................... 20
F. Other Service Providers ................................................... 24
VI. Brokerage Allocation and Other Practices ..................................... 25
A. Brokerage Transactions .................................................... 25
B. Commissions ............................................................... 25
C. Brokerage Selection ....................................................... 26
D. Directed Brokerage ........................................................ 26
E. Regular Broker-Dealers .................................................... 26
VII. Capital Stock and Other Securities ........................................... 26
VIII. Purchase, Redemption and Pricing of Shares ................................... 27
A. Purchase/Redemption of Shares ............................................. 27
B. Offering Price ............................................................ 28
IX. Taxation of the Fund and Shareholders ........................................ 29
X. Underwriters ................................................................. 30
XI. Calculation of Performance Data .............................................. 30
XII. Financial Statements ......................................................... 32
</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 Bank of New York.
"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 Balanced Income 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.
"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 November 23, 1994, with the name Dean Witter Balanced
Income Fund. Effective June 22, 1998, the Fund's name was changed to Morgan
Stanley Dean Witter Balanced Income Fund.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
- --------------------------------------------------------------------------------
A. CLASSIFICATION
The Fund is an open-end, diversified management investment company whose
investment objective is to provide current income and moderate capital growth.
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."
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
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 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 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 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. 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 alone.
Moreover, the premium received will offset a portion of the potential loss
incurred by the Fund if the securities underlying the option decline in value.
The Fund may be required, at any time during the option period, to deliver
the underlying security 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 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.
4
<PAGE>
Covered Put Writing. As a writer of a covered put option, the 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 on securities and stock indexes in amounts equaling up to 5% of
its total assets. The Fund may purchase put options on securities which it
holds (or has the right to acquire) in its portfolio only to protect itself
against a decline in the value of the security. The Fund may also purchase put
options to close out written put positions in a manner similar to call option
closing purchase transactions. 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 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 during the term of the option.
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 Investment Manager to forecast correctly interest rates
and/or market movements. If the market value of the portfolio securities 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 increase, but has retained
the risk of loss should the price of the underlying security 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.
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
5
<PAGE>
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.
There can be no assurance that a liquid secondary market will exist for a
particular option at any specific time.
Futures Contracts. The Fund may purchase and sell interest rate and stock
index futures contracts that are traded on U.S. commodity exchanges on such
underlying securities as U.S. Treasury bonds, notes, bills and GNMA
Certificates and such indexes as the S&P 500 Index, the Moody's Investment-Grade
Corporate Bond Index and the New York Stock Exchange Composite Index.
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 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 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 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
contract sale for the same aggregate amount of the specific type of security
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
6
<PAGE>
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
enter into futures contracts provided that not more than 5% of its total assets
are required as a futures contract deposit. In addition, the Fund may enter
into futures contracts and options transactions only to the extent that
obligations under such contracts or transactions represent not more than 30% of
the Fund's total assets.
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. Also, prices of futures contracts may not
move in tandem with the changes in prevailing interest rates and/or market
movements 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 movements in the prices of securities and movements in the
prices of futures contracts, a correct forecast of interest rate and/or market
movement trends by the Investment Manager 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 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.
7
<PAGE>
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.
MONEY MARKET SECURITIES. In addition to the short-term fixed-income
securities in which the Fund may otherwise invest, the Fund may invest in
various money market securities for cash management purposes or when assuming a
temporary defensive position, which among others may 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 or 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; and
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 by Moody's.
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 Investment
Manager subject to procedures established by the Trustees. In addition, as
described above, the value of the collateral
8
<PAGE>
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.
ASSET-BACKED SECURITIES. The Fund may invest in asset-backed securities,
which apply the mortgage-backed securities structure to a broad range of other
assets. The cash flow of these securities depends on the cash flow from an
underlying pool of assets, such as credit card receivables, home equity loans
or automobile loans.
Any Fund investments in asset-back securities are subject to, among other
risks, those risks associated with fixed-income securities: credit risk and
interest rate risk. See the "Principal Risk" section in the Prospectus for a
discussion of credit and interest risks. While asset-backed securities also
pose many of the same risks as mortgage-backed securities, they may involve
certain unique risks because they are backed by different types of assets. For
example, credit card receivables generally are unsecured and debtors are
protected by consumer credit laws, which may reduce the value of the related
securities.
INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in real
estate investment trusts, which pool investors' funds for investments primarily
in commercial real estate properties. Investment in real estate investment
trusts may be the most practical available means for the Fund to invest in the
real estate industry (the Fund is prohibited from investing in real estate
directly). As a shareholder in a real estate investment trust, the Fund would
bear its ratable share of the real estate investment trust's expenses,
including its advisory and administration fees. At the same time the Fund would
continue to pay its own investment management fees and other expenses, as a
result of which the Fund and its shareholders in effect will be absorbing
duplicate levels of fees with respect to investments in real estate investment
trusts.
LENDING PORTFOLIO SECURITIES. The Fund will not lend its portfolio
securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From
time to time the Fund may purchase securities 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 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 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 Investment Manager determines that issuance of the security is probable. At
that time, the Fund will record the
9
<PAGE>
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 net 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 Investment Manager, 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 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 securities trades, pricing and account services. The Investment
Manager, 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
10
<PAGE>
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 to provide current income and moderate capital growth.
The Fund may not:
1. Invest more than 5% of the value of its total assets in the securities
of any one issuer (other than obligations issued, or guaranteed by, the
United States Government, its agencies or instrumentalities).
2. Purchase more than 10% of all outstanding voting securities or any
class of securities of any one issuer.
3. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry. This restriction does not apply to
obligations issued or guaranteed by the United States Government, its
agencies or instrumentalities.
4. Invest in securities of any issuer if, in the exercise of reasonable
diligence, the Fund has determined that any officer or trustee of the
Fund or of the Investment Manager owns more than 1/2 of 1% of the
outstanding securities of the issuer, and the officers and trustees who
own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of the issuer.
5. Purchase or sell real estate or interests therein (including limited
partnership interests), although the Fund may purchase securities of
issuers which engage in real estate operations and securities secured by
real estate or interests therein.
6. Purchase or sell commodities except that the Fund may purchase or sell
(write) futures contracts and related options thereon.
7. Borrow money, except from banks for investment purposes or as a
temporary measure for extraordinary or emergency purposes in an amount
up to 5% (taken at the lower of cost or current value) of the Fund's
total assets (not including the amount borrowed).
8. 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.
9. 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 agreement; or
(b) borrowing money.
11
<PAGE>
10. Make loans of money or securities, except: (a) by the purchase of debt
obligations; or (b) by investment in repurchase agreements.
11. Make short sales of securities.
12. Purchase securities on margin, except 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.
13. 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.
14. Invest for the purpose of exercising control or management of any other
issuer.
15. Invest more than 5% of the value of its total assets in securities of
issuers having a record, together with predecessors, of less than 3
years of continuous operation. This restriction shall not apply to any
obligation of the United States Government, its agencies or
instrumentalities.
16. 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
these programs.
17. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
In addition, the Fund, as a non-fundamental policy, will not invest more
than 5% of the value of its net assets in warrants, including not more than 2%
of such assets in warrants not listed on the New York or American Stock
Exchange. However, the acquisition of warrants attached to other securities is
not subject to this restriction.
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 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
Independent Trustees also serve as Independent Trustees of "Discover Brokerage
12
<PAGE>
Index Series," a mutual fund for which the Investment Manager is the investment
advisor. Three of the six Independent Trustees are also Independent Trustees of
certain other mutual funds, referred to as the "TCW/DW Funds," for which MSDW
Services Company is the manager and TCW Funds Management, Inc. 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 85 Morgan Stanley Dean Witter Funds, the 11
TCW/DW 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,
Trustee 1998); Director or Trustee of the Morgan Stanley Dean
c/o Kmart Corporation Witter Funds and Discover Brokerage Index Series; formerly
3100 West Big Beaver Road Chairman and Chief Executive Officer of Levitz Furniture
Troy, Michigan 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, the TCW/DW
Chief Executive Officer and Trustee Funds and Discover Brokerage Index Series; formerly
Two World Trade Center Chairman, Chief Executive Officer and Director of the
New York, New York Investment Manager, the 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
c/o Huntsman Corporation United States Senator (R-Utah)(1974-1992) and Chairman,
500 Huntsman Way Senate Banking Committee (1980-1986); formerly Mayor
Salt Lake City, Utah of Salt Lake 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.
Wayne E. Hedien (65) ...................... Retired; Director or Trustee of the Morgan Stanley Dean
Trustee Witter Funds and Discover Brokerage Index Series; Director
c/o Gordon Altman Butowsky of The PMI Group, Inc. (private mortgage insurance);
Weitzen Shalov & Wein Trustee and Vice Chairman of The Field Museum of
Counsel to the Independent Trustees Natural History; formerly associated with the Allstate
114 West 47th Street Companies (1966-1994), most recently as Chairman of
New York, New York 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.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------- ----------------------------------------------------------------
<S> <C>
Dr. Manuel H. Johnson (50) ................ Senior Partner, Johnson Smick International, Inc., a
Trustee consulting firm; Co-Chairman and a founder of the Group
c/o Johnson Smick International, Inc. of Seven Council (G7C), an international economic
1133 Connecticut Avenue, N.W. commission; Chairman of the Audit Committee and Director
Washington, D.C. or Trustee of the Morgan Stanley Dean Witter Funds, the
TCW/DW 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 investment
Trustee partnership; Chairman of the Insurance Committee and
c/o Triumph Capital, L.P. Director or Trustee of the Morgan Stanley Dean Witter
237 Park Avenue Funds, the TCW/DW Funds and Discover Brokerage Index
New York, New York Series; 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 Trustee
New York, New York of the Morgan Stanley Dean Witter Funds and Discover
Brokerage Index Series; Director and/or officer of various
MSDW subsidiaries.
John L. Schroeder (68) .................... Retired; Chairman of the Derivatives Committee and
Trustee Director or Trustee of the Morgan Stanley Dean Witter
c/o Gordon Altman Butowsky Funds, the TCW/DW Funds and Discover Brokerage
Weitzen Shalov & Wein Index Series; Director of Citizens Utilities Company
Counsel to the Independent Trustees (telecommunications, gas, electric and water utilities
114 West 47th Street company); formerly Executive Vice President and Chief
New York, New York Investment Officer of the Home Insurance Company
(August, 1991-September, 1995).
Mitchell M. Merin (45) .................... 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 June,
New York, New York ........................ 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, the TCW/DW 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, the TCW/DW
Funds and Discover Brokerage Index Series (May
1997-April, 1999), and Executive Vice President of Dean
Witter, Discover & Co.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------- -------------------------------------------------------------
<S> <C>
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 and the TCW/DW
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 and the TCW/DW Funds.
Rajesh K. Gupta (39) ...................... Senior Vice President of the Investment Manager; Vice
Vice President President of various Morgan Stanley Dean Witter Funds.
Two World Trade Center
New York, New York
Paul D. Vance (63) ........................ Senior Vice President of the Investment Manager; Vice
Vice President President of various Morgan Stanley Dean Witter Funds.
Two World Trade Center
New York, New York
Thomas F. Caloia (53) ..................... First Vice President and Assistant Treasurer of the
Treasurer Investment Manager and MSDW Services Company;
Two World Trade Center Treasurer of the Morgan Stanley Dean Witter Funds, the
New York, New York TCW/DW Funds 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, and Joseph J. McAlinden, Executive Vice President and Chief
Investment Officer of the Investment Manager and Director of the Transfer
Agent, and Peter M. Avelar, Kenton J. Hinchliffe, Mark Bavoso, and Jonathan R.
Page, Senior Vice Presidents of the Investment Manager, are Vice Presidents of
the Fund.
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, and Todd Lebo,
Vice President and Assistant General Counsel of the Investment Manager and MSDW
Services Company, 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. Indeed, by serving on the Funds' Boards,
certain Trustees who would otherwise be qualified and in demand to serve on
bank boards would be prohibited by law from doing so. All of the Independent
Trustees serve as
15
<PAGE>
members of the Audit Committee. In addition, three of the Trustees, including
two Independent Trustees, serve as members of the Derivatives Committee and the
Insurance Committee.
The Independent Trustees are charged with recommending to the full Board
approval of man-agement, 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; re-viewing 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, 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 Chairman 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
16
<PAGE>
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. Effective May 1, 1999, Dr. Johnson serves
as Chairman of the Audit Committee.
The following table illustrates the compensation that the Fund paid to its
Independent Trustees for the fiscal year ended January 31, 1999.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- ------------------------------- --------------
<S> <C>
Michael Bozic ................. $1,500
Edwin J. Garn ................. 1,650
Wayne E. Hedien ............... 1,650
Dr. Manuel H. Johnson ......... 1,600
Michael E. Nugent ............. 1,650
John L. Schroeder ............. 1,650
</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 85 Morgan Stanley Dean Witter Funds and, in the case of Messrs. Johnson,
Nugent and Schroeder, the 11 TCW/DW Funds that were in operation at December
31, 1998. With respect to Messrs. Johnson, Nugent and Schroeder, the TCW/DW
Funds are included solely because of a limited exchange privilege between those
Funds and five Morgan Stanley Dean Witter Money Market Funds. 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 AND TCW/DW FUNDS
<TABLE>
<CAPTION>
TOTAL CASH
COMPENSATION
FOR SERVICES TO
FOR SERVICE 85 MORGAN
AS DIRECTOR OR FOR SERVICE AS STANLEY DEAN
TRUSTEE AND TRUSTEE AND WITTER FUNDS
COMMITTEE MEMBER COMMITTEE MEMBER AND 11
NAME OF OF 85 MORGAN STANLEY DEAN OF 11 TCW/DW TCW/DW
INDEPENDENT TRUSTEE WITTER FUNDS FUNDS FUNDS
- ------------------------------- --------------------------- ------------------ ----------------
<S> <C> <C> <C>
Michael Bozic ................. $120,150 -- $120,150
Edwin J. Garn ................. 132,450 -- 132,450
Wayne E. Hedien ............... 132,350 -- 132,350
Dr. Manuel H. Johnson ......... 128,400 $62,331 190,731
Michael E. Nugent ............. 132,450 62,131 194,581
John L. Schroeder ............. 132,450 64,731 197,181
</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) 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
17
<PAGE>
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 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 December 31, 1998, and the
estimated retirement benefits for the Independent Trustees, to commence upon
their retirement, from the 55 Morgan Stanley Dean Witter Funds as of December
31, 1998.
RETIREMENT BENEFITS FROM ALL MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS
----------------------------------
RETIREMENT ESTIMATED
BENEFITS ANNUAL 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 of 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 Class A shares of the Fund
as of May 1, 1999: Dean Witter Reynolds, Custodian for Leo J. Tauber, IRA
Rollover dated 09/11/92, 317 Carol Drive, Ventura, California 93003-1710 --
7.2%; Fideicomiso Servicios Medicos, dated 08/28/98, Aseguradora Mundial TTEE
Att: R Diaz, P.O. Box 8911, Panama 5 Republic of Panama -- 62.3%. The following
persons owned 5% or more of the Class D shares of the fund as of May 1, 1999:
Morgan Stanley Dean Witter Trust as Trustee, Robbins Manufacturing, P.O. Box
957, Jersey City, NJ 07303-0957 -- 98.4%.
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
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
18
<PAGE>
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.
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 manage the investment of the
Fund's assets, including the placing of orders for the purchase and sale of
portfolio securities. The Fund pays the Investment Manager monthly compensation
calculated daily by applying the annual rate of 0.60% to the Fund's daily net
assets. During a portion of the fiscal year ended January 31, 1997 (February 1,
1996-March 31, 1996), the Investment Manager had undertaken to assume all
operating expenses (except for any brokerage fees) and waive the compensation
provided for in the Management Agreement until such time as the Fund attained
$50 million in net assets or until March 31, 1996, whichever occurred first.
The Fund began paying fees on April 1, 1996 at which time the waiver expired.
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
January 31, 1997, 1998 and 1999, the Investment Manager accrued total
compensation under the Management Agreement in the amounts of $241,446,
$338,530 and $493,580, respectively. The actual amount payable after the waiver
for the period ended fiscal year 1997 was $207,615.
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
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 FUND EXPENSES PAID BY THIRD
PARTIES
The Investment Manager manages the investment of the Fund's assets,
including the placing of orders for the purchase and sale of portfolio
securities. The Investment Manager 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, 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
19
<PAGE>
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 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 (not
including compensation or expenses of attorneys who are employees of the
Investment Manager); 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 will 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: up to 0.25%, 1.0% and up to 1.0% of the
average daily net assets of Class A, Class B, and Class C, respectively.
20
<PAGE>
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 January 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) $41,858 FSCs: $14,036 FSCs: N/A(2)
CDSCs: $ 0 CDSCs: $ 0 CDSCs: N/A(2)
Class B .......... CDSCs: $52,922 CDSCs: $20,147 CDSCs: N/A(2)
Class C .......... CDSCs: $19,482 CDSCs: $ 1,693 CDSCs: $ 0
</TABLE>
- ----------
(1) FSCs apply to Class A only.
(2) This Class commenced operations on July 28, 1987.
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's 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" 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. For the fiscal year ended
January 31, 1999, Class A, Class B and Class C shares of the Fund accrued
payments under the Plan amounting to $6,486, $453,675 and $318,887,
respectively, which amounts are equal to 0.24%, 100% and 0.95% of the average
daily net assets of Class A, Class B 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
21
<PAGE>
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
(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.
22
<PAGE>
Each Class paid 100% of the amounts accrued under the Plan with respect to
that Class for the fiscal year ended January 31, 1999 to the Distributor. The
Distributor and Dean Witter Reynolds estimate that they have spent, pursuant to
the Plan, $2,277,857 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) 17.28% ($393,711)--advertising and promotional expenses; (ii) 0.58%
($13,240)--printing of prospectuses for distribution to other than current
shareholders; and (iii) 82.14% ($1,870,906)--other expenses, including the
gross sales credit and the carrying charge, of which 1.87% ($35,002) represents
carrying charges, 40.13% ($750,885) 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 58.00% ($1,085,019) 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 January 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 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 $1,599,291 as of January 31, 1999 (the end of
the Fund's fiscal year), which was equal to 2.81% 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 $20,426 in the case of Class C at
December 31, 1998 (the end of the calendar year), which amount was equal to
0.06% of the net assets of Class C on such date, 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
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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.
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 Bank of New York, 90 Washington Street, New York, New York 10286 is
the Custodian of the Fund's assets. 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 1177 Avenue of the Americas, New York, New
York, 10036, 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, 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.
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VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
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A. BROKERAGE TRANSACTIONS
Subject to the general supervision of the Trustees, the Investment Manager
is 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 January 31, 1997, 1998 and 1999, the Fund paid
a total of $16,769, $16,873 and $34,675, respectively, in brokerage
commissions.
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 January 31, 1997, 1998 and 1999, the Fund
did not effect any principal transactions with Dean Witter Reynolds.
Consistent with the policy described above, 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 January 31, 1997, 1998 and 1999, the Fund
paid a total of $11,362, $9,287 and $15,309, respectively, in brokerage
commissions to Dean Witter Reynolds. During the fiscal year ended January 31,
1999, the brokerage commissions paid to Dean Witter Reynolds represented
approximately 44.15% of the total brokerage commissions paid by the Fund during
the year and were paid on account of transactions having an aggregate dollar
value equal to approximately 48.84% of the aggregate dollar value of all
portfolio transactions of the Fund during the year for which commissions were
paid.
During the period June 1, 1997 through January 31, 1998 and during the
fiscal year ended January 31, 1999, the Fund paid a total of $195 and $3,315
respectively, in brokerage commissions to Morgan Stanley & Co., which
broker-dealer became an affiliate of the Investment Manager on May 31,
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1997 upon consummation of the merger of Dean Witter, Discover & Co. with Morgan
Stanley Group Inc. During the fiscal year ended January 31, 1999, the brokerage
commissions paid to Morgan Stanley & Co. represented approximately 9.56% of the
total brokerage commissions paid by the Fund for this period and were paid on
account of transactions having an aggregate dollar value equal to approximately
11.89% of the aggregate dollar value of all portfolio transactions of the Fund
during the year for which commssions were paid.
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.
In seeking to implement the Fund's policies, the Investment Manager
effects transactions with those brokers and dealers who the Investment Manager
believes provide the most favorable prices and are capable of providing
efficient executions. If the Investment Manager believes 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 or the Investment
Manager. 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 from brokers and
dealers may be of benefit to the Investment Manager in the management of
accounts of some of its other clients and may not in all cases benefit the Fund
directly.
The Investment Manager currently serves 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 to cause purchase and sale transactions to be allocated among the Fund
and others whose assets it manages in such manner as it deems 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 utilizes 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 January 31, 1999, the Fund paid $15,849 in
brokerage commissions in connection with transactions in the aggregate amount
of $12,696,515 to brokers because of research services provided.
E. REGULAR BROKER-DEALERS
During the fiscal year ended January 31, 1999, the Fund did not purchase
securities issued by brokers or dealers that were among the ten brokers or the
ten dealers which executed transactions for or with the Fund in the largest
dollar amounts during the year. At January 31, 1999, the Fund did not own any
securities issued by any of such issuers.
VII. CAPITAL STOCK AND OTHER SECURITIES
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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
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<PAGE>
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. The shareholders also have the right under certain circumstances to
remove the Trustees in accordance with the provisions of Section 16(c) of the
Investment Company Act of 1940. The voting 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
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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
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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.
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 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) all portfolio
securities for which over-the-counter market quotations are readily available
are valued at the latest bid price prior to the time of valuation, and (2) when
market quotations are not readily available, including circumstances under
which it is determined by the Investment Manager 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 (valuation of
securities for which market quotations are not readily available may also be
based upon current market prices of securities which are comparable in coupon,
rating and maturity or an appropriate matrix utilizing similar factors).
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 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
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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.
IX. TAXATION OF THE FUND AND SHAREHOLDERS
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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 Taxpayer Relief Act of 1997
reduced the maximum tax on long-term capital gains applicable to individuals
from 28% to 20%.
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<PAGE>
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 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.
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. Any loss realized by shareholders upon a 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.
X. UNDERWRITERS
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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
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From time to time the Fund may quote its "yield" and/or its "total return"
in advertisements and sales literature. These figures are computed separately
for Class A, Class B, Class C and Class D shares.
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Yield is calculated for any 30-day period as follows: the amount of interest
income for each security in the Fund's portfolio is determined in accordance
with regulatory requirements; the total for the entire portfolio constitutes
the Fund's gross income for the period. Expenses accrued during the period are
subtracted to arrive at "net investment income" of each Class. The resulting
amount is divided by the product of the maximum offering price per share on the
last day of the period, multiplied by the average number of shares of the
applicable Class outstanding during the period that were entitled to dividends.
This amount is added to 1 and raised to the sixth power. 1 is then subtracted
from the result and the difference is multiplied by 2 to arrive at the
annualized yield. For the 30-day period ended January 31, 1999, the yield,
calculated pursuant to the formula described above, was approximately 3.34%,
2.78%, 2.78% and 3.78% for Class A, Class B, Class C and Class D, respectively.
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. The average annual total returns
for Class C for the one year period ended January 31, 1999 and for the period
March 28, 1995 (commencement of operations) through January 31, 1999 were 9.32%
and 12.84%, respectively. The average annual total returns of Class A for the
fiscal year ended January 31, 1999 and for the period July 28, 1997 (inception
of the Class) through January 31, 1999 were 5.27% and 6.59%, respectively. The
average annual total returns of Class B for the fiscal year ended January 31,
1999 and for the period July 28, 1997 through January 31, 1998 were 5.32% and
7.11%, respectively. The average annual total returns of Class D for the fiscal
year ended January 31, 1999 and for the period July 28, 1997 through January
31, 1999 were 11.27% and 10.70%, respectively.
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 of Class C for the one year period ended January 31, 1999 and for
the period March 28, 1995 (commencement of operations) through January 31, 1999
were 10.32% and 12.84%, respectively. The average annual total returns of Class
A for the fiscal year ended January 31, 1999 and for the period July 28, 1997
through January 31, 1999 were 11.11% and 10.46%, respectively. The average
annual total returns of Class B for the fiscal year ended January 31, 1999 and
for the period July 28, 1997 through January 31, 1999 were 10.32% and 9.65%,
respectively. The average annual total returns of Class D for the fiscal year
ended January 31, 1999 and for the period July 28, 1997 through January 31,
1999 were 11.27% and 10.70%, 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 the foregoing calculation, the
total returns for Class C for the one year period ended January 31, 1999 and
for the period March 28, 1995 (commencement of operations) through January 31,
1999 were 10.32% and 59.14%, respectively. The total returns of Class A for the
fiscal year ended January 31, 1999 and for the period July 28, 1997 through
January 31, 1999 were 11.11% and 16.22%, respectively. The total returns of
Class B for the
31
<PAGE>
fiscal year ended January 31, 1999 and for the period July 28, 1997 through
January 31, 1999 were 10.32% and 14.94%, respectively. The total returns of
Class D for the fiscal year ended January 31, 1999 and for the period July 28,
1997 through January 31, 1999 were 11.27% and 16.60%, 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 grown to the following amounts at October 31,
1998:
<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 $11,012 $55,786 $112,733
Class B ......... 07/28/97 11,494 57,470 114,940
Class C ......... 03/28/95 15,914 79,570 159,140
Class D ......... 07/28/97 11,660 58,300 116,600
</TABLE>
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent organizations.
XII. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
EXPERTS. The financial statements of the Fund for the fiscal year ended
January 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.
32
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
PORTFOLIO OF INVESTMENTS January 31, 1999
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ---------------- ------------
<S> <C> <C>
COMMON STOCKS (34.5%)
Aluminum (1.4%)
16,000 Alcoa Inc. ............................. $ 1,338,000
------------
Beverages -- Non-Alcoholic (1.3%)
33,000 PepsiCo, Inc. .......................... 1,289,062
------------
Computer Hardware (1.3%)
6,900 International Business Machines
Corp. .................................. 1,264,425
------------
Construction/Agricultural
Equipment/Trucks (1.3%)
39,000 Deere & Co. ............................ 1,269,938
------------
Diversified Financial Services (1.3%)
32,500 Associates First Capital Corp.
(Class A) .............................. 1,318,281
------------
Diversified Manufacturing (1.4%)
66,000 Timken Co. ............................. 1,431,375
------------
Electric Utilities (2.5%)
29,000 GPU, Inc. .............................. 1,236,125
36,000 Unicom Corp. ........................... 1,282,500
------------
2,518,625
------------
Electronics (1.4%)
24,000 Raytheon Co. (Class B) ................. 1,342,500
------------
Forest Products (1.4%)
25,000 Weyerhaeuser Co. ....................... 1,353,125
------------
Integrated Oil Companies (1.3%)
22,500 Atlantic Richfield Co. ................. 1,290,938
------------
Major Banks (2.7%)
25,000 Bank One Corp. ......................... 1,309,375
20,500 BankAmerica Corp. ...................... 1,370,938
------------
2,680,313
------------
Major Chemicals (1.3%)
24,500 Du Pont (E.I.) de Nemours & Co.,
Inc. ................................... 1,254,094
------------
Major Pharmaceuticals (1.3%)
10,300 Bristol-Myers Squibb Co. ............... 1,320,331
------------
Motor Vehicles (2.7%)
21,500 Ford Motor Co. ......................... 1,320,906
15,000 General Motors Corp. ................... 1,346,250
------------
2,667,156
------------
Multi-Sector Companies (1.4%)
13,300 General Electric Co. ................... 1,394,837
------------
Natural Gas (2.6%)
21,000 Enron Corp. ............................ 1,386,000
39,500 Tenneco, Inc. .......................... 1,219,563
------------
2,605,563
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ---------------- ------------
<S> <C> <C>
Packaged Goods/Cosmetics (1.3%)
14,500 Procter & Gamble Co. ................... $ 1,317,687
------------
Railroads (1.3%)
32,500 CSX Corp. .............................. 1,308,125
------------
Retail (2.7%)
22,000 Dayton-Hudson Corp. .................... 1,402,500
21,000 May Department Stores Co. .............. 1,267,875
------------
2,670,375
------------
Specialty Foods/Candy (1.3%)
39,000 ConAgra, Inc. .......................... 1,267,500
------------
Telecommunications (1.3%)
14,600 AT&T Corp. ............................. 1,324,950
------------
TOTAL COMMON STOCKS
(Identified Cost $28,789,410) .......... 34,227,200
------------
PRINCIPAL
AMOUNT IN
THOUSANDS
- --------------
CORPORATE BONDS (3.8%)
Diversified Financial Services (1.0%)
$ 500 Associates Corp. of North America
6.01% due 02/07/03 ..................... 509,715
500 Associates Corp. of North America
6.25% due 11/01/08 ..................... 518,065
------------
1,027,780
------------
Finance -- Automotive (1.0%)
1,000 Ford Motor Credit Corp.
6.00% due 01/14/03 ..................... 1,015,330
------------
Major Chemicals (0.5%)
500 Monsanto Co. -- 144A*
5.875% due 12/01/08 .................... 508,030
------------
Telecommunications (1.3%)
800 U.S. West Capital Funding, Inc.
6.25% due 07/15/05 ..................... 833,808
400 WorldCom, Inc
6.40% due 08/15/05 ..................... 417,672
------------
1,251,480
------------
TOTAL CORPORATE BONDS
(Identified Cost $3,721,972) ........... 3,802,620
------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (21.5%)
Federal Farm Credit Banks
1,000 5.90% due 01/10/05 ..................... 1,035,140
900 5.92% due 12/29/04 ..................... 935,658
------------
1,970,798
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
33
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
PORTFOLIO OF INVESTMENTS January 31, 1999, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- --------------- ------------
<S> <C> <C>
Federal Home Loan Banks
$ 1,000 0.00% due 02/25/04 ..................... $ 773,040
2,000 0.00% due 07/02/12 ..................... 700,780
1,000 5.88% due 11/25/08 ..................... 1,008,710
1,200 5.96% due 02/05/08 ..................... 1,251,024
------------
3,733,554
------------
Federal National Mortgage Assoc.
1,000 6.55% due 11/21/07 ..................... 1,030,070
500 6.75% due 07/30/07 ..................... 517,850
------------
1,547,920
------------
Resolution Funding Corp.
(Coupon Strips)
2,500 0.00% due 04/15/04 + ................... 1,944,500
1,500 0.00% due 10/15/04 ..................... 1,136,955
1,300 0.00% due 01/15/06 ..................... 920,803
3,000 0.00% due 01/15/08 + ................... 1,903,590
------------
5,905,848
------------
Tennessee Valley Authority
740 0.00% due 10/15/04 ..................... 554,023
------------
U.S. Treasury Notes
500 5.50% due 01/31/03 ..................... 515,140
1,300 5.50% due 05/31/03 ..................... 1,342,900
1,500 5.625% due 02/15/06 .................... 1,574,925
500 5.75% due 11/30/02 ..................... 518,570
400 5.875% due 06/30/00 .................... 406,540
700 5.875% due 09/30/02 .................... 728,161
500 6.25% due 02/15/07 ..................... 548,645
100 7.125% due 02/29/00 .................... 102,542
------------
5,737,423
------------
U.S. Treasury Strips
1,500 0.00% due 11/15/04 ..................... 1,146,015
1,000 0.00% due 02/15/05 ..................... 752,830
------------
1,898,845
------------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS
(Identified Cost $20,543,778) .......... 21,348,411
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- --------------- ------------
<S> <C> <C>
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES (37.4%)
Federal National Mortgage Assoc.
$ 1,227 6.00% due 10/01/00 ..................... $ 1,235,356
1,691 6.00% due 02/01/11-04/01/13 ............ 1,697,085
1,007 6.00% due 10/01/28 ..................... 995,372
3,209 6.50% due 03/01/11-06/01/13 ............ 3,260,066
967 6.50% due 04/01/28-06/01/28 ............ 975,280
2,068 7.00% due 07/01/11-07/01/12 ............ 2,117,467
3,714 7.00% due 08/01/25-11/01/27 ............ 3,795,524
3,441 7.50% due 08/01/23-05/01/27 ............ 3,543,399
817 8.00% due 05/01/24-07/01/26 ............ 847,974
------------
18,467,523
------------
Government National Mortgage
Assoc. I
5,018 6.00% due 06/15/28-12/15/28 ............ 4,980,104
1,506 7.00% due 09/15/23-08/15/25 ............ 1,543,238
2,914 7.50% due 08/15/25-10/15/26 ............ 3,012,623
807 8.00% due 06/15/26-07/15/26 ............ 840,508
------------
10,376,473
------------
Government National Mortgage
Assoc. II
3,920 6.50% due 04/20/28-01/20/29 ............ 3,944,555
2,000 6.50%** ................................ 2,012,500
2,327 7.00% due 02/20/26-06/20/27 ............ 2,373,284
------------
8,330,339
------------
TOTAL U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(Identified Cost $36,429,191) .......... 37,174,335
------------
SHORT-TERM INVESTMENTS (4.2%)
U.S. GOVERNMENT AGENCY (a) (1.0%)
1,000 Federal Home Loan Mortgage Corp.
4.72% due 02/11/99
(Amortized Cost $998,689) .............. 998,689
------------
REPURCHASE AGREEMENT (3.2%)
3,216 The Bank of New York 4.688%
due 02/01/99 (dated 01/29/99;
proceeds $3,217,714) (b)
(Identified Cost $3,216,457) ........... 3,216,457
------------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $4,215,146)............ 4,215,146
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
34
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
PORTFOLIO OF INVESTMENTS January 31, 1999, continued
<TABLE>
<CAPTION>
VALUE
------------
<S> <C> <C>
TOTAL INVESTMENTS
(Identified Cost $93,699,497) (c)......... 101.4 % $100,767,712
LIABILITIES IN EXCESS OF OTHER
ASSETS ................................... (1.4) (1,431,009)
---- ------------
NET ASSETS ............................... 100.0 % $99,336,703
======= ============
</TABLE>
- -------------------------------
* Resale is restricted to qualified institutional investors.
** Security was purchased on a forward commitment basis with an
approximate principal amount and no definite maturity date; the actual
principal amount and maturity date will be determined upon settlement.
+ Some or all of these securities are segregated as collateral for
securities purchased on a forward commitment basis.
(a) Security was purchased on a discount basis. The interest rate
shown has been adjusted to reflect a money market equivalent
yield.
(b) Collateralized by $2,759,404 U.S. Treasury Bond 11.75% due
02/15/01 valued at $3,280,786.
(c) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$8,336,441 and the aggregate gross unrealized depreciation is
$1,268,226, resulting in net unrealized appreciation of
$7,068,215.
SEE NOTES TO FINANCIAL STATEMENTS
35
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1999
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $93,699,497).................................... $100,767,712
Receivable for:
Shares of beneficial interest sold ............................. 513,862
Interest ....................................................... 429,899
Investments sold ............................................... 186,269
Dividends ...................................................... 83,841
Deferred organizational expenses .................................. 39,169
Prepaid expenses and other assets ................................ 50,033
-------------
TOTAL ASSETS ................................................... 102,070,785
-------------
LIABILITIES:
Payable for:
Investments purchased .......................................... 2,371,970
Shares of beneficial interest repurchased ...................... 168,939
Plan of distribution fee ....................................... 78,568
Investment management fee ...................................... 50,043
Accrued expenses .................................................. 64,562
-------------
TOTAL LIABILITIES .............................................. 2,734,082
-------------
NET ASSETS ..................................................... $99,336,703
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital ................................................... $90,671,389
Net unrealized appreciation ....................................... 7,068,215
Accumulated undistributed net investment income ................... 266,570
Accumulated undistributed net realized gain ....................... 1,330,529
-----------
NET ASSETS ..................................................... $99,336,703
===========
CLASS A SHARES:
Net Assets ........................................................ $5,447,760
Shares Outstanding (unlimited authorized, $.01 par value) ......... 427,232
NET ASSET VALUE PER SHARE ...................................... $12.75
======
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value) .............. $13.46
======
CLASS B SHARES:
Net Assets ........................................................ $56,919,022
Shares Outstanding (unlimited authorized, $.01 par value) ......... 4,468,801
NET ASSET VALUE PER SHARE ...................................... $12.74
======
CLASS C SHARES:
Net Assets ........................................................ $35,290,824
Shares Outstanding (unlimited authorized, $.01 par value) ......... 2,769,321
NET ASSET VALUE PER SHARE ...................................... $12.74
======
CLASS D SHARES:
Net Assets ........................................................ $1,679,097
Shares Outstanding (unlimited authorized, $.01 par value) ......... 131,659
NET ASSET VALUE PER SHARE ...................................... $12.75
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
36
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended January 31, 1999
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INCOME
Interest .......................................... $3,424,937
Dividends ......................................... 654,527
----------
TOTAL INCOME ................................... 4,079,464
----------
EXPENSES
Investment management fee ......................... 493,580
Plan of distribution fee (Class A shares) ......... 6,486
Plan of distribution fee (Class B shares) ......... 453,675
Plan of distribution fee (Class C shares) ......... 318,887
Registration fees ................................. 77,575
Transfer agent fees and expenses .................. 64,908
Professional fees ................................. 55,560
Shareholder reports and notices ................... 41,831
Organizational expenses ........................... 34,007
Custodian fees .................................... 23,732
Trustees' fees and expenses ....................... 13,378
Other ............................................. 9,882
----------
TOTAL EXPENSES ................................. 1,593,501
----------
NET INVESTMENT INCOME .......................... 2,485,963
----------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain ................................. 4,548,195
Net change in unrealized appreciation ............. 1,158,569
----------
NET GAIN ....................................... 5,706,764
----------
NET INCREASE ...................................... $8,192,727
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
37
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JANUARY 31, 1999 JANUARY 31, 1998*
------------------ ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................ $ 2,485,963 $ 1,842,253
Net realized gain .................................... 4,548,195 2,080,032
Net change in unrealized appreciation ................ 1,158,569 3,537,079
------------ ------------
NET INCREASE ...................................... 8,192,727 7,459,364
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A shares .................................... (90,042) (12,978)
Class B shares .................................... (1,360,747) (536,334)
Class C shares .................................... (991,558) (1,293,004)
Class D shares .................................... (34,394) (219)
Net realized gain
Class A shares .................................... (188,753) (16,524)
Class B shares .................................... (2,103,741) (810,058)
Class C shares .................................... (1,368,093) (1,161,126)
Class D shares .................................... (58,637) (259)
------------ ------------
TOTAL DIVIDENDS AND DISTRIBUTIONS ................. (6,195,965) (3,830,502)
------------ ------------
Net increase from transactions in shares of beneficial
interest ........................................... 32,003,023 13,424,115
------------ ------------
NET INCREASE ...................................... 33,999,785 17,052,977
NET ASSETS:
Beginning of period .................................. 65,336,918 48,283,941
------------ ------------
END OF PERIOD
(Including undistributed net investment income of
$266,570 and $223,345, respectively)............... $ 99,336,703 $ 65,336,918
============ ============
</TABLE>
- ---------------------
* Class A, Class B and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
38
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS January 31, 1999
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Balanced Income Fund (the "Fund"), formerly Dean
Witter Balanced Income Fund, is registered under the Investment Company Act of
1940, as amended (the "Act"), as a diversified, open-end management investment
company. The Fund's investment objective is to provide current income and
moderate capital growth. The Fund seeks to achieve its objective by investing
in investment grade fixed income securities and, to a lesser extent, common
stock of companies which have a record of paying dividends and have the
potential for increasing dividends and securities convertible into common
stock. The Fund was organized as a Massachusetts business trust on November 23,
1994 and commenced operations on March 28, 1995. On July 28, 1997, the Fund
commenced offering three additional classes of shares, with the then current
shares, other than shares which were acquired in exchange for shares of Funds
for which Morgan Stanley Dean Witter Advisors Inc. serves as Investment Manager
("Morgan Stanley Dean Witter Funds") offered with either a front-end sales
charge or a contingent deferred sales charge ("CDSC") and shares acquired
through reinvestment of dividends and distributions thereon, designated Class C
shares. Shares held prior to July 28, 1997 which were acquired in exchange for
shares of a Morgan Stanley Dean Witter Fund sold with a front-end sales charge,
including shares acquired through reinvestment of dividends and distributions
thereon, have been designated Class A shares and shares held prior to July 28,
1997 which were acquired in exchange for shares of a Morgan Stanley Dean Witter
Fund sold with a CDSC, including shares acquired through reinvestment of
dividends and distributions thereon, have been designated 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
39
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS January 31, 1999, continued
(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) 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; (3) when market
quotations are not readily available, including circumstances under which it is
determined by Morgan Stanley Dean Witter Advisors Inc. (the "Investment
Manager"), formerly Dean Witter InterCapital Inc., that sale 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 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); (4) certain portfolio
securities may be valued by an outside pricing service approved by the
Trustees. The pricing service may utilize a matrix system incorporating
security quality, maturity and coupon as the evaluation model parameters,
and/or research and evaluations by its staff, including review of broker-dealer
market price quotations, if available, in determining what it believes is the
fair valuation of the securities valued by such pricing service; 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.
Discounts are accreted over the life of the respective securities. Dividend
income and other distributions are recorded on the ex-dividend date. 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. 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.
E. 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
40
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS January 31, 1999, continued
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.
F. ORGANIZATIONAL EXPENSES -- The Investment Manager paid the organizational
expenses of the Fund in the amount of approximately $170,000 of which
approximately $136,000 have been reimbursed. The balance has been absorbed by
the Investment Manager. 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 AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.60% 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.
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. 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 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
41
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS January 31, 1999, continued
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 $1,599,291 at January 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 account executives may be reimbursed in the subsequent
calendar year. For the year ended January 31, 1999, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.24% and
0.95%, respectively.
The Distributor has informed the Fund that for the year ended January 31, 1999,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $52,922 and $19,482, respectively
and received $41,858 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.
42
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS January 31, 1999, continued
4. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JANUARY 31, 1999 JANUARY 31, 1998+*
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold ................................................ 443,674 $ 5,539,418 65,442 $ 811,302
Reinvestment of dividends and distributions ......... 7,895 98,394 1,562 19,338
Redeemed ............................................ (97,102) (1,234,884) (30,968) (392,193)
------- ------------- ------- -------------
Net increase -- Class A ............................. 354,467 4,402,928 36,036 438,447
------- ------------- ------- -------------
CLASS B SHARES
Sold ................................................ 2,624,083 33,324,855 833,271 10,407,565
Reinvestment of dividends and distributions ......... 169,821 2,113,831 64,208 794,863
Redeemed ............................................ (1,067,595) (13,526,589) (564,931) (7,045,845)
---------- ------------- -------- -------------
Net increase -- Class B ............................. 1,726,309 21,912,097 332,548 4,156,583
---------- ------------- -------- -------------
CLASS C SHARES
Sold ................................................ 929,718 11,808,519 1,852,659 22,297,952
Reinvestment of dividends and distributions ......... 169,885 2,120,074 173,390 2,105,205
Redeemed ............................................ (781,013) (9,857,608) (1,300,934) (15,584,565)
---------- ------------- ---------- -------------
Net increase -- Class C ............................. 318,590 4,070,985 725,115 8,818,592
---------- ------------- ---------- -------------
CLASS D SHARES
Sold ................................................ 135,950 1,684,078 806 10,015
Reinvestment of dividends and distributions ......... 7,529 93,031 39 478
Redeemed ............................................ (12,665) (160,096) -- --
---------- ------------- ---------- -------------
Net increase -- Class D ............................. 130,814 1,617,013 845 10,493
---------- ------------- ---------- -------------
Net increase in Fund ................................ 2,530,180 $ 32,003,023 1,094,544 $ 13,424,115
========== ============= ========== =============
</TABLE>
- ---------------
+ On July 28, 1997, 36,729 shares representing $456,174 were transferred to
Class A and 2,409,944 shares representing $29,931,505 were transferred to
Class B.
* For Class A, B and D shares, for the period July 28, 1997 (issue date)
through January 31, 1998.
5. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales/maturities/prepayments of
portfolio securities, excluding short-term investments, for the year ended
January 31, 1999 aggregated $51,253,597 and $25,415,154, respectively. Included
in the aforementioned are purchases and sales/maturities/prepayments of U.S.
Government securities of $27,421,393 and $11,655,248, respectively.
43
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
NOTES TO FINANCIAL STATEMENTS January 31, 1999, continued
For the year ended January 31, 1999, the Fund incurred brokerage commissions of
$15,309 with DWR for portfolio transactions executed on behalf of the Fund.
Included at January 31, 1999, in the payable for investments purchased and
receivable for investments sold were $362,668 and $92,222, respectively, for
unsettled trades with DWR.
For the year ended January 31, 1999, the Fund incurred brokerage commissions of
$3,315 with Morgan Stanley & Co., Inc., an affiliate 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
and Distributor, is the Fund's transfer agent. At January 31, 1999, the Fund
had transfer agent fees and expenses payable of approximately $100.
6. FEDERAL INCOME TAX STATUS
As of January 31, 1999, the Fund had temporary book/tax differences
attributable to capital loss deferrals on wash sales and permanent book/tax
differences primarily attributable to nondeductible organizational expenses. To
reflect reclassifications arising from the permanent differences,
paid-in-capital was charged $34,007, accumulated undistributed net realized
gain was credited $4 and accumulated undistributed net investment income was
credited $34,003.
44
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME 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 ENDED JANUARY 31 MARCH 28, 1995*
--------------------------------------------------- THROUGH
1999++ 1998**++ 1997 JANUARY 31, 1996
---------------- ------------- ---------------- ----------------------
<S> <C> <C> <C> <C>
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............ $ 12.41 $ 11.57 $ 11.34 $ 10.00
---------- -------- ---------- ----------
Income from investment operations:
Net investment income .......................... 0.38 0.42 0.36 0.38
Net realized and unrealized gain ............... 0.85 1.23 0.50 1.30
---------- -------- ---------- ----------
Total income from investment operations ......... 1.23 1.65 0.86 1.68
---------- -------- ---------- ----------
Less dividends and distributions from:
Net investment income .......................... (0.38) (0.40) (0.38) (0.33)
Net realized gain .............................. (0.52) (0.41) (0.25) (0.01)
---------- --------- ---------- ----------
Total dividends and distributions ............... (0.90) (0.81) (0.63) (0.34)
---------- --------- ---------- ---------
Net asset value, end of period .................. $ 12.74 $ 12.41 $ 11.57 $ 11.34
========== ========= ========== ==========
TOTAL RETURN+ ................................... 10.32% 14.42% 7.82% 16.93%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................ 1.94%(4) 2.07% 1.88%(3) -- %(2)(3)
Net investment income ........................... 3.02%(4) 3.30% 3.49%(3) 5.27%(2)(3)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ......... $35,291 $30,402 $48,284 $ 31,252
Portfolio turnover rate ......................... 32% 21% 21 % 3%(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, other than shares which were
acquired in exchange for shares of Funds for which Morgan Stanley Dean
Witter Advisors Inc. serves as Investment Manager ("Morgan Stanley Dean
Witter Funds") offered with either a front-end sales charge or a
contingent deferred sales charge ("CDSC") and shares acquired through
reinvestment of dividends and distributions thereon, have been designated
Class C shares. Shares held prior to July 28, 1997 which were acquired in
exchange for shares of a Morgan Stanley Dean Witter Fund sold with a
front-end sales charge, including shares acquired through reinvestment of
dividends and distributions thereon, have been designated Class A shares
and shares held prior to July 28, 1997 which were acquired in exchange
for shares of a Morgan Stanley Dean Witter Fund sold with a CDSC,
including shares acquired through reinvestment of dividends and
distributions thereon, 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) If the Investment Manager had not reimbursed expenses and waived the
management fee, the annualized expense and net investment income ratios
would have been 2.19% and 3.18%, respectively, for the year ended January
31, 1997 and 2.69% and 2.58%, respectively, for the period ended January
31, 1996.
(4) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
45
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
JANUARY 31, 1999 JANUARY 31, 1998
------------------ -----------------
<S> <C> <C>
CLASS A SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............ $ 12.41 $ 12.42
--------- ---------
Income from investment operations:
Net investment income .......................... 0.46 0.25
Net realized and unrealized gain ............... 0.87 0.32
--------- ---------
Total income from investment operations ......... 1.33 0.57
--------- ---------
Less dividends and distributions from:
Net investment income .......................... ( 0.47) (0.26)
Net realized gain .............................. ( 0.52) (0.32)
--------- ---------
Total dividends and distributions ............... ( 0.99) (0.58)
--------- ---------
Net asset value, end of period .................. $ 12.75 $ 12.41
========= =========
TOTAL RETURN+ ................................... 11.11% 4.60%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................ 1.23%(3) 1.43%(2)
Net investment income ........................... 3.73%(3) 3.92%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ......... $ 5,448 $ 903
Portfolio turnover rate ......................... 32% 21%
CLASS B SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............ $ 12.41 $ 12.42
----------- -----------
Income from investment operations:
Net investment income .......................... 0.38 0.20
Net realized and unrealized gain ............... 0.85 0.33
----------- -----------
Total income from investment operations ......... 1.23 0.53
----------- -----------
Less dividends and distributions from:
Net investment income .......................... (0.38) (0.22)
Net realized gain .............................. (0.52) (0.32)
----------- -----------
Total dividends and distributions ............... (0.90) (0.54)
----------- -----------
Net asset value, end of period .................. $ 12.74 $ 12.41
=========== ===========
TOTAL RETURN+ ................................... 10.32% 4.19%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................ 1.99%(3) 2.16%(2)
Net investment income ........................... 2.97%(3) 3.15%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ......... $56,919 $34,021
Portfolio turnover rate ......................... 32% 21%
</TABLE>
- -------------
* The date shares were first issued. Shareholders who held shares of the
Fund prior to July 28, 1997 (the date the Fund converted to a multiple
class share structure) should refer to the Financial Highlights of Class
C to obtain the historical per share data and ratio information of their
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) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
46
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
JANUARY 31, 1999 JANUARY 31, 1998
------------------ -----------------
<S> <C> <C>
CLASS D SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............ $12.42 $12.42
-------- --------
Income from investment operations:
Net investment income .......................... 0.48 0.26
Net realized and unrealized gain ............... 0.87 0.33
-------- --------
Total income from investment operations ......... 1.35 0.59
-------- --------
Less dividends and distributions from:
Net investment income .......................... (0.50) (0.27)
Net realized gain .............................. (0.52) (0.32)
--------- ---------
Total dividends and distributions ............... (1.02) (0.59)
--------- ---------
Net asset value, end of period .................. $12.75 $12.42
========= =========
TOTAL RETURN+ ................................... 11.27 % 4.79 %(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................ 0.99 %(3) 1.16 %(2)
Net investment income ........................... 3.97 % (3) 4.15 %(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ......... $1,679 $10
Portfolio turnover rate ......................... 32 % 21 %
</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
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
47
<PAGE>
MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER BALANCED INCOME 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
Balanced Income Fund (the "Fund"), formerly Dean Witter Balanced Income Fund,
at January 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 January 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
March 10, 1999
1999 FEDERAL TAX NOTICE (unaudited)
During the year ended January 31, 1999, the Fund paid to its shareholders
$0.52 per share from long-term capital gains. For such period, 24.48% of
the income paid qualified for the dividends received deduction available
to corporations.
48
