Registration Statement of an Open-End Investment Company (Business Combination) — Form N-14
Filing Table of Contents
Document/Exhibit Description Pages Size
1: N-14 Initial Registration; Business Combination 270 1.33M
2: EX-99.B11(A) Opinion and Consent of Mayer Brown & Platt 2± 9K
3: EX-99.B11(B) Opinion and Consent of Piper Marbury 2 15K
4: EX-99.B12 Opinion of Mayer Brown & Platt 4 16K
5: EX-99.B14 Consent of Pricewaterhousecoopers 1 9K
6: EX-99.B16 Power of Attorney 2 12K
7: EX-99.B17(B) Form of Proxy 2 11K
8: EX-99.B17(C) Voting Information Card 1 6K
| Page | (sequential) | | | | (alphabetic) | Top |
|---|
| | |
- Alternative Formats (Word, et al.)
- A. Board of Directors
- A. Board of Trustees
- A. Brokerage Transactions
- A. Classification
- Additional Information About Natural Resource
- Additional Information About Precious Metals and Natural Resource
- A. Investment Manager
- Appraisal Rights
- A. Purchase/Redemption of Shares
- Available Information
- Average Annual Total Returns
- Barry Fink
- B. Commissions
- B. Investment Strategies and Risks
- B. Management Information
- Board's Consideration, The
- B. Offering Price
- B. Principal Underwriter
- Capitalization Table (unaudited)
- C. Brokerage Selection
- C. Compensation
- C. Fund Policies/Investment Restrictions
- Charles A. Fiumefreddo
- Class A Shares
- Class C Shares
- Comparison of Investment Objectives, Policies and Restrictions
- Comparison of Precious Metals and Natural Resource
- Cross Reference Sheet
- C. Services Provided by the Investment Manager and Fund Expenses Paid by Third Parties
- D. Dealer Reallowances
- D. Directed Brokerage
- Description of Securities and Shareholder Inquiries
- Description of Shares
- Dividends, Distributions and Taxes
- E. Regular Broker-Dealers
- E. Rule 12b-1 Plan
- Exhibit A
- Exhibits
- Expenses of Solicitation
- Fee Table
- Financial Highlights
- Financial Information
- Financial Statements
- Financial Statements and Experts
- F. Other Service Providers
- Fund, The
- General
- I. Fund History
- II. Description of the Fund and Its Investments and Risks
- III. Management of the Fund
- Indemnification
- Introduction
- Investment Manager
- Investment Objectives and Policies
- Investment Restrictions
- IV. Control Persons and Principal Holders of Securities
- IX. Taxation of the Fund and Shareholders
- Legal Matters
- Letter of Intent
- Management
- Management's Discussion of Fund Performance
- Michael Bozic
- Mitchell M. Merin
- OTC options
- Other Business
- Precious Metals
- Principal Risk Factors
- Proposal, The
- Proxies
- Purchase, Redemption and Pricing of Shares
- Purchases, Exchanges and Redemptions
- Purchases, Repurchases and Redemptions
- Record Date; Share Information
- Registration Statement
- Reorganization Agreement, The
- Reorganization, The
- Robert Rossetti
- Synopsis
- Table of Contents
- Tax Aspects of the Reorganization
- Tax Consequences of the Reorganization
- The Board's Consideration
- The Fund
- The Proposal
- The Reorganization
- The Reorganization Agreement
- Thomas F. Caloia
- Transfer Agent
- Trustees
- Undertakings
- VI. Brokerage Allocation and Other Practices
- VII. Capital Stock and Other Securities
- VIII. Purchase, Redemption and Pricing of Shares
- V. Investment Management and Other Services
- Vote Required
- XI. Calculation of Performance Data
- XII. Financial Statements
- X. Underwriters
|
| 1 | 1st Page - Filing Submission
|
| " | Registration Statement
|
| 2 | Cross Reference Sheet
|
| 5 | Table of Contents
|
| 6 | Introduction
|
| " | General
|
| " | Record Date; Share Information
|
| 7 | Proxies
|
| " | Expenses of Solicitation
|
| 8 | Vote Required
|
| " | Synopsis
|
| " | The Reorganization
|
| 9 | Fee Table
|
| 11 | Precious Metals
|
| 12 | Tax Consequences of the Reorganization
|
| " | Comparison of Precious Metals and Natural Resource
|
| " | Investment Objectives and Policies
|
| 14 | Purchases, Exchanges and Redemptions
|
| 15 | Principal Risk Factors
|
| 16 | The Proposal
|
| " | The Board's Consideration
|
| 18 | The Reorganization Agreement
|
| 19 | Tax Aspects of the Reorganization
|
| 20 | Description of Shares
|
| 21 | Capitalization Table (unaudited)
|
| " | Appraisal Rights
|
| " | Comparison of Investment Objectives, Policies and Restrictions
|
| 23 | Investment Restrictions
|
| " | Additional Information About Precious Metals and Natural Resource
|
| " | Financial Information
|
| " | Management
|
| " | Description of Securities and Shareholder Inquiries
|
| 24 | Dividends, Distributions and Taxes
|
| " | Purchases, Repurchases and Redemptions
|
| " | Management's Discussion of Fund Performance
|
| " | Financial Statements and Experts
|
| " | Legal Matters
|
| 25 | Available Information
|
| " | Other Business
|
| 26 | Exhibit A
|
| 43 | The Fund
|
| 59 | Letter of Intent
|
| 65 | Financial Highlights
|
| 74 | Charles A. Fiumefreddo
|
| 75 | Average Annual Total Returns
|
| 86 | Class A Shares
|
| " | Class C Shares
|
| 92 | Michael Bozic
|
| " | Transfer Agent
|
| " | Investment Manager
|
| 140 | Trustees
|
| " | Barry Fink
|
| " | Robert Rossetti
|
| " | Thomas F. Caloia
|
| 143 | Mitchell M. Merin
|
| 162 | Additional Information About Natural Resource
|
| " | Purchase, Redemption and Pricing of Shares
|
| 163 | Financial Statements
|
| 175 | I. Fund History
|
| " | II. Description of the Fund and Its Investments and Risks
|
| " | A. Classification
|
| " | B. Investment Strategies and Risks
|
| 176 | OTC options
|
| 183 | C. Fund Policies/Investment Restrictions
|
| 185 | III. Management of the Fund
|
| " | A. Board of Directors
|
| " | B. Management Information
|
| 189 | C. Compensation
|
| 191 | IV. Control Persons and Principal Holders of Securities
|
| " | V. Investment Management and Other Services
|
| " | A. Investment Manager
|
| 192 | B. Principal Underwriter
|
| " | C. Services Provided by the Investment Manager and Fund Expenses Paid by Third Parties
|
| 193 | D. Dealer Reallowances
|
| " | E. Rule 12b-1 Plan
|
| 197 | F. Other Service Providers
|
| " | VI. Brokerage Allocation and Other Practices
|
| " | A. Brokerage Transactions
|
| 198 | B. Commissions
|
| " | C. Brokerage Selection
|
| 199 | D. Directed Brokerage
|
| " | E. Regular Broker-Dealers
|
| " | VII. Capital Stock and Other Securities
|
| 200 | VIII. Purchase, Redemption and Pricing of Shares
|
| " | A. Purchase/Redemption of Shares
|
| " | B. Offering Price
|
| 201 | IX. Taxation of the Fund and Shareholders
|
| 203 | X. Underwriters
|
| " | XI. Calculation of Performance Data
|
| 205 | XII. Financial Statements
|
| 231 | A. Board of Trustees
|
| 268 | Item 15. Indemnification
|
| " | Item 16. Exhibits
|
| 269 | Item 17. Undertakings
|
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 25, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
---------------------
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. [ ]
---------------------
MORGAN STANLEY DEAN WITTER
NATURAL RESOURCE DEVELOPMENT
SECURITIES INC.
(Exact Name of Registrant as Specified in Charter)
(formerly named Dean Witter Natural Resource Development Securities Inc.)
TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
(Address of Principal Executive Offices)
212-392-1600
(Registrant's Telephone Number)
BARRY FINK, ESQ.
Two World Trade Center
New York, New York 10048
(Name and Address of Agent for Service)
---------------------
COPY TO:
STUART M. STRAUSS, ESQ.
Mayer, Brown & Platt
1675 Broadway
New York, New York 10019
---------------------
It is proposed that this filing will become effective on the thirtieth day
after the date of the filing, pursuant to Rule 488.
The Exhibit Index is located on page [ ]
PURSUANT TO RULE 429, THIS REGISTRATION STATEMENT RELATES TO SHARES
PREVIOUSLY REGISTERED BY THE REGISTRANT ON FORM N-1A (REGISTRATION NOS.
2-70421; 811-3129).
--------------------------------------------------------------------------------
FORM N-14
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933
[Enlarge/Download Table]
PART A OF FORM N-14 ITEM NO. PROXY STATEMENT AND PROSPECTUS HEADING
------------------------------ ---------------------------------------------------------
1 (a) ........................ Cross Reference Sheet
(b) ........................ Front Cover Page
(c) ........................ *
2 (a) ........................ *
(b) ........................ Table of Contents
3 (a) ........................ Fee Table
(b) ........................ Synopsis
(c) ........................ Principal Risk Factors
4 (a) ........................ The Reorganization
(b) ........................ The Reorganization -- Capitalization Table (Unaudited)
5 (a) ........................ Registrant's Prospectus
(b) ........................ *
(c) ........................ *
(d) ........................ *
(e) ........................ Available Information
(f) ........................ Available Information
6 (a) ........................ Prospectus of Morgan Stanley Dean Witter Precious Metals
and Minerals Trust
(b) ........................ Available Information
(c) ........................ *
(d) ........................ *
7 (a) ........................ Introduction -- Proxies
(b) ........................ *
(c) ........................ Introduction; The Reorganization -- Appraisal Rights
8 (a) ........................ The Reorganization
(b) ........................ *
9 .......................... *
[Enlarge/Download Table]
PART B OF FORM N-14 ITEM NO. STATEMENT OF ADDITIONAL INFORMATION HEADING
------------------------------ ---------------------------------------------------------
10(a) ........................ Cover Page
(b) ........................ *
11 .......................... Table of Contents
12(a) ........................ Additional Information about Morgan Stanley Dean Witter
Natural Resource Development Securities Inc.
(b) ........................ *
(c) ........................
13(a) ........................ Additional Information about Morgan Stanley Dean Witter
Precious Metals and Minerals Trust
(b) ........................ *
(c) ........................ *
14 ........................ Registrant's Annual Report for the fiscal year ended
February 28, 1999. Morgan Stanley Dean Witter
Precious Metals and Minerals Trust's Annual
Report for the fiscal year ended October 31,
1998 and Semi-Annual Report for the six month
period ended April 30, 1999.
[Download Table]
PART C OF FORM N-14 ITEM NO. OTHER INFORMATION HEADING
------------------------------ --------------------------
15 .......................... Indemnification
16 .......................... Exhibits
17 .......................... Undertakings
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* Not Applicable or negative answer
MORGAN STANLEY DEAN WITTER
PRECIOUS METALS AND MINERALS TRUST
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(800) 869-NEWS
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 21, 1999
TO THE SHAREHOLDERS OF MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS
TRUST:
Notice is hereby given of a Special Meeting of the Shareholders of Morgan
Stanley Dean Witter Precious Metals and Minerals Trust ("Precious Metals") to be
held in the Career Development Room, Sixty-First Floor, Two World Trade Center,
New York, New York 10048, at 10:00 A.M., New York time, on December 21, 1999,
and any adjournments thereof (the "Meeting"), for the following purposes:
1. To consider and vote upon an Agreement and Plan of Reorganization, dated
July 29, 1999 (the "Reorganization Agreement"), between Precious Metals
and Morgan Stanley Dean Witter Natural Resource Development Securities
Inc. ("Natural Resource"), pursuant to which substantially all of the
assets of Precious Metals would be combined with those of Natural Resource
and shareholders of Precious Metals would become shareholders of Natural
Resource receiving shares of Natural Resource with a value equal to the
value of their holdings in Precious Metals (the "Reorganization"); and
2. To act upon such other matters as may properly come before the Meeting.
The Reorganization is more fully described in the accompanying Proxy
Statement and Prospectus and a copy of the Reorganization Agreement is attached
as Exhibit A thereto. Shareholders of record at the close of business on
September 3, 1999 are entitled to notice of, and to vote at, the Meeting. Please
read the Proxy Statement and Prospectus carefully before telling us, through
your proxy or in person, how you wish your shares to be voted. Alternatively, if
you are eligible to vote telephonically by touchtone telephone or electronically
on the Internet (as discussed in the enclosed Proxy Statement) you may do so in
lieu of attending the Meeting in person. THE BOARD OF TRUSTEES OF PRECIOUS
METALS RECOMMENDS YOU VOTE IN FAVOR OF THE REORGANIZATION. WE URGE YOU TO SIGN,
DATE AND MAIL THE ENCLOSED PROXY PROMPTLY.
By Order of the Board of Trustees,
BARRY FINK,
Secretary
September , 1999
YOU CAN HELP AVOID THE NECESSITY AND EXPENSE OF SENDING FOLLOW-UP LETTERS TO
ENSURE A QUORUM BY PROMPTLY RETURNING THE ENCLOSED PROXY. IF YOU ARE UNABLE TO
BE PRESENT IN PERSON, PLEASE FILL IN, SIGN AND RETURN THE ENCLOSED PROXY IN
ORDER THAT THE NECESSARY QUORUM BE REPRESENTED AT THE MEETING. THE ENCLOSED
ENVELOPE REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. AS DISCUSSED IN
THE ENCLOSED PROXY STATEMENT, CERTAIN SHAREHOLDERS WILL BE ABLE TO VOTE
TELEPHONICALLY BY TOUCHTONE TELEPHONE OR ELECTRONICALLY ON THE INTERNET BY
FOLLOWING INSTRUCTIONS ON THEIR PROXY CARDS OR ON THE ENCLOSED VOTING
INFORMATION CARD.
MORGAN STANLEY DEAN WITTER
NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
(800) 869-NEWS
ACQUISITION OF THE ASSETS OF
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
BY AND IN EXCHANGE FOR SHARES OF MORGAN STANLEY DEAN
WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
This Proxy Statement and Prospectus is being furnished to shareholders of
Morgan Stanley Dean Witter Precious Metals and Minerals Trust ("Precious
Metals") in connection with an Agreement and Plan of Reorganization, dated July
29, 1999 (the "Reorganization Agreement"), pursuant to which substantially all
the assets of Precious Metals will be combined with those of Morgan Stanley Dean
Witter Natural Resource Development Securities Inc. ("Natural Resource") in
exchange for shares of Natural Resource (the "Reorganization"). As a result of
this transaction, shareholders of Precious Metals will become shareholders of
Natural Resource and will receive shares of Natural Resource with a value equal
to the value of their holdings in Precious Metals. The terms and conditions of
this transaction are more fully described in this Proxy Statement and Prospectus
and in the Reorganization Agreement between Precious Metals and Natural
Resource, attached hereto as Exhibit A. The address of Precious Metals is that
of Natural Resource set forth above. This Proxy Statement also constitutes a
Prospectus of Natural Resource, which is dated September , 1999, filed by
Natural Resource with the Securities and Exchange Commission (the "Commission")
as part of its Registration Statement on Form N-14 (the "Registration
Statement").
Natural Resource is an open-end diversified management investment company
whose investment objective is to seek capital growth. The fund seeks to achieve
its objective by investing at least 65% of its assets in common stocks of
companies engaged in the natural resource and related businesses.
This Proxy Statement and Prospectus sets forth concisely information about
Natural Resource that shareholders of Precious Metals should know before voting
on the Reorganization Agreement. A copy of the Prospectus for Natural Resource
dated June 30, 1999, is attached as Exhibit B and incorporated herein by
reference. Also enclosed and incorporated herein by reference is Natural
Resource's Annual Report for the fiscal year ended February 28, 1999. A
Statement of Additional Information relating to the Reorganization, described in
this Proxy Statement and Prospectus (the "Additional Statement"), dated
September , 1999, has been filed with the Commission and is also incorporated
herein by reference. Also incorporated herein by reference are Precious Metals'
Prospectus, dated February 22, 1999, and Annual Report for its fiscal year ended
October 31, 1998 and the succeeding unaudited Semi-Annual Report for the six
months ended April 30, 1999. Such documents are available without charge by
calling (800) 869-NEWS (TOLL FREE).
Investors are advised to read and retain this Proxy Statement and Prospectus for
future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROXY STATEMENT AND PROSPECTUS IS DATED SEPTEMBER , 1999.
TABLE OF CONTENTS
PROXY STATEMENT AND PROSPECTUS
[Enlarge/Download Table]
PAGE
-----
INTRODUCTION .......................................................................... 1
General ............................................................................. 1
Record Date; Share Information ...................................................... 1
Proxies ............................................................................. 2
Expenses of Solicitation ............................................................ 2
Vote Required ....................................................................... 3
SYNOPSIS .............................................................................. 3
The Reorganization .................................................................. 3
Fee Table ........................................................................... 4
Tax Consequences of the Reorganization .............................................. 7
Comparison of Precious Metals and Natural Resource .................................. 7
PRINCIPAL RISK FACTORS ................................................................ 10
THE REORGANIZATION .................................................................... 11
The Proposal ........................................................................ 11
The Board's Consideration ........................................................... 11
The Reorganization Agreement ........................................................ 13
Tax Aspects of the Reorganization ................................................... 14
Description of Shares ............................................................... 15
Capitalization Table (unaudited) .................................................... 16
Appraisal Rights .................................................................... 16
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS ........................ 16
Investment Objectives and Policies .................................................. 16
Investment Restrictions ............................................................. 18
ADDITIONAL INFORMATION ABOUT PRECIOUS METALS AND NATURAL
RESOURCE ............................................................................. 18
General ............................................................................. 18
Financial Information ............................................................... 18
Management .......................................................................... 18
Description of Securities and Shareholder Inquiries ................................. 18
Dividends, Distributions and Taxes .................................................. 19
Purchases, Repurchases and Redemptions .............................................. 19
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE ........................................... 19
FINANCIAL STATEMENTS AND EXPERTS ...................................................... 19
LEGAL MATTERS ......................................................................... 19
AVAILABLE INFORMATION ................................................................. 20
OTHER BUSINESS ........................................................................ 20
Exhibit A - Agreement and Plan of Reorganization, dated July 29, 1999, by and between
Precious Metals and Natural Resource ................................................. A-1
Exhibit B - Prospectus of Natural Resource dated June 30, 1999 ........................ B-1
MORGAN STANLEY DEAN WITTER
PRECIOUS METALS AND MINERALS TRUST
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(800) 869-NEWS
--------------------
PROXY STATEMENT AND PROSPECTUS
--------------------
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 21, 1999
INTRODUCTION
GENERAL
This Proxy Statement and Prospectus is being furnished to the shareholders
of Morgan Stanley Dean Witter Precious Metals and Minerals Trust ("Precious
Metals"), an open-end diversified management investment company, in connection
with the solicitation by the Board of Trustees of Precious Metals (the "Board")
of proxies to be used at the Special Meeting of Shareholders of Precious Metals
to be held in the Career Development Room, Sixty-First Floor, Two World Trade
Center, New York, New York 10048 at 10:00 A.M., New York time, on December 21,
1999, and any adjournments thereof (the "Meeting"). It is expected that the
mailing of this Proxy Statement and Prospectus will be made on or about
September , 1999.
At the Meeting, Precious Metals shareholders ("Shareholders") will consider
and vote upon an Agreement and Plan of Reorganization, dated July 29, 1999 (the
"Reorganization Agreement"), between Precious Metals and Morgan Stanley Dean
Witter Natural Resource Development Securities Inc. ("Natural Resource")
pursuant to which substantially all of the assets of Precious Metals will be
combined with those of Natural Resource in exchange for shares of Natural
Resource. As a result of this transaction, Shareholders will become shareholders
of Natural Resource and will receive shares of Natural Resource equal to the
value of their holdings in Precious Metals on the date of such transaction (the
"Reorganization"). Pursuant to the Reorganization, each Shareholder will receive
the class of shares of Natural Resource that corresponds to the class of shares
of Precious Metals currently held by that Shareholder. Accordingly, as a result
of the Reorganization, each Class A, Class B, Class C and Class D Shareholder of
Precious Metals will receive Class A, Class B, Class C and Class D shares of
Natural Resource, respectively. The shares to be issued by Natural Resource
pursuant to the Reorganization (the "Natural Resource Shares") will be issued at
net asset value without an initial sales charge. Further information relating to
Natural Resource is set forth herein and in Natural Resource's current
Prospectus, dated June 30, 1999 ("Natural Resource's Prospectus"), attached to
this Proxy Statement and Prospectus and incorporated herein by reference.
The information concerning Precious Metals contained herein has been
supplied by Precious Metals and the information concerning Natural Resource
contained herein has been supplied by Natural Resource.
RECORD DATE; SHARE INFORMATION
The Board has fixed the close of business on September 3, 1999 as the
record date (the "Record Date") for the determination of the Shareholders
entitled to notice of, and to vote at, the Meeting. As of the Record
1
Date, there were shares of Precious Metals issued and outstanding.
Shareholders on the Record Date are entitled to one vote per share on each
matter submitted to a vote at the Meeting. A majority of the outstanding shares
entitled to vote, represented in person or by proxy, will constitute a quorum at
the Meeting.
The following persons were known to own of record or beneficially 5% or
more of the outstanding shares of a Class of Precious Metals as of the Record
Date: As of the Record Date, the trustees and officers of Precious Metals, as a
group, owned less than 1% of the outstanding shares of Precious Metals.
The following persons were known to own of record or beneficially 5% or
more of the outstanding shares of a Class of Natural Resource as of the Record
Date: As of the Record Date, the trustees and officers of Natural Resource, as a
group, owned less than 1% of the outstanding shares of Natural Resource.
PROXIES
The enclosed form of proxy, if properly executed and returned, will be
voted in accordance with the choice specified thereon. The proxy will be voted
in favor of the Reorganization Agreement unless a choice is indicated to vote
against or to abstain from voting on the Reorganization Agreement. The Board
knows of no business, other than that set forth in the Notice of Special Meeting
of Shareholders, to be presented for consideration at the Meeting. However, the
proxy confers discretionary authority upon the persons named therein to vote as
they determine on other business, not currently contemplated, which may come
before the Meeting. Abstentions and, if applicable, broker "non-votes" will not
count as votes in favor of the Reorganization Agreement, and broker "non-votes"
will not be deemed to be present at the meeting for purposes of determining
whether the Reorganization Agreement has been approved. Broker "non-votes" are
shares held in street name for which the broker indicates that instructions have
not been received from the beneficial owners or other persons entitled to vote
and for which the broker does not have discretionary voting authority. If a
Shareholder executes and returns a proxy but fails to indicate how the votes
should be cast, the proxy will be voted in favor of the Reorganization
Agreement. The proxy may be revoked at any time prior to the voting thereof by:
(i) delivering written notice of revocation to the Secretary of Precious Metals
at Two World Trade Center, New York, New York 10048; (ii) attending the Meeting
and voting in person; or (iii) completing and returning a new proxy (whether by
mail or, as discussed below, by touchtone telephone or the Internet) (if
returned and received in time to be voted). Attendance at the Meeting will not
in and of itself revoke a proxy.
In the event that the necessary quorum to transact business or the vote
required to approve or reject the Reorganization Agreement is not obtained at
the Meeting, the persons named as proxies may propose one or more adjournments
of the Meeting to permit further solicitation of proxies. Any such adjournment
will require the affirmative vote of the holders of a majority of shares of
Precious Metals present in person or by proxy at the Meeting. The persons named
as proxies will vote in favor of such adjournment those proxies which they are
entitled to vote in favor of the Reorganization Agreement and will vote against
any such adjournment those proxies required to be voted against the
Reorganization Agreement.
EXPENSES OF SOLICITATION
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement and Prospectus, will be borne by Precious Metals
which expenses are expected to approximate $125,000. Precious Metals and Natural
Resource will bear all of their respective other expenses associated with the
Reorganization. In addition to the solicitation of proxies by mail, proxies may
be solicited by officers of Precious Metals, and officers and regular employees
of Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors" or the "Investment
Manager") and Morgan Stanley Dean Witter Trust FSB ("MSDW Trust"), an affiliate
of MSDW
2
Advisors, personally or by mail, telephone, telegraph or otherwise, without
compensation therefor. Brokerage houses, banks and other fiduciaries may be
requested to forward soliciting material to the beneficial owners of shares and
to obtain authorization for the execution of proxies.
Shareholders whose shares are registered with MSDW Trust will be able to
vote their shares by touchtone telephone or by Internet by following the
instructions on the proxy card or on the Voting Information Card accompanying
this Proxy Statement. To vote by touchtone telephone, Shareholders can call the
toll-free number 1-800-690-6903. To vote by Internet, Shareholders can access
the websites www.msdwt.com or www.proxyvote.com. Telephonic and Internet voting
with MSDW Trust presently are not available to Shareholders whose shares are
held in street name.
In certain instances, MSDW Trust, an affiliate of MSDW Advisors, may call
Shareholders to ask if they would be willing to have their votes recorded by
telephone. The telephone voting procedure is designed to authenticate
Shareholders' identities, to allow Shareholders to authorize the voting of their
shares in accordance with their instructions and to confirm that their
instructions have been recorded properly. No recommendation will be made as to
how a Shareholder should vote on the Reorganization Agreement other than to
refer to the recommendation of the Board. Precious Metals has been advised by
counsel that these procedures are consistent with the requirements of applicable
law. Shareholders voting by telephone in this manner will be asked for their
social security number or other identifying information and will be given an
opportunity to authorize proxies to vote their shares in accordance with their
instructions. To ensure that the Shareholders' instructions have been recorded
correctly, they will receive a confirmation of their instructions in the mail. A
special toll-free number will be available in case the information contained in
the confirmation is incorrect. Although a Shareholder's vote may be taken by
telephone, each Shareholder will receive a copy of this Proxy Statement and
Prospectus and may vote by mail using the enclosed proxy card or by touchtone
telephone or the Internet as set forth above. The last proxy vote received in
time to be voted, whether by proxy card, touchtone telephone or Internet, will
be the vote that is counted and will revoke all previous votes by the
Shareholder.
VOTE REQUIRED
Approval of the Reorganization Agreement by the Shareholders requires the
affirmative vote of a majority (i.e., more than 50%) of the shares of Precious
Metals represented in person or by proxy and entitled to vote at the Meeting,
provided a quorum is present at the Meeting. If the Reorganization Agreement is
not approved by Shareholders, Precious Metals will continue in existence and the
Board will consider alternative actions.
SYNOPSIS
The following is a synopsis of certain information contained in or
incorporated by reference in this Proxy Statement and Prospectus. This synopsis
is only a summary and is qualified in its entirety by the more detailed
information contained or incorporated by reference in this Proxy Statement and
Prospectus and the Reorganization Agreement. Shareholders should carefully
review this Proxy Statement and Prospectus and Reorganization Agreement in their
entirety and, in particular, Natural Resource's Prospectus, which is attached to
this Proxy Statement and incorporated herein by reference.
THE REORGANIZATION
The Reorganization Agreement provides for the transfer of substantially all
the assets of Precious Metals, subject to stated liabilities, to Natural
Resource in exchange for the Natural Resource Shares. The aggregate net asset
value of the Natural Resource Shares issued in the exchange will equal the
aggregate value of the net assets of Precious Metals received by Natural
Resource. On or after the closing date scheduled for the Reorganization (the
"Closing Date"), Precious Metals will distribute the Natural Resource Shares
received by Precious Metals to Shareholders as of the Valuation Date (as defined
below under "The Reorganization Agreement") in complete liquidation of Precious
Metals and Precious Metals will thereafter be dissolved and
3
deregistered under the Investment Company Act of 1940, as amended (the "1940
Act"). As a result of the Reorganization, each Shareholder will receive that
number of full and fractional Natural Resource Shares equal in value to such
Shareholder's pro rata interest in the net assets of Precious Metals transferred
to Natural Resource. Pursuant to the Reorganization, each Shareholder will
receive the class of shares of Natural Resource that corresponds to the class of
shares of Precious Metals currently held by that Shareholder. Accordingly, as a
result of the Reorganization, each Class A, Class B, Class C and Class D
Shareholder of Precious Metals will become holders of Class A, Class B, Class C
and Class D shares of Natural Resource, respectively. Shareholders holding their
shares of Precious Metals in certificate form will be asked to surrender their
certificates in connection with the Reorganization. Shareholders who do not
surrender their certificates prior to the Closing Date will still receive their
shares of Natural Resource; however, such Shareholders will not be able to
redeem, transfer or exchange the Natural Resource Shares received until the old
certificates have been surrendered. The Board has determined that the interests
of Shareholders will not be diluted as a result of the Reorganization.
FOR THE REASONS SET FORTH BELOW UNDER "THE REORGANIZATION -- THE BOARD'S
CONSIDERATION," THE BOARD, INCLUDING THE TRUSTEES WHO ARE NOT "INTERESTED
PERSONS" OF PRECIOUS METALS ("INDEPENDENT TRUSTEES"), AS THAT TERM IS DEFINED IN
THE 1940 ACT, HAS CONCLUDED THAT THE REORGANIZATION IS IN THE BEST INTERESTS OF
PRECIOUS METALS AND ITS SHAREHOLDERS AND RECOMMENDS APPROVAL OF THE
REORGANIZATION AGREEMENT.
FEE TABLE
Precious Metals and Natural Resource each pay expenses for management of
their assets, distribution of their shares and other services, and those
expenses are reflected in the net asset value per share of each fund. The
following table briefly describes the fees and expenses that a shareholder of
Precious Metals and Natural Resource may pay if they buy and hold shares of each
respective fund. These expenses are deducted from each respective fund's assets
and are based on expenses paid by Precious Metals for its fiscal year ended
October 31, 1998, and by Natural Resource for its fiscal year ended February 28,
1999. The table also sets forth pro forma fees for the surviving combined fund
(Natural Resource) reflecting what the fee schedule would have been on February
28, 1999, if the Reorganization had been consummated twelve (12) months prior to
that date.
Shareholder Fees
[Enlarge/Download Table]
PRECIOUS NATURAL PRO FORMA
METALS RESOURCE COMBINED
--------------- --------------- ---------------
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON PURCHASES
(AS A PERCENTAGE OF OFFERING PRICE)
Class A ............................................... 5.25%(1) 5.25%(1) 5.25%(1)
Class B ............................................... none none none
Class C ............................................... none none none
Class D ............................................... none none none
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON REINVESTED
DIVIDENDS
Class A ............................................... none none none
Class B ............................................... none none none
Class C ............................................... none none none
Class D ............................................... none none none
MAXIMUM CONTINGENT DEFERRED SALES CHARGE (LOAD) (AS A
PERCENTAGE OF THE LESSER OF ORIGINAL PURCHASE PRICE OR
REDEMPTION PROCEEDS)
Class A ............................................... none (2) none (2) none (2)
Class B ............................................... 5.00%(3) 5.00%(3) 5.00%(3)
Class C ............................................... 1.00%(4) 1.00%(4) 1.00%(4)
Class D ............................................... none none none
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[Download Table]
PRECIOUS NATURAL PRO FORMA
METALS RESOURCE COMBINED
--------- ---------- -----------
REDEMPTION FEES
Class A ......... none none none
Class B ......... none none none
Class C ......... none none none
Class D ......... none none none
EXCHANGE FEE
Class A ......... none none none
Class B ......... none none none
Class C ......... none none none
Class D ......... none none none
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
[Download Table]
PRECIOUS NATURAL PRO FORMA
METALS RESOURCE COMBINED
---------- ---------- -----------
MANAGEMENT FEES
Class A ................................... 0.80% 0.62% 0.62%
Class B ................................... 0.80% 0.62% 0.62%
Class C ................................... 0.80% 0.62% 0.62%
Class D ................................... 0.80% 0.62% 0.62%
DISTRIBUTION AND SERVICE (12B-1) FEES(5)(6)
Class A ................................... 0.23% 0.24% 0.23%
Class B ................................... 1.00% 1.00% 1.00%
Class C ................................... 1.00% 1.00% 1.00%
Class D ................................... none none none
OTHER EXPENSES (7)
Class A ................................... 0.98% 0.28% 0.29%
Class B ................................... 0.98% 0.28% 0.29%
Class C ................................... 0.98% 0.28% 0.29%
Class D ................................... 0.98% 0.28% 0.29%
TOTAL ANNUAL FUND OPERATING EXPENSES
Class A ................................... 2.01% 1.14% 1.14%
Class B ................................... 2.78% 1.90% 1.91%
Class C ................................... 2.78% 1.90% 1.91%
Class D ................................... 1.78% 0.90% 0.91%
----------
(1) Reduced for purchases of $25,000 and over (see "Share Class Arrangements
-- Class A Shares" in each fund's Prospectus).
(2) Investments that are not subject to any sales charge at the time of
purchase are subject to a Contingent Deferred Sales Charge ("CDSC") of
1.00% that will be imposed on redemptions made within one year after
purchase, except for certain specific circumstances (see "Purchases,
Exchanges and Redemptions" below and "Share Class Arrangements -- Class A
Shares" in each fund's Prospectus).
(3) The CDSC is scaled down to 1.00% during the sixth year, reaching zero
thereafter.
(4) Only applicable to redemptions made within one year after purchase (see
"Purchases, Exchanges and Redemptions" below and "Share Class Arrangements
-- Class C Shares" in each fund's Prospectus).
5
(5) The 12b-1 fee is accrued daily and payable monthly. With respect to each
fund, the entire 12b-1 fee payable by Class A and a portion of the 12b-1
fee payable by each of Class B and Class C equal to 0.25% of the average
daily net assets of the class are currently characterized as a service fee
within the meaning of National Association of Securities Dealers, Inc.
("NASD") guidelines and are payments made for personal service and/ or
maintenance of shareholder accounts. The remainder of the 12b-1 fee, if
any, is an asset-based sales charge, and is a distribution fee paid to
Morgan Stanley Dean Witter Distributors Inc. (the "Distributor") to
compensate it for the services provided and the expenses borne by the
Distributor and others in the distribution of each fund's shares (see
"Description of Shares" below and "Share Class Arrangements" in each
fund's Prospectus).
(6) Upon conversion of Class B shares to Class A shares, such shares will be
subject to the lower 12b-1 fee applicable to Class A shares. No sales
charge is imposed at the time of conversion of Class B shares to Class A
shares. Class C shares do not have a conversion feature and, therefore,
are subject to an ongoing 1.00% 12b-1 fee (see "Description of Shares"
below and "Share Class Arrangements" in each fund's Prospectus).
(7) The Investment Manager has agreed to reimburse or waive $50,000 in
expenses of the Combined Fund for the first year of combined operations.
EXAMPLE
To attempt to show the effect of these expenses on an investment over time,
the hypotheticals shown below have been created. The Example assumes that an
investor invests $10,000 in either Precious Metals or Natural Resource or the
new combined fund (Natural Resource), that the investment has a 5% return each
year and that the operating expenses for each fund remain the same (as set forth
in the chart above). Although a shareholder's actual costs may be higher or
lower, the tables below show a shareholder's costs at the end of each period
based on these assumptions depending upon whether or not a shareholder sold his
shares at the end of each period.
If a Shareholder SOLD His Shares:
[Download Table]
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
Precious Metals
Class A ......... $718 $1,122 $1,551 $2,740
Class B ......... $781 $1,162 $1,669 $3,109
Class C ......... $381 $ 862 $1,469 $3,109
Class D ......... $181 $ 560 $ 964 $2,095
Natural Resource
Class A ......... $640 $ 870 $1,120 $1,840
Class B ......... $690 $ 900 $1,230 $2,220
Class C ......... $290 $ 600 $1,030 $2,220
Class D ......... $ 90 $ 290 $ 500 $1,110
Pro Forma Combined
Class A ......... $640 $ 870 $1,120 $1,840
Class B ......... $690 $ 900 $1,230 $2,230
Class C ......... $290 $ 600 $1,030 $2,230
Class D ......... $ 90 $ 290 $ 500 $1,120
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A Shareholder HELD His Shares:
[Download Table]
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
Precious Metals
Class A ......... $718 $1,122 $1,551 $2,740
Class B ......... $281 $ 862 $1,469 $3,109
Class C ......... $281 $ 862 $1,469 $3,109
Class D ......... $181 $ 560 $ 964 $2,095
Natural Resource
Class A ......... $640 $ 870 $1,120 $1,840
Class B ......... $190 $ 600 $1,030 $2,220
Class C ......... $190 $ 600 $1,030 $2,220
Class D ......... $ 90 $ 290 $ 500 $1,110
Pro Forma Combined
Class A ......... $640 $ 870 $1,120 $1,840
Class B ......... $190 $ 600 $1,030 $2,230
Class C ......... $190 $ 600 $1,030 $2,230
Class D ......... $ 90 $ 290 $ 500 $1,120
LONG-TERM SHAREHOLDERS OF CLASS A, CLASS B AND CLASS C SHARES OF PRECIOUS
METALS AND NATURAL RESOURCE MAY PAY MORE IN SALES CHARGES INCLUDING DISTRIBUTION
FEES THAN THE ECONOMIC EQUIVALENT OF THE MAXIMUM FRONT-END SALES CHARGES
PERMITTED BY THE NASD.
The purpose of the foregoing fee table is to assist the investor or
shareholder in understanding the various costs and expenses that an investor or
shareholder in the fund will bear directly or indirectly. For a more complete
description of these costs and expenses, see "Comparison of Precious Metals and
Natural Resource -- Investment Management and Distribution Plan Fees, Other
Significant Fees, and Purchases, Exchanges and Redemptions" below.
TAX CONSEQUENCES OF THE REORGANIZATION
As a condition to the Reorganization, Precious Metals will receive an
opinion of Mayer, Brown & Platt to the effect that the Reorganization will
constitute a tax-free reorganization for Federal income tax purposes, and that
no gain or loss will be recognized by Precious Metals or the shareholders of
Precious Metals for Federal income tax purposes as a result of the transactions
included in the Reorganization. For further information about the tax
consequences of the Reorganization, see "The Reorganization -- Tax Aspects of
the Reorganization" below.
COMPARISON OF PRECIOUS METALS AND NATURAL RESOURCE
INVESTMENT OBJECTIVES AND POLICIES. Precious Metals and Natural Resource
are funds which have similar although not identical investment objectives. The
investment objective of Precious Metals is long-term capital appreciation. The
investment objective of Natural Resource is capital growth.
Precious Metals seeks to achieve its investment objective by normally
investing at least 65% of its assets in the common stock and other securities of
companies principally engaged in the precious metals and minerals business.
These include companies engaged in the exploration, mining, fabrication,
processing, distribution or trading of precious metals and minerals -- or in
financing, managing or operating companies engaged in these activities. Precious
Metals may also invest a portion of its assets in gold, silver, platinum and
palladium bullion
7
and coins (or certificates, receipts or contracts representing ownership
interests in these metals). Natural Resource seeks to achieve its investment
objective by normally investing at least 65% of its assets in common stocks of
companies engaged in the natural resource and related areas. These include
companies involved in the exploration, development, production or distribution
of natural resources or in the development of energy-efficient technologies or
in providing natural resource related supplies or services. In addition to
precious metals, such natural resources also include oil, gas, coal, minerals,
water, timberland and forest products. Up to 35% of the assets of Precious
Metals may be invested in common stocks of companies not engaged in the precious
metals and minerals business, as well as in U.S. Government securities and money
market instruments. Natural Resource may invest up to 35% of its assets in
common stock of companies not in the natural resources areas, as well as in
investment grade corporate debt securities, U.S. Government securities and money
market instruments. Both funds may invest greater than 35% of their assets in
various money market instruments or cash when market conditions warrant a
reduction of the funds' securities holdings in order to adopt a temporary
defensive posture. The processes by which each fund selects common stocks and
other investments may differ and are more fully described under "Comparison of
Investment Objectives, Policies and Restrictions" below.
The principal differences between the funds' investment policies, as well
as certain similarities, are more fully described under "Comparison of
Investment Objectives, Policies and Restrictions" below.
The investment policies of both Precious Metals and Natural Resource are
not fundamental and may be changed by their respective Boards of Trustees.
INVESTMENT MANAGEMENT AND DISTRIBUTION PLAN FEES. Precious Metals and
Natural Resource obtain management services from MSDW Advisors. With respect to
Precious Metals, the fund pays MSDW Advisors monthly compensation calculated
daily at an annual rate of 0.80% of the fund's average daily net assets. With
respect to Natural Resource, the fund pays MSDW Advisors monthly compensation
calculated daily by applying the annual rate of 0.625% to the portion of the
fund's average daily net assets not exceeding $250 million and 0.50% to the
portion of such daily net assets exceeding $250 million. Each class of both
funds' shares is subject to the same management fee rates applicable to the
respective fund.
Both Precious Metals and Natural Resource have adopted similar distribution
plans ("Plans") pursuant to Rule 12b-1 under the 1940 Act. In the case of Class
A and Class C shares, each fund's Plan provides that the fund will reimburse the
Distributor and others for the expenses of certain activities and services
incurred by them in connection with the distribution of the Class A and Class C
Shares of the fund. Reimbursement for these expenses is made in monthly payments
by each fund to the Distributor which will in no event exceed amounts equal to
payments at the annual rates of 0.25% and 1.0% of the average daily net assets
of Class A and Class C shares, respectively. In the case of Class B shares,
Precious Metals's Plan provides that the fund will pay the Distributor a fee,
which is accrued daily and paid monthly, at the annual rate of 1.0% of the
lesser of (a) the average daily net sales of the fund's Class B shares or (b)
the average daily net assets of Class B of the fund. In the case of Natural
Resource's Class B shares, Natural Resource's Plan provides that the fund will
pay the Distributor a fee, which is accrued daily and paid monthly, at the
annual rate of (i) 1.0% of the lesser of (a) the average daily net sales of the
fund's Class B shares since the implementation of the Plan on July 2, 1984 or
(b) the average daily net assets of Class B attributable to shares issued, net
of related shares redeemed, since implementation of the Plan. The fee is paid
for the services provided and the expenses borne by the Distributor and others
in connection with the distribution of each fund's Class B shares. There are no
12b-1 fees applicable to both funds' Class D shares. For further information
relating to the 12b-1 fees applicable to each class of Natural Resource's
shares, see the section entitled "Share Class Arrangements" in Natural
Resource's Prospectus, attached hereto. The Distributor also receives the
proceeds of any contingent deferred sales charge ("CDSC") paid by the funds'
shareholders at the time of redemption. The CDSC schedules applicable to each of
Precious Metals and Natural Resource are set forth below under "Purchases,
Exchanges and Redemptions."
8
OTHER SIGNIFICANT FEES. Both Precious Metals and Natural Resource pay
additional fees in connection with their operations, including legal, auditing,
transfer agent, trustees fees and custodial fees. See "Synopsis -- Fee Table"
above for the percentage of average net assets represented by such "Other
Expenses."
PURCHASES, EXCHANGES AND REDEMPTIONS. Class A shares of each fund are sold
at net asset value plus an initial sales charge of up to 5.25%. The initial
sales charge is reduced for certain purchases. Investments of $1 million or more
(and investment by certain other limited categories of investors) are not
subject to any sales charges at the time of purchase, but are subject to a CDSC
of 1.0% on redemptions made within one year after purchase (except for certain
specific circumstances fully described in each fund's Prospectus).
Class B shares of each fund are offered at net asset value with no initial
sales charge, but are subject to the same CDSC schedule set forth below (Class B
shares of each fund purchased by certain qualified employer sponsored benefit
plans are subject to a reduced CDSC schedule):
[Download Table]
CLASS B SHARES OF PRECIOUS METALS AND
YEAR SINCE PURCHASE PAYMENT MADE NATURAL RESOURCE
------------------------------------- --------------------------------------
First .......................... 5.0%
Second ......................... 4.0%
Third .......................... 3.0%
Fourth ......................... 2.0%
Fifth .......................... 2.0%
Sixth .......................... 1.0%
Seventh and thereafter ......... none
Class C shares of each fund are sold at net asset value with no initial
sales charge, but are subject to a CDSC of 1.0% on redemptions made within one
year after purchase. The CDSC may be waived for certain redemptions (which are
fully described under the section "Share Class Arrangements" in each fund's
Prospectus).
Class D shares of each fund are available only to limited categories of
investors and are sold at net asset value with no initial sales charge or CDSC.
The CDSC charge is paid to the Distributor. Shares of Natural Resource and
Precious Metals are distributed by the Distributor and offered by Dean Witter
Reynolds Inc. and other dealers who have entered into selected dealer agreements
with the Distributor. For further information relating to the CDSC schedules
applicable to each of the classes of Natural Resource's shares, see the section
entitled "Share Class Arrangements" in Natural Resource's Prospectus.
Shares of each class of Precious Metals and Natural Resource may be
exchanged for shares of the same class of any other Morgan Stanley Dean Witter
Fund that offers its shares in more than one class, without the imposition of an
exchange fee. Additionally, shares of each class of Precious Metals and Natural
Resource may be exchanged for shares of Morgan Stanley Dean Witter Short-Term
U.S. Treasury Trust, Morgan Stanley Dean Witter North American Government Income
Trust, Morgan Stanley Dean Witter Limited Term Municipal Trust, Morgan Stanley
Dean Witter Short-Term Bond Fund and the five Morgan Stanley Dean Witter Funds
that are money market funds (the foregoing eight funds are collectively referred
to as the "Exchange Funds"), without the imposition of an exchange fee. Class A
shares of Precious Metals and Natural Resource may also be exchanged for shares
of Morgan Stanley Dean Witter Multi-State Municipal Series Trust and Morgan
Stanley Dean Witter Hawaii Municipal Trust. Upon consummation of the
Reorganization, the foregoing exchange privileges will still be applicable to
shareholders of the combined fund (Natural Resource).
9
With respect to both funds, no CDSC is imposed at the time of any exchange,
although any applicable CDSC will be imposed upon ultimate redemption. During
the period of time a Natural Resource or Precious Metals shareholder remains in
an Exchange Fund, the holding period (for purposes of determining the CDSC rate)
is frozen. Both Precious Metals and Natural Resource provide telephone exchange
privileges to their shareholders. For greater details relating to exchange
privileges applicable to Natural Resource, see the section entitled "How to
Exchange Shares" in Natural Resource's Prospectus.
Shareholders of Precious Metals and Natural Resource may redeem their
shares for cash at any time at the net asset value per share next determined;
however, such redemption proceeds may be reduced by the amount of any applicable
CDSC. Both Precious Metals and Natural Resource offer a reinstatement privilege
whereby a shareholder who has not previously exercised such privilege whose
shares have been redeemed or repurchased may, within thirty-five days after the
date of redemption or repurchase, reinstate any portion or all of the proceeds
thereof in shares of the same class from which such shares were redeemed or
repurchased and receive a pro rata credit for any CDSC paid in connection with
such redemption or repurchase. Precious Metals and Natural Resource may redeem
involuntarily, at net asset value, most accounts valued at less than $100.
DIVIDENDS. Each fund declares dividends separately for each of its classes.
Precious Metals and Natural Resource each pay dividends from net investment
income at least once each year. Both funds distribute net capital gains, if any,
at least annually. Each fund, however, may determine either to distribute or to
retain all or part of any net long-term capital gains in any year for
reinvestment. With respect to each fund, dividends and capital gains
distributions are automatically reinvested in additional shares of the same
class of shares of the fund at net asset value unless the shareholder elects to
receive cash.
PRINCIPAL RISK FACTORS
The share price or net asset value of Natural Resource and Precious Metals
will fluctuate with changes in the market value of their respective portfolio
securities. The market value of the funds' portfolio securities will increase or
decrease due to a variety of economic, market and political factors, including
movements in interest rates, which cannot be predicted.
Both funds may invest their assets in foreign securities (up to 100% for
Precious Metals and up to 25% for Natural Resource) and, as such, are subject to
risks that are in addition to the risks associated with domestic securities. One
such additional risk is currency risk. While the price of a fund's 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
political and economic developments abroad, including the possibility of
expropriations or confiscatory taxation, limitations on the use or transfer of
fund assets and any effects of foreign social, economic or political
instability. Foreign companies are not subject to the regulatory requirements of
U.S. companies and, as such, there may be less publicly available information
about such companies. Moreover, foreign companies are not subject to uniform
accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies. Additionally, securities of
foreign issuers may be less liquid than comparable securities of U.S. issuers
and, as such, their price changes may be more volatile. Furthermore, foreign
exchanges and broker-dealers are generally subject to less government and
exchange scrutiny and regulation than their American counterparts and brokerage
commissions, dealer concessions and other transaction costs may be higher on
foreign markets than in the U.S.
Because both funds concentrate their investments in particular industries,
both funds' shares may be more volatile than that of investment companies that
do not similarly concentrate their investments and the overall
10
portfolio of each fund could decline due to developments specific to their
respective industries. Precious Metals invests to a greater extent than Natural
Resource in gold and other precious metals and minerals. Investments related to
gold and other precious metals and minerals are considered speculative and are
impacted by a host of world-wide economic, financial and political factors.
Prices of gold and other precious metals may fluctuate widely over short periods
of time due to changes in inflation or expectations regarding inflation in
various countries, the availability of supplies of these precious metals,
changes in industrial and commercial demand, and metal sales by governments,
central banks or international agencies. Prices also may fluctuate widely due to
investment speculation, monetary and other economic policies of various
governments and governmental restrictions on the private ownership of certain
precious metals and minerals. Additionally, the precious metals and minerals
securities in which Precious Metals may invest may not necessarily move in
tandem with the prices of actual precious metals and minerals. At the present
time, there are five major producers of gold bullion. In order of magnitude they
are: the Republic of South Africa, the successor states of the former Soviet
Union, Canada, the United States and Australia. Political and economic
conditions in these countries may have a direct effect on the mining,
distribution and price of gold and sales of central bank gold holdings.
Investments in natural resource industries can be significantly affected by
events relating to those industries, such as international political and
economic developments, energy conservation, the success of exploration projects,
tax and other government regulations, as well as other factors.
Precious Metals and Natural Resource each may enter into foreign currency
exchange contracts when purchasing foreign securities in order to facilitate
settlement and to limit the effect of changes in the relationship between the
U.S. dollar and the foreign currency during the period between trade date and
settlement date. Both Precious Metals and Natural Resource may engage in options
and futures transactions which involve certain risks. Additionally, both funds
may enter into repurchase agreements, may purchase securities on a when-issued
and delayed delivery basis, or on a when, as and if issued basis, may lend their
portfolio securities, and may enter into options and futures transactions, all
of which involve certain special risks.
The foregoing discussion is a summary of the principal risk factors. For a
more complete discussion of the risks of each fund, see "Principal Risks" and
"Additional Risk Information" in the Prospectus of Precious Metals and in
Natural Resource's Prospectus attached hereto and incorporated herein by
reference.
THE REORGANIZATION
THE PROPOSAL
The Board of Trustees of Precious Metals, including the Independent
Trustees, having reviewed the financial position of Precious Metals and the
prospects for achieving economies of scale through the Reorganization and having
determined that the Reorganization is in the best interests of Precious Metals
and its Shareholders and that the interests of Shareholders will not be diluted
as a result thereof, recommends approval of the Reorganization by Shareholders
of Precious Metals.
THE BOARD'S CONSIDERATION
At a meeting held on July 29, 1999, the Board, including all of the
Independent Trustees, unanimously approved the Reorganization Agreement and
determined to recommend that Shareholders approve the Reorganization Agreement.
In reaching this decision, the Board made an extensive inquiry into a number of
factors, particularly the comparative expenses currently incurred in the
operations of Precious Metals and Natural Resource. The Board also considered
other factors, including, but not limited to: the steadily shrinking
11
asset base of Precious Metals which may affect the long-term economic viability
of the fund because of higher costs and disadvantageous economies of scale; the
general compatibility of the investment objectives, policies, restrictions and
portfolios of Precious Metals and Natural Resource; the terms and conditions of
the Reorganization which would affect the price of shares to be issued in the
Reorganization; the tax-free nature of the Reorganization; and any direct or
indirect costs to be incurred by Precious Metals and Natural Resource in
connection with the Reorganization.
In recommending the Reorganization to Shareholders, the Board of Precious
Metals considered that the Reorganization would have the following benefits to
Shareholders:
1. Once the Reorganization is consummated, the expenses which would be
borne by shareholders of each class of the "combined fund" will be significantly
lower on a percentage basis than the expenses per share of each corresponding
class of Precious Metals. In part, this is because the estimated current rate of
the investment management fee to be paid by the surviving Natural Resource
(0.62% of average daily net assets) would be lower than the rate of the
investment management fee currently paid by Precious Metals (0.80% of average
daily net assets). Furthermore, to the extent that the Reorganization would
result in Shareholders becoming shareholders of a combined larger fund, further
economies of scale could be achieved since various fixed expenses (e.g.,
auditing and legal) can be spread over a larger number of shares. The Board
noted that the expense ratio for each class of Precious Metals was higher (for
its fiscal year ended October 31, 1998) than the expense ratio for each
corresponding class of Natural Resource (for its fiscal year ended February 28,
1999).
2. Shareholders will be able to participate in an expanded diversified
portfolio of worldwide issuers consisting not only of precious metals companies
but also other companies in the entire natural resources industry, through
investment in Natural Resource.
3. The Reorganization is intended to qualify as a tax-free reorganization
for Federal income tax purposes, pursuant to which no gain or loss will be
recognized by Precious Metals or its Shareholders for Federal income tax
purposes as a result of transactions included in the Reorganization.
4. The Board also took into consideration that absent the Reorganization,
Natural Resource will continue to compete for investor funds with Precious
Metals and that it appeared unlikely that Precious Metals would experience a
material growth in assets in the future. The Reorganization should allow for
more concentrated selling efforts to the benefit of both Precious Metals and
Natural Resource shareholders and avoid the inefficiencies associated with the
operation and distribution of two similar funds through the same sales
organization.
The Board of Trustees of Natural Resource, including a majority of the
Independent Trustees of Natural Resource, also have determined that the
Reorganization is in the best interests of Natural Resource and its shareholders
and that the interests of existing shareholders of Natural Resource will not be
diluted as a result thereof. The transaction will enable Natural Resource to
acquire investment securities which are consistent with Natural Resource's
investment objective, without the brokerage costs attendant to the purchase of
such securities in the market. Also, the addition of assets to Natural
Resource's portfolio will cause Natural Resource to reach a lower breakpoint
rate reduction in the investment management fee resulting from the addition of
more assets at a lower breakpoint in the management fee schedule. As a result,
future additions of assets will be assessed at the lower rate. Furthermore, like
the Shareholders of Precious Metals, the shareholders of Natural Resource may
also realize an intangible benefit in having the Morgan Stanley Dean Witter
sales organization concentrate its selling efforts on one rather than two
similar funds, which may result in further economies of scale. Finally, the
Board considered that even if the benefits enumerated above are not realized,
the costs to the Fund are sufficiently minor to warrant taking the opportunity
to realize those benefits.
12
THE REORGANIZATION AGREEMENT
The terms and conditions under which the Reorganization would be
consummated, as summarized below, are set forth in the Reorganization Agreement.
This summary is qualified in its entirety by reference to the Reorganization
Agreement, a copy of which is attached as Exhibit A to this Proxy Statement and
Prospectus.
The Reorganization Agreement provides that (i) Precious Metals will
transfer all of its assets, including portfolio securities, cash (other than
cash amounts retained by Precious Metals as a "Cash Reserve" in the amount
sufficient to discharge its liabilities not discharged prior to the Valuation
Date (as defined below) and for expenses of the dissolution), cash equivalents
and receivables to Natural Resource on the Closing Date in exchange for the
assumption by Natural Resource of stated liabilities of Precious Metals,
including all expenses, costs, charges and reserves, as reflected on an
unaudited statement of assets and liabilities of Precious Metals prepared by the
Treasurer of Precious Metals as of the Valuation Date (as defined below) in
accordance with generally accepted accounting principles consistently applied
from the prior audited period, and the delivery of the Natural Resource Shares;
(ii) such Natural Resource Shares would be distributed to Shareholders on the
Closing Date or as soon as practicable thereafter; (iii) Precious Metals would
be dissolved; and (iv) the outstanding shares of Precious Metals would be
canceled.
The number of Natural Resource Shares to be delivered to Precious Metals
will be determined by dividing the aggregate net asset value of each class of
shares of Precious Metals acquired by Natural Resource by the net asset value
per share of the corresponding class of shares of Natural Resource; these values
will be calculated as of the close of business of the New York Stock Exchange on
the third business day following the receipt of the requisite approval by
Shareholders of the Reorganization Agreement or at such other time as Precious
Metals and Natural Resource may agree (the "Valuation Date"). As an
illustration, assume that on the Valuation Date, Class B shares of Precious
Metals had an aggregate net asset value (not including any Cash Reserve of
Precious Metals) of $100,000. If the net asset value per Class B share of
Natural Resource were $10 per share at the close of business on the Valuation
Date, the number of Class B shares Natural Resource to be issued would be 10,000
($100,000 (divided by) $10). These 10,000 Class B shares of Natural Resource
would be distributed to the former Class B shareholders of Precious Metals. This
example is given for illustration purposes only and does not bear any
relationship to the dollar amounts or shares expected to be involved in the
Reorganization.
On the Closing Date or as soon as practicable thereafter, Precious Metals
will distribute pro rata to its Shareholders of record as of the close of
business on the Valuation Date, the Natural Resource Shares it receives. Each
Shareholder will receive the class of shares of Natural Resource that
corresponds to the class of shares of Precious Metals currently held by that
Shareholder. Accordingly, the Natural Resource Shares will be distributed as
follows: each of the Class A, Class B, Class C and Class D shares of Natural
Resource will be distributed to holders of Class A, Class B, Class C and Class D
shares of Precious Metals, respectively. Natural Resource will cause its
transfer agent to credit and confirm an appropriate number of Natural Resource
Shares to each Shareholder. Certificates for Natural Resource Shares will be
issued only upon written request of a Shareholder and only for whole shares,
with fractional shares credited to the name of the Shareholder on the books of
Natural Resource. Shareholders who wish to receive certificates representing
their Natural Resource Shares must, after receipt of their confirmations, make a
written request to Natural Resource's transfer agent Morgan Stanley Dean Witter
Trust FSB, Harborside Financial Center, Jersey City, New Jersey 07311.
Shareholders of Precious Metals holding their shares in certificate form will be
asked to surrender such certificates in connection with the Reorganization.
Shareholders who do not surrender their certificates prior to the Closing Date
will still receive their shares of Natural Resource; however, such Shareholders
will not be able to redeem, transfer or exchange the Natural Resource Shares
received until the old certificates have been surrendered.
13
The Closing Date will be the next business day following the Valuation
Date. The consummation of the Reorganization is contingent upon the approval of
the Reorganization by the Shareholders and the receipt of the other opinions and
certificates set forth in Sections 6, 7 and 8 of the Reorganization Agreement
and the occurrence of the events described in those Sections, certain of which
may be waived by Precious Metals or Natural Resource. The Reorganization
Agreement may be amended in any mutually agreeable manner. All expenses of this
solicitation, including the cost of preparing and mailing this Proxy Statement
and Prospectus, will be borne by Precious Metals, which expenses are expected to
approximate $125,000. Precious Metals and Natural Resource will bear all of
their respective other expenses associated with the Reorganization.
The Reorganization Agreement may be terminated and the Reorganization
abandoned at any time, before or after approval by Shareholders or by mutual
consent of Precious Metals and Natural Resource. In addition, either party may
terminate the Reorganization Agreement upon the occurrence of a material breach
of the Reorganization Agreement by the other party or if, by March 31, 2000, any
condition set forth in the Reorganization Agreement has not been fulfilled or
waived by the party entitled to its benefits.
Under the Reorganization Agreement, within one year after the Closing Date,
Precious Metals shall: either pay or make provision for all of its liabilities
and distribute any remaining amount of the Cash Reserve (after paying or making
provision for such liabilities and the estimated cost of making the
distribution) to former Shareholders of Precious Metals that received Natural
Resource Shares. Precious Metals shall be dissolved and deregistered as an
investment company promptly following the distributions of shares of Natural
Resource to Shareholders of record of Precious Metals.
The effect of the Reorganization is that Shareholders who vote their shares
in favor of the Reorganization Agreement are electing to sell their shares of
Precious Metals (at net asset value on the Valuation Date calculated after
subtracting any Cash Reserve) and reinvest the proceeds in Natural Resource
Shares at net asset value and without recognition of taxable gain or loss for
Federal income tax purposes. See "Tax Aspects of the Reorganization" below. As
noted in "Tax Aspects of the Reorganization" below, if Precious Metals
recognizes net gain from the sale of securities prior to the Closing Date, such
gain, to the extent not offset by capital loss carryforwards, will be
distributed to Shareholders prior to the Closing Date and will be taxable to
Shareholders as capital gain.
Shareholders will continue to be able to redeem their shares of Precious
Metals at net asset value next determined after receipt of the redemption
request (subject to any applicable CDSC) until the close of business on the
business day next preceding the Closing Date. Redemption requests received by
Precious Metals thereafter will be treated as requests for redemption of shares
of Natural Resource.
TAX ASPECTS OF THE REORGANIZATION
At least one but not more than 20 business days prior to the Valuation
Date, Precious Metals will declare and pay a dividend or dividends which,
together with all previous such dividends, will have the effect of distributing
to Shareholders all of Precious Metals' investment company taxable income for
all periods since the inception of Precious Metals through and including the
Valuation Date (computed without regard to any dividends paid deduction), and
all of Precious Metals' net capital gain, if any, realized in such periods
(after reduction for any capital loss carryforward).
The Reorganization is intended to qualify for Federal income tax purposes
as a tax-free reorganization under Section 368(a)(1)(C) of the Internal Revenue
Code of 1986, as amended (the "Code").
As a condition to the Reorganization, Precious Metals and Natural Resource
will receive an opinion of Mayer, Brown & Platt to the effect that, based on
certain assumptions, facts, the terms of the Reorganization Agreement and
representations set forth in the Reorganization Agreement or otherwise provided
by Precious
14
Metals and Natural Resource (including a representation to the effect that
Natural Resource has no plan or intention to sell or otherwise dispose of more
than fifty percent of the assets of Precious Metals acquired in the
Reorganization except for dispositions made in the ordinary course of business):
1. The transfer of Precious Metals' assets in exchange for the Natural
Resource Shares and the assumption by Natural Resource of certain stated
liabilities of Precious Metals followed by the distribution by Precious Metals
of the Natural Resource Shares to Shareholders in exchange for their Precious
Metals shares pursuant to and in accordance with the terms of the Reorganization
Agreement will constitute a "reorganization" within the meaning of Section
368(a)(1)(C) of the Code, and Precious Metals and Natural Resource will each be
a "party to a reorganization" within the meaning of Section 368(b) of the Code;
2. No gain or loss will be recognized by Natural Resource upon the receipt
of the assets of Precious Metals solely in exchange for the Natural Resource
Shares and the assumption by Natural Resource of the stated liabilities of
Precious Metals;
3. No gain or loss will be recognized by Precious Metals upon the transfer
of the assets of Precious Metals to Natural Resource in exchange for the Natural
Resource Shares and the assumption by Natural Resource of the stated liabilities
or upon the distribution of Natural Resource Shares to Shareholders in exchange
for their Precious Metals shares;
4. No gain or loss will be recognized by Shareholders upon the exchange of
the shares of Precious Metals for the Natural Resource Shares;
5. The aggregate tax basis for the Natural Resource Shares received by each
of the Shareholders pursuant to the Reorganization will be the same as the
aggregate tax basis of the shares in Precious Metals held by each such
Shareholder immediately prior to the Reorganization;
6. The holding period of the Natural Resource Shares to be received by each
Shareholder will include the period during which the shares in Precious Metals
surrendered in exchange therefor were held (provided such shares in Precious
Metals were held as capital assets on the date of the Reorganization);
7. The tax basis of the assets of Precious Metals acquired by Natural
Resource will be the same as the tax basis of such assets of Precious Metals
immediately prior to the Reorganization; and
8. The holding period of the assets of Precious Metals in the hands of
Natural Resource will include the period during which those assets were held by
Precious Metals.
SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE EFFECT, IF
ANY, OF THE PROPOSED TRANSACTION IN LIGHT OF THEIR INDIVIDUAL CIRCUMSTANCES.
BECAUSE THE FOREGOING DISCUSSION ONLY RELATES TO THE FEDERAL INCOME TAX
CONSEQUENCES OF THE PROPOSED TRANSACTION, SHAREHOLDERS SHOULD ALSO CONSULT THEIR
TAX ADVISORS AS TO STATE AND LOCAL TAX CONSEQUENCES, IF ANY, OF THE PROPOSED
TRANSACTION.
DESCRIPTION OF SHARES
Natural Resource shares to be issued pursuant to the Reorganization
Agreement will, when issued, be fully paid and non-assessable by Natural
Resource and transferable without restrictions and will have no preemptive
rights. Class B shares of Natural Resource, like Class B shares of Precious
Metals, have a conversion feature pursuant to which approximately ten (10) years
after the date of the original purchase of such shares, the shares will convert
automatically to Class A shares, based on the relative net asset values of the
two classes. For greater details regarding the conversion feature, including the
method by which the 10 year period is calculated and the treatment of reinvested
dividends, see "Purchase of Fund Shares" in each fund's Prospectus.
15
CAPITALIZATION TABLE (UNAUDITED)
The following table sets forth the capitalization of Natural Resource and
Precious Metals as of June 30, 1999 and on a pro forma combined basis as if the
Reorganization had occurred on that date:
[Download Table]
NET ASSET
SHARES VALUE
NET ASSETS OUTSTANDING PER SHARE
-------------- ------------- ----------
CLASS A
-----------------------------------
Precious Metals ................... $ 1,258,234 263,581 $ 4.77
Natural Resource .................. $ 1,027,034 76,852 $ 13.36
Combined Fund (pro forma) ......... $ 2,285,268 171,031 $ 13.36
CLASS B
------------------------------------
Precious Metals ................... $ 27,659,664 5,884,748 $ 4.70
Natural Resource .................. $190,824,589 14,493,803 $ 13.17
Combined Fund (pro forma) ......... $218,484,253 16,594,005 $ 13.17
CLASS C
------------------------------------
Precious Metals ................... $ 1,893,501 403,014 $ 4.70
Natural Resource .................. $ 2,183,056 166,013 $ 13.15
Combined Fund (pro forma) ......... $ 4,076,557 310,005 $ 13.15
CLASS D
------------------------------------
Precious Metals ................... $ 780,594 164,832 $ 4.74
Natural Resource .................. $ 21,052,317 1,568,281 $ 13.42
Combined Fund (pro forma) ......... $ 21,832,911 1,626,447 $ 13.42
APPRAISAL RIGHTS
Shareholders will have no appraisal rights in connection with the
Reorganization.
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES AND POLICIES
Precious Metals and Natural Resource each are funds which have similar
although not identical investment objectives. The investment objective of
Precious Metals is long-term capital appreciation. The investment objective of
Natural Resource is capital growth. Precious Metals concentrates its investments
in the precious metals and minerals industry. Natural Resource concentrates its
investments in the natural resource industry which is a broad industry group
that includes not only precious metals and minerals but additionally oil, gas,
coal, water, timberland and forest products. Both funds seek to achieve their
objectives by investing principally in a diversified portfolio of securities in
accordance with their respective investment strategies set forth below.
Natural Resource normally invests at least 65% of its assets in common
stocks of domestic and foreign companies engaged in the natural resource and
related business such as in the exploration, development, production or
distribution of natural resources, the development of energy-efficient
technologies or in providing natural resource related supplies or services.
In selecting securities for Natural Resource, the Investment Manager
invests in companies that it believes are responsive to domestic and world
demand for natural resources. Such companies may include those which own or
process natural resources, such as precious metals, other minerals, water,
timberland and forest
16
products; own or produce sources of energy such as oil, natural gas, coal,
uranium, geothermal, oil shale and biomass; participate in the exploration for
and development of natural resource supplies from new and conventional sources;
own or control oil, gas, or other mineral leases, rights or royalty interests;
provide natural resource transportation, distribution or processing services,
such as refining and pipeline services; provide related services or supplies,
such as drilling, well servicing, chemicals, parts and equipment; or contribute
energy-efficient technologies, such as systems for energy conversion,
conservation and pollution control.
Precious Metals normally invests at least 65% of its assets in common stock
and other securities of foreign and domestic companies engaged in the precious
metals and minerals business such as companies engaged in the exploration,
mining, fabrication, processing, distribution or trading of precious metals and
minerals or in financing, managing or operating companies engaged in these
activities. The Investment Manager invests in companies which it believes have
growth potential based on a wide variety of factors.
Both Precious Metals and Natural Resource respectively may invest up to 35%
of their total assets in common stock of companies not in the precious metals or
natural resource businesses, in U.S. Government securities, corporate debt
securities rated investment grade by Moody's or S&P or if not rated, as deemed
to be of comparable quality by the Adviser (Natural Resource), and money market
instruments.
During periods in which, in the opinion of the Investment Manager, market
conditions warrant a reduction of some or all of each fund's securities
holdings, each fund may adopt a temporary "defensive" posture in which greater
than 35% of each fund's total assets are invested in money market instruments or
cash.
Both funds invest their assets in foreign securities, including securities
of foreign issuers denominated in foreign currencies or in the form of American
Depository Receipts ("ADRs") or European Depository Receipts ("EDRs"); however,
Natural Resource may only invest up to 25% of its total assets in securities of
foreign issuers which are not Canadian issuers or which are not listed in the
U.S. on a national securities exchange while Precious Metals has no such policy.
Additionally, Precious Metals may enter into forward foreign currency exchange
contracts in connection with its foreign securities investments as a hedge
against fluctuations in future foreign exchange rates.
Both Precious Metals and Natural Resource may engage in options and futures
transactions. Both funds may purchase and sell (write) options on portfolio
securities denominated in U.S. dollars and foreign currencies (Precious Metals)
and may purchase and sell (write) options on the U.S. dollar and foreign
currencies (Precious Metals) which are or may be in the future listed on U.S.
and foreign securities exchanges or are written in over-the-counter transactions
("OTC options"). Both funds may write covered call options on portfolio
securities and currencies (Precious Metals) without limit, in order to hedge
against the decline in the value of a security or currency (Precious Metals) in
which such security is denominated and to close out long call option positions.
Both funds also may purchase listed and OTC call and put options in amounts
equaling up to 10% of their respective total assets and may invest in stock
index options. Both funds may purchase call and put options to close out covered
call or written put positions, as applicable, or to protect the value of the
relevant security. Both funds may purchase and sell futures contracts that are
currently traded, or may in the future be traded, on U.S. and foreign commodity
exchanges on underlying portfolio securities, on any currency (Precious Metals)
("currency" futures), as well as on U.S. and foreign fixed-income securities
("interest rate" futures) and on such indexes of U.S. or foreign equity or
fixed-income securities as may exist or come into being ("index" futures).
Both Natural Resource and Precious Metals may (i) purchase securities on a
when-issued or delayed delivery basis, (ii) purchase or sell securities on a
forward commitment basis, (iii) purchase securities on a "when, as and if
issued" basis, (iv) enter into repurchase agreements subject to certain
procedures designed to minimize risks associated with such agreements, (v)
purchase rights and warrants, (vi) invest in zero coupon securities and (vii)
invest up to 5% of their respective total assets in securities which are subject
to restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended, or which are not otherwise readily
marketable (both funds do not include Rule 144A securities in this limitation).
17
The investment policies of both Precious Metals and Natural Resource are
not fundamental and may be changed by their respective Boards. The foregoing
discussion is a summary of the principal differences and similarities between
the investment policies of the funds. For a more complete discussion of each
fund's policies, see "Principal Investment Strategies" and "Additional
Investment Strategy Information" in each fund's Prospectus and "Description of
the Fund and Its Investments and Risks" in each fund's Statement of Additional
Information.
INVESTMENT RESTRICTIONS
The investment restrictions adopted by Precious Metals and Natural Resource
as fundamental policies are substantially similar and are summarized under the
caption "Description of the Fund and Its Investments and Risks -- Fund
Policies/Investment Restrictions" in their respective Statements of Additional
Information. A fundamental investment restriction cannot be changed without the
vote of the majority of the outstanding voting securities of a fund, as defined
in the 1940 Act. The material differences are as follows: (a) Natural Resource
may not, as to 100% of its total assets, invest more than 5% of the value of its
total assets in the securities of any one issuer (other than U.S. Government
securities); Precious Metals has a similar restriction with respect to 75% of
its total assets; (b) Precious Metals may not purchase warrants if as a result
the fund would have more than 5% of its net assets invested in warrants or more
than 2% of its net assets invested in warrants not listed on the New York or
American Stock Exchange; Natural Resource has adopted this restriction but not
as a fundamental policy; and (c) Natural Resource may not purchase securities of
other investment companies except in connection with a merger, consolidation,
reorganization or acquisition of assets; Precious Metals may purchase securities
of other investment companies in an amount of up to 10% of its total assets.
ADDITIONAL INFORMATION ABOUT PRECIOUS METALS
AND NATURAL RESOURCE
GENERAL
For a discussion of the organization and operation of Natural Resource and
Precious Metals, see "The Fund and its Management," "Investment Objective and
Policies," "Investment Restrictions" and "Prospectus Summary" in, and the cover
page of, their respective Prospectuses.
FINANCIAL INFORMATION
For certain financial information about Natural Resource and Precious
Metals, see "Financial Highlights" and "Past Performance" in their respective
Prospectuses.
MANAGEMENT
For information about the respective Board of Trustees, Investment
Manager, and the Distributor of Natural Resource and Precious Metals, see "Fund
Management" in their respective Prospectuses.
DESCRIPTION OF SECURITIES AND SHAREHOLDER INQUIRIES
For a description of the nature and most significant attributes of shares
of Precious Metals and Natural Resource, and information regarding shareholder
inquiries, see Capital Stock and Other Securities in their respective Statements
of Additional Information.
18
DIVIDENDS, DISTRIBUTIONS AND TAXES
For a discussion of Natural Resource's and Precious Metals' policies with
respect to dividends, distributions and taxes, see "Distributions" and "Tax
Consequences" in their respective Prospectuses as well as the discussion herein
under "Synopsis -- Purchases, Exchanges and Redemptions."
PURCHASES, REPURCHASES AND REDEMPTIONS
For a discussion of how Natural Resource's and Precious Metals' shares may
be purchased, repurchased and redeemed, see "How to Buy Shares," "How to
Exchange Shares" and "How to Sell Shares" in their respective Prospectuses.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
For a discussion of Natural Resource's performance, see management's letter
to shareholders in its Annual Report for its fiscal year ended February 28, 1999
accompanying this Proxy Statement and Prospectus. For a discussion of the
performance of Precious Metals, see its Annual Report for its fiscal year ended
October 31, 1998 and its unaudited Semi-Annual Report for the six months ended
April 30, 1999.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of Natural Resource, for the year ended February
28, 1999, and Precious Metals, for the year ended October 31, 1998 that are
incorporated by reference in the Statement of Additional Information relating to
the Registration Statement on Form N-14 of which this Proxy Statement and
Prospectus forms a part, have been audited by PricewaterhouseCoopers LLP,
independent accountants. The financial statements have been incorporated by
reference in reliance upon such reports given upon the authority of
PricewaterhouseCoopers LLP as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Natural Resource
will be passed upon by Mayer, Brown & Platt, New York, New York. Such firm will
rely on Piper & Marbury L.L.P. as to matters of Maryland law.
19
AVAILABLE INFORMATION
Additional information about Precious Metals and Natural Resource is
available, as applicable, in the following documents which are incorporated
herein by reference: (i) Natural Resource's Prospectus dated June 30, 1999,
attached to this Proxy Statement and Prospectus, which Prospectus forms a part
of Post-Effective Amendment No. 26 to Natural Resource's Registration Statement
on Form N-1A (File Nos. 2-70421; 811-3129); (ii) Natural Resource's Annual
Report for its fiscal year ended February 28, 1999, accompanying this Proxy
Statement and Prospectus; (iii) Precious Metals' Prospectus dated February 22,
1999, which Prospectus forms a part of Post-Effective Amendment No. 11 to
Precious Metals' Registration Statement on Form N-1A (File Nos. 33-32872;
811-5988); and (iv) Precious Metals' Annual Report for its fiscal year ended
October 31, 1998 and its unaudited Semi-Annual Report for its six months ended
April 30, 1999. The foregoing documents may be obtained without charge by
calling (800) 869-NEWS (toll-free).
Precious Metals and Natural Resource are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and in
accordance therewith, file reports and other information with the Commission.
Proxy material, reports and other information about Precious Metals and Natural
Resource which are of public record can be inspected and copied at public
reference facilities maintained by the Commission at Room 1204, Judiciary Plaza,
450 Fifth Street, NW, Washington, D.C. 20549 and certain of its regional
offices, and copies of such materials can be obtained at prescribed rates from
the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, Washington, D.C. 20549.
OTHER BUSINESS
Management of Precious Metals knows of no business other than the matters
specified above which will be presented at the Meeting. Since matters not known
at the time of the solicitation may come before the Meeting, the proxy as
solicited confers discretionary authority with respect to such matters as
properly come before the Meeting, including any adjournment or adjournments
thereof, and it is the intention of the persons named as attorneys-in-fact in
the proxy to vote this proxy in accordance with their judgment on such matters.
By Order of the Board of Trustees
Barry Fink,
Secretary
September , 1999
20
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made as of this
29th day of July, 1999, by and between MORGAN STANLEY DEAN WITTER NATURAL
RESOURCE DEVELOPMENT SECURITIES INC., a Maryland corporation ("Natural
Resource") and MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST, a
Massachusetts business trust ("Precious Metals").
This Agreement is intended to be and is adopted as a "plan of
reorganization" within the meaning of Treas. Reg. 1.368-2(g), for a
reorganization under Section 368(a)(1) of the Internal Revenue Code of 1986, as
amended (the "Code"). The reorganization ("Reorganization") will consist of the
transfer to Natural Resource of substantially all of the assets of Precious
Metals in exchange for the assumption by Natural Resource of all stated
liabilities of Precious Metals and the issuance by Natural Resource of shares of
common stock, par value $0.01 per share (the "Natural Resource Shares"), to be
distributed, after the Closing Date hereinafter referred to, to the shareholders
of Precious Metals in liquidation of Precious Metals as provided herein, all
upon the terms and conditions hereinafter set forth in this Agreement.
In consideration of the premises and of the covenants and agreements
hereinafter set forth, the parties hereto covenant and agree as follows:
1. THE REORGANIZATION AND LIQUIDATION OF PRECIOUS METALS
1.1 Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, Precious Metals agrees
to assign, deliver and otherwise transfer the Precious Metals Assets (as defined
in paragraph 1.2) to Natural Resource and Natural Resource agrees in exchange
therefor to assume all of Precious Metals' stated liabilities on the Closing
Date as set forth in paragraph 1.3(a) and to deliver to Precious Metals the
number of Natural Resource Shares, including fractional Natural Resource Shares,
determined in the manner set forth in paragraph 2.3. Such transactions shall
take place at the closing provided for in paragraph 3.1 ("Closing").
1.2 (a) The "Precious Metals Assets" shall consist of all property,
including without limitation, all cash (other than the "Cash Reserve" (as
defined in paragraph 1.3(b)), cash equivalents, securities and dividend and
interest receivables owned by Precious Metals, and any deferred or prepaid
expenses shown as an asset on Precious Metals' books on the Valuation Date.
(b) On or prior to the Valuation Date, Precious Metals will provide Natural
Resource with a list of all of Precious Metals' assets to be assigned, delivered
and otherwise transferred to Natural Resource and of the stated liabilities to
be assumed by Natural Resource pursuant to this Agreement. Precious Metals
reserves the right to sell any of the securities on such list but will not,
without the prior approval of Natural Resource, acquire any additional
securities other than securities of the type in which Natural Resource is
permitted to invest and in amounts agreed to in writing by Natural Resource.
Natural Resource will, within a reasonable time prior to the Valuation Date,
furnish Precious Metals with a statement of Natural Resource's investment
objectives, policies and restrictions and a list of the securities, if any, on
the list referred to in the first sentence of this paragraph that do not conform
to Natural Resource's investment objective, policies and restrictions. In the
event that Precious Metals holds any investments that Natural Resource is not
permitted to hold, Precious Metals will dispose of such securities on or prior
to the Valuation Date. In addition, if it is determined that the portfolios of
Precious Metals and Natural Resource, when aggregated, would contain investments
exceeding certain percentage limitations imposed upon Natural Resource with
respect to such investments, Precious
A-1
Metals if requested by Natural Resource will, on or prior to the Valuation Date,
dispose of and/or reinvest a sufficient amount of such investments as may be
necessary to avoid violating such limitations as of the Closing Date (as defined
in paragraph 3.1).
1.3 (a) Precious Metals will endeavor to discharge all of its liabilities
and obligations on or prior to the Valuation Date. Natural Resource will assume
all stated liabilities, which includes, without limitation, all expenses, costs,
charges and reserves reflected on an unaudited Statement of Assets and
Liabilities of Precious Metals prepared by the Treasurer of Precious Metals as
of the Valuation Date in accordance with generally accepted accounting
principles consistently applied from the prior audited period.
(b) On the Valuation Date, Precious Metals may establish a cash reserve,
which shall not exceed 5% of Precious Metals' net assets as of the close of
business on the Valuation Date ("Cash Reserve") to be retained by Precious
Metals and used for the payment of its liabilities not discharged prior to the
Valuation Date and for the expenses of dissolution.
1.4 In order for Precious Metals to comply with Section 852(a)(1) of the
Code and to avoid having any investment company taxable income or net capital
gain (as defined in Sections 852(b)(2) and 1222(11) of the Code, respectively)
in the short taxable year ending with its dissolution, Precious Metals will on
or before the Valuation Date (a) declare a dividend in an amount large enough so
that it will have declared dividends of all of its investment company taxable
income and net capital gain, if any, for such taxable year (determined without
regard to any deduction for dividends paid) and (b) distribute such dividend.
1.5 On the Closing Date or as soon as practicable thereafter, Precious
Metals will distribute Natural Resource Shares received by Precious Metals
pursuant to paragraph 1.1 pro rata to its shareholders of record determined as
of the close of business on the Valuation Date ("Precious Metals Shareholders").
Each Precious Metals Shareholder will receive the class of shares of Natural
Resource that corresponds to the class of shares of Precious Metals currently
held by that Precious Metals Shareholder. Accordingly, the Natural Resource
Shares will be distributed as follows: each of the Class A, Class B, Class C and
Class D shares of Natural Resource will be distributed to holders of Class A,
Class B, Class C and Class D shares of Precious Metals, respectively. Such
distribution will be accomplished by an instruction, signed by Precious Metals'
Secretary, to transfer Natural Resource Shares then credited to Precious Metals'
account on the books of Natural Resource to open accounts on the books of
Natural Resource in the names of the Precious Metals Shareholders and
representing the respective pro rata number of Natural Resource Shares due such
Precious Metals Shareholders. All issued and outstanding shares of Precious
Metals simultaneously will be canceled on Precious Metals' books; however, share
certificates representing interests in Precious Metals will represent a number
of Natural Resource Shares after the Closing Date as determined in accordance
with paragraph 2.3. Natural Resource will issue certificates representing
Natural Resource Shares in connection with such exchange only upon the written
request of a Precious Metals Shareholder.
1.6 Ownership of Natural Resource Shares will be shown on the books of
Natural Resource's transfer agent. Natural Resource Shares will be issued in the
manner described in Natural Resource's current Prospectus and Statement of
Additional Information.
1.7 Any transfer taxes payable upon issuance of Natural Resource Shares in
a name other than the registered holder of Natural Resource Shares on Precious
Metals' books as of the close of business on the Valuation Date shall, as a
condition of such issuance and transfer, be paid by the person to whom Natural
Resource Shares are to be issued and transferred.
1.8 Any reporting responsibility of Precious Metals is and shall remain the
responsibility of Precious Metals up to and including the date on which Precious
Metals is dissolved and deregistered pursuant to paragraph 1.9.
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1.9 Within one year after the Closing Date, Precious Metals shall pay or
make provision for the payment of all its liabilities and taxes, and distribute
to the shareholders of Precious Metals as of the close of business on the
Valuation Date any remaining amount of the Cash Reserve (as reduced by the
estimated cost of distributing it to shareholders). If and to the extent that
any trust, escrow account, or other similar entity continues after the close of
such one-year period in connection either with making provision for payment of
liabilities or taxes or with distributions to shareholders of Precious Metals,
such entity shall either (i) qualify as a liquidating trust under Section 7701
of the Code (and applicable Treasury Regulations thereunder) or other entity
which does not constitute a continuation of Precious Metals for federal income
tax purposes, or (ii) be subject to a waiver under Section 368(a)(2)(G)(ii) of
the complete distribution requirement of Section 368(a)(2)(G)(i) of the Code.
Precious Metals shall be dissolved as a Massachusetts business trust and
deregistered as an investment company under the Investment Company Act of 1940,
as amended ("1940 Act"), promptly following the making of all distributions
pursuant to paragraph 1.5 (and, in any event, within one year after the Closing
Date).
1.10 Copies of all books and records maintained on behalf of Precious
Metals in connection with its obligations under the 1940 Act, the Code, state
blue sky laws or otherwise in connection with this Agreement will promptly after
the Closing be delivered to officers of Natural Resource or their designee and
Natural Resource or its designee shall comply with applicable record retention
requirements to which Precious Metals is subject under the 1940 Act.
2. VALUATION
2.1 The value of the Precious Metals Assets shall be the value of such
assets computed as of 4:00 p.m. on the New York Stock Exchange on the third
business day following the receipt of the requisite approval by shareholders of
Precious Metals of this Agreement or at such time on such earlier or later date
after such approval as may be mutually agreed upon in writing (such time and
date being hereinafter called the "Valuation Date"), using the valuation
procedures set forth in Natural Resource's then current Prospectus and Statement
of Additional Information.
2.2 The net asset value of a Natural Resource Share shall be the net asset
value per share computed on the Valuation Date, using the valuation procedures
set forth in Natural Resource's then current Prospectus and Statement of
Additional Information.
2.3 The number of Natural Resource Shares (including fractional shares, if
any) to be issued hereunder shall be determined, with respect to each class, by
dividing the aggregate net asset value of each class of Precious Metals shares
(determined in accordance with paragraph 2.1) by the net asset value per share
of the corresponding class of shares of Natural Resource (determined in
accordance with paragraph 2.2). For purposes of this paragraph, the aggregate
net asset value of each class of shares of Precious Metals shall not include the
amount of the Cash Reserve.
2.4 All computations of value shall be made by Morgan Stanley Dean Witter
Services Company Inc. ("MSDW Services") in accordance with its regular practice
in pricing Natural Resource. Natural Resource shall cause MSDW Services to
deliver a copy of its valuation report at the Closing.
3. CLOSING AND CLOSING DATE
3.1 The Closing shall take place on the next business day following the
Valuation Date (the "Closing Date"). The Closing shall be held as of 9:00 a.m.
Eastern time, or at such other time as the parties may agree. The Closing shall
be held in a location mutually agreeable to the parties hereto. All acts taking
place at the Closing shall be deemed to take place simultaneously as of 9:00
a.m. Eastern time on the Closing Date unless otherwise provided.
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3.2 Portfolio securities held by Precious Metals and represented by a
certificate or other written instrument shall be presented by it or on its
behalf to The Bank of New York (the "Custodian"), as custodian for Natural
Resource, for examination no later than five business days preceding the
Valuation Date. Such portfolio securities (together with any cash or other
assets) shall be delivered by Precious Metals to the Custodian for the account
of Natural Resource on or before the Closing Date in conformity with applicable
custody provisions under the 1940 Act and duly endorsed in proper form for
transfer in such condition as to constitute good delivery thereof in accordance
with the custom of brokers. The portfolio securities shall be accompanied by all
necessary Federal and state stock transfer stamps or a check for the appropriate
purchase price of such stamps. Portfolio securities and instruments deposited
with a securities depository (as defined in Rule 17f-4 under the 1940 Act) shall
be delivered on or before the Closing Date by book-entry in accordance with
customary practices of such depository and the Custodian. The cash delivered
shall be in the form of a Federal Funds wire, payable to the order of "The Bank
of New York, Custodian for Morgan Stanley Dean Witter Natural Resource
Development Securities Inc."
3.3 In the event that on the Valuation Date, (a) the New York Stock
Exchange shall be closed to trading or trading thereon shall be restricted or
(b) trading or the reporting of trading on such Exchange or elsewhere shall be
disrupted so that, in the judgment of both Natural Resource and Precious Metals,
accurate appraisal of the value of the net assets of Natural Resource or the
Precious Metals Assets is impracticable, the Valuation Date shall be postponed
until the first business day after the day when trading shall have been fully
resumed without restriction or disruption and reporting shall have been
restored.
3.4 If requested, Precious Metals shall deliver to Natural Resource or its
designee (a) at the Closing, a list, certified by its Secretary, of the names,
addresses and taxpayer identification numbers of the Precious Metals
Shareholders and the number and percentage ownership of outstanding Precious
Metals shares owned by each such Precious Metals Shareholder, all as of the
Valuation Date, and (b) as soon as practicable after the Closing, all original
documentation (including Internal Revenue Service forms, certificates,
certifications and correspondence) relating to the Precious Metals Shareholders'
taxpayer identification numbers and their liability for or exemption from
back-up withholding. Natural Resource shall issue and deliver to such Secretary
a confirmation evidencing delivery of Natural Resource Shares to be credited on
the Closing Date to Precious Metals or provide evidence satisfactory to Precious
Metals that such Natural Resource Shares have been credited to Precious Metals'
account on the books of Natural Resource. At the Closing, each party shall
deliver to the other such bills of sale, checks, assignments, share
certificates, if any, receipts or other documents as such other party or its
counsel may reasonably request.
4. COVENANTS OF NATURAL RESOURCE AND PRECIOUS METALS
4.1 Except as otherwise expressly provided herein with respect to Precious
Metals, Natural Resource and Precious Metals each will operate its business in
the ordinary course between the date hereof and the Closing Date, it being
understood that such ordinary course of business will include customary
dividends and other distributions.
4.2 Natural Resource will prepare and file with the Securities and Exchange
Commission ("Commission") a registration statement on Form N-14 under the
Securities Act of 1933, as amended ("1933 Act"), relating to Natural Resource
Shares ("Registration Statement"). Precious Metals will provide Natural Resource
with the Proxy Materials as described in paragraph 4.3 below, for inclusion in
the Registration Statement. Precious Metals will further provide Natural
Resource with such other information and documents relating to Precious Metals
as are reasonably necessary for the preparation of the Registration Statement.
4.3 Precious Metals will call a meeting of its shareholders to consider
and act upon this Agreement and to take all other action necessary to obtain
approval of the transactions contemplated herein. Precious Metals
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will prepare the notice of meeting, form of proxy and proxy statement
(collectively, "Proxy Materials") to be used in connection with such meeting;
provided that Natural Resource will furnish Precious Metals with its currently
effective prospectus for inclusion in the Proxy Materials and with such other
information relating to Natural Resource as is reasonably necessary for the
preparation of the Proxy Materials.
4.4 Precious Metals will assist Natural Resource in obtaining such
information as Natural Resource reasonably requests concerning the beneficial
ownership of Precious Metals shares.
4.5 Subject to the provisions of this Agreement, Natural Resource and
Precious Metals will each take, or cause to be taken, all action, and do or
cause to be done, all things reasonably necessary, proper or advisable to
consummate and make effective the transactions contemplated by this Agreement.
4.6 Precious Metals shall furnish or cause to be furnished to Natural
Resource within 30 days after the Closing Date a statement of Precious Metals'
assets and liabilities as of the Closing Date, which statement shall be
certified by Precious Metals' Treasurer and shall be in accordance with
generally accepted accounting principles consistently applied. As promptly as
practicable, but in any case within 60 days after the Closing Date, Precious
Metals shall furnish Natural Resource, in such form as is reasonably
satisfactory to Natural Resource, a statement certified by Precious Metals'
Treasurer of Precious Metals' earnings and profits for Federal income tax
purposes that will be carried over to Natural Resource pursuant to Section 381
of the Code.
4.7 As soon after the Closing Date as is reasonably practicable, Precious
Metals (a) shall prepare and file all Federal and other tax returns and reports
of Precious Metals required by law to be filed with respect to all periods
ending on or before the Closing Date but not theretofore filed and (b) shall pay
all Federal and other taxes shown as due thereon and/or all Federal and other
taxes that were unpaid as of the Closing Date, including without limitation, all
taxes for which the provision for payment was made as of the Closing Date (as
represented in paragraph 5.2(k)).
4.8 Natural Resource agrees to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act and the 1940 Act and to
make such filings required by the state Blue Sky and securities laws as it may
deem appropriate in order to continue its operations after the Closing Date.
5. REPRESENTATIONS AND WARRANTIES
5.1 Natural Resource represents and warrants to Precious Metals as follows:
(a) Natural Resource is a validly existing Maryland corporation with full
power to carry on its business as presently conducted;
(b) Natural Resource is a duly registered, open-end, management investment
company, and its registration with the Commission as an investment company
under the 1940 Act and the registration of its shares under the 1933 Act are
in full force and effect;
(c) All of the issued and outstanding shares of Natural Resource have been
offered and sold in compliance in all material respects with applicable
registration requirements of the 1933 Act and state securities laws. Shares
of Natural Resource are registered in all jurisdictions in which they are
required to be registered under state securities laws and other laws, and
said registrations, including any periodic reports or supplemental filings,
are complete and current, all fees required to be paid have been paid, and
Natural Resource is not subject to any stop order and is fully qualified to
sell its shares in each state in which its shares have been registered;
(d) The current Prospectus and Statement of Additional Information of
Natural Resource conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the regulations
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thereunder and do not include any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading;
(e) Natural Resource is not in, and the execution, delivery and performance
of this Agreement will not result in a, material violation of any provision
of Natural Resource's Articles of Incorporation or By-Laws or of any
agreement, indenture, instrument, contract, lease or other undertaking to
which Natural Resource is a party or by which it is bound;
(f) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or, to its
knowledge, threatened against Natural Resource or any of its properties or
assets which, if adversely determined, would materially and adversely affect
its financial condition or the conduct of its business; and Natural Resource
knows of no facts that might form the basis for the institution of such
proceedings and is not a party to or subject to the provisions of any order,
decree or judgment of any court or governmental body which materially and
adversely affects, or is reasonably likely to materially and adversely
effect, its business or its ability to consummate the transactions herein
contemplated;
(g) The Statement of Assets and Liabilities, Statement of Operations,
Statement of Changes in Net Assets and Financial Highlights for the year
ended February 28, 1999, of Natural Resource certified by
PricewaterhouseCoopers LLP (copies of which have been furnished to Precious
Metals), fairly present, in all material respects, Natural Resource's
financial condition as of such date in accordance with generally accepted
accounting principles, and its results of such operations, changes in its net
assets and financial highlights for such period, and as of such date there
were no known liabilities of Natural Resource (contingent or otherwise) not
disclosed therein that would be required in accordance with generally
accepted accounting principles to be disclosed therein;
(h) All issued and outstanding Natural Resource Shares are, and at the
Closing Date will be, duly and validly issued and outstanding, fully paid and
nonassessable with no personal liability attaching to the ownership thereof,
except as set forth under the caption "Additional Information" in Natural
Resource's current Prospectus incorporated by reference in the Registration
Statement. Natural Resource does not have outstanding any options, warrants
or other rights to subscribe for or purchase any of its shares;
(i) The execution, delivery and performance of this Agreement have been
duly authorized by all necessary action on the part of Natural Resource, and
this Agreement constitutes a valid and binding obligation of Natural Resource
enforceable in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating to
or affecting creditors rights and to general equity principles. No other
consents, authorizations or approvals are necessary in connection with
Natural Resource's performance of this Agreement;
(j) Natural Resource Shares to be issued and delivered to Precious Metals,
for the account of the Precious Metals Shareholders, pursuant to the terms of
this Agreement will at the Closing Date have been duly authorized and, when
so issued and delivered, will be duly and validly issued Natural Resource
Shares, and will be fully paid and non-assessable with no personal liability
attaching to the ownership thereof, except as set forth under the caption
"Capital Stock and Other Securities" in Natural Resource's current Statement
of Additional Information incorporated by reference in the Statement of
Additional Information to this Registration Statement;
(k) All material Federal and other tax returns and reports of Natural
Resource required by law to be filed on or before the Closing Date have been
filed and are correct, and all Federal and other taxes
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shown as due or required to be shown as due on said returns and reports have
been paid or provision has been made for the payment thereof, and to the best
of Natural Resource's knowledge, no such return is currently under audit and
no assessment has been asserted with respect to any such return;
(l) For each taxable year since its inception, Natural Resource has met the
requirements of Subchapter M of the Code for qualification and treatment as a
"regulated investment company" and neither the execution or delivery of nor
the performance of its obligations under this Agreement will adversely
affect, and no other events are reasonably likely to occur which will
adversely affect the ability of Natural Resource to continue to meet the
requirements of Subchapter M of the Code;
(m) Since February 28, 1999 there has been no change by Natural Resource in
accounting methods, principles, or practices, including those required by
generally accepted accounting principles;
(n) The information furnished or to be furnished by Natural Resource for
use in registration statements, proxy materials and other documents which may
be necessary in connection with the transactions contemplated hereby shall be
accurate and complete in all material respects and shall comply in all
material respects with Federal securities and other laws and regulations
applicable thereto; and
(o) The Proxy Materials to be included in the Registration Statement (only
insofar as they relate to Natural Resource) will, on the effective date of
the Registration Statement and on the Closing Date, not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not materially
misleading.
5.2 Precious Metals represents and warrants to Natural Resource as follows:
(a) Precious Metals is a validly existing Massachusetts business trust with
full power to carry on its business as presently conducted;
(b) Precious Metals is a duly registered, open-end, management investment
company, and its registration with the Commission as an investment company
under the 1940 Act and the registration of its shares under the 1933 Act are
in full force and effect;
(c) All of the issued and outstanding shares of beneficial interest of
Precious Metals have been offered and sold in compliance in all material
respects with applicable requirements of the 1933 Act and state securities
laws. Shares of Precious Metals are registered in all jurisdictions in which
they are required to be registered and said registrations, including any
periodic reports or supplemental filings, are complete and current, all fees
required to be paid have been paid, and Precious Metals is not subject to any
stop order and is fully qualified to sell its shares in each state in which
its shares have been registered;
(d) The current Prospectus and Statement of Additional Information of
Precious Metals conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the regulations thereunder
and do not include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading;
(e) Precious Metals is not, and the execution, delivery and performance of
this Agreement will not result, in a material violation of any provision of
Precious Metals' Declaration of Trust or By-Laws or of any agreement,
indenture, instrument, contract, lease or other undertaking to which Precious
Metals is a party or by which it is bound;
(f) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or, to its
knowledge, threatened against Precious Metals or any of its
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properties or assets which, if adversely determined, would materially and
adversely affect its financial condition or the conduct of its business; and
Precious Metals knows of no facts that might form the basis for the
institution of such proceedings and is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental body
which materially and adversely affects, or is reasonably likely to materially
and adversely effect, its business or its ability to consummate the
transactions herein contemplated;
(g) The Statement of Assets and Liabilities, Statement of Operations,
Statement of Changes in Net Assets and Financial Highlights of Precious
Metals for the year ended October 31, 1998, certified by
PricewaterhouseCoopers LLP (copies of which have been or will be furnished to
Natural Resource) fairly present, in all material respects, Precious Metals'
financial condition as of such date, and its results of operations, changes
in its net assets and financial highlights for such period in accordance with
generally accepted accounting principles, and as of such date there were no
known liabilities of Precious Metals (contingent or otherwise) not disclosed
therein that would be required in accordance with generally accepted
accounting principles to be disclosed therein;
(h) Precious Metals has no material contracts or other commitments (other
than this Agreement) that will be terminated with liability to it prior to
the Closing Date;
(i) All issued and outstanding shares of Precious Metals are, and at the
Closing Date will be, duly and validly issued and outstanding, fully paid and
nonassessable with no personal liability attaching to the ownership thereof,
except as set forth under the caption "Capital Stock and Other Securities" in
Precious Metals' current Statement of Additional Information incorporated by
reference in the Statement of Additional Information to this Registration
Statement. Precious Metals does not have outstanding any options, warrants or
other rights to subscribe for or purchase any of its shares, nor is there
outstanding any security convertible to any of its shares. All such shares
will, at the time of Closing, be held by the persons and in the amounts set
forth in the list of shareholders submitted to Natural Resource pursuant to
paragraph 3.4;
(j) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action on the
part of Precious Metals, and subject to the approval of Precious Metals'
shareholders, this Agreement constitutes a valid and binding obligation of
Precious Metals, enforceable in accordance with its terms, subject as to
enforcement to bankruptcy, insolvency, reorganization, moratorium and other
laws relating to or affecting creditors rights and to general equity
principles. No other consents, authorizations or approvals are necessary in
connection with Precious Metals' performance of this Agreement;
(k) All material Federal and other tax returns and reports of Precious
Metals required by law to be filed on or before the Closing Date shall have
been filed and are correct and all Federal and other taxes shown as due or
required to be shown as due on said returns and reports have been paid or
provision has been made for the payment thereof, and to the best of Precious
Metals' knowledge, no such return is currently under audit and no assessment
has been asserted with respect to any such return;
(l) For each taxable year since its inception, Precious Metals has met all
the requirements of Subchapter M of the Code for qualification and treatment
as a "regulated investment company" and neither the execution or delivery of
nor the performance of its obligations under this Agreement will adversely
affect, and no other events are reasonably likely to occur which will
adversely affect the ability of Precious Metals to continue to meet the
requirements of Subchapter M of the Code;
(m) At the Closing Date, Precious Metals will have good and valid title to
the Precious Metals Assets, subject to no liens (other than the obligation,
if any, to pay the purchase price of portfolio securities
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purchased by Precious Metals which have not settled prior to the Closing
Date), security interests or other encumbrances, and full right, power and
authority to assign, deliver and otherwise transfer such assets hereunder,
and upon delivery and payment for such assets, Natural Resource will acquire
good and marketable title thereto, subject to no restrictions on the full
transfer thereof, including any restrictions as might arise under the 1933
Act;
(n) On the effective date of the Registration Statement, at the time of the
meeting of Precious Metals' shareholders and on the Closing Date, the Proxy
Materials (exclusive of the currently effective Natural Resource Prospectus
contained therein) will (i) comply in all material respects with the
provisions of the 1933 Act, the Securities Exchange Act of 1934, as amended
("1934 Act") and the 1940 Act and the regulations thereunder and (ii) not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading. Any other information furnished by Precious Metals
for use in the Registration Statement or in any other manner that may be
necessary in connection with the transactions contemplated hereby shall be
accurate and complete and shall comply in all material respects with
applicable Federal securities and other laws and regulations thereunder;
(o) Precious Metals will, on or prior to the Valuation Date, declare one or
more dividends or other distributions to shareholders that, together with all
previous dividends and other distributions to shareholders, shall have the
effect of distributing to the shareholders all of its investment company
taxable income and net capital gain, if any, through the Valuation Date
(computed without regard to any deduction for dividends paid);
(p) Precious Metals has maintained or has caused to be maintained on its
behalf all books and accounts as required of a registered investment company
in compliance with the requirements of Section 31 of the 1940 Act and the
Rules thereunder; and
(q) Precious Metals is not acquiring Natural Resource Shares to be issued
hereunder for the purpose of making any distribution thereof other than in
accordance with the terms of this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PRECIOUS METALS
The obligations of Precious Metals to consummate the transactions provided
for herein shall be subject, at its election, to the performance by Natural
Resource of all the obligations to be performed by it hereunder on or before the
Closing Date and, in addition thereto, the following conditions:
6.1 All representations and warranties of Natural Resource contained in
this Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date;
6.2 Natural Resource shall have delivered to Precious Metals a certificate
of its President and Treasurer, in a form reasonably satisfactory to Precious
Metals and dated as of the Closing Date, to the effect that the representations
and warranties of Natural Resource made in this Agreement are true and correct
at and as of the Closing Date, except as they may be affected by the
transactions contemplated by this Agreement, and as to such other matters as
Precious Metals shall reasonably request;
6.3 Precious Metals shall have received a favorable opinion from Mayer,
Brown & Platt, counsel to Natural Resource, dated as of the Closing Date, to the
effect that:
(a) Natural Resource is a validly existing Maryland corporation, and has
the power to own all of its properties and assets and to carry on its
business as presently conducted (Maryland counsel may be relied
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upon in delivering such opinion); (b) Natural Resource is a duly registered,
open-end, management investment company, and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect; (c) this Agreement has been duly authorized, executed and delivered
by Natural Resource and, assuming that the Registration Statement complies
with the 1933 Act, the 1934 Act and the 1940 Act and regulations thereunder
and assuming due authorization, execution and delivery of this Agreement by
Precious Metals, is a valid and binding obligation of Natural Resource
enforceable against Natural Resource in accordance with its terms, subject as
to enforcement, to bankruptcy, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors rights and to general equity
principles; (d) Natural Resource Shares to be issued to Precious Metals
Shareholders as provided by this Agreement are duly authorized and upon such
delivery will be validly issued, fully paid and non-assessable (except as set
forth under the caption "Capital Stock and Other Securities" in Natural
Resource's Statement of Additional Information), and no shareholder of
Natural Resource has any preemptive rights to subscription or purchase in
respect thereof (Maryland counsel may be relied upon in delivering such
opinion); (e) the execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, violate
Natural Resource's Articles of Incorporation or By-Laws; and (f) to the
knowledge of such counsel, no consent, approval, authorization or order of
any court or governmental authority of the United States or any state is
required for the consummation by Natural Resource of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act and the 1940 Act and such as may be required under state
securities laws; and
6.4 As of the Closing Date, there shall have been no material change in the
investment objective, policies and restrictions nor any increase in the
investment management fees or annual fees pursuant to Natural Resource's 12b-1
plan of distribution from those described in Natural Resource's Prospectus dated
June 30, 1999 and Statement of Additional Information dated June 30, 1999.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF NATURAL RESOURCE
The obligations of Natural Resource to complete the transactions provided
for herein shall be subject, at its election, to the performance by Precious
Metals of all the obligations to be performed by it hereunder on or before the
Closing Date and, in addition thereto, the following conditions:
7.1 All representations and warranties of Precious Metals contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date;
7.2 Precious Metals shall have delivered to Natural Resource at the Closing
a certificate of its President and its Treasurer, in form and substance
satisfactory to Natural Resource and dated as of the Closing Date, to the effect
that the representations and warranties of Precious Metals made in this
Agreement are true and correct at and as of the Closing Date, except as they may
be affected by the transactions contemplated by this Agreement, and as to such
other matters as Natural Resource shall reasonably request;
7.3 Precious Metals shall have delivered to Natural Resource a statement of
the Precious Metals Assets and its liabilities, together with a list of Precious
Metals' portfolio securities and other assets showing the respective adjusted
bases and holding periods thereof for income tax purposes, as of the Closing
Date, certified by the Treasurer of Precious Metals;
7.4 Precious Metals shall have delivered to Natural Resource within three
business days after the Closing a letter from PricewaterhouseCoopers LLP dated
as of the Closing Date stating that (a) such firm has performed a limited review
of the Federal and state income tax returns of Precious Metals for each of the
last
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three taxable years and, based on such limited review, nothing came to their
attention that caused them to believe that such returns did not properly
reflect, in all material respects, the Federal and state income tax liabilities
of Precious Metals for the periods covered thereby, (b) for the period from
October 31, 1998 to and including the Closing Date, such firm has performed a
limited review (based on unaudited financial data) to ascertain the amount of
applicable Federal, state and local taxes and has determined that same either
have been paid or reserves have been established for payment of such taxes, and,
based on such limited review, nothing came to their attention that caused them
to believe that the taxes paid or reserves set aside for payment of such taxes
were not adequate in all material respects for the satisfaction of all Federal,
state and local tax liabilities for the period from October 31, 1998 to and
including the Closing Date and (c) based on such limited reviews, nothing came
to their attention that caused them to believe that Precious Metals would not
qualify as a regulated investment company for Federal income tax purposes for
any such year or period;
7.5 Natural Resource shall have received at the Closing a favorable opinion
from Mayer, Brown & Platt, counsel to Precious Metals, dated as of the Closing
Date to the effect that:
(a) Precious Metals is a validly existing Massachusetts business trust and
has the power to own all of its properties and assets and to carry on its
business as presently conducted (Massachusetts counsel may be relied upon in
delivering such opinion); (b) Precious Metals is a duly registered, open-end,
management investment company under the 1940 Act, and its registration with
the Commission as an investment company under the 1940 Act is in full force
and effect; (c) this Agreement has been duly authorized, executed and
delivered by Precious Metals and, assuming that the Registration Statement
complies with the 1933 Act, the 1934 Act and the 1940 Act and the regulations
thereunder and assuming due authorization, execution and delivery of this
Agreement by Natural Resource, is a valid and binding obligation of Precious
Metals enforceable against Precious Metals in accordance with its terms,
subject as to enforcement, to bankruptcy, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors rights and to
general equity principles; (d) the execution and delivery of this Agreement
did not, and the consummation of the transactions contemplated hereby will
not, violate Precious Metals' Declaration of Trust or By-Laws; and (e) to the
knowledge of such counsel, no consent, approval, authorization or order of
any court or governmental authority of the United States or any state is
required for the consummation by Precious Metals of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act and the 1940 Act and such as may be required under state
securities laws; and
7.6 On the Closing Date, the Precious Metals Assets shall include no assets
that Natural Resource, by reason of limitations of the fund's Declaration of
Trust or otherwise, may not properly acquire.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF NATURAL RESOURCE
AND PRECIOUS METALS
The obligations of Precious Metals and Natural Resource hereunder are each
subject to the further conditions that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of
Precious Metals in accordance with the provisions of Precious Metals'
Declaration of Trust, and certified copies of the resolutions evidencing such
approval shall have been delivered to Natural Resource;
8.2 On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with, this
Agreement or the transactions contemplated herein;
A-11
8.3 All consents of other parties and all other consents, orders and
permits of Federal, state and local regulatory authorities (including those of
the Commission and of state Blue Sky and securities authorities, including
"no-action" positions of and exemptive orders from such Federal and state
authorities) deemed necessary by Natural Resource or Precious Metals to permit
consummation, in all material respects, of the transactions contemplated herein
shall have been obtained, except where failure to obtain any such consent, order
or permit would not involve risk of a material adverse effect on the assets or
properties of Natural Resource or Precious Metals;
8.4 The Registration Statement shall have become effective under the 1933
Act, no stop orders suspending the effectiveness thereof shall have been issued
and, to the best knowledge of the parties hereto, no investigation or proceeding
for that purpose shall have been instituted or be pending, threatened or
contemplated under the 1933 Act;
8.5 Precious Metals shall have declared and paid a dividend or dividends
and/or other distribution or distributions that, together with all previous such
dividends or distributions, shall have the effect of distributing to the
Precious Metals Shareholders all of Precious Metals' investment company taxable
income (computed without regard to any deduction for dividends paid) and all of
its net capital gain (after reduction for any capital loss carry-forward and
computed without regard to any deduction for dividends paid) for all taxable
years ending on or before the Closing Date; and
8.6 The parties shall have received the opinion of the law firm of Mayer,
Brown & Platt (based on such representations as such law firm shall reasonably
request), addressed to Natural Resource and Precious Metals, which opinion may
be relied upon by the shareholders of Precious Metals, substantially to the
effect that, for Federal income tax purposes:
(a) The transfer of Precious Metals' assets in exchange for Natural
Resource Shares and the assumption by Natural Resource of certain stated
liabilities of Precious Metals followed by the distribution by Precious
Metals of Natural Resource Shares to the Precious Metals Shareholders in
exchange for their Precious Metals shares pursuant to and in accordance with
the terms of the Reorganization Agreement will constitute a "reorganization"
within the meaning of Section 368(a)(1)(C) of the Code, and Precious Metals
and Natural Resource will each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code;
(b) No gain or loss will be recognized by Natural Resource upon the receipt
of the assets of Precious Metals solely in exchange for Natural Resource
Shares and the assumption by Natural Resource of the stated liabilities of
Precious Metals;
(c) No gain or loss will be recognized by Precious Metals upon the transfer
of the assets of Precious Metals to Natural Resource in exchange for Natural
Resource Shares and the assumption by Natural Resource of the stated
liabilities or upon the distribution of Natural Resource Shares to the
Precious Metals Shareholders in exchange for their Precious Metals shares;
(d) No gain or loss will be recognized by the Precious Metals Shareholders
upon the exchange of the Precious Metals shares for Natural Resource Shares;
(e) The aggregate tax basis for Natural Resource Shares received by each
Precious Metals Shareholder pursuant to the reorganization will be the same
as the aggregate tax basis of the Precious Metals Shares held by each such
Precious Metals Shareholder immediately prior to the Reorganization;
(f) The holding period of Natural Resource Shares to be received by each
Precious Metals Shareholder will include the period during which the Precious
Metals Shares surrendered in exchange therefor were held (provided such
Precious Metals Shares were held as capital assets on the date of the
Reorganization);
A-12
(g) The tax basis of the assets of Precious Metals acquired by Natural
Resource will be the same as the tax basis of such assets to Precious Metals
immediately prior to the Reorganization; and
(h) The holding period of the assets of Precious Metals in the hands of
Natural Resource will include the period during which those assets were held
by Precious Metals.
Notwithstanding anything herein to the contrary, neither Natural Resource
nor Precious Metals may waive the conditions set forth in this paragraph 8.6.
9. FEES AND EXPENSES
9.1 (a) Natural Resource shall bear its expenses incurred in connection
with the entering into, and carrying out of, the provisions of this Agreement,
including legal, accounting, Commission registration fees and Blue Sky expenses.
Precious Metals shall bear its expenses incurred in connection with the entering
into and carrying out of the provisions of this Agreement, including legal and
accounting fees, printing, filing and proxy solicitation expenses and portfolio
transfer taxes (if any) incurred in connection with the consummation of the
transactions contemplated herein.
(b) In the event the transactions contemplated herein are not consummated
by reason of Precious Metals being either unwilling or unable to go forward
(other than by reason of the nonfulfillment or failure of any condition to
Precious Metals' obligations specified in this Agreement), Precious Metals' only
obligation hereunder shall be to reimburse Natural Resource for all reasonable
out-of-pocket fees and expenses incurred by Natural Resource in connection with
those transactions.
(c) In the event the transactions contemplated herein are not consummated
by reason of Natural Resource being either unwilling or unable to go forward
(other than by reason of the nonfulfillment or failure of any condition to
Natural Resource's obligations specified in this Agreement), Natural Resource's
only obligation hereunder shall be to reimburse Precious Metals for all
reasonable out-of-pocket fees and expenses incurred by Precious Metals in
connection with those transactions.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated herein, except
that the representations, warranties and covenants of Precious Metals hereunder
shall not survive the dissolution and complete liquidation of Precious Metals in
accordance with Section 1.9.
11. TERMINATION
11.1 This Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time prior to the Closing:
(a) by the mutual written consent of Precious Metals and Natural
Resource;
(b) by either Natural Resource or Precious Metals by notice to the other,
without liability to the terminating party on account of such termination
(providing the terminating party is not otherwise in material default or
breach of this Agreement) if the Closing shall not have occurred on or before
March 31, 2000; or
(c) by either Natural Resource or Precious Metals, in writing without
liability to the terminating party on account of such termination (provided
the terminating party is not otherwise in material default
A-13
or breach of this Agreement), if (i) the other party shall fail to perform in
any material respect its agreements contained herein required to be performed
on or prior to the Closing Date, (ii) the other party materially breaches any
of its representations, warranties or covenants contained herein, (iii) the
Precious Metals shareholders fail to approve this Agreement at any meeting
called for such purpose at which a quorum was present or (iv) any other
condition herein expressed to be precedent to the obligations of the
terminating party has not been met and it reasonably appears that it will not
or cannot be met.
11.2 (a) Termination of this Agreement pursuant to paragraphs 11.1 (a) or
(b) shall terminate all obligations of the parties hereunder and there shall be
no liability for damages on the part of Natural Resource or Precious Metals, or
the trustees or officers of Natural Resource or Precious Metals, to any other
party or its trustees or officers.
(b) Termination of this Agreement pursuant to paragraph 11.1 (c) shall
terminate all obligations of the parties hereunder and there shall be no
liability for damages on the part of Natural Resource or Precious Metals, or
the trustees or officers of Natural Resource or Precious Metals, except that
any party in breach of this Agreement shall, upon demand, reimburse the
non-breaching party for all reasonable out-of-pocket fees and expenses
incurred in connection with the transactions contemplated by this Agreement,
including legal, accounting and filing fees.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the parties.
13. MISCELLANEOUS
13.1 The article and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
13.5 The obligations and liabilities of Natural Resource hereunder are
solely those of Natural Resource. It is expressly agreed that no shareholder,
nominee, trustee, officer, agent, or employee of Natural Resource shall be
personally liable hereunder. The execution and delivery of this Agreement have
been authorized by the trustees of Natural Resource and signed by authorized
officers of Natural Resource acting as such, and neither such authorization by
such trustees nor such execution and delivery by such officers shall be deemed
to have been made by any of them individually or to impose any liability on any
of them personally.
13.6 The obligations and liabilities of Precious Metals hereunder are
solely those of Precious Metals. It is expressly agreed that no shareholder,
nominee, trustee, officer, agent, or employee of Precious Metals shall be
personally liable hereunder. The execution and delivery of this Agreement have
been authorized by the
A-14
trustees of Precious Metals and signed by authorized officers of Precious Metals
acting as such, and neither such authorization by such trustees nor such
execution and delivery by such officers shall be deemed to have been made by any
of them individually or to impose any liability on any of them personally.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by a duly authorized officer.
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND
MINERALS TRUST
By: /s/ CHARLES A. FIUMEFREDDO
--------------------------------------------
Name: Charles A. Fiumefreddo
Title: Chairman
MORGAN STANLEY DEAN WITTER NATURAL
RESOURCE DEVELOPMENT SECURITIES INC.
By: /s/ BARRY FINK
--------------------------------------------
Name: Barry Fink
Title: Vice President
A-15
PROSPECTUS - JUNE 30, 1999
EXHIBIT B
MORGAN STANLEY DEAN WITTER
NATURAL RESOURCE DEVELOPMENT SECURITIES
[COVER PHOTO]
A MUTUAL FUND THAT SEEKS 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.
CONTENTS
[Enlarge/Download Table]
The Fund Investment Objective.................................. 1
Principal Investment Strategies....................... 1
Principal Risks....................................... 2
Past Performance...................................... 4
Fees and Expenses..................................... 5
Additional Investment Strategy Information............ 6
Additional Risk Information........................... 7
Fund Management....................................... 8
Shareholder Information Pricing Fund Shares................................... 9
How to Buy Shares..................................... 9
How to Exchange Shares................................ 11
How to Sell Shares.................................... 12
Distributions......................................... 14
Tax Consequences...................................... 15
Share Class Arrangements.............................. 15
Financial Highlights ...................................................... 23
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.
THE FUND
[ICON] INVESTMENT OBJECTIVE
--------------------------------------------------------------------------------
Morgan Stanley Dean Witter Natural Resource Development Securities
Inc. seeks capital growth.
[ICON] PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------
The Fund will normally invest at least 65% of its total assets in
common stocks of domestic and foreign companies engaged in the
natural resource and related businesses. These companies may be
engaged in the exploration, development, production or distribution
of natural resources, the development of energy-efficient
technologies or in providing natural resource related supplies or
services. A company will be considered engaged in the natural
resource and related businesses if it derives at least 50% of its
revenues from those businesses or it devotes at least 50% of its
assets to activities in those businesses. The Investment Manager will
seek to identify favorable industries within the natural resource and
related business area and will seek to invest in companies with
attractive valuations or business prospects within those industries.
[Sidebar]
CAPITAL GROWTH
AN INVESTMENT OBJECTIVE HAVING THE GOAL OF SELECTING SECURITIES WITH
THE POTENTIAL TO RISE IN PRICE RATHER THAN PAY OUT INCOME.
[End Sidebar]
The Fund's "Investment Manager," Morgan Stanley Dean Witter Advisors
Inc., invests in companies that it believes are responsive to
domestic and world demand for natural resources and that engage in
the development of natural resources. These companies include those
that:
- own or process natural resources, such as precious metals, other
minerals, water, timberland and forest products;
- own or produce sources of energy such as oil, natural gas, coal,
uranium, geothermal, oil shale and biomass;
- participate in the exploration for and development of natural
resource supplies from new and conventional sources;
- own or control oil, gas, or other mineral leases, rights or royalty
interests;
- provide natural resource transportation, distribution or processing
services, such as refining and pipeline services;
- provide related services or supplies, such as drilling, well
servicing, chemicals, parts and equipment; or
- contribute energy-efficient technologies, such as systems for
energy conversion, conservation and pollution control.
1
Common stock is a share ownership or equity interest in a
corporation. It may or may not pay dividends, as some companies
reinvest all of their profits back into their businesses, while
others pay out some of their profits to shareholders as dividends. A
depository receipt is generally issued by a bank or financial
institution and represents an ownership interest in the common stock
or other equity securities of a foreign company.
The Fund may invest up to 25% of its assets in foreign securities
(including depository receipts). This percentage limitation, however,
does not apply to securities of foreign companies (including
depository receipts) that are listed in the U.S. on a national
securities exchange or to securities of Canadian issuers.
The Fund also may invest up to 35% of its assets in: common stock of
companies not in the natural resource areas; investment grade
corporate debt securities (including zero coupon securities); and
U.S. government securities (including zero coupon 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.
[ICON] PRINCIPAL RISKS
--------------------------------------------------------------------------------
There is no assurance that the Fund will achieve its investment
objective. The Fund's share price will fluctuate with changes in the
market value of the Fund's portfolio securities. When you sell Fund
shares, they may be worth less than what you paid for them and,
accordingly, you can lose money investing in this Fund.
A principal risk of investing in the Fund is associated with its
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. Stock prices can fluctuate
widely in response to these factors.
NATURAL RESOURCES. The Fund's investments in natural resource
industries can be significantly affected by events relating to those
industries, such as international political and economic
developments, energy conservation, the success of exploration
projects, tax and other government regulations, as well as other
factors. The Fund's portfolio securities, and consequently the Fund's
net asset value, may experience substantial price fluctuations as a
result of these factors. Unlike most diversified mutual funds, the
Fund is subject to the risks associated with concentrating its assets
in a particular sector--natural resources. Thus, the Fund's overall
portfolio may decline in value due to developments specific to this
sector. Given the Fund's concentration policy, Fund shares should not
be considered a complete investment program.
2
FOREIGN SECURITIES. The Fund's investments in foreign securities
(including depository receipts) involve risks that are in addition to
the risks associated with domestic securities. One additional risk is
currency risk. While the price of Fund shares is quoted in U.S.
dollars, the Fund generally converts U.S. dollars to a foreign
market's local currency to purchase a security in that market. If the
value of that local currency falls relative to the U.S. dollar, the
U.S. dollar value of the foreign security will decrease. This is true
even if the foreign security's local price remains unchanged.
Foreign securities also have risks related to economic and political
developments abroad, including expropriations, confiscatory taxation,
exchange control regulation, limitations on the use or transfer of
Fund assets and any effects of foreign social, economic or political
instability. Foreign companies, in general, are not subject to the
regulatory requirements of U.S. companies and, as such, there may be
less publicly available information about these companies. Moreover,
foreign accounting, auditing and financial reporting standards
generally are different from those applicable to U.S. companies.
Finally, in the event of a default of any foreign debt obligations,
it may be more difficult for the Fund to obtain or enforce a judgment
against the issuers of the securities.
Securities of foreign issuers may be less liquid than comparable
securities of U.S. issuers and, as such, their price changes may be
more volatile. Furthermore, foreign exchanges and broker-dealers are
generally subject to less government and exchange scrutiny and
regulation than their U.S. counterparts. In addition, differences in
clearance and settlement procedures in foreign markets may occasion
delays in settlement of the Fund's trades effected in those markets.
Many European countries have adopted or are in the process of
adopting a single European currency, referred to as the "euro." The
consequences of the euro conversion for foreign exchange rates,
interest rates and the value of European securities the Fund may
purchase are presently unclear. The consequences may adversely affect
the value and/or increase the volatility of securities held by the
Fund.
The performance of the Fund also will depend on whether or not 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
fixed-income investments. For more information about these risks, see
the "Additional Risk Information" section.
Shares of the Fund are not bank deposits and are not guaranteed or
insured by the FDIC or any other government agency.
3
[ICON] PAST PERFORMANCE
--------------------------------------------------------------------------------
The bar chart and table below provide some indication of the risks of
investing in the Fund. The Fund's past performance does not indicate
how the Fund will perform in the future.
[Sidebar]
ANNUAL TOTAL RETURNS
THIS CHART SHOWS HOW THE PERFORMANCE OF THE FUND'S CLASS B SHARES HAS VARIED
FROM YEAR TO YEAR OVER THE PAST 10 CALENDAR YEARS.
[End Sidebar]
ANNUAL TOTAL RETURNS - CALENDAR YEARS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
[Download Table]
1989 31.63%
`90 -8.73%
`91 6.39%
`92 6.67%
`93 17.45%
`94 -0.93%
`95 23.40%
`96 27.00%
`97 14.02%
`98 -21.76%
The bar chart reflects the performance of Class B shares; the performance of the
other Classes will differ because the Classes have different ongoing fees. The
performance information in the bar chart does not reflect the deduction of sales
charges; if these amounts were reflected, returns would be less than shown.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 14.68% (quarter ended September 30, 1997) and the lowest return for
a calendar quarter was -18.59% (quarter ended September 30, 1998). Year-to-date
total return as of March 31, 1999 was 6.57%.
[Sidebar]
AVERAGE ANNUAL
TOTAL RETURNS
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL RETURNS WITH THOSE OF A BROAD
MEASURE OF MARKET PERFORMANCE OVER TIME, AS WELL AS WITH AN INDEX OF FUNDS WITH
SIMILAR INVESTMENT OBJECTIVES. THE FUND'S RETURNS INCLUDE THE MAXIMUM APPLICABLE
SALES CHARGE FOR EACH CLASS AND ASSUME YOU SOLD YOUR SHARES AT THE END OF EACH
PERIOD.
[End Sidebar]
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 1998)
--------------------------------------------------------------------------------------------------------
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
--------------------------------------------------------------------------------------------------------
Class A(1) -25.32% -- --
--------------------------------------------------------------------------------------------------------
Class B -25.63% 6.45% 8.29%
--------------------------------------------------------------------------------------------------------
Class C(1) -22.61% -- --
--------------------------------------------------------------------------------------------------------
Class D(1) -21.01% -- --
--------------------------------------------------------------------------------------------------------
S&P 500 Index(2) -28.58% 24.05% 19.19%
--------------------------------------------------------------------------------------------------------
Lipper Natural Resources Funds Average(3) -23.92% 3.06% 6.33%
--------------------------------------------------------------------------------------------------------
1 Classes A, C and D commenced operations on July 28, 1997.
2 The Standard & Poor's-Registered Trademark- 500 Composite 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 Lipper Natural Resources Funds Average tracks the performance of all
funds which invest more than 65% of their equity commitment in natural
resource stocks, as reported by Lipper Analytical Services, Inc.
[ICON] FEES AND EXPENSES
--------------------------------------------------------------------------------
The table below briefly describes the fees and expenses that you may
pay if you buy and hold shares of the Fund. The Fund offers four
Classes of shares: Classes A, B, C and D. Each Class has a different
combination of fees, expenses and other features. The Fund does not
charge account or exchange fees. See the "Share Class Arrangements"
section for further fee and expense information.
[Sidebar]
SHAREHOLDER FEES
THESE FEES ARE PAID DIRECTLY FROM YOUR INVESTMENT.
ANNUAL FUND
OPERATING EXPENSES
THESE EXPENSES ARE DEDUCTED FROM THE FUND'S ASSETS AND ARE BASED ON EXPENSES
PAID FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1999.
[End Sidebar]
[Enlarge/Download Table]
CLASS A CLASS B CLASS C CLASS D
---------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES
---------------------------------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.25%(1) None None None
---------------------------------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage based on the lesser of
the offering price or net asset value at redemption) None(2) 5.00%(3) 1.00%(4) None
---------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
---------------------------------------------------------------------------------------------------------
Management fee 0.62% 0.62% 0.62% 0.62%
---------------------------------------------------------------------------------------------------------
Distribution and service (12b-1) fees 0.24% 1.00% 1.00% None
---------------------------------------------------------------------------------------------------------
Other expenses 0.28% 0.28% 0.28% 0.28%
---------------------------------------------------------------------------------------------------------
Total annual Fund operating expenses 1.14% 1.90% 1.90% 0.90%
---------------------------------------------------------------------------------------------------------
1 Reduced for purchases of $25,000 and over.
2 Investments that are not subject to any sales charge at the time of
purchase are subject to a contingent deferred sales charge ("CDSC") of
1.00% that will be imposed if you sell your shares within one year after
purchase, except for certain specific circumstances.
3 The CDSC is scaled down to 1.00% during the sixth year, reaching zero
thereafter. See "Share Class Arrangements" for a complete discussion of the
CDSC.
4 Only applicable if you sell your shares within one year after purchase.
5
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.
[Enlarge/Download Table]
IF YOU SOLD YOUR SHARES: IF YOU HELD YOUR SHARES:
----------------------------------------- -----------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------------------------------------------------------------------
CLASS A $640 $870 $1,120 $1,840 $640 $870 $1,120 $1,840
---------------------------------------------------------- -----------------------------------------
CLASS B $690 $900 $1,230 $2,220 $190 $600 $1,030 $2,220
---------------------------------------------------------- -----------------------------------------
CLASS C $290 $600 $1,030 $2,220 $190 $600 $1,030 $2,220
---------------------------------------------------------- -----------------------------------------
CLASS D $ 90 $290 $ 500 $1,110 $ 90 $290 $ 500 $1,110
---------------------------------------------------------- -----------------------------------------
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 NASD.
[ICON] ADDITIONAL INVESTMENT STRATEGY INFORMATION
--------------------------------------------------------------------------------
This section provides additional information relating to the Fund's
principal 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.
PORTFOLIO TURNOVER. The Fund may engage in active and frequent
trading of portfolio securities to achieve its principal investment
strategies. The portfolio turnover rate is not expected to exceed
200% annually under normal circumstances. A high turnover rate, such
as 200%, will increase Fund brokerage costs. It also may increase the
Fund's capital gains, which are passed along to Fund shareholders as
distributions. This, in turn, may increase your tax liability as a
Fund shareholder. See the sections on "Distributions" and "Tax
Consequences."
The percentage limitations relating to the composition of the Fund's
portfolio apply at the time the Fund acquires an investment and refer
to the Fund's net assets, unless otherwise noted. Subsequent
percentage changes that result from market fluctuations 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.
6
[ICON] ADDITIONAL RISK INFORMATION
--------------------------------------------------------------------------------
This section provides additional information relating to the
principal risks of investing in the Fund.
FIXED-INCOME SECURITIES. Principal risks of investing in the Fund are
associated with its fixed-income investments. All fixed-income
securities, such as corporate debt, 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.
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 comparable securities that pay
interest.)
While the credit risk of U.S. government securities is minimal, the
Fund's corporate debt investments may have speculative
characteristics.
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
corporate and governmental issuers in which the Fund invests do not
properly process and calculate date-related information from and
after January 1, 2000. While year 2000-related computer problems
could have a negative effect on the Fund, the Investment Manager and
its affiliates are working hard to avoid any problems and to obtain
assurances from their service providers that they are taking similar
steps.
In addition, it is possible that the markets for securities in which
the Fund invests may be detrimentally affected by computer failures
throughout the financial services industry beginning January 1, 2000.
Improperly functioning trading systems may result in settlement
problems and liquidity issues. In addition, corporate and
governmental data processing errors 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.
7
[ICON] 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,
NY 10048.
[Sidebar]
MORGAN STANLEY DEAN WITTER ADVISORS INC.
THE INVESTMENT MANAGER IS WIDELY RECOGNIZED AS A LEADER IN THE MUTUAL
FUND INDUSTRY AND TOGETHER WITH MORGAN STANLEY DEAN WITTER SERVICES
COMPANY INC., ITS WHOLLY-OWNED SUBSIDIARY, HAS MORE THAN $134.2
BILLION IN ASSETS UNDER MANAGEMENT OR ADMINISTRATION AS OF MAY 31,
1999.
[End Sidebar]
The Fund is managed within the Investment Manager's Growth Group.
David F. Myers and Catherine A. Maniscalco, each a Vice President of
the Investment Manager and a member of the Growth Group, have been
the primary portfolio managers of the Fund since July 1997. Mr. Myers
has been a portfolio manager at the Investment Manager for over five
years. PriorF to joining the Investment Manager in March 1995, Ms.
Maniscalco was a portfolio management software product specialist at
National Investor Data Services (April 1994-March 1995).
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 February 28, 1999 the Fund accrued total compensation to the
Investment Manager amounting to 0.62% of the Fund's average daily net
assets.
8
SHAREHOLDER INFORMATION
[ICON] PRICING FUND SHARES
--------------------------------------------------------------------------------
The price of Fund shares (excluding sales charges), called "net asset
value," is based on the value of the Fund's portfolio securities.
While the assets of each Class are invested in a single portfolio of
securities, the net asset value of each Class will differ because the
Classes have different ongoing distribution fees.
The net asset value per share of the Fund is determined once daily at
4:00 p.m. Eastern time on each day that the New York Stock Exchange
is open (or, on days when the New York Stock Exchange closes prior to
4:00 p.m., at such earlier time). Shares will not be priced on days
that the New York Stock Exchange is closed.
The value of the Fund's portfolio securities is based on the
securities' market price when available. When a market price is not
readily available, including circumstances under which the Investment
Manager 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 Directors. In these
cases, the Fund's net asset value will reflect certain portfolio
securities' fair value rather than their market price. In addition,
if the Fund holds securities primarily listed on foreign exchanges,
the value of the Fund's portfolio securities may change on days when
you will not be able to purchase or sell your shares.
An exception to the Fund's general policy of using market prices
concerns its short-term debt portfolio securities. Debt securities
with remaining maturities of sixty days or less at the time of
purchase are valued at amortized cost. However, if the cost does not
reflect the securities' market value, these securities will be valued
at their fair value.
[ICON] HOW TO BUY SHARES
--------------------------------------------------------------------------------
You may open a new account to buy Fund shares or buy additional Fund
shares for an existing account by contacting your Morgan Stanley Dean
Witter Financial Advisor or other authorized financial
representative. Your Financial Advisor will assist you, step-by-step,
with the procedures to invest in the Fund. You may also purchase
shares directly by calling the Fund's transfer agent and requesting
an application.
[Sidebar]
CONTACTING A FINANCIAL ADVISOR
IF YOU ARE NEW TO THE MORGAN STANLEY DEAN WITTER FAMILY OF FUNDS AND
WOULD LIKE TO CONTACT A FINANCIAL ADVISOR, CALL (800) THE-DEAN FOR
THE TELEPHONE NUMBER OF THE MORGAN STANLEY DEAN WITTER OFFICE NEAREST
YOU. YOU MAY ALSO ACCESS OUR OFFICE LOCATOR ON OUR INTERNET SITE AT:
WWW.DEANWITTER.COM/FUNDS
[End Sidebar]
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.
9
When you buy Fund shares, the shares are purchased at the next share
price calculated (less any applicable front-end sales charge for
Class A shares) after we receive your purchase order. Your payment is
due on the third business day after you place your purchase order. We
reserve the right to reject any order for the purchase of Fund
Shares.
[Sidebar]
EASYINVEST-SM-
A PURCHASE PLAN THAT ALLOWS YOU TO TRANSFER MONEY AUTOMATICALLY FROM YOUR
CHECKING OR SAVINGS ACCOUNT OR FROM A MONEY MARKET FUND ON A SEMI-MONTHLY,
MONTHLY OR QUARTERLY BASIS. CONTACT YOUR MORGAN STANLEY DEAN WITTER FINANCIAL
ADVISOR FOR FURTHER INFORMATION ABOUT THIS SERVICE.
[End Sidebar]
[Enlarge/Download Table]
MINIMUM INVESTMENT AMOUNTS
------------------------------------------------------------------------------------------------
MINIMUM INVESTMENT
----------------------
INVESTMENT OPTIONS INITIAL ADDITIONAL
------------------------------------------------------------------------------------------------
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*
------------------------------------------------------------------------------------------------
* Provided your schedule of investments totals $1,000 in twelve months.
There is no minimum investment amount if you purchase Fund shares
through: (1) the Investment Manager's mutual fund asset allocation
plan, (2) a program, approved by the Fund's distributor, in which you
pay an asset-based fee for advisory, administrative and/ or brokerage
services, or (3) employer-sponsored employee benefit plan accounts.
INVESTMENT OPTIONS FOR CERTAIN INSTITUTIONAL AND OTHER
INVESTORS/CLASS D SHARES. To be eligible to purchase Class D shares,
you must qualify under one of the investor categories specified in
the "Share Class Arrangements" section of this PROSPECTUS.
SUBSEQUENT INVESTMENTS SENT DIRECTLY TO THE FUND. In addition to
buying additional Fund shares for an existing account by contacting
your Morgan Stanley Dean Witter Financial Advisor, you may send a
check directly to the Fund. To buy additional shares in this manner:
- Write a "letter of instruction" to the Fund specifying the name(s)
on the account, the account number, the social security or tax
identification number, the Class of shares you wish to purchase and
the investment amount (which would include any applicable front-end
sales charge). The letter must be signed by the account owner(s).
- Make out a check for the total amount payable to: Morgan Stanley
Dean Witter Natural Resource Development Securities Inc.
- Mail the letter and check to Morgan Stanley Dean Witter Trust FSB
at P.O. Box 1040, Jersey City, NJ 07303.
10
[ICON] HOW TO EXCHANGE SHARES
--------------------------------------------------------------------------------
PERMISSIBLE FUND EXCHANGES. You may exchange shares of any Class of
the Fund for the same Class of any other continuously offered
Multi-Class Fund, or for shares of a No-Load Fund, a Money Market
Fund, North American Government Income Trust or Short-Term U.S.
Treasury Trust, without the imposition of an exchange fee. See the
inside back cover of this PROSPECTUS for each Morgan Stanley Dean
Witter Fund's designation as a Multi-Class Fund, No-Load Fund or
Money Market Fund. If a Morgan Stanley Dean Witter Fund is not
listed, consult the inside back cover of that fund's PROSPECTUS for
its designation. For purposes of exchanges, shares of FSC Funds
(subject to a front-end sales charge) are treated as Class A shares
of a Multi-Class Fund.
Exchanges may be made after shares of the Fund acquired by purchase
have been held for thirty days. There is no waiting period for
exchanges of shares acquired by exchange or dividend reinvestment.
The current PROSPECTUS for each Fund describes its investment
objective(s), policies and investment minimums, and should be read
before investment.
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
11
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 sale of such shares.
TAX CONSIDERATIONS OF EXCHANGES. If you exchange shares of the Fund
for shares of another Morgan Stanley Dean Witter Fund there are
important tax considerations. For tax purposes, the exchange out of
the Fund is considered a sale of Fund shares -- and the exchange into
the other Fund is considered a purchase. As a result, you may realize
a capital gain or loss.
You should review the "Tax Consequences" section and consult your own
tax professional about the tax consequences of an exchange.
FREQUENT EXCHANGES. A pattern of frequent exchanges may result in the
Fund limiting or prohibiting, at its discretion, additional purchases
and/or exchanges. The Fund will notify you in advance of limiting
your exchange privileges.
CDSC CALCULATIONS ON EXCHANGES. See the "Share Class Arrangements"
section of this PROSPECTUS for a further discussion of how applicable
contingent deferred sales charges (CDSCs) are calculated for shares
of one Morgan Stanley Dean Witter Fund that are exchanged for shares
of another.
For further information regarding exchange privileges, you should
contact your Morgan Stanley Dean Witter Financial Advisor or call
(800) 869-NEWS.
[ICON] HOW TO SELL SHARES
--------------------------------------------------------------------------------
You can sell some or all of your Fund shares at any time. If you sell
Class A, Class B or Class C shares, your net sale proceeds are
reduced by the amount of any applicable CDSC. Your shares will be
sold at the next price calculated after we receive your order to sell
as described below.
[Download Table]
OPTIONS PROCEDURES
--------------------------------------------------------------------------------
Contact your To sell your shares, simply call your Morgan Stanley Dean
Financial Advisor Witter Financial Advisor or other authorized financial
representative.
------------------------------------------------------------
[ICON]
Payment will be sent to the address to which the account is
registered or deposited in your brokerage account.
--------------------------------------------------------------------------------
By Letter You can also sell your shares by writing a "letter of
instruction" that includes:
[ICON]
- your account number;
- the dollar amount or the number of shares you wish to
sell;
- the Class of shares you wish to sell; and
- the signature of each owner as it appears on the account.
------------------------------------------------------------
12
[Download Table]
OPTIONS PROCEDURES
--------------------------------------------------------------------------------
By Letter, If you are requesting payment to anyone other than the
continued registered owner(s) or that payment be sent to any address
other than the address of the registered owner(s) or
pre-designated bank account, you will need a signature
guarantee. You can obtain a signature guarantee from an
eligible guarantor acceptable to Morgan Stanley Dean Witter
Trust FSB. (You should contact Morgan Stanley Dean Witter
Trust FSB at (800) 869-NEWS for a determination as to
whether a particular institution is an eligible guarantor.)
A notary public CANNOT provide a signature guarantee.
Additional documentation may be required for shares held by
a corporation, partnership, trustee or executor.
------------------------------------------------------------
Mail the letter to Morgan Stanley Dean Witter Trust FSB at
P.O. Box 983, Jersey City, New Jersey 07303. If you hold
share certificates, you must return the certificates, along
with the letter and any required additional documentation.
A check will be mailed to the name(s) and address in which
the account is registered, or otherwise according to your
instructions.
--------------------------------------------------------------------------------
Systematic If your investment in all of the Morgan Stanley Dean Witter
Withdrawal Plan Family of Funds has a total market value of at least
[ICON] $10,000, you may elect to withdraw amounts of $25 or more,
or in any whole percentage of a Fund's balance (provided the
amount is at least $25), on a monthly, quarterly,
semi-annual or annual basis, from any Fund with a balance of
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.
--------------------------------------------------------------------------------
PAYMENT FOR SOLD SHARES. After we receive your complete instructions
to sell as described above, a check will be mailed to you within
seven days, although we will attempt to make payment within one
business day. Payment may also be sent to your brokerage account.
Payment may be postponed or the right to sell your shares suspended
under unusual circumstances. If you request to sell shares that were
recently purchased by check, payment of the sale proceeds may be
delayed for the minimum time needed to verify that the check has been
honored (not more than fifteen days from the time we receive the
check).
TAX CONSIDERATIONS. Normally, your sale of Fund shares is subject to
federal and state income tax. You should review the "Tax
Consequences" section of this PROSPECTUS and consult your own tax
professional about the tax consequences of a sale.
13
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,
contact your Morgan Stanley Dean Witter Financial Advisor or other
authorized financial representative regarding restrictions on the
sale of such shares.
[ICON] DISTRIBUTIONS
--------------------------------------------------------------------------------
The Fund passes substantially all of its earnings from income and
capital gains along to its investors as "distributions." The Fund
earns income from stocks and interest from fixed-income investments.
These amounts are passed along to Fund shareholders as "income
dividend distributions." The Fund realizes capital gains whenever it
sells securities for a higher price than it paid for them. These
amounts may be passed along as "capital gain distributions."
[Sidebar]
TARGETED DIVIDENDS-SM-
YOU MAY SELECT TO HAVE YOUR FUND DISTRIBUTIONS AUTOMATICALLY INVESTED
IN OTHER CLASSES OF FUND SHARES OR CLASSES OF ANOTHER MORGAN STANLEY
DEAN WITTER FUND THAT YOU OWN. CONTACT YOUR MORGAN STANLEY DEAN
WITTER FINANCIAL ADVISOR FOR FURTHER INFORMATION ABOUT THIS SERVICE.
[End Sidebar]
The Fund declares income dividends separately for each Class.
Distributions paid on Class A and Class D shares usually will be
higher than for Class B and Class C because distribution fees that
Class B and Class C pay are higher. Normally, income dividends are
distributed to shareholders semi-annually. Capital gains, if any, are
usually distributed in June and December. The Fund, however, may
retain and reinvest any long-term capital gains. The Fund may at
times make payments from sources other than income or capital gains
that represent a return of a portion of your investment.
Distributions are reinvested automatically in additional shares of
the same Class and automatically credited to your account, unless you
request in writing that all distributions be paid in cash. If you
elect the cash option, the Fund will mail a check to you no later
than seven business days after the distribution is declared. No
interest will accrue on uncashed checks. If you wish to change how
your distributions are paid, your request should be received by the
Fund's transfer agent, Morgan Stanley Dean Witter Trust FSB, at least
five business days prior to the record date of the distributions.
14
[ICON] TAX CONSEQUENCES
--------------------------------------------------------------------------------
As with any investment, you should consider how your Fund investment
will be taxed. The tax information in this PROSPECTUS is provided as
general information. You should consult your own tax professional
about the tax consequences of an investment in the Fund.
Unless your investment in the Fund is through a tax-deferred
retirement account, such as a 401(k) plan or IRA, you need to be
aware of the possible tax consequences when:
- The Fund makes distributions; and
- You sell Fund shares, including an exchange to another Morgan
Stanley Dean Witter Fund.
TAXES ON DISTRIBUTIONS. Your distributions are normally subject to
federal and state income tax when they are paid, whether you take
them in cash or reinvest them in Fund shares. A distribution also may
be subject to local income tax. Any income dividend distributions and
any short-term capital gain distributions are taxable to you as
ordinary income. Any long-term capital gain distributions are taxable
as long-term capital gains, no matter how long you have owned shares
in the Fund.
Every January, you will be sent a statement (IRS Form 1099-DIV)
showing the taxable distributions paid to you in the previous year.
The statement provides full information on your dividends and capital
gains for tax purposes.
TAXES ON SALES. Your sale of Fund shares normally is subject to
federal and state income tax and may result in a taxable gain or loss
to you. A sale also may be subject to local income tax. Your exchange
of Fund shares for shares of another Morgan Stanley Dean Witter Fund
is treated for tax purposes like a sale of your original shares and a
purchase of your new shares. Thus, the exchange may, like a sale,
result in a taxable gain or loss to you and will give you a new tax
basis for your new shares.
When you open your Fund account, you should provide your social
security or tax identification number on your investment application.
By providing this information, you will avoid being subject to a
federal backup withholding tax of 31% on taxable distributions and
redemption proceeds. Any withheld amount would be sent to the IRS as
an advance tax payment.
[ICON] SHARE CLASS ARRANGEMENTS
--------------------------------------------------------------------------------
The Fund offers several Classes of shares having different
distribution arrangements designed to provide you with different
purchase options according to your investment needs. Your Morgan
Stanley Dean Witter Financial Advisor or other authorized financial
representative can help you decide which Class may be appropriate for
you.
15
The general public is offered three Classes: Class A shares, Class B
shares and Class C shares, which differ principally in terms of sales
charges and ongoing expenses. A fourth Class, Class D shares, is
offered only to a limited category of investors. Shares that you
acquire through reinvested distributions will not be subject to any
front-end sales charge or CDSC -- contingent deferred sales charge.
Sales personnel may receive different compensation for selling each
Class of shares. The sales charges applicable to each Class provide
for the distribution financing of shares of that Class.
The chart below compares the sales charge and maximum annual 12b-1
fee applicable to each Class:
[Enlarge/Download Table]
MAXIMUM ANNUAL
CLASS SALES CHARGE 12b-1 FEE
----------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------
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.
[Sidebar]
FRONT-END SALES
CHARGE OR FSC
AN INITIAL SALES CHARGE YOU PAY WHEN PURCHASING CLASS A SHARES THAT
IS BASED ON A PERCENTAGE OF THE OFFERING PRICE. THE PERCENTAGE
DECLINES BASED UPON THE DOLLAR VALUE OF CLASS A SHARES YOU PURCHASE.
WE OFFER THREE WAYS TO REDUCE YOUR CLASS A SALES CHARGES - THE
COMBINED PURCHASE PRIVILEGE, RIGHT OF ACCUMULATION AND LETTER OF
INTENT.
[End Sidebar]
The 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:
[Enlarge/Download Table]
FRONT-END SALES CHARGE
------------------------------------------------
AMOUNT OF PERCENTAGE OF PUBLIC APPROXIMATE PERCENTAGE OF
SINGLE TRANSACTION OFFERING PRICE AMOUNT INVESTED
------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------
16
The reduced sales charge schedule is applicable to purchases of Class
A shares in a single transaction by:
- A single account (including an individual, trust or fiduciary
account).
- Family member accounts (limited to husband, wife and children under
the age of 21).
- Pension, profit sharing or other employee benefit plans of
companies and their affiliates.
- Tax-exempt organizations.
- Groups organized for a purpose other than to buy mutual fund
shares.
COMBINED PURCHASE PRIVILEGE. You also will have the benefit of
reduced sales charges by combining purchases of Class A shares of the
Fund in a single transaction with purchases of Class A shares of
other Multi-Class Funds and shares of FSC Funds.
RIGHT OF ACCUMULATION. You also may benefit from a reduction of sales
charges if the cumulative net asset value of Class A shares of the
Fund purchased in a single transaction, together with shares of other
Funds you currently own which were previously purchased at a price
including a front-end sales charge (including shares acquired through
reinvestment of distributions), amounts to $25,000 or more. Also, if
you have a cumulative net asset value of all your Class A and Class D
shares equal to at least $5 million (or $25 million for certain
employee benefit plans), you are eligible to purchase Class D shares
of any Fund subject to the Fund's minimum initial investment
requirement.
You must notify your Morgan Stanley Dean Witter Financial Advisor or
other authorized financial representative (or Morgan Stanley Dean
Witter Trust FSB if you purchase directly through the Fund), at the
time a purchase order is placed, that the purchase qualifies for the
reduced charge under the Right of Accumulation. Similar notification
must be made in writing when an order is placed by mail. The reduced
sales charge will not be granted if: (i) notification is not
furnished at the time of the order; or (ii) a review of the records
of Dean Witter Reynolds or other authorized dealer of Fund shares or
the Fund's transfer agent does not confirm your represented holdings.
LETTER OF INTENT. The schedule of reduced sales charges for larger
purchases also will be available to you if you enter into a written
"letter of intent." A letter of intent provides for the purchase of
Class A shares of the Fund or other Multi-Class Funds and/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-
17
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:
- A trust for which Morgan Stanley Dean Witter Trust FSB provides
discretionary trustee services.
- Persons participating in a fee-based investment program (subject to
all of its terms and conditions, including mandatory sale or
transfer restrictions on termination) approved by the Fund's
distributor pursuant to which they pay an asset-based fee for
investment advisory, administrative and/or brokerage services.
- Employer-sponsored employee benefit plans, whether or not qualified
under the Internal Revenue Code, for which Morgan Stanley Dean
Witter Trust FSB serves as trustee or Dean Witter Reynolds'
Retirement Plan Services serves as recordkeeper under a written
Recordkeeping Services Agreement ("MSDW Eligible Plans") which have
at least 200 eligible employees.
- An MSDW Eligible Plan whose Class B shares have converted to Class
A shares, regardless of the plan's asset size or number of eligible
employees.
- A client of a Morgan Stanley Dean Witter Financial Advisor who
joined us from another investment firm within six months prior to
the date of purchase of Fund shares, and you used the proceeds from
the sale of shares of a proprietary mutual fund of that Financial
Advisor's previous firm that imposed either a front-end or deferred
sales charge to purchase Class A shares, provided that: (1) you
sold the shares not more than 60 days prior to the purchase of Fund
shares, and (2) the sale proceeds were maintained in the interim in
cash or a money market fund.
- Current or retired Directors/Trustees of the Morgan Stanley Dean
Witter Funds, such persons' spouses and children under the age of
21, and trust accounts for which any of such persons is a
beneficiary.
- Current or retired directors, officers and employees of Morgan
Stanley Dean Witter & Co. and any of its subsidiaries, such
persons' spouses and children under the age of 21, and trust
accounts for which any of such persons is a beneficiary.
18
[Sidebar]
CONTINGENT DEFERRED SALES CHARGE OR CDSC
A FEE YOU PAY WHEN YOU SELL SHARES OF CERTAIN MORGAN STANLEY DEAN WITTER FUNDS
PURCHASED WITHOUT AN INITIAL SALES CHARGE. THIS FEE DECLINES THE LONGER YOU HOLD
YOUR SHARES AS SET FORTH IN THE TABLE.
[End Sidebar]
CLASS B SHARES Class B shares are offered at net asset value with no
initial sales charge but are subject to a contingent deferred sales
charge, or CDSC, as set forth in the table below. For the purpose of
calculating the CDSC, shares are deemed to have been purchased on the
last day of the month during which they were purchased.
[Download Table]
CDSC AS A PERCENTAGE
YEAR SINCE PURCHASE PAYMENT MADE OF AMOUNT REDEEMED
--------------------------------------------------------------
First 5.0%
--------------------------------------------------------------
Second 4.0%
--------------------------------------------------------------
Third 3.0%
--------------------------------------------------------------
Fourth 2.0%
--------------------------------------------------------------
Fifth 2.0%
--------------------------------------------------------------
Sixth 1.0%
--------------------------------------------------------------
Seventh and thereafter None
--------------------------------------------------------------
Each time you place an order to sell or exchange shares, shares with
no CDSC will be sold or exchanged first, then shares with the lowest
CDSC will be sold or exchanged next. For any shares subject to a
CDSC, the CDSC will be assessed on an amount equal to the lesser of
the current market value or the cost of the shares being sold.
CDSC WAIVERS. A CDSC, if otherwise applicable, will be waived in the
case of:
- Sales of shares held at the time you die or become disabled (within
the definition in Section 72(m)(7) of the Internal Revenue Code
which relates to the ability to engage in gainful employment), if
the shares are: (i) registered either in your name (not a trust) or
in the names of you and your spouse as joint tenants with right of
survivorship; or (ii) held in a qualified corporate or
self-employed retirement plan, IRA or 403(b) Custodial Account,
provided in either case that the sale is requested within one year
of your death or initial determination of disability.
- Sales in connection with the following retirement plan
"distributions": (i) lump-sum or other distributions from a
qualified corporate or self-employed retirement plan following
retirement (or, in the case of a "key employee" of a "top heavy"
plan, following attainment of age 59 1/2); (ii) distributions from
an IRA or 403(b) Custodial Account following attainment of age 59
1/2; or (iii) a tax-free return of an excess IRA contribution (a
"distribution" does not include a direct transfer of IRA, 403(b)
Custodial Account or retirement plan assets to a successor
custodian or trustee).
- Sales of shares held for you as a participant in an MSDW Eligible
Plan.
- Sales of shares in connection with the Systematic Withdrawal Plan
of up to 12% annually of the value of each Fund from which plan
sales are made. The percentage is determined on the date you
establish the Systematic Withdrawal Plan and based on the next
calculated share price. You may have this CDSC waiver applied in
amounts up to 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
19
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 are subject to an annual 12b-1 fee
of 1.0% of the lesser of: (a) the average daily aggregate gross
purchases by all shareholders of the Fund's Class B shares since the
inception of the 12b-1 plan on July 2, 1984 (not including
reinvestments of dividends or capital gains distributions), less the
average daily aggregate net asset value of the Fund's Class B shares
sold by all shareholders since the 12b-1 plan's inception upon which
a CDSC has been imposed or waived, or (b) the average daily net
assets of Class B shares attributable to shares purchased, net of
related shares sold, since inception of the 12b-1 plan.
CONVERSION FEATURE. After ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund with no initial sales
charge. The ten year period runs from the last day of the month in
which the shares were purchased, or in the case of Class B shares
acquired through an exchange, from the last day of the month in which
the original Class B shares were purchased; the shares will convert
to Class A shares based on their relative net asset values in the
month following the ten year period. At the same time, an equal
proportion of Class B shares acquired through automatically
reinvested distributions will convert to Class A shares on the same
basis. (Class B shares held before May 1, 1997, however, will convert
to Class A shares in May 2007.)
In the case of Class B shares held in an MSDW Eligible Plan, the plan
is treated as a single investor and all Class B shares will convert
to Class A shares on the conversion date of the Class B shares of a
Morgan Stanley Dean Witter Fund purchased by that plan.
Currently, the Class B share conversion is not a taxable event; the
conversion feature may be cancelled if it is deemed a taxable event
in the future by the Internal Revenue Service.
If you exchange your Class B shares for shares of a Money Market
Fund, a No-Load Fund, North American Government Income Trust or
Short-Term U.S. Treasury Trust, the holding period for conversion is
frozen as of the last day of the month of the exchange and resumes on
the last day of the month you exchange back into Class B shares.
EXCHANGING SHARES SUBJECT TO A CDSC. There are special considerations
when you exchange Fund shares that are subject to a CDSC. When
determining the length of time you held the shares and the
corresponding CDSC rate, any period (starting at the end of
20
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 in a regular
account 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 1.0% on sales made
within one year after the last day of the month of purchase. The CDSC
will be assessed in the same manner and with the same CDSC waivers as
with Class B shares.
DISTRIBUTION FEE. Class C shares are subject to an annual
distribution (12b-1) fee of up to 1.0% of the average daily net
assets of that Class. The Class C shares' distribution fee may cause
that Class to have higher expenses and pay lower dividends than Class
A or Class D shares. Unlike Class B shares, Class C shares have no
conversion feature and, accordingly, an investor that purchases Class
C shares may be subject to distribution (12b-1) fees applicable to
Class C shares for an indefinite period.
CLASS D SHARES Class D shares are offered without any sales charge on
purchases or sales and without any distribution (12b-1) fee. Class D
shares are offered only to investors meeting an initial investment
minimum of $5 million ($25 million for MSDW Eligible Plans) and the
following investor categories:
- Investors participating in the Investment Manager's mutual fund
asset allocation program (subject to all of its terms and
conditions, including mandatory sale or transfer restrictions on
termination) pursuant to which they pay an asset-based fee.
21
- Persons participating in a fee-based investment program (subject to
all of its terms and conditions, including mandatory sale or
transfer restrictions on termination) approved by the Fund's
distributor pursuant to which they pay an asset-based fee for
investment advisory, administrative and/or brokerage services.
- Employee benefit plans maintained by Morgan Stanley Dean Witter &
Co. or any of its subsidiaries for the benefit of certain employees
of Morgan Stanley Dean Witter & Co. and its subsidiaries.
- Certain unit investment trusts sponsored by Dean Witter Reynolds.
- Certain other open-end investment companies whose shares are
distributed by the Fund's distributor.
- Investors who were shareholders of the Dean Witter Retirement
Series on September 11, 1998 for additional purchases for their
former Dean Witter Retirement Series accounts.
MEETING CLASS D ELIGIBILITY MINIMUMS. To meet the $5 million ($25
million for MSDW Eligible Plans) initial investment to qualify to
purchase Class D shares you may combine: (1) purchases in a single
transaction of Class D shares of the Fund and other Morgan Stanley
Dean Witter Multi-Class Funds and/or (2) previous purchases of Class
A and Class D shares of Multi-Class Funds and shares of FSC Funds you
currently own, along with shares of Morgan Stanley Dean Witter Funds
you currently own that you acquired in exchange for those shares.
NO SALES CHARGES FOR REINVESTED CASH DISTRIBUTIONS If you receive a
cash payment representing an income dividend or capital gain and you
reinvest that amount in the applicable Class of shares by returning the
check within 30 days of the payment date, the purchased shares would
not be subject to an initial sales charge or CDSC.
PLAN OF DISTRIBUTION (RULE 12B-1 FEES) The Fund has adopted a Plan of
Distribution in accordance with Rule 12b-1 under the Investment Company
Act of 1940 with respect to the distribution of Class A, Class B and
Class C shares. The Plan allows the Fund to pay distribution fees for
the sale and distribution of these shares. It also allows the Fund to
pay for services to shareholders of Class A, Class B and Class C
shares. Because these fees are paid out of the Fund's assets on an
ongoing basis, over time these fees will increase the cost of your
investment in these Classes and may cost you more than paying other
types of sales charges.
22
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 fiscal years of the Fund. Certain
information reflects financial results for a single Fund share outstanding
throughout each year. 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.
[Enlarge/Download Table]
FOR THE YEAR ENDED FEBRUARY 28 1999 1998*++ 1997 1996** 1995
-------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES
-------------------------------------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA:
-------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 13.81 $ 13.34 $ 12.70 $ 10.77 $ 11.82
-------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) (0.04) (0.02) -- 0.06 0.09
Net realized and unrealized gain (loss) (3.60) 2.18 2.66 2.53 (0.24)
--------- --------- --------- --------- ---------
Total income (loss) from investment operations (3.64) 2.16 2.66 2.59 (0.15)
-------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income -- (0.01) (0.02) (0.04) (0.12)
Net realized gain (0.14) (1.68) (2.00) (0.62) (0.78)
--------- --------- --------- --------- ---------
Total dividends and distributions (0.14) (1.69) (2.02) (0.66) (0.90)
-------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 10.03 $ 13.81 $ 13.34 $ 12.70 $ 10.77
-------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (26.60)% 16.93% 20.88% 24.32% (1.26)%
-------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
-------------------------------------------------------------------------------------------------------------------------
Expenses 1.90%(1) 1.80% 1.84% 1.90% 1.90%
-------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.20)%(1) (0.15)% 0.05% 0.52% 0.77%
-------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
-------------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $ 147,527 $ 273,333 $ 247,989 $ 152,661 $ 132,812
-------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 26% 67% 156% 49% 59%
-------------------------------------------------------------------------------------------------------------------------
* 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 purchased
prior to July 2, 1984 (and with respect to such shares, certain shares
acquired through reinvestment of dividends and capital gains distributions
(collectively the "Old Shares")), have been designated Class B shares. The
Old Shares have been designated Class D shares.
** Year ended February 29.
++ 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) Reflects overall Fund ratios for investment income and non-class specific
expenses.
23
[Enlarge/Download Table]
FOR THE YEAR ENDED FOR THE PERIOD JULY 28, 1997*
FEBRUARY 28, 1999 THROUGH FEBRUARY 28, 1998++
---------------------------------------------------------------------------------------------
CLASS A SHARES
---------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA:
---------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 13.87 $14.44
---------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income 0.03 0.04
Net realized and unrealized loss (3.61) (0.10)
------- ------
Total loss from investment operations (3.58) (0.06)
---------------------------------------------------------------------------------------------
Less distributions from net realized
gain (0.14) (0.51)
---------------------------------------------------------------------------------------------
Net asset value, end of period $ 10.15 $13.87
---------------------------------------------------------------------------------------------
TOTAL RETURN+ (26.04)% (0.22)%(1)
---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
---------------------------------------------------------------------------------------------
Expenses 1.14%(3) 1.11%(2)
---------------------------------------------------------------------------------------------
Net investment income 0.56%(3) 0.45%(2)
---------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
---------------------------------------------------------------------------------------------
Net assets, end of period, in
thousands $ 691 $ 309
---------------------------------------------------------------------------------------------
Portfolio turnover rate 26% 67%(1)
---------------------------------------------------------------------------------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
24
[Enlarge/Download Table]
FOR THE YEAR ENDED FOR THE PERIOD JULY 28, 1997*
FEBRUARY 28, 1999 THROUGH FEBRUARY 28, 1998++
---------------------------------------------------------------------------------------------
CLASS C SHARES
---------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA:
---------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 13.81 $14.44
---------------------------------------------------------------------------------------------
LOSS FROM INVESTMENT OPERATIONS:
Net investment loss (0.02) (0.02)
Net realized and unrealized loss (3.63) (0.10)
------- ------
Total loss from investment operations (3.65) (0.12)
---------------------------------------------------------------------------------------------
Less distributions from net realized
gain (0.14) (0.51)
---------------------------------------------------------------------------------------------
Net asset value, end of period $ 10.02 $13.81
---------------------------------------------------------------------------------------------
TOTAL RETURN+ (26.67)% (0.64)%(1)
---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
---------------------------------------------------------------------------------------------
Expenses 1.90%(3) 1.87%(2)
---------------------------------------------------------------------------------------------
Net investment loss (0.20)%(3) (0.23)%(2)
---------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
---------------------------------------------------------------------------------------------
Net assets, end of period, in
thousands $ 1,278 $1,488
---------------------------------------------------------------------------------------------
Portfolio turnover rate(1) 26% 67%
---------------------------------------------------------------------------------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
25
[Enlarge/Download Table]
FOR THE YEAR ENDED FOR THE PERIOD JULY 28, 1997*
FEBRUARY 28, 1999 THROUGH FEBRUARY 28, 1998++
------------------------------------------------------------------------------------------------------------------
CLASS D SHARES
------------------------------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA:
------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 13.89 $ 14.44
------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.05 0.07
Net realized and unrealized loss (3.61) (0.11)
------- -------
Total loss from investment operations (3.56) (0.04)
------------------------------------------------------------------------------------------------------------------
Less distributions from net realized gain (0.14) (0.51)
------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 10.19 $ 13.89
------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (25.86)% (0.08)%(1)
------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
------------------------------------------------------------------------------------------------------------------
Expenses 0.90%(3) 0.84%(2)
------------------------------------------------------------------------------------------------------------------
Net investment income 0.80%(3) 0.82%(2)
------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $15,454 $13,161
------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 26% 67%(1)
------------------------------------------------------------------------------------------------------------------
* 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 B 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.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
26
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27
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28
MORGAN STANLEY DEAN WITTER
FAMILY OF FUNDS
The Morgan Stanley Dean Witter Family of Funds offers
investors a wide range of investment choices. Come on
in and meet the family!
--------------------------------------------------------------------------------
GROWTH FUNDS
---------------------------------
GROWTH FUNDS
Aggressive Equity Fund
American Opportunities Fund
Capital Growth Securities
Developing Growth Securities
Equity Fund
Growth Fund
Market Leader Trust
Mid-Cap Equity Trust
Small Cap Growth Fund
Special Value Fund
Value Fund
THEME FUNDS
Financial Services Trust
Health Sciences Trust
Information Fund
Natural Resource Development Securities
Precious Metals and Minerals Trust
GLOBAL/INTERNATIONAL FUNDS
Competitive Edge Fund - "Best Ideas"
Portfolio
European Growth Fund
Fund of Funds - International Portfolio
International Fund
International SmallCap Fund
Japan Fund
Latin American Growth Fund
Pacific Growth Fund
--------------------------------------------------------------------------------
GROWTH AND INCOME FUNDS
---------------------------------
Balanced Growth Fund
Balanced Income Fund
Convertible Securities Trust
Dividend Growth Securities
Fund of Funds - Domestic Portfolio
Income Builder Fund
Mid-Cap Dividend Growth Securities
S&P 500 Index Fund
S&P 500 Select Fund
Strategist Fund
Total Return Trust
Value-Added Market Series/Equity Portfolio
THEME FUNDS
Global Utilities Fund
Real Estate Fund
Utilities Fund
GLOBAL FUNDS
Global Dividend Growth Securities
--------------------------------------------------------------------------------
INCOME FUNDS
---------------------------------
GOVERNMENT INCOME FUNDS
Federal Securities Trust
Short-Term U.S. Treasury Trust
U.S. Government Securities Trust
DIVERSIFIED INCOME FUNDS
Diversified Income Trust
CORPORATE INCOME FUNDS
High Yield Securities
Intermediate Income Securities
Short-Term Bond Fund (NL)
GLOBAL INCOME FUNDS
North American Government Income Trust
World Wide Income Trust
TAX-FREE INCOME FUNDS
California Tax-Free Income Fund
Hawaii Municipal Trust (FSC)
Limited Term Municipal Trust (NL)
Multi-State Municipal Series Trust (FSC)
New York Tax-Free Income Fund
Tax-Exempt Securities Trust
--------------------------------------------------------------------------------
MONEY MARKET FUNDS
---------------------------------
TAXABLE MONEY MARKET FUNDS
Liquid Asset Fund (MM)
U.S. Government Money Market Trust (MM)
TAX-FREE MONEY MARKET FUNDS
California Tax-Free Daily Income Trust (MM)
N.Y. Municipal Money Market Trust (MM)
Tax-Free Daily Income Trust (MM)
There may be Funds created after this PROSPECTUS was published. Please consult
the inside back cover of a new Fund's prospectus for its designation, e.g.,
Multi-Class Fund or Money Market Fund.
Unless otherwise noted, each listed Morgan Stanley Dean Witter Fund, except for
North American Government Income Trust and Short-Term U.S. Treasury Trust, is a
Multi-Class Fund. A Multi-Class Fund is a mutual fund offering multiple Classes
of shares. The other types of funds are: NL - No-Load (Mutual) Fund; MM - Money
Market Fund; FSC - A mutual fund sold with a front-end sales charge and a
distribution (12b-1) fee.
PROSPECTUS - JUNE 30, 1999
Additional information about the Fund's investments is available in the Fund's
ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS. In the Fund's ANNUAL REPORT, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. The
Fund's Statement of Additional Information also provides additional information
about the Fund. The Statement of Additional Information is incorporated herein
by reference (legally is part of this PROSPECTUS). For a free copy of any of
these documents, to request other information about the Fund, or to make
shareholder inquiries, please call:
(800) 869-NEWS
You also may obtain information about the Fund by calling your Morgan Stanley
Dean Witter Financial Advisor or by visiting our Internet site at:
www.deanwitter.com/funds
Information about the Fund (including the STATEMENT OF ADDITIONAL INFORMATION)
can be viewed and copied at the Securities and Exchange Commission's Public
Reference Room in Washington, DC. Information about the Reference Room's
operations may be obtained by calling the SEC at (800) SEC-0330. Reports and
other information about the Fund are available on the SEC's Internet site
(www.sec.gov) and copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Section of the SEC, Washington,
DC 20549-6009.
TICKER SYMBOLS:
CLASS A: NREAX CLASS C: NRECX
-------------------- --------------------
CLASS B: NREBX CLASS D: NREDX
-------------------- --------------------
(THE FUND'S INVESTMENT COMPANY ACT FILE NO. IS 811-3129)
MORGAN STANLEY DEAN WITTER
NATURAL RESOURCE
DEVELOPMENT SECURITIES
[BACK COVER PHOTO]
A MUTUAL FUND THAT
SEEKS CAPITAL GROWTH
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE TWO WORLD TRADE CENTER,
DEVELOPMENT SECURITIES INC. NEW YORK, NEW YORK 10048
LETTER TO THE SHAREHOLDERS FEBRUARY 28, 1999
DEAR SHAREHOLDER:
During the twelve-month period ended February 28, 1999, commodity and energy
prices remained under pressure as the Commodity Research Bureau (CRB) Index
declined to its lowest level in more than two decades and the Goldman Sachs
Commodity Index ended the year down -32.96 percent. As a result, shares of most
basic-industry companies performed poorly.
Despite the poor overall picture, some commodities are showing signs of
improvement as supply and demand come into balance. For example, in the forest
products and paper sector, restrained capacity growth and
consolidation of assets through mergers has significantly and favorably
contained inventory levels of different grades of paper in light of a bleak
demand outlook. Within the energy sector, prices may also have seen their cycles
bottom, as announcements in advance of a March 23, 1999, OPEC meeting signaled a
further effort to reduce production to match it with daily oil demand, thus
boosting prices.
PERFORMANCE AND PORTFOLIO
For the 12-month period ended February 28, 1999, Morgan Stanley Dean Witter
Natural Resource Development Securities Class B shares produced a total return
of -26.60 percent, compared to -29.60 percent for the Lipper Natural Resources
Funds Average and 19.74 percent for the broad-based S&P 500 Index. For the same
period, the Fund's Class A, C and D shares returned -26.04 percent, -26.67
percent and -25.86 percent, respectively. Performance of the Fund's four classes
varies because of differing expenses. The accompanying chart illustrates the
Fund's performance versus the Lipper Natural Resources Funds Average and the S&P
500 Index.
While the Fund sharply underperformed the broad-market index, it did outperform
the average fund in its Lipper peer group. We attribute this outperformance to
the Fund's focus on diversification within the commodity-related sectors and its
bias toward both quality and liquidity.
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
LETTER TO THE SHAREHOLDERS FEBRUARY 28, 1999, CONTINUED
During the fiscal year, the Fund sold or reduced positions in Alcan Aluminum,
Reynolds Metals, Imperial Chemical, Solutia and Case. The Fund added to existing
positions in the paper group and initiated a position in Georgia Pacific. It
also increased its exposure to gold by adding Placer Dome. At the end of
February, 44.5 percent of the Fund's assets were allocated to the basic energy
sector (e.g., integrated oil companies, natural gas, oil and gas production, and
oil refining and marketing), 37.7 percent to the metals and basic materials
sectors (e.g., major chemicals, forest products, paper, precious metals, steel
and iron ore) and 15.7 percent to the energy development and technology sectors
(e.g., contract drilling, diversified manufacturing, oilfield services and
equipment).
LOOKING AHEAD
In the latter part of 1998, lower interest rates generally prevailed as much of
the world (excluding the United States) experienced slow economic growth and
concerted central bank policies aimed at stimulating local economies. We expect
this global easing to translate into a gradual reflation of economic activity
and hence higher commodity prices over time.
As 1999 unfolds, there is increasing evidence of a pickup in economic activity
in certain Asian economies. Recent strength in the Japanese equity market
implies that investors may believe the bottom there has been reached. We are
encouraged by the increased demand for pulp and paper products, to which stocks
have reacted positively. We expect the increase in economic activity to broaden
and to affect other commodities such as steel, aluminum, copper and gold. While
it appears that the worst may be over, any recovery could be long and slow.
Finally, we believe that, after a protracted period of underperformance, the
natural resources sector represents good relative value.
We appreciate your ongoing support of Morgan Stanley Dean Witter Natural
Resource Development Securities and look forward to continuing to serve your
investment needs.
Very truly yours,
/s/ Charles A. Fiumefreddo
CHARLES A. FIUMEFREDDO
CHAIRMAN OF THE BOARD
2
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE
DEVELOPMENT SECURITIES INC.
FUND PERFORMANCE FEBRUARY 28, 1999
[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND ACCURATE
DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR THE
PURPOSE OF EDGAR FILING.]
[Download Table]
Growth of $10,000--Class B
Shares
Lipper
($ in Thousands) Fund S&P 500(4) (5)
February-1989 $10,000 $10,000 $10,000
February-1990 $12,111 $11,884 $12,250
February-1991 $12,458 $13,627 $12,070
February-1992 $12,220 $15,810 $11,652
February-1993 $13,847 $17,494 $12,693
February-1994 $15,531 $18,947 $15,159
February-1995 $15,334 $20,341 $14,242
February-1996 $19,064 $27,391 $17,867
February-1997 $23,045 $34,557 $21,981
February-1998 $26,946 $46,648 $22,476
February-1999 $19,780(3) $55,856 $15,823
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. PERFORMANCE FOR CLASS
A, CLASS C, AND CLASS D SHARES WILL VARY FROM THE PERFORMANCE OF CLASS B
SHARES SHOWN ABOVE DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURNS
------------------------------------------------------------------------------------------------------------------
CLASS B SHARES* CLASS A SHARES+
-------------------------------------------------- ----------------------------------------------------------
PERIOD ENDED 2/28/99 PERIOD ENDED 2/28/99
------------------------- --------------------------
1 Year -26.60%(1) -30.23%(2) 1 Year -26.04%(1) -29.93%(2)
5 Year 4.96(1) 4.67(2) Since Inception (7/28/97) -17.42(1) -20.18(2)
10 Year 7.06(1) 7.06(2)
[Enlarge/Download Table]
CLASS C SHARES++ CLASS D SHARES++
-------------------------------------------------- ----------------------------------------------------------
PERIOD ENDED 2/28/99 PERIOD ENDED 2/28/99
------------------------- --------------------------
1 Year -26.67%(1) -27.39%(2) 1 Year -25.86%(1)
Since Inception (7/28/97) -18.08(1) -18.08(2) Since Inception (7/28/97) -17.22(1)
------------------------
(1) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable sales charge. See the Fund's current prospectus for
complete details on fees and sales charges.
(3) Closing value assuming a complete redemption on February 28, 1999.
(4) The Standard & Poor's 500 Stock Index (S&P 500) 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.
(5) The Lipper Natural Resources Funds Average tracks the performance of all
funds which invest more than 65% of their equity commitment in natural
resource stocks, as reported by Lipper Analytical Services, Inc.
* The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%.
The CDSC declines to 0% after six years.
+ The maximum front-end sales charge for Class A is 5.25%.
++ The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of purchase.
++ Class D shares have no sales charge.
3
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
PORTFOLIO OF INVESTMENTS FEBRUARY 28, 1999
[Enlarge/Download Table]
NUMBER OF
SHARES VALUE
------------------------------------------------------------------------------------------------------------
COMMON STOCKS (97.9%)
BASIC ENERGY (44.5%)
CANADIAN OIL & GAS (0.5%)
175,000 Gulf Canada Resources, Ltd. (Canada)*.............................................. $ 404,687
174,831 Ranger Oil Ltd..................................................................... 491,712
------------
896,399
------------
INTEGRATED OIL COMPANIES (26.3%)
50,000 Atlantic Richfield Co.............................................................. 2,731,250
60,000 BP Amoco PLC (ADR) (United Kingdom)................................................ 5,100,000
25,000 Chevron Corp....................................................................... 1,921,875
45,000 Ente Nazionale Idrocarburi SpA (ADR) (Italy)....................................... 2,655,000
115,000 Exxon Corp......................................................................... 7,654,687
25,000 Kerr-McGee Corp.................................................................... 714,063
95,000 Mobil Corp......................................................................... 7,902,812
35,000 PennzEnergy Co..................................................................... 328,125
117,000 Royal Dutch Petroleum Co. (ADR) (Netherlands)...................................... 5,133,375
95,000 Texaco, Inc........................................................................ 4,423,437
70,000 Unocal Corp........................................................................ 1,973,125
95,000 YPF Sociedad Anonima (ADR) (Argentina)............................................. 2,755,000
------------
43,292,749
------------
NATURAL GAS (0.8%)
60,000 KN Energy, Inc..................................................................... 1,256,250
------------
OIL & GAS PRODUCTION (6.4%)
50,000 Anardarko Petroleum Corp........................................................... 1,375,000
80,000 Apache Corp........................................................................ 1,595,000
70,000 Burlington Resources, Inc.......................................................... 2,266,250
55,000 Cabot Oil & Gas Corp. (Class A).................................................... 601,562
25,000 Devon Energy Corp.................................................................. 585,937
10,000 Noble Affiliates, Inc.............................................................. 226,250
22,500 Nuevo Energy Co.*.................................................................. 157,500
80,000 Occidental Petroleum Corp.......................................................... 1,205,000
25,000 Snyder Oil Corp.................................................................... 260,937
55,000 St. Mary Land & Exploration Co..................................................... 825,000
71,500 Swift Energy Co.*.................................................................. 429,000
55,000 Union Pacific Resources Group, Inc................................................. 491,563
80,000 Vintage Petroleum, Inc............................................................. 355,000
100,000 Wiser Oil Co....................................................................... 168,750
------------
10,542,749
------------
OIL REFINING/MARKETING (3.8%)
35,000 Pennzoil-Quaker State Co........................................................... 435,313
40,000 Petro-Canada (Canada).............................................................. 429,908
NUMBER OF
SHARES VALUE
------------------------------------------------------------------------------------------------------------
25,000 Sunoco, Inc........................................................................ $ 760,938
35,000 Tosco Corp......................................................................... 724,063
75,000 Total S.A. (ADR) (France).......................................................... 3,871,875
------------
6,222,097
------------
OIL/GAS TRANSMISSION (6.7%)
70,000 El Paso Energy Corp................................................................ 2,550,625
45,000 Enron Corp......................................................................... 2,925,000
40,000 Enron Oil & Gas Co................................................................. 660,000
135,000 Williams Companies, Inc............................................................ 4,995,000
------------
11,130,625
------------
TOTAL BASIC ENERGY................................................................. 73,340,869
------------
ENERGY DEVELOPMENT &
TECHNOLOGY (15.7%)
CONTRACT DRILLING (2.9%)
35,000 Diamond Offshore Drilling, Inc..................................................... 724,062
75,000 ENSCO International, Inc........................................................... 665,625
30,000 Global Marine, Inc.*............................................................... 232,500
40,000 Marine Drilling Company, Inc.*..................................................... 255,000
65,000 Nabors Industries, Inc.*........................................................... 747,500
25,000 Noble Drilling Corp.*.............................................................. 309,375
20,000 Patterson Energy, Inc.*............................................................ 55,625
25,000 Precision Drilling Corp. (Class A) (Canada)*....................................... 229,687
88,500 R & B Falcon Corp.*................................................................ 486,750
25,000 Santa Fe International Corp........................................................ 334,375
40,000 Transocean Offshore Inc............................................................ 825,000
------------
4,865,499
------------
DIVERSIFIED MANUFACTURING (2.8%)
95,000 Allegheny Teledyne Inc............................................................. 1,959,375
65,000 AlliedSignal, Inc.................................................................. 2,689,375
------------
4,648,750
------------
OILFIELD SERVICES/EQUIPMENT (10.0%)
50,000 Baker Hughes, Inc.................................................................. 900,000
25,000 BJ Services Co.*................................................................... 351,563
60,000 Cooper Cameron Corp.*.............................................................. 1,387,500
110,000 Global Industries Ltd.*............................................................ 556,875
125,000 Halliburton Co..................................................................... 3,531,250
5,000 National-Oilwell, Inc.*............................................................ 44,375
20,000 Offshore Logistics, Inc.*.......................................................... 173,750
30,000 Petroleum Geo - Services ASA (ADR) (Norway)*....................................... 343,125
83,200 Schlumberger, Ltd.................................................................. 4,040,400
30,000 Smith International, Inc.*......................................................... 729,375
32,500 Stolt Comex Seaway, S.A. (ADR) (United Kingdom)*................................... 190,938
SEE NOTES TO FINANCIAL STATEMENTS
4
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
PORTFOLIO OF INVESTMENTS FEBRUARY 28, 1999, CONTINUED
[Enlarge/Download Table]
NUMBER OF
SHARES VALUE
------------------------------------------------------------------------------------------------------------
70,000 Stolt Comex Seaway, S.A. (United Kingdom)*......................................... $ 457,188
30,000 Trico Marine Service, Inc.*........................................................ 129,375
55,000 UTI Energy Corp.*.................................................................. 319,688
90,000 Varco International, Inc.*......................................................... 697,500
65,000 Veritas DGC Inc.*.................................................................. 613,438
116,500 Weatherford International, Inc.*................................................... 1,980,500
------------
16,446,840
------------
TOTAL ENERGY DEVELOPMENT & TECHNOLOGY.............................................. 25,961,089
------------
METALS AND BASIC MATERIALS (37.7%)
ALUMINUM (2.2%)
90,000 Alcoa Inc.......................................................................... 3,645,000
------------
CONSTRUCTION/AGRICULTURAL EQUIPMENT/TRUCKS (0.9%)
45,000 Deere & Co......................................................................... 1,470,937
------------
CONTAINERS/PACKAGING (2.6%)
78,000 Owens-Illinois, Inc.*.............................................................. 1,867,125
40,000 Temple-Inland, Inc................................................................. 2,397,500
------------
4,264,625
------------
ENVIRONMENTAL SERVICES (0.2%)
15,500 Casella Waste Systems Inc., (Class A)*............................................. 315,812
------------
FOREST PRODUCTS (1.1%)
25,000 Georgia-Pacific Group.............................................................. 1,831,250
------------
INDUSTRIAL MACHINERY/COMPONENTS (1.0%)
34,200 Ingersoll-Rand Co.................................................................. 1,624,500
------------
MAJOR CHEMICALS (6.9%)
35,000 Dow Chemical Co.................................................................... 3,443,125
75,000 Du Pont (E.I.) de Nemours & Co., Inc............................................... 3,848,437
90,000 Monsanto Co........................................................................ 4,100,625
------------
11,392,187
------------
METALS FABRICATIONS (0.6%)
40,000 Reliance Steel & Aluminum Co....................................................... 1,022,500
------------
PAINTS/COATINGS (0.9%)
30,000 PPG Industries, Inc................................................................ 1,561,875
------------
PAPER (8.6%)
50,000 Boise Cascade Corp................................................................. 1,553,125
50,000 Bowater, Inc....................................................................... 2,106,250
50,000 Champion International Corp........................................................ 1,850,000
NUMBER OF
SHARES VALUE
------------------------------------------------------------------------------------------------------------
100,000 Mead Corp.......................................................................... $ 3,043,750
40,000 Union Camp Corp.................................................................... 2,675,000
80,000 Willamette Industries, Inc......................................................... 2,915,000
------------
14,143,125
------------
PRECIOUS METALS (6.1%)
160,000 Barrick Gold Corp. (Canada)........................................................ 2,830,000
100,000 Getchell Gold Corp.*............................................................... 2,593,750
100,000 Newmont Mining Corp................................................................ 1,725,000
100,000 Placer Dome Inc. (Canada).......................................................... 1,093,750
82,950 Stillwater Mining Co.*............................................................. 1,902,666
------------
10,145,166
------------
SPECIALTY CHEMICALS (2.0%)
60,000 Avery Dennison Corp................................................................ 3,221,250
------------
SPECIALTY STEELS (0.8%)
30,000 Nucor Corp......................................................................... 1,336,875
------------
STEEL/IRON ORE (3.8%)
80,000 AK Steel Holding Corp.............................................................. 1,745,000
95,000 British Steel PLC (ADR) (United Kingdom)........................................... 1,870,313
45,000 Lone Star Technologies, Inc.*...................................................... 582,188
80,000 USX-U.S. Steel Group............................................................... 2,025,000
------------
6,222,501
------------
TOTAL METALS & BASIC MATERIALS..................................................... 62,197,603
------------
[Enlarge/Download Table]
TOTAL INVESTMENTS
(IDENTIFIED COST $178,309,725) (a)........................................................ 97.9 % 161,499,561
OTHER ASSETS IN EXCESS OF LIABILITIES..................................................... 2.1 3,450,760
------ -------------
NET ASSETS................................................................................ 100.0 % $ 164,950,321
------ -------------
------ -------------
---------------------
ADR American Depository Receipt.
* Non-income producing security.
(a) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $22,003,093 and the
aggregate gross unrealized depreciation is $38,813,257, resulting in net
unrealized depreciation of $16,810,164.
SEE NOTES TO FINANCIAL STATEMENTS
5
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1999
[Enlarge/Download Table]
ASSETS:
Investments in securities, at value
(identified cost $178,309,725).............................................................. $161,499,561
Receivable for:
Investments sold.......................................................................... 3,676,977
Dividends................................................................................. 416,280
Capital stock sold........................................................................ 195,092
Foreign withholding taxes reclaimed....................................................... 34,594
Prepaid expenses and other assets............................................................. 98,252
------------
TOTAL ASSETS............................................................................. 165,920,756
------------
LIABILITIES:
Payable for:
Capital stock repurchased................................................................. 196,014
Plan of distribution fee.................................................................. 127,550
Investment management fee................................................................. 88,601
Payable to bank............................................................................... 447,129
Accrued expenses and other payables........................................................... 111,141
------------
TOTAL LIABILITIES........................................................................ 970,435
------------
NET ASSETS............................................................................... $164,950,321
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $193,467,539
Net unrealized depreciation................................................................... (16,810,164)
Accumulated net investment loss............................................................... (52,409)
Accumulated net realized loss................................................................. (11,654,645)
------------
NET ASSETS............................................................................... $164,950,321
============
CLASS A SHARES:
Net Assets.................................................................................... $691,035
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE)................................... 68,091
NET ASSET VALUE PER SHARE................................................................ $10.15
============
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE)......................................... $10.71
============
CLASS B SHARES:
Net Assets.................................................................................... $147,527,336
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE)................................... 14,708,614
NET ASSET VALUE PER SHARE................................................................ $10.03
============
CLASS C SHARES:
Net Assets.................................................................................... $1,277,627
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE)................................... 127,480
NET ASSET VALUE PER SHARE................................................................ $10.02
============
CLASS D SHARES:
Net Assets.................................................................................... $15,454,323
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE)................................... 1,516,381
NET ASSET VALUE PER SHARE................................................................ $10.19
============
SEE NOTES TO FINANCIAL STATEMENTS
6
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28, 1999
[Enlarge/Download Table]
NET INVESTMENT LOSS:
INCOME
Dividends (net of $93,493 foreign withholding tax)............................................ $ 3,683,514
Interest...................................................................................... 188,322
------------
TOTAL INCOME............................................................................. 3,871,836
------------
EXPENSES
Plan of distribution fee (Class A shares)..................................................... 1,320
Plan of distribution fee (Class B shares)..................................................... 2,124,861
Plan of distribution fee (Class C shares)..................................................... 12,497
Investment management fee..................................................................... 1,408,351
Transfer agent fees and expenses.............................................................. 342,988
Registration fees............................................................................. 93,922
Shareholder reports and notices............................................................... 87,009
Professional fees............................................................................. 69,946
Custodian fees................................................................................ 22,782
Directors' fees and expenses.................................................................. 17,187
Other......................................................................................... 9,972
------------
TOTAL EXPENSES........................................................................... 4,190,835
------------
NET INVESTMENT LOSS...................................................................... (318,999)
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss............................................................................. (10,954,030)
Net change in unrealized appreciation......................................................... (56,429,019)
------------
NET LOSS................................................................................. (67,383,049)
------------
NET DECREASE.................................................................................. $(67,702,048)
============
SEE NOTES TO FINANCIAL STATEMENTS
7
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
[Enlarge/Download Table]
FOR THE YEAR FOR THE YEAR
ENDED ENDED
FEBRUARY 28, FEBRUARY 28,
1999 1998*
---------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss......................................... $ (318,999) $ (351,725)
Net realized gain (loss).................................... (10,954,030) 13,069,671
Net change in unrealized appreciation....................... (56,429,019) 28,945,843
-------------- --------------
NET INCREASE (DECREASE)................................ (67,702,048) 41,663,789
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class B shares.......................................... -- (105,075)
Net realized gain
Class A shares.......................................... (5,526) (9,967)
Class B shares.......................................... (2,604,507) (32,041,346)
Class C shares.......................................... (14,135) (36,377)
Class D shares.......................................... (114,256) (416,177)
-------------- --------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................... (2,738,424) (32,608,942)
-------------- --------------
Net increase (decrease) from capital stock transactions..... (52,899,959) 31,247,222
-------------- --------------
NET INCREASE (DECREASE)................................ (123,340,431) 40,302,069
NET ASSETS:
Beginning of period......................................... 288,290,752 247,988,683
-------------- --------------
END OF PERIOD
(INCLUDING NET INVESTMENT LOSSES OF $52,409 AND $49,179,
RESPECTIVELY)........................................... $ 164,950,321 $ 288,290,752
============= =============
---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
8
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1999
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Natural Resource Development Securities Inc. (the
"Fund"), formerly Dean Witter Natural Resource Development Securities Inc., 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 capital growth. The Fund invests primarily in common stock of
companies in the natural resources and related areas. The Fund was incorporated
in Maryland on December 22, 1980 and commenced operations on March 30, 1981. On
July 28, 1997, the Fund commenced offering three additional classes of shares,
with the then current shares, other than shares which were purchased prior to
July 2, 1984 (and with respect to such shares, certain shares acquired through
reinvestment of dividends and capital gains distributions (collectively the "Old
Shares")), designated as Class B shares. The Old Shares have been designated
Class D shares.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares, are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price (in
cases where securities are traded on more than one exchange, the securities are
valued on the exchange designated as the primary market pursuant to procedures
adopted by the Directors); (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
9
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1999, CONTINUED
value as determined in good faith under procedures established by and under the
general supervision of the Directors (valuation of debt securities for which
market quotations are not readily available may be based upon current market
prices of securities which are comparable in coupon, rating and maturity or an
appropriate matrix utilizing similar factors); and (4) short-term debt
securities having a maturity date of more than sixty days at time of purchase
are valued on a mark-to-market basis until sixty days prior to maturity and
thereafter at amortized cost based on their value on the 61st day. Short-term
debt securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. 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 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.
10
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1999, CONTINUED
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with the Investment Manager, the
Fund pays a management fee, accrued daily and payable monthly, by applying the
following annual rates to the net assets of the Fund determined at the close of
each business day: 0.625% to the portion of daily net assets not exceeding $250
million and 0.50% to the portion of daily net assets exceeding $250 million.
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
lesser of: (a) the average daily aggregate gross sales of the Class B shares
since the inception of the Fund (not including reinvestment of dividend or
capital gain distributions) less the average daily aggregate net asset value of
the Class B shares redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or waived; or (b) the average daily net
assets of Class B; and (iii) Class C -- up to 1.0% of the average daily net
assets of Class C. In the case of Class A shares, amounts paid under the Plan
are paid to the Distributor for services provided. In the case of Class B and
Class C shares, amounts paid under the Plan are paid to the Distributor for (1)
services provided and the expenses borne by it and others in the distribution of
the shares of these Classes, including the payment of commissions for sales of
these Classes and incentive compensation to, and expenses of, Morgan Stanley
Dean Witter Financial Advisors and others who engage in or support distribution
of the shares or who service shareholder accounts, including overhead and
telephone expenses; (2) printing and distribution of prospectuses and reports
used in connection with the offering of these shares to other than current
shareholders; and (3) preparation, printing and distribution of sales literature
and advertising materials. In addition, the Distributor may utilize fees paid
pursuant to the Plan, in the case of Class B shares,
11
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1999, CONTINUED
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 $5,822,597 at February 28, 1999.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the year ended February 28, 1999, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.24% and
1.0%, respectively.
The Distributor has informed the Fund that for the year ended February 28, 1999,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $404,686 and $1,864, respectively
and received $10,626 in front-end sales charges from sales of the Fund's Class A
shares. The respective shareholders pay such charges which are not an expense of
the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended February 28, 1999 aggregated
$57,916,923 and $107,740,740, respectively.
For the year ended February 28, 1999, the Fund incurred brokerage commissions of
$57,167 with DWR for portfolio transactions executed on behalf of the Fund.
12
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1999, CONTINUED
For the year ended February 28, 1999, the Fund incurred $28,737 in brokerage
commissions 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.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Directors of the Fund who will have served as independent
Directors for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregated pension costs for the year ended February 28, 1999
included in Director's fees and expenses in the Statement of Operations amounted
to $6,389. At February 28, 1999, the Fund had an accrued pension liability of
$52,405 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. FEDERAL INCOME TAX STATUS
At February 28, 1999, the Fund had a net capital loss carryover of approximately
$6,384,000 which will be available through February 28, 2007 to offset future
capital gains to the extent provided by regulations.
Capital losses incurred after October 31 ("post-October losses") within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $5,226,000 during fiscal 1999.
As of February 28, 1999, the Fund had temporary book/tax differences primarily
attributable to post-October losses and capital loss deferrals on wash sales and
permanent book/tax differences primarily attributable to a net operating loss.
To reflect reclassifications arising from the permanent differences,
paid-in-capital was charged $368,840, accumulated net realized loss was credited
$53,071 and net investment loss was credited $315,769.
13
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1999, CONTINUED
6. CAPITAL STOCK
Transactions in capital stock were as follows:
[Enlarge/Download Table]
FOR THE YEAR FOR THE YEAR
ENDED ENDED
FEBRUARY 28, 1999 FEBRUARY 28, 1998*+
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
CLASS A SHARES
Sold............................................................. 87,666 $ 1,046,452 27,229 $ 407,922
Reinvestment of distributions.................................... 383 5,103 673 8,808
Redeemed......................................................... (42,239) (490,436) (5,621) (78,162)
----------- -------------- ----------- ------------
Net increase - Class A........................................... 45,810 561,119 22,281 338,568
----------- -------------- ----------- ------------
CLASS B SHARES
Sold............................................................. 10,150,338 129,276,569 17,476,686 251,041,315
Reinvestment of dividends and distributions...................... 184,797 2,441,170 2,235,739 29,908,674
Redeemed......................................................... (15,417,509) (191,663,575) (17,865,123) (255,937,003)
----------- -------------- ----------- ------------
Net increase (decrease) - Class B................................ (5,082,374) (59,945,836) 1,847,302 25,012,986
----------- -------------- ----------- ------------
CLASS C SHARES
Sold............................................................. 448,875 5,948,277 214,875 2,958,438
Reinvestment of distributions.................................... 1,001 13,228 2,477 32,320
Redeemed......................................................... (430,175) (5,757,346) (109,573) (1,457,551)
----------- -------------- ----------- ------------
Net increase - Class C........................................... 19,701 204,159 107,779 1,533,207
----------- -------------- ----------- ------------
CLASS D SHARES
Sold............................................................. 1,402,605 15,983,255 292,553 4,265,324
Reinvestment of distributions.................................... 8,305 110,702 30,695 402,418
Redeemed......................................................... (842,093) (9,813,358) (21,545) (305,281)
----------- -------------- ----------- ------------
Net increase - Class D........................................... 568,817 6,280,599 301,703 4,362,461
----------- -------------- ----------- ------------
Net increase (decrease) in Fund.................................. (4,448,046) $ (52,899,959) 2,279,065 $ 31,247,222
=========== ============== =========== ============
---------------------
* For Class A, C and D shares, for the period July 28, 1997 (issue date)
through February 28, 1998.
+ On July 28, 1997, 645,861 shares representing $9,326,226 were transferred
to Class D.
14
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of capital stock outstanding
throughout each period:
[Enlarge/Download Table]
FOR THE YEAR ENDED FEBRUARY 28
-------------------------------------------------------------------------
1999 1998*++ 1997 1996** 1995
--------------------------------------------------------------------------------------------------------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of
period....................... $ 13.81 $ 13.34 $ 12.70 $ 10.77 $ 11.82
------ ------ ------ ------ ------
Income (loss) from investment
operations:
Net investment income
(loss)..................... (0.04) (0.02) -- 0.06 0.09
Net realized and unrealized
gain (loss)................ (3.60) 2.18 2.66 2.53 (0.24)
------ ------ ------ ------ ------
Total income (loss) from
investment operations........ (3.64) 2.16 2.66 2.59 (0.15)
------ ------ ------ ------ ------
Less dividends and
distributions from:
Net investment income...... -- (0.01) (0.02) (0.04) (0.12)
Net realized gain.......... (0.14) (1.68) (2.00) (0.62) (0.78)
------ ------ ------ ------ ------
Total dividends and
distributions................ (0.14) (1.69) (2.02) (0.66) (0.90)
------ ------ ------ ------ ------
Net asset value, end of
period....................... $ 10.03 $ 13.81 $ 13.34 $ 12.70 $ 10.77
====== ====== ====== ====== ======
TOTAL RETURN+................. (26.60)% 16.93% 20.88% 24.32% (1.26)%
RATIOS TO AVERAGE NET ASSETS:
Expenses...................... 1.90%(1) 1.80% 1.84% 1.90% 1.90%
Net investment income
(loss)....................... (0.20)%(1) (0.15)% 0.05% 0.52% 0.77%
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands.................... $147,527 $273,333 $247,989 $152,661 $132,812
Portfolio turnover rate....... 26% 67% 156% 49% 59%
---------------------
* 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 purchased
prior to July 2, 1984 (and with respect to such shares, certain shares
acquired through reinvestment of dividends and capital gains distributions
(collectively the "Old Shares")), have been designated Class B shares. The
Old Shares have been designated Class D shares.
** Year ended February 29.
++ 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) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
15
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
FINANCIAL HIGHLIGHTS, CONTINUED
[Enlarge/Download Table]
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
FEBRUARY 28, FEBRUARY 28,
1999 1998++
-----------------------------------------------------------------------------------------------------------
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................................. $ 13.87 $ 14.44
------ ------
Income (loss) from investment operations:
Net investment income.............................................. 0.03 0.04
Net realized and unrealized loss................................... (3.61) (0.10)
------ ------
Total loss from investment operations................................. (3.58) (0.06)
------ ------
Less distributions from net realized gain............................. (0.14) (0.51)
------ ------
Net asset value, end of period........................................ $ 10.15 $ 13.87
====== ======
TOTAL RETURN+......................................................... (26.04)% (0.22)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.14%(3) 1.11%(2)
Net investment income................................................. 0.56%(3) 0.45%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $691 $309
Portfolio turnover rate............................................... 26% 67%(1)
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................................. $ 13.81 $ 14.44
------ ------
Loss from investment operations:
Net investment loss................................................ (0.02) (0.02)
Net realized and unrealized loss................................... (3.63) (0.10)
------ ------
Total loss from investment operations................................. (3.65) (0.12)
------ ------
Less distributions from net realized gain............................. (0.14) (0.51)
------ ------
Net asset value, end of period........................................ $ 10.02 $ 13.81
====== ======
TOTAL RETURN+......................................................... (26.67)% (0.64)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.90%(3) 1.87%(2)
Net investment loss................................................... (0.20)%(3) (0.23)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $1,278 $1,488
Portfolio turnover rate............................................... 26% 67%(1)
---------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
16
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
FINANCIAL HIGHLIGHTS, CONTINUED
[Enlarge/Download Table]
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
FEBRUARY 28, FEBRUARY 28,
1999 1998++
-----------------------------------------------------------------------------------------------------------
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................................. $ 13.89 $ 14.44
------ ------
Income (loss) from investment operations:
Net investment income.............................................. 0.05 0.07
Net realized and unrealized loss................................... (3.61) (0.11)
------ ------
Total loss from investment operations................................. (3.56) (0.04)
------ ------
Less distributions from net realized gain............................. (0.14) (0.51)
------ ------
Net asset value, end of period........................................ $ 10.19 $ 13.89
====== ======
TOTAL RETURN+......................................................... (25.86)% (0.08)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 0.90%(3) 0.84%(2)
Net investment income................................................. 0.80%(3) 0.82%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $15,454 $13,161
Portfolio turnover rate............................................... 26% 67%(1)
---------------------
* 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 B 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.
+ 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
17
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE
DEVELOPMENT SECURITIES INC.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
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 Natural
Resource Development Securities Inc. (the "Fund"), formerly Dean Witter Natural
Resource Development Securities Inc., at February 28, 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 February 28, 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
APRIL 13, 1999
1999 FEDERAL TAX NOTICE (UNAUDITED)
During the fiscal year ended February 28, 1999, 47.63% of the
income dividends qualified for the dividends received deduction
available to corporations.
18
(This page has been left blank intentionally.)
BOARD OF DIRECTORS
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
David F. Myers
Vice President
Catherine Maniscalco
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and
directors, fees, expenses and other pertinent information, please see the
prospectus of the Fund.
This report is not authorized for distribution to prospective investors in
the Fund unless preceded or accompanied by an effective prospectus.
MORGAN STANLEY
DEAN WITTER
NATURAL RESOURCE
DEVELOPMENT
SECURITIES
[PHOTO]
ANNUAL REPORT
FEBRUARY 28, 1999
PROSPECTUS - FEBRUARY 22, 1999
MORGAN STANLEY DEAN WITTER
PRECIOUS METALS AND MINERALS TRUST
[COVER PHOTO]
A MUTUAL FUND THAT SEEKS LONG-TERM CAPITAL APPRECIATION
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.
CONTENTS
[Enlarge/Download Table]
The Fund Investment Objective......................... 1
Principal Investment Strategies.............. 1
Principal Risks.............................. 1
Past Performance............................. 3
Fees and Expenses............................ 4
Additional Investment Strategy Information... 5
Additional Risk Information.................. 5
Fund Management.............................. 6
Shareholder Information Pricing Fund Shares.......................... 7
How to Buy Shares............................ 8
How to Exchange Shares....................... 9
How to Sell Shares........................... 11
Distributions................................ 12
Tax Consequences............................. 13
Share Class Arrangements..................... 14
Financial Highlights ............................................. 21
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.
FUND CATEGORY
---------------------------
[X] GROWTH
[ ] Growth and Income
[ ] Income
[ ] Money Market
THE FUND
[ICON] INVESTMENT OBJECTIVE
--------------------------------------------------------------------------------
Morgan Stanley Dean Witter Precious Metals and Minerals Trust (the
"Fund") is a mutual fund that seeks long-term capital appreciation.
There is no guarantee that the Fund will achieve this objective.
[ICON] PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------
The Fund will normally invest at least 65% of its assets in the
common stock and other securities of foreign and domestic companies
principally engaged in the precious metals and minerals business. The
companies may engage in the exploration, mining, fabrication,
processing, distribution or trading of precious metals and minerals
-- or in financing, managing or operating companies engaged in these
activities. A company is considered to be principally engaged in
these activities if it derives a majority of its income from, or
devotes a majority of its assets to, the activities. The Fund's
"Investment Manager," Morgan Stanley Dean Witter Advisors Inc.,
invests in companies that it believes have growth potential based on
a wide variety of factors.
(SIDEBAR)
CAPITAL GROWTH
AN INVESTMENT OBJECTIVE HAVING THE GOAL OF SELECTING SECURITIES WITH THE
POTENTIAL TO RISE IN VALUE RATHER THAN PAY OUT INCOME.
(END SIDEBAR)
Because most of the world's gold production is outside of the United
States, a majority of the Fund's assets may be invested in the
securities of foreign companies.
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.
The Fund also may invest a portion of its assets in gold, silver,
platinum and palladium bullion and coins (or certificates, receipts
or contracts representing ownership interests in these precious
metals).
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. In addition to the investments discussed above, the Fund may
invest in common stocks of companies that are not primarily engaged
in the precious metals or minerals business, long-term U.S.
Government Securities and money market instruments.
[ICON] PRINCIPAL RISKS
--------------------------------------------------------------------------------
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.
1
PRECIOUS METALS AND MINERALS. The Fund's investments related to gold
and other precious metals and minerals are considered speculative and
are impacted by a host of world-wide economic, financial and
political factors. Prices of gold and other precious metals may
fluctuate widely over short periods of time due to changes in
inflation or expectations regarding inflation in various countries,
the availability of supplies of these precious metals, changes in
industrial and commercial demand, and metal sales by governments,
central banks or international agencies. Prices also may fluctuate
widely due to investment speculation, monetary and other economic
policies of various governments and governmental restrictions on the
private ownership of certain precious metals and minerals.
Additionally, the precious metals and minerals securities in which
the Fund may invest may not necessarily move in tandem with the
prices of actual precious metals and minerals.
At the present time, there are five major producers of gold bullion.
In order of magnitude they are: the Republic of South Africa, the
successor states of the former Soviet Union, Canada, the United
States and Australia. Political and economic conditions in these
countries may have a direct effect on the mining, distribution and
price of gold and sales of central bank gold holdings.
CONCENTRATION POLICY. Unlike most industry diversified mutual funds,
the Fund is subject to the risks associated with concentrating its
assets in a particular industry -- precious metals and minerals.
Thus, the Fund's overall portfolio may decline in value due to
developments specific to this industry. Given the Fund's
concentration policy, Fund shares should not be considered a complete
investment program.
COMMON STOCK. In general, stock values fluctuate in response to
activities specific to the company as well as general market,
economic and political conditions. Stock prices can fluctuate widely
in response to these factors.
FOREIGN SECURITIES. The Fund's investments in foreign securities
(including depository receipts) involve risks that are in addition to
the risks associated with domestic securities. One additional risk is
currency risk. While the price of Fund shares is quoted in U.S.
dollars, the Fund generally converts U.S. dollars to a foreign
market's local currency to purchase a security in that market. If the
value of that local currency falls relative to the U.S. dollar, the
U.S. dollar value of the foreign security will decrease. This is true
even if the foreign security's local price remains unchanged.
Foreign securities also have risks related to economic and political
developments abroad, including expropriations, confiscatory taxation,
exchange control regulation, limitations on the use or transfer of
Fund assets and any effects of foreign social, economic or political
instability. Foreign companies, in general, are not subject to the
regulatory requirements of U.S. companies and, as such, there may be
less publicly available information about these companies. Moreover,
foreign accounting, auditing and financial reporting standards
generally are different from those applicable to U.S. companies.
Finally, in the event of a default of any foreign debt obligations,
it may be more difficult for the Fund to obtain or enforce a judgment
against the issuers of the securities.
Securities of foreign issuers may be less liquid than comparable
securities of U.S. issuers and, as such, their price changes may be
more volatile. Furthermore, foreign exchanges and broker-dealers are
generally subject to less government and exchange scrutiny and
regulation than their U.S. counterparts.
Many European countries have adopted or are in the process of
adopting a single European currency, referred to as the "euro." The
consequences of the euro conversion
2
for foreign exchange rates, interest rates and the value of European
securities the Fund may purchase are presently unclear. The
consequences may adversely affect the value and/or increase the
volatility of securities held by the Fund.
OTHER RISKS. The performance of the Fund also will depend on whether
or not 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
fixed-income securities. For more information about these risks, see
the "Additional Risk Information" section.
Shares of the Fund are not bank deposits and are not guaranteed or
insured by any bank, governmental entity, or the FDIC.
[ICON] PAST PERFORMANCE
--------------------------------------------------------------------------------
The bar chart and table below provide some indication of the risks of
investing in the Fund. The Fund's past performance does not indicate
how the Fund will perform in the future.
(SIDEBAR)
ANNUAL TOTAL RETURNS
THIS CHART SHOWS HOW THE PERFORMANCE OF THE FUND'S CLASS B SHARES HAS VARIED
FROM YEAR TO YEAR DURING THE LIFE OF THE FUND.
(END SIDEBAR)
ANNUAL TOTAL RETURNS - CALENDAR YEARS
[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND ACCURATE
DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR THE
PURPOSE OF EDGAR FILING.]
[Download Table]
1990* -10.42%
'91 -4.41%
'92 -9.95%
'93 55.90%
'94 -11.54%
'95 4.97%
'96 1.62%
'97 -43.13%
'98 -14.39%
* For the period August 6, 1990 through December 31, 1990.
The bar chart reflects the performance of Class B shares; the performance of the
other Classes will differ because the Classes have different ongoing fees. The
performance information in the bar chart does not reflect the deduction of sales
charges; if these amounts were reflected, returns would be less than shown.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 24.77% (quarter ended June 30, 1993) and the lowest return for a
calendar quarter was -31.76% (quarter ended December 31, 1997).
(SIDEBAR)
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.
(END SIDEBAR)
[Download Table]
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED THE 1998 CALENDAR YEAR)
--------------------------------------------------------------------------------
LIFE OF FUND
PAST 1 YEAR PAST 5 YEARS (SINCE 8/6/90)
--------------------------------------------------------------------------------
Class A -18.33% -- --
--------------------------------------------------------------------------------
Class B(1) -18.67% -14.71% -6.82%
--------------------------------------------------------------------------------
Class C -15.24% -- --
--------------------------------------------------------------------------------
Class D -14.51% -- --
--------------------------------------------------------------------------------
S&P 500(2) 28.58% 24.05% 19.77%
--------------------------------------------------------------------------------
Lipper Gold-Oriented Funds
Index(3) -12.80% -14.29% -5.68%(4)
--------------------------------------------------------------------------------
1 Prior to July 28, 1997, the Fund only issued Class B shares.
2 The S&P 500(Registered Trademark) is Standard &
Poor's(Registered Trademark) 500 Composite Stock Price Index, a widely
recognized, unmanaged index of common stock prices. The Index is unmanaged,
and should not be considered an investment.
3 The Lipper Gold-Oriented Funds Index is an equally-weighted performance
index of the largest qualifying funds (based on net assets) in the Lipper
Gold-Oriented Funds objective. The Index, which is adjusted for capital
gains distributions and income dividends, is unmanaged and should not be
considered an investment. There are currently 10 funds represented in this
index.
4 For the Period August 31, 1990 to December 31, 1998.
3
[ICON] FEES AND EXPENSES
--------------------------------------------------------------------------------
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 table below briefly describes the fees and expenses
that you may pay if you buy and hold shares of the Fund. The Fund
does not charge account or exchange fees. See the "Share Class
Arrangements" section for further fee and expense information.
(SIDEBAR)
SHAREHOLDER FEES
THESE FEES ARE PAID DIRECTLY FROM YOUR INVESTMENT.
(END SIDEBAR)
(SIDEBAR)
ANNUAL FUND
OPERATING EXPENSES
THESE EXPENSES ARE DEDUCTED FROM THE FUND'S ASSETS AND ARE BASED ON EXPENSES
PAID FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998.
(END SIDEBAR)
[Enlarge/Download Table]
CLASS A CLASS B CLASS C CLASS D
---------------------------------------------------------------------------------------------------
SHAREHOLDER FEES
---------------------------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.25%(1) None None None
---------------------------------------------------------------------------------------------------
Maximum deferred sales charge (load) (as a percentage based
on the lesser of the offering price or net asset value at
redemption) None(2) 5.00%(3) 1.00%(4) None
---------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
---------------------------------------------------------------------------------------------------
Management Fee 0.80% 0.80% 0.80% 0.80%
---------------------------------------------------------------------------------------------------
Distribution and service (12b-1) fees 0.23% 1.00% 1.00% None
---------------------------------------------------------------------------------------------------
Other expenses 0.98% 0.98% 0.98% 0.98%
---------------------------------------------------------------------------------------------------
Total annual Fund operating expenses 2.01% 2.78% 2.78% 1.78%
---------------------------------------------------------------------------------------------------
1 Reduced for purchases of $25,000 and over.
2 Investments that are not subject to any sales charge at the time of
purchase are subject to a contingent deferred sales charge ("CDSC") of
1.00% that will be imposed on sales made 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 to sales made within one year after purchase.
EXAMPLE
This example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund, your
investment has a 5% return each year, and the Fund's operating
expenses remain the same. Although your actual costs may be higher or
lower, the tables below show your costs at the end of each period
based on these assumptions depending upon whether or not you sell
your shares at the end of each period.
[Enlarge/Download Table]
IF YOU SOLD YOUR SHARES IF YOU HELD YOUR SHARES
----------------------------------------- -----------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------------- -----------------------------------------
CLASS A $718 $1,122 $1,551 $2,740 $718 $1,122 $1,551 $2,740
---------------------------------------------------------- -----------------------------------------
CLASS B $781 $1,162 $1,669 $3,109 $281 $ 862 $1,469 $3,109
---------------------------------------------------------- -----------------------------------------
CLASS C $381 $ 862 $1,469 $3,109 $281 $ 862 $1,469 $3,109
---------------------------------------------------------- -----------------------------------------
CLASS D $181 $ 560 $ 964 $2,095 $181 $ 560 $ 964 $2,095
---------------------------------------------------------- -----------------------------------------
4
[ICON] ADDITIONAL INVESTMENT STRATEGY INFORMATION
--------------------------------------------------------------------------------
This section provides additional information concerning the Fund's
principal strategies.
COMMON STOCKS AND OTHER SECURITIES. As discussed in the "Principal
Investment Strategies" section, the Fund will normally invest at
least 65% of its assets in the common stocks and other securities of
companies engaged in the precious metals and minerals business. The
other securities in which the Fund may invest include securities
convertible into common stocks, preferred stocks and debt securities
(including zero coupon bonds). The Fund's policy to concentrate its
investments in the precious metals and minerals business, except
during temporary "defensive" periods discussed below, is a
fundamental policy. A fundamental policy may not be changed without
shareholder approval.
OTHER INVESTMENTS. The Fund also may invest up to 35% of its assets,
under normal market conditions, in common stocks of companies that
are not primarily engaged in the precious metals or minerals
business, long-term U.S. Government securities and money market
instruments.
DEFENSIVE INVESTING. The Fund may take temporary "defensive"
positions in attempting to respond to adverse market conditions. The
Fund may invest any amount of its assets in cash or money market
instruments in a defensive posture when the 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 or
changes in assets will not require the Fund to sell any portfolio
security. The Fund may change its principal investment strategies
(except for its concentration policy for 65% of its assets) without
shareholder approval; however, you would be notified of any changes.
[ICON] ADDITIONAL RISK INFORMATION
--------------------------------------------------------------------------------
This section provides information regarding the principal risks of
investing in the Fund in addition to those discussed in the
"Principal Risks" section.
OTHER SECURITIES AND INVESTMENTS. In addition to common stocks, the
Fund may invest in fixed-income securities, such as preferred stock,
corporate debt securities and U.S. Government securities. All
fixed-income securities are subject to two types of risk: credit risk
and interest rate risk. Credit risk refers to the possibility that
the issuer of a security will be unable to make interest payments and
repay the principal on its debt.
Interest rate risk refers to fluctuations in the value of a
fixed-income security resulting from changes in the general level of
interest rates. When the general level of interest rates goes up, the
price of most fixed-income securities goes down. When the general
level of interest rates goes down, the price of most fixed-income
securities goes up.
5
(Zero coupon securities are typically subject to greater price
fluctuations than comparable securities that pay interest.) Preferred
stock also has risk characteristics similar to those of common
stocks.
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
affiliates are working hard to avoid any problems and to obtain
assurances from their service providers that they are taking similar
steps.
[ICON] 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, NY 10048.
(SIDEBAR)
MORGAN STANLEY DEAN WITTER ADVISORS INC.
THE INVESTMENT MANAGER IS WIDELY RECOGNIZED AS A LEADER IN THE MUTUAL FUND
INDUSTRY AND TOGETHER WITH MORGAN STANLEY DEAN WITTER SERVICES COMPANY INC., ITS
WHOLLY-OWNED SUBSIDIARY, HAS MORE THAN $127 BILLION IN ASSETS UNDER MANAGEMENT
OR ADMINISTRATION AS OF JANUARY 31, 1999.
(END SIDEBAR)
The Fund's portfolio is managed within Investment Manager's Growth Group. Robert
Rossetti, a Vice President of the Investment Manager, and a member of Investment
Manager's Growth Group, has been the primary portfolio manager of the Fund since
December of 1996. Prior to joining Investment Manager in May of 1995, Mr.
Rossetti was a Vice President at Merrill Lynch & Co. Inc. (November 1994-April
1995) and prior thereto was a Vice President at Prudential Securities for six
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 October 31, 1998 the Fund
accrued total compensation to the Investment Manager amounting to 0.80% of the
Fund's average daily net assets.
6
SHAREHOLDER INFORMATION
[ICON] PRICING FUND SHARES
--------------------------------------------------------------------------------
The price of Fund shares (excluding sales charges), called "net asset
value," is based on the value of the Fund's portfolio securities. While the
assets of each Class are invested in a single portfolio of securities, the
net asset value of each Class will differ because the Classes have different
ongoing distribution fees.
The net asset value per share of the Fund is determined once daily at 4:00
p.m. Eastern time on each day that the New York Stock Exchange is open (or,
on days when the New York Stock Exchange closes prior to 4:00 p.m., at such
earlier time). Shares will not be priced on days that the New York Stock
Exchange is closed.
The value of the Fund's portfolio securities is based on the securities'
market price when available. When a market price is not readily available,
including circumstances under which the Investment Manager 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. In
addition, if the Fund holds securities primarily listed on foreign
exchanges, the value of the Fund's portfolio securities may change on days
when you will not be able to purchase or sell your shares.
An exception to the Fund's general policy of using market prices concerns
its short-term debt portfolio securities. Debt securities with remaining
maturities of sixty days or less at the time of purchase are valued at
amortized cost. However, if the cost does not reflect the securities' market
value, these securities will be valued at their fair value.
7
[ICON] HOW TO BUY SHARES
--------------------------------------------------------------------------------
You may open a new account to buy Fund shares or buy additional Fund shares
for an existing account by contacting your Morgan Stanley Dean Witter
Financial Advisor or other authorized financial representative. Your
Financial Advisor will assist you, step-by-step, with the procedures to
invest in the Fund. You may also purchase shares directly by calling the
Fund's transfer agent and requesting an application.
(SIDEBAR)
CONTACTING A FINANCIAL ADVISOR
IF YOU ARE NEW TO THE MORGAN STANLEY DEAN WITTER FAMILY OF FUNDS AND WOULD LIKE
TO CONTACT A FINANCIAL ADVISOR, CALL (800) THE-DEAN FOR THE TELEPHONE NUMBER OF
THE MORGAN STANLEY DEAN WITTER OFFICE NEAREST YOU.
YOU MAY ALSO ACCESS OUR OFFICE LOCATOR ON OUR INTERNET SITE AT:
www.deanwitter.com/funds
(END SIDEBAR)
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 investment order in proper form. We reserve the right
to reject any order for the purchase of Fund shares.
(SIDEBAR)
EASYINVEST(SM)
A PURCHASE PLAN THAT ALLOWS YOU TO TRANSFER MONEY AUTOMATICALLY FROM YOUR
CHECKING OR SAVINGS ACCOUNT OR FROM A MONEY MARKET FUND ON A SEMI-MONTHLY,
MONTHLY OR QUARTERLY BASIS. CONTACT YOUR MORGAN STANLEY DEAN WITTER FINANCIAL
ADVISOR FOR FURTHER INFORMATION ABOUT THIS SERVICE.
(END SIDEBAR)
[Enlarge/Download Table]
MINIMUM INVESTMENT AMOUNTS
------------------------------------------------------------------------------------------------
MINIMUM INVESTMENT
----------------------
INVESTMENT OPTIONS INITIAL ADDITIONAL
------------------------------------------------------------------------------------------------
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*
------------------------------------------------------------------------------------------------
* Provided your schedule of investments totals $1,000 in twelve months.
There is no minimum investment amount if you purchase Fund shares through: (1)
the Investment Manager's mutual fund asset allocation plan, (2) a program,
approved by the Fund's distributor, in which you pay an asset-based fee for
advisory, administrative and/or brokerage services, or (3) employer-sponsored
employee benefit plan accounts.
INVESTMENT OPTIONS FOR CERTAIN INSTITUTIONAL AND OTHER INVESTORS/CLASS D
SHARES. To be eligible to purchase Class D shares, you must qualify under
one of the investor categories specified in the "Share Class Arrangements"
section of this PROSPECTUS.
8
THREE DAY SETTLEMENT. Fund shares are sold through the Fund's distributor,
Morgan Stanley Dean Witter Distributors Inc., on a normal three business
day basis; that is, your payment for Fund shares is due on the third
business day (settlement day) after you place a purchase order.
SUBSEQUENT INVESTMENTS SENT DIRECTLY TO THE FUND. In addition to buying
additional Fund shares for an existing account by contacting your Morgan
Stanley Dean Witter Financial Advisor or other authorized financial
representative, you may send a check directly to the Fund. To buy
additional shares in this manner:
- Write a "letter of instruction" to the Fund specifying the name(s) on the
account, the account number, the social security or tax identification
number, the Class of shares you wish to purchase and the investment
amount (which would include any applicable front-end sales charge). The
letter must be signed by the account owner(s).
- Make out a check for the total amount payable to: Morgan Stanley Dean
Witter Precious Metals and Minerals Trust.
- Mail the letter and check to Morgan Stanley Dean Witter Trust FSB at P.O.
Box 1040, Jersey City, NJ 07303.
[ICON] HOW TO EXCHANGE SHARES
--------------------------------------------------------------------------------
PERMISSIBLE FUND EXCHANGES. You may exchange shares of any Class of the
Fund for the same Class of any other continuously offered Multi-Class Fund,
or for shares of a No-Load Fund, 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.
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.
9
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.
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 OTHER AUTHORIZED
FINANCIAL REPRESENTATIVE, OR CALL (800) 869-NEWS.
10
[ICON] HOW TO SELL SHARES
--------------------------------------------------------------------------------
You can sell some or all of your Fund shares at any time. If you sell Class
A, Class B or Class C shares, your net sale proceeds are reduced by the
amount of any applicable CDSC. Your shares will be sold at the next price
calculated after we receive your order to sell as described below.
[Download Table]
OPTIONS PROCEDURES
--------------------------------------------------------------------------------
Contact Your To sell your shares, simply call your Morgan Stanley Dean
Financial Advisor Witter Financial Advisor or other authorized financial
representative.
------------------------------------------------------------
[ICON] Payment will be sent to the address to which the account is
registered or deposited in your brokerage account.
--------------------------------------------------------------------------------
By Letter You can also sell your shares by writing a "letter of
instruction" that includes:
[ICON] - your account number;
- the dollar amount or the number of shares you wish to
sell;
- the Class of shares you wish to sell; and
- the signature of each owner as it appears on the account.
------------------------------------------------------------
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
Withdrawal Plan Family of Funds has a total market value of at least
$10,000, you may elect to withdraw amounts of $25 or more,
or in any whole percentage of a Fund's balance (provided the
amount is at least $25), on a monthly, quarterly,
semi-annual or annual basis, from any Fund with a balance of
$1,000. Each time you add a Fund to the plan, you must meet
the plan requirements.
------------------------------------------------------------
[ICON] Amounts withdrawn are subject to any applicable CDSC. A CDSC
may be waived under certain circumstances. See the Class B
waiver categories listed in the "Share Class Arrangements"
section of this PROSPECTUS.
------------------------------------------------------------
To sign up for the Systematic Withdrawal Plan, contact your
Morgan Stanley Dean Witter Financial Advisor or other
authorized financial representative, or call (800) 869-NEWS.
You may terminate or suspend your plan at any time. Please
remember that withdrawals from the plan are sales of shares,
not Fund "distributions," and ultimately may exhaust your
account balance. The Fund may terminate or revise the plan
at any time.
--------------------------------------------------------------------------------
(SIDEBAR)
SYSTEMATIC WITHDRAWAL PLAN
THIS PLAN ALLOWS YOU TO WITHDRAW MONEY AUTOMATICALLY FROM YOUR FUND ACCOUNT AT
REGULAR INTERVALS. CONTACT YOUR MORGAN STANLEY DEAN WITTER FINANCIAL ADVISOR FOR
MORE DETAILS.
(END SIDEBAR)
11
PAYMENT FOR SOLD SHARES. After we receive your complete instructions to sell
as described above, a check will be mailed to you within seven days,
although we will attempt to make payment within one business day. Payment
may also be sent to your brokerage account.
Payment may be postponed or the right to sell your shares suspended under
unusual circumstances. If you request to sell shares that were recently
purchased by check, payment of the sale proceeds may be delayed for the
minimum time needed to verify that the check has been honored (not more than
fifteen days from the time we receive the check).
TAX CONSIDERATIONS. Normally, your sale of Fund shares is subject to federal
and state income tax. You should review the "Tax Consequences" section of
this PROSPECTUS and consult your own tax professional about the tax
consequences of a sale.
REINSTATEMENT PRIVILEGE. If you sell Fund shares and have not previously
exercised the reinstatement privilege, you may, within 35 days after the
date of sale, invest any portion of the proceeds in the same Class of Fund
shares at their net asset value and receive a pro rata credit for any CDSC
paid in connection with the sale.
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. Certain restrictions may apply to Fund shares pledged in
margin accounts with Dean Witter Reynolds or another authorized
broker-dealer of Fund shares. If you hold Fund shares in this manner, please
contact your Morgan Stanley Dean Witter Financial Advisor or other
authorized financial representative for more details.
[ICON] DISTRIBUTIONS
--------------------------------------------------------------------------------
The Fund passes substantially all of its earnings from income and capital
gains along to its investors as "distributions." The Fund earns income from
stocks and interest from fixed-income investments. These amounts are passed
along to Fund shareholders as "income dividend distributions." The Fund
realizes capital gains whenever it sells securities for a higher price than
it paid for them. These amounts may be passed along as "capital gain
distributions."
The Fund declares income dividends separately for each Class. Distributions
paid on Class A and Class D shares usually will be higher than for Class B
and Class C
12
because distribution fees that Class B and Class C pay are higher. Normally,
income dividends 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, the Fund
will mail a check to you no later than seven business days after the
distribution is declared. No interest will accrue on uncashed checks. If you
wish to change how your distributions are paid, your request should be received
by the Fund's transfer agent, Morgan Stanley Dean Witter Trust FSB, at least
five business days prior to the record date of the distributions.
(SIDEBAR)
TARGETED DIVIDENDS(SM)
YOU MAY SELECT TO HAVE YOUR FUND DISTRIBUTIONS AUTOMATICALLY INVESTED IN OTHER
CLASSES OF FUND SHARES OR CLASSES OF ANOTHER MORGAN STANLEY DEAN WITTER FUND
THAT YOU OWN. CONTACT YOUR MORGAN STANLEY DEAN WITTER FINANCIAL ADVISOR FOR
FURTHER INFORMATION ABOUT THIS SERVICE.
(END SIDEBAR)
[ICON] TAX CONSEQUENCES
--------------------------------------------------------------------------------
As with any investment, you should consider how your Fund investment will be
taxed. The tax information in this PROSPECTUS is provided as general
information. You should consult your own tax professional about the tax
consequences of an investment in the Fund.
Unless your investment in the Fund is through a tax-deferred retirement
account, such as a 401(k) plan or IRA, you need to be aware of the possible
tax consequences when:
- The Fund makes distributions; and
- You sell Fund shares, including an exchange to another Morgan Stanley Dean
Witter Fund.
TAXES ON DISTRIBUTIONS. Your distributions are normally subject to federal
and state income tax when they are paid, whether you take them in cash or
reinvest them in Fund shares. A distribution also may be subject to local
income tax. Any income dividend distributions and any short-term capital
gain distributions are taxable to you as ordinary income. Any long-term
capital gain distributions are taxable as long-term capital gains, no matter
how long you have owned shares in the Fund.
Every January, you will be sent a statement (IRS Form 1099-DIV) showing the
taxable distributions paid to you in the previous year. The statement
provides full information on your dividends and capital gains for tax
purposes.
TAXES ON SALES. Your sale of Fund shares normally is subject to federal and
state income tax and may result in a taxable gain or loss to you. A sale
also may be subject to local income tax. Your exchange of Fund shares for
shares of another Morgan Stanley Dean Witter Fund is treated for tax
purposes like a sale of your original shares and a purchase of your new
shares. Thus, the exchange may, like a sale, result in a taxable gain or
loss to you and will give you a new tax basis for your new shares.
13
When you open your Fund account, you should provide your social security or
tax identification number on your investment application. By providing this
information, you will avoid being subject to a federal backup withholding
tax of 31% on taxable distributions and redemption proceeds. Any withheld
amount would be sent to the IRS as an advance tax payment.
[ICON] SHARE CLASS ARRANGEMENTS
--------------------------------------------------------------------------------
The Fund offers several Classes of shares having different distribution
arrangements designed to provide you with different purchase options
according to your investment needs. Your Morgan Stanley Dean Witter
Financial Advisor or other authorized financial representative can help you
decide which Class may be appropriate for you.
The general public is offered three Classes: Class A shares, Class B shares
and Class C shares, which differ principally in terms of sales charges and
ongoing expenses. A fourth Class, Class D shares, is offered only to a
limited category of investors. Shares that you acquire through reinvested
distributions will not be subject to any front-end sales charge or CDSC --
contingent deferred sales charge. Sales personnel may receive different
compensation for selling each Class of shares. The sales charges applicable
to each Class provide for the distribution financing of shares of that
Class.
The chart below compares the sales charge and annual 12b-1 fee applicable to
each Class:
[Download Table]
CLASS SALES CHARGE ANNUAL 12b-1 FEE
------------------------------------------------------------------
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
------------------------------------------------------------------
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.
14
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:
[Enlarge/Download Table]
FRONT-END SALES CHARGE
---------------------------------------------
AMOUNT OF PERCENTAGE OF PUBLIC APPROXIMATE PERCENTAGE
SINGLE TRANSACTION OFFERING PRICE OF AMOUNT INVESTED
---------------------------------------------------------------------------------------
Less than $25,000 5.25% 5.54%
---------------------------------------------------------------------------------------
$25,000 but less than $50,000 4.75% 4.99%
---------------------------------------------------------------------------------------
$50,000 but less than $100,000 4.00% 4.17%
---------------------------------------------------------------------------------------
$100,000 but less than $250,000 3.00% 3.09%
---------------------------------------------------------------------------------------
$250,000 but less than $1 million 2.00% 2.04%
---------------------------------------------------------------------------------------
$1 million and over 0.00% 0.00%
---------------------------------------------------------------------------------------
(SIDEBAR)
FRONT-END SALES CHARGE OR FSC
AN INITIAL SALES CHARGE YOU PAY WHEN PURCHASING CLASS A SHARES THAT IS BASED ON
A PERCENTAGE OF THE OFFERING PRICE. THE PERCENTAGE DECLINES BASED UPON THE
DOLLAR VALUE OF CLASS A SHARES YOU PURCHASE. WE OFFER THREE WAYS TO REDUCE YOUR
CLASS A SALES CHARGES - THE COMBINED PURCHASE PRIVILEGE, RIGHT OF ACCUMULATION
AND LETTER OF INTENT.
(END SIDEBAR)
The reduced sales charge schedule is applicable to purchases of Class A
shares in a single transaction by:
- A single account (including an individual, trust or fiduciary account).
- Family member accounts (limited to husband, wife and children under the
age of 21).
- Pension, profit sharing or other employee benefit plans of companies and
their affiliates.
- Tax-exempt organizations.
- Groups organized for a purpose other than to buy mutual fund shares.
COMBINED PURCHASE PRIVILEGE. You also will have the benefit of reduced sales
charges by combining purchases of Class A shares of the Fund in a single
transaction with purchases of Class A shares of other Multi-Class Funds and
shares of FSC Funds.
RIGHT OF ACCUMULATION. You also may benefit from a reduction of sales
charges if the cumulative net asset value of Class A shares of the Fund
purchased in a single transaction, together with shares of other Funds you
currently own which were previously purchased at a price including a
front-end sales charge (including shares acquired through reinvestment of
distributions), amounts to $25,000 or more. Also, if you have a cumulative
net asset value of all your Class A and Class D shares equal to at least $5
million (or $25 million for certain employee benefit plans), you are
eligible to purchase Class D shares of any Fund subject to the Fund's
minimum initial investment requirement.
You must notify your Morgan Stanley Dean Witter Financial Advisor or other
authorized financial representative (or Morgan Stanley Dean Witter Trust FSB
if you purchase directly through the Fund), at the time a purchase order is
placed, that the purchase qualifies for the reduced charge under the Right
of Accumulation. Similar notification must be made in writing when an order
is placed by mail. The reduced sales charge will not be granted if: (i)
notification is not furnished at the time of the
15
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.
OTHER FRONT-END SALES CHARGE WAIVERS. In addition to investments of
$1 million or more, your purchase of Class A shares is not subject to a
front-end sales charge (or a CDSC upon sale) if your account qualifies under
one of the following categories:
- A trust for which Morgan Stanley Dean Witter Trust FSB provides
discretionary trustee services.
- Persons participating in a fee-based investment program (subject to all of
its terms and conditions, including mandatory sale or transfer
restrictions on termination) approved by the Fund's distributor pursuant
to which they pay an asset-based fee for investment advisory,
administrative and/or brokerage services.
- Employer-sponsored employee benefit plans, whether or not qualified under
the Internal Revenue Code, for which Morgan Stanley Dean Witter Trust FSB
serves as trustee or Dean Witter Reynolds' Retirement Plan Services serves
as recordkeeper under a written Recordkeeping Services Agreement ("MSDW
Eligible Plans") which have at least 200 eligible employees.
- An MSDW Eligible Plan whose Class B shares have converted to Class A
shares, regardless of the plan's asset size or number of eligible
employees.
- A client of a Morgan Stanley Dean Witter Financial Advisor who joined us
from another investment firm within six months prior to the date of
purchase of Fund shares, and you used the proceeds from the sale of shares
of a proprietary mutual fund of that Financial Advisor's previous firm
that imposed either a front-end or deferred sales charge to purchase Class
A shares, provided that: (1) you sold the shares not more than 60 days
prior to the purchase of Fund shares, and (2) the sale proceeds were
maintained in the interim in cash or a money market fund.
16
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.
(SIDEBAR)
CONTINGENT DEFERRED SALES CHARGE OR CDSC
A FEE YOU PAY WHEN YOU SELL SHARES OF CERTAIN MORGAN STANLEY DEAN WITTER FUNDS
PURCHASED WITHOUT AN INITIAL SALES CHARGE. THIS FEE DECLINES THE LONGER YOU HOLD
YOUR SHARES AS SET FORTH IN THE TABLE.
(END SIDEBAR)
[Download Table]
CDSC AS A PERCENTAGE
YEAR SINCE PURCHASE PAYMENT MADE OF AMOUNT REDEEMED
----------------------------------------------------------------
First 5.0%
----------------------------------------------------------------
Second 4.0%
----------------------------------------------------------------
Third 3.0%
----------------------------------------------------------------
Fourth 2.0%
----------------------------------------------------------------
Fifth 2.0%
----------------------------------------------------------------
Sixth 1.0%
----------------------------------------------------------------
Seventh and thereafter None
----------------------------------------------------------------
Each time you place an order to sell or exchange shares, shares with no CDSC
will be sold or exchanged first, then shares with the lowest CDSC will be
sold or exchanged next. For any shares subject to a CDSC, the CDSC will be
assessed on an amount equal to the lesser of the current market value or the
cost of the shares being sold.
CDSC WAIVERS. A CDSC, if otherwise applicable, will be waived in the case
of:
- Sales of shares held at the time you die or become disabled (within the
definition in Section 72(m)(7) of the Internal Revenue Code which relates
to the ability to engage in gainful employment), if the shares are: (i)
registered either in your name (not a trust) or in the names of you and
your spouse as joint tenants with right of survivorship; or (ii) held in a
qualified corporate or self-employed retirement plan, IRA or 403(b)
Custodial Account, provided in either case that the sale is requested
within one year of your death or initial determination of disability.
- Sales in connection with the following retirement plan "distributions":
(i) lump-sum or other distributions from a qualified corporate or
self-employed retirement plan following retirement (or, in the case of a
"key employee" of a "top heavy" plan, following attainment of age 59 1/2);
(ii) distributions from an IRA or 403(b) Custodial Account following
attainment of age 59 1/2; or (iii) a tax-free return of an excess IRA
contribution (a "distribution" does not include a direct transfer of IRA,
403(b) Custodial Account or retirement plan assets to a successor
custodian or trustee).
- Sales of shares held for you as a participant in an MSDW Eligible Plan.
- Sales of shares in connection with the Systematic Withdrawal Plan of up to
12% annually of the value of each Fund from which plan sales are made. The
percentage is determined on the date you establish the Systematic
Withdrawal Plan and based on the next calculated share price. You may have
this CDSC waiver applied in amounts up to 1% per month, 3% per quarter, 6%
semi-annually or 12%
17
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 are subject to an annual 12b-1 fee of 1.0%
of the lesser of: (a) the average daily aggregate gross purchases by all
shareholders of the Fund's Class B shares since the inception of the Fund
(not including reinvestments of dividends or capital gains distributions),
less the average daily aggregate net asset value of the Fund's Class B
shares sold by all shareholders since the Fund's inception upon which a CDSC
has been imposed or waived, or (b) the average daily net assets of Class B.
CONVERSION FEATURE. After ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund with no initial sales charge.
The ten year period runs from the last day of the month in which the shares
were purchased, or in the case of Class B shares acquired through an
exchange, from the last day of the month in which the original Class B
shares were purchased; the shares will convert to Class A shares based on
their relative net asset values in the month following the ten year period.
At the same time, an equal proportion of Class B shares acquired through
automatically reinvested distributions will convert to Class A shares on the
same basis. (Class B shares held before May 1, 1997, however, will convert
to Class A shares in May 2007.)
In the case of Class B shares held in an 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.
18
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 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 1.0% of the average daily net assets of that Class. The Class
C shares' distribution fee may cause that Class to have higher expenses and
pay lower dividends than Class A or Class D shares. Unlike Class B shares,
Class C shares have no conversion feature and, accordingly, an investor that
purchases Class C shares may be subject to distribution (12b-1) fees
applicable to Class C shares for an indefinite period.
CLASS D SHARES Class D shares are offered without any sales charge on
purchases or sales and without any distribution (12b-1) fee. Class D shares
are offered only to investors meeting an initial investment minimum of
$5 million ($25 million for MSDW Eligible Plans) and the following
investor categories:
- Investors participating in the Investment Manager's mutual fund asset
allocation program (subject to all of its terms and conditions, including
mandatory sale or transfer restrictions on termination) pursuant to which
they pay an asset-based fee.
- Persons participating in a fee-based investment program (subject to all of
its terms and conditions, including mandatory sale or transfer
restrictions on termination) approved by the Fund's distributor pursuant
to which they pay an asset-based fee for investment advisory,
administrative and/or brokerage services.
- Employee benefit plans maintained by Morgan Stanley Dean Witter & Co. or
any of its subsidiaries for the benefit of certain employees of Morgan
Stanley Dean Witter & Co. and its subsidiaries.
- Certain unit investment trusts sponsored by Dean Witter Reynolds.
19
- Certain other open-end investment companies whose shares are distributed
by the Fund's distributor.
- Investors who were shareholders of the Dean Witter Retirement Series on
September 11, 1998 for additional purchases for their former Dean Witter
Retirement Series accounts.
MEETING CLASS D ELIGIBILITY MINIMUMS. To meet the $5 million ($25 million
for MSDW Eligible Plans) initial investment to qualify to purchase Class D
shares you may combine: (1) purchases in a single transaction of Class D
shares of the Fund and other Morgan Stanley Dean Witter Multi-Class Funds
and/or (2) previous purchases of Class A and Class D shares of Multi-Class
Funds and shares of FSC Funds you currently own, along with shares of Morgan
Stanley Dean Witter Funds you currently own that you acquired in exchange
for those shares.
NO SALES CHARGES FOR REINVESTED CASH DISTRIBUTIONS If you receive a cash
payment representing an income dividend or capital gain and you reinvest
that amount in the applicable Class of shares by returning the check within
30 days of the payment date, the purchased shares would not be subject to
an initial sales charge or CDSC.
PLAN OF DISTRIBUTION (RULE 12B-1 FEES) The Fund has adopted a Plan of
Distribution in accordance with Rule 12b-1 under the Investment Company Act
of 1940 with respect to the distribution of Class A, Class B and Class C
shares. The Plan allows the Fund to pay distribution fees for the sale and
distribution of these shares. It also allows the Fund to pay for services
to shareholders of Class A, Class B and Class C shares. Because these fees
are paid out of the Fund's assets on an ongoing basis, over time these fees
will increase the cost of your investment in these Classes and may cost you
more than paying other types of sales charges.
20
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance for the past 5 fiscal years of the Fund.
Certain information reflects financial results for a single Fund share.
The total returns in the table represent the rate an investor would have
earned or lost on an investment in the Fund (assuming reinvestment of
all dividends and distributions).
This information has been audited by PricewaterhouseCoopers LLP, whose
report, along with the Fund's financial statements, is included in the
annual report, which is available upon request.
[Enlarge/Download Table]
CLASS B SHARES
----------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31 1998++ 1997*++ 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA:
----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 6.85 $ 11.14 $ 9.77 $ 11.45 $ 10.80
----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss (0.09) (0.10) (0.10) (0.08) (0.06)
Net realized and unrealized gain (loss) (1.75) (3.35) 1.66 (1.38) 0.73
------- ------- -------- -------- -----------
Total income (loss) from investment operations (1.84) (3.45) 1.56 (1.46) 0.67
----------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income -- (0.13) -- -- --
Net realized gain -- (0.71) (0.19) (0.22) (0.02)
------- ------- -------- -------- -----------
Total dividends and distributions -- (0.84) (0.19) (0.22) (0.02)
----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 5.01 $ 6.85 $ 11.14 $ 9.77 $ 11.45
----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (26.86)% (33.29)% 15.93% (12.78)% 6.18%
----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
----------------------------------------------------------------------------------------------------------------------------
Expenses 2.78%(1) 2.36% 2.27% 2.29% 2.28%
----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.55)%(1) (1.13)% (0.84)% (0.70)% (0.87)%
----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $30,005 $37,964 $ 60,841 $ 55,448 $ 73,444
----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 36% 53% 46% 23% 46%
----------------------------------------------------------------------------------------------------------------------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date have been designated Class B shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charges. Calculated based on the
net asset value as of the last business day of the period.
(1) Reflects overall Fund ratios for investment income and non-class specific
expenses.
21
[Enlarge/Download Table]
CLASS A SHARES++
------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD JULY 28, 1997*
SELECTED PER SHARE DATA: OCTOBER 31, 1998 THROUGH OCTOBER 31, 1997
------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 6.86 $ 7.95
------------------------------------------------------------------------------------------------------------------
LOSS FROM INVESTMENT OPERATIONS:
Net investment loss (0.05) --
Net realized and unrealized loss (1.76) (1.09)
------- -------
Total loss from investment operations (1.81) (1.09)
------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 5.05 $ 6.86
------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (26.38)% (13.71)%(1)
------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
------------------------------------------------------------------------------------------------------------------
Expenses 2.01%(3) 1.61%(2)
------------------------------------------------------------------------------------------------------------------
Net investment loss (0.78)%(3) (0.08)%(2)
------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $ 91 $ 32
------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 36% 53%
------------------------------------------------------------------------------------------------------------------
[Enlarge/Download Table]
CLASS C SHARES++
------------------------------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA:
------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 6.84 $ 7.95
------------------------------------------------------------------------------------------------------------------
LOSS FROM INVESTMENT OPERATIONS:
Net investment loss (0.09) (0.02)
Net realized and unrealized loss (1.74) (1.09)
------- -------
Total loss from investment operations (1.83) (1.11)
------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 5.01 $ 6.84
------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (26.75)% (13.96)%(1)
------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
------------------------------------------------------------------------------------------------------------------
Expenses 2.78%(3) 2.37%(2)
------------------------------------------------------------------------------------------------------------------
Net investment loss (1.55)%(3) (0.79)%(2)
------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $ 1,046 $ 475
------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 36% 53%
------------------------------------------------------------------------------------------------------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charges. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
22
[Enlarge/Download Table]
CLASS D SHARES++
---------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD JULY 28, 1997*
SELECTED PER SHARE DATA: OCTOBER 31, 1998 THROUGH OCTOBER 31, 1997
---------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 6.86 $ 7.95
---------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income 0.02 --
Net realized and unrealized loss (1.85) (1.09)
------- -------
Total loss from investment operations (1.83) (1.09)
---------------------------------------------------------------------------------------------
Net asset value, end of period $ 5.03 $ 6.86
---------------------------------------------------------------------------------------------
TOTAL RETURN+ (26.68)% (13.71)%(1)
---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
---------------------------------------------------------------------------------------------
Expenses 1.78%(3) 1.35%(2)
---------------------------------------------------------------------------------------------
Net investment income (loss) (0.55)%(3) 0.22%(2)
---------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
---------------------------------------------------------------------------------------------
Net assets, end of period, in
thousands $ 327 $ 9
---------------------------------------------------------------------------------------------
Portfolio turnover rate 36% 53%
---------------------------------------------------------------------------------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
23
NOTES
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24
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 Value 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
GLOBAL/INTERNATIONAL FUNDS
Competitive Edge Fund - "Best Ideas" Portfolio
European Growth Fund
Fund of Funds - International Portfolio
Global Dividend Growth Securities
International SmallCap Fund
Japan Fund
Pacific Growth Fund
--------------------------------------------------------------------------------
GROWTH AND INCOME FUNDS
---------------------------------
Balanced Growth Fund
Balanced Income Fund
Convertible Securities Trust
Dividend Growth Securities
Fund of Funds - Domestic Portfolio
Income Builder Fund
Mid-Cap Dividend Growth Securities
S&P 500 Index Fund
S&P 500 Select Fund
Strategist Fund
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)
N.Y. Municipal Money Market Trust (MM)
Tax-Free Daily Income Trust (MM)
There may be Funds created after this PROSPECTUS was published. Please consult
the inside 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.
PROSPECTUS - FEBRUARY 22, 1999
Additional information about the Fund's investments is available in the Fund's
ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS. In the Fund's ANNUAL REPORT, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. The
Fund's STATEMENT OF ADDITIONAL INFORMATION also provides additional information
about the Fund. The STATEMENT OF ADDITIONAL INFORMATION is incorporated herein
by reference (legally is part of this PROSPECTUS). For a free copy of any of
these documents, to request other information about the Fund, or to make
shareholder inquiries, please call:
(800) 869-NEWS
You also may obtain information about the Fund by calling your Morgan Stanley
Dean Witter Financial Advisor or by visiting our Internet site at:
www.deanwitter.com/funds
Information about the Fund (including the STATEMENT OF ADDITIONAL INFORMATION)
can be viewed and copied at the Securities and Exchange Commission's Public
Reference Room in Washington, DC. Information about the Reference Room's
operations may be obtained by calling the SEC at (800) SEC-0330. Reports and
other information about the Fund are available on the SEC's Internet site
(www.sec.gov), and copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Section of the SEC, Washington,
DC 20549-6009.
TICKER SYMBOLS:
CLASS A: METAX CLASS C: METCX
-------------------- --------------------
CLASS B: METBX CLASS D: METDX
-------------------- --------------------
(MORGAN STANLEY DEAN WITTER
PRECIOUS METALS AND MINERALS
TRUST; INVESTMENT COMPANY ACT
FILE NO. 811-5988)
MORGAN STANLEY DEAN WITTER
PRECIOUS METALS AND
MINERALS TRUST
[BACK COVER PHOTO]
A MUTUAL FUND
THAT SEEKS LONG-TERM
CAPITAL APPRECIATION
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND TWO WORLD TRADE CENTER,
MINERALS TRUST NEW YORK, NEW YORK 10048
LETTER TO THE SHAREHOLDERS OCTOBER 31, 1998
DEAR SHAREHOLDER:
The fiscal year ended October 31, 1998, continued to be a difficult period for
gold and other precious metals. Several factors contributed to gold's struggle
during the period under review. Probably the most significant factor was the low
rate of inflation in the United States. Another negative influence was the
decision by several European central banks to sell gold reserves to meet
European Monetary Union (EMU) requirements for reduced budget deficits. Also,
because gold tends to perform poorly when the U.S. dollar is strong, the price
of bullion suffered as the U.S. dollar continued to outpace all other major
currencies, particularly the Japanese yen. The financial woes of the Asian
economies during the period reinforced the U.S. dollar's strength, thus
contributing to the downward pressure on the price of gold.
Gold opened the period at a 12-year low of $311 per ounce and dropped to a
19-year low of $273 per ounce in August. In September, anticipation that the
Federal Reserve Board would ease monetary policy resulted in a weakening of the
U.S. dollar and an increase in the gold price. Bullion ended the period under
review at $293 per ounce.
PERFORMANCE AND PORTFOLIO
For the twelve-month period ended October 31, 1998, the average precious metals
fund, as measured by the Lipper Gold-Oriented Funds Index, returned -25.29
percent. Morgan Stanley Dean Witter Precious Metals and Minerals Trust was no
exception, as its Class B shares posted a total return of -26.86 percent. During
the same period, the Fund's Class A, C and D shares returned -26.38 percent,
-26.75 percent and -26.68 percent, respectively. The performance of the Fund's
four share classes varies, because each class has different expenses. The
broader market, as measured by the Standard & Poor's 500 Composite Stock Price
Index (S&P 500), earned a 21.99 percent return. The
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
LETTER TO THE SHAREHOLDERS OCTOBER 31, 1998, CONTINUED
accompanying chart illustrates the performance of a $10,000 investment in the
Fund's Class B shares versus that of similar hypothetical investments in the
Lipper Gold-Oriented Funds Index and the S&P 500.
At period end, the Fund's key portfolio holdings included Stillwater Mining,
Euro-Nevada Mining, Placer Dome, Barrick Gold and Battle Mountain Gold.
Geographically, the Fund's assets were 46 percent invested in Canada, 32 percent
in the United States, 18 percent in Australia and 3 percent in the United
Kingdom.
LOOKING AHEAD
The spread of the "Asian flu" to Russia and Latin America has led to concerns
about whether the United States can withstand growing outside financial
pressures. If the health of the U.S. economy appears threatened, as the
economies of Latin America experience further difficulties and Japan seeks to
resolve its financial problems, we would expect pressures on the U.S. dollar.
This trend would likely create more interest in gold as a hedge for the dollar
and would be positive for bullion over the long term, because gold is considered
a safe haven in times of financial uncertainty. Precious metals stocks should
also perform well in such an environment.
We believe that the long-term outlook for precious metals is promising. Supply
is slowing as high-cost mines close, and demand is currently strong. Future
trends may depend on the impact that the upcoming European Monetary Union has on
the market. Also, if the reactions of the world's central bankers to the ongoing
global financial crisis lead to higher inflation, we could expect to see an
increase in the price of gold.
We appreciate your ongoing support of Morgan Stanley Dean Witter Precious Metals
and Minerals Trust and look forward to continuing to serve your investment
objectives.
Very truly yours,
/s/ Charles A. Fiumefreddo
--------------------------
CHARLES A. FIUMEFREDDO
CHAIRMAN OF THE BOARD
2
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND
MINERALS TRUST
FUND PERFORMANCE OCTOBER 31, 1998
[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND ACCURATE
DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR THE
PURPOSE OF EDGAR FILING.]
[Download Table]
GROWTH OF $10,000--CLASS B
($ in Thousands)
Fund S&P 500(4) Lipper(5)
August 6, 1990 $10,000 $10,000 $10,000
October 31, 1990 $8,570 $9,179 $8,663
October 31, 1991 $8,675 $12,251 $9,060
October 31, 1992 $7,984 $13,469 $7,436
October 31, 1993 $10,956 $15,476 $11,871
October 31, 1994 $11,634 $16,072 $13,717
October 31, 1995 $10,147 $20,313 $11,157
October 31, 1996 $11,764 $25,200 $13,248
October 31, 1997 $7,848 $33,277 $8,554
October 31, 1998 $5,740(3) $40,594 $6,390
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. PERFORMANCE FOR CLASS
A, CLASS C, AND CLASS D SHARES WILL VARY FROM THE PERFORMANCE OF CLASS B
SHARES SHOWN ABOVE DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURNS
----------------------------------------------------------------------------------------------------
CLASS B SHARES* CLASS A SHARES**
----------------------------------------------- -----------------------------------------------
PERIOD ENDED 10/31/98 PERIOD ENDED 10/31/98
------------------------- -------------------------
1 Year (26.86)%(1) (30.52)%(2) 1 Year (26.38)%(1) (30.25)%(2)
5 Years (12.13) (1) (12.44) (2) Since Inception (7/28/97) (30.25) (1) (33.18) (2)
Since Inception (8/6/90) (6.52) (1) (6.52) (2)
[Enlarge/Download Table]
CLASS C SHARES+ CLASS D SHARES++
----------------------------------------------- -----------------------------------------------
PERIOD ENDED 10/31/98 PERIOD ENDED 10/31/98
------------------------- -------------------------
1 Year (26.75)%(1) (27.49)%(2) 1 Year (26.68)%(1)
Since Inception (7/28/97) (30.69) (1) (30.69) (2) Since Inception (7/28/97) (30.47) (1)
------------------------
(1) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable sales charge. See the Fund's current prospectus for
complete details on fees and sales charges.
(3) Closing value assuming a complete redemption on October 31, 1998.
(4) The Standard and Poor's 500 Stock Index (S&P 500) 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.
(5) The Lipper Gold-Oriented Funds Index is an equally-weighted performance
index of the largest qualifying funds (based on net assets) in the Lipper
Gold-Oriented Funds objective. The Index, which is adjusted for capital
gains distributions and income dividends, is unmanaged and should not be
considered an investment. There are currently 10 funds represented in this
Index.
* The maximum CDSC for Class B is 5.0%. The CDSC declines to 0% after six
years.
** The maximum front-end sales charge for Class A is 5.25%.
+ The maximum CDSC for Class C shares is 1% for shares redeemed within one
year of purchase.
++ Class D shares have no sales charge.
3
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1998
[Enlarge/Download Table]
NUMBER OF
SHARES VALUE
----------------------------------------------------------------------------------------------------------------
COMMON STOCKS (99.1%)
AUSTRALIA (18.0%)
GOLD MINING
600,000 Delta Gold NL.......................................................................... $ 980,928
500,000 Resolute Ltd........................................................................... 430,560
1,250,000 Ross Mining NL......................................................................... 811,200
-----------
2,222,688
-----------
PRECIOUS METALS
700,000 Acacia Resources Ltd................................................................... 1,113,840
300,000 Lihir Gold Ltd.*....................................................................... 415,584
25,000 Lihir Gold Ltd. (ADR)*................................................................. 662,500
800,000 Normandy Mining Ltd.................................................................... 713,856
200,000 Ranger Minerals NL*.................................................................... 549,120
-----------
3,454,900
-----------
TOTAL AUSTRALIA........................................................................ 5,677,588
-----------
CANADA (45.9%)
GOLD MINING
50,000 IAMGOLD, International African Mining Gold Corp.*...................................... 141,005
50,000 IAMGOLD, International African Mining Gold Corp. - 144A*............................... 141,005
100,000 Sutton Resources Ltd.*................................................................. 385,738
200,000 Yamana Resources, Inc.*................................................................ 154,295
-----------
822,043
-----------
PRECIOUS METALS
90,000 Aber Resources Ltd.*................................................................... 504,700
200,000 Agnico-Eagle Mines Ltd................................................................. 998,379
85,000 Barrick Gold Corp...................................................................... 1,816,875
200,000 Cambior Inc. (ADR)..................................................................... 1,000,000
135,000 Euro-Nevada Mining Corp................................................................ 2,109,238
75,000 Franco Nevada Mining Corp. Ltd......................................................... 1,446,515
350,000 Geomaque Explorations Ltd.*............................................................ 349,433
200,000 Greenstone Resources Ltd.*............................................................. 286,548
300,000 Meridian Gold Inc.*.................................................................... 1,556,250
125,000 Placer Dome, Inc. (ADR)................................................................ 1,968,750
100,000 Prime Resources Group, Inc. (ADR)...................................................... 849,271
125,000 Repadre Capital Corp.*................................................................. 202,593
650,000 Vengold Inc.*.......................................................................... 526,742
-----------
13,615,294
-----------
TOTAL CANADA........................................................................... 14,437,337
-----------
UNITED KINGDOM (3.1%)
OTHER METALS/MINERALS
20,000 Rio Tinto PLC (ADR).................................................................... 990,000
-----------
UNITED STATES (32.0%)
CONSUMER SPECIALTIES
50,000 Lazare Kaplan International, Inc.*..................................................... 387,500
-----------
NUMBER OF
SHARES VALUE
----------------------------------------------------------------------------------------------------------------
OTHER METALS/MINERALS
75,000 Freeport-McMoran Copper & Gold, Inc. (Class A)......................................... $ 895,313
20,000 Freeport-McMoran Copper & Gold, Inc. (Class B)......................................... 246,250
-----------
1,141,563
-----------
PRECIOUS METALS
300,000 Battle Mountain Gold Co................................................................ 1,631,250
125,000 Crown Resources Corp.*................................................................. 312,500
85,000 Getchell Gold Corp.*................................................................... 1,487,500
100,000 Homestake Mining Co.................................................................... 1,187,500
70,375 Newmont Mining Corp.................................................................... 1,495,469
75,000 Stillwater Mining Co.*................................................................. 2,428,125
-----------
8,542,344
-----------
TOTAL UNITED STATES.................................................................... 10,071,407
-----------
ZIMBABWE (0.1%)
OTHER METALS/MINERALS
120,000 Zimbabwe Platinum Mines Ltd.*.......................................................... 29,203
-----------
TOTAL COMMON STOCKS
(IDENTIFIED COST $39,486,619).......................................................... 31,205,535
-----------
[Enlarge/Download Table]
PRINCIPAL
AMOUNT IN
THOUSANDS
----------
SHORT-TERM INVESTMENT (2.2%)
REPURCHASE AGREEMENT
$ 684 The Bank of New York 5.125% due 11/02/98 (dated 10/30/98; proceeds $683,945)
(IDENTIFIED COST $683,653) (a)....................................................... 683,653
-----------
[Enlarge/Download Table]
TOTAL INVESTMENTS
(IDENTIFIED COST $40,170,272) (b).......................................................... 101.3% 31,889,188
LIABILITIES IN EXCESS OF OTHER ASSETS...................................................... (1.3) (420,898)
------ ------------
NET ASSETS................................................................................. 100.0% $ 31,468,290
===== ============
---------------------
ADR American Depository Receipt.
* Non-income producing security.
(a) Collateralized by $697,301 Student Loan Marketing Association 5.077% due
11/19/98 valued at $697,326.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $2,346,405 and the
aggregate gross unrealized depreciation is $10,627,489, resulting in net
unrealized depreciation of $8,281,084.
SEE NOTES TO FINANCIAL STATEMENTS
4
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
[Enlarge/Download Table]
ASSETS:
Investments in securities, at value
(identified cost $40,170,272)........................................... $ 31,889,188
Receivable for:
Shares of beneficial interest sold.................................... 149,650
Dividends............................................................. 30,654
Prepaid expenses and other assets......................................... 39,781
------------
TOTAL ASSETS......................................................... 32,109,273
------------
LIABILITIES:
Payable for:
Shares of beneficial interest repurchased............................. 283,981
Investments purchased................................................. 254,856
Plan of distribution fee.............................................. 27,378
Investment management fee............................................. 22,099
Accrued expenses and other payables....................................... 52,669
------------
TOTAL LIABILITIES.................................................... 640,983
------------
NET ASSETS........................................................... $ 31,468,290
============
COMPOSITION OF NET ASSETS:
Paid-in-capital........................................................... $ 60,013,917
Net unrealized depreciation............................................... (8,281,197)
Accumulated net investment loss........................................... (127,339)
Accumulated net realized loss............................................. (20,137,091)
------------
NET ASSETS........................................................... $ 31,468,290
============
CLASS A SHARES:
Net Assets................................................................ $91,152
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)................. 18,054
NET ASSET VALUE PER SHARE............................................ $5.05
=====
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE).................... $5.33
=====
CLASS B SHARES:
Net Assets................................................................ $30,005,023
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)................. 5,990,376
NET ASSET VALUE PER SHARE............................................ $5.01
=====
CLASS C SHARES:
Net Assets................................................................ $1,045,540
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)................. 208,707
NET ASSET VALUE PER SHARE............................................ $5.01
=====
CLASS D SHARES:
Net Assets................................................................ $326,575
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)................. 64,942
NET ASSET VALUE PER SHARE............................................ $5.03
=====
SEE NOTES TO FINANCIAL STATEMENTS
5
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1998
[Enlarge/Download Table]
NET INVESTMENT LOSS:
INCOME
Dividends (net of $14,613 foreign withholding tax).................................... $ 247,239
Interest.............................................................................. 145,797
------------
TOTAL INCOME..................................................................... 393,036
------------
EXPENSES
Plan of distribution fee (Class A shares)............................................. 147
Plan of distribution fee (Class B shares)............................................. 306,235
Plan of distribution fee (Class C shares)............................................. 9,392
Investment management fee............................................................. 256,380
Registration fees..................................................................... 88,745
Transfer agent fees and expenses...................................................... 86,657
Professional fees..................................................................... 53,618
Shareholder reports and notices....................................................... 49,175
Custodian fees........................................................................ 16,621
Trustees' fees and expenses........................................................... 10,804
Other................................................................................. 7,989
------------
TOTAL EXPENSES................................................................... 885,763
------------
NET INVESTMENT LOSS.............................................................. (492,727)
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss on:
Investments....................................................................... (9,648,954)
Foreign exchange transactions..................................................... (629)
------------
NET LOSS......................................................................... (9,649,583)
------------
Net change in unrealized appreciation/depreciation on:
Investments....................................................................... (420,844)
Translation of other assets and liabilities denominated in foreign currencies..... 22
------------
NET DEPRECIATION................................................................. (420,822)
------------
NET LOSS......................................................................... (10,070,405)
------------
NET DECREASE.......................................................................... $(10,563,132)
============
SEE NOTES TO FINANCIAL STATEMENTS
6
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
[Enlarge/Download Table]
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1998 1997*
-----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss................................................... $ (492,727) $ (575,376)
Net realized loss..................................................... (9,649,583) (9,101,223)
Net change in unrealized depreciation................................. (420,822) (9,193,959)
------------- -------------
NET DECREASE..................................................... (10,563,132) (18,870,558)
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class B shares.................................................... -- (656,572)
Net realized gain
Class B shares.................................................... -- (3,712,483)
------------- -------------
TOTAL DIVIDENDS AND DISTRIBUTIONS................................ -- (4,369,055)
------------- -------------
Net increase from transactions in shares of beneficial interest....... 3,551,128 878,665
------------- -------------
NET DECREASE..................................................... (7,012,004) (22,360,948)
NET ASSETS:
Beginning of period................................................... 38,480,294 60,841,242
------------- -------------
END OF PERIOD
(INCLUDING NET INVESTMENT LOSSES OF $127,339 AND $191,129,
RESPECTIVELY)..................................................... $ 31,468,290 $ 38,480,294
============ ============
---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
7
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Precious Metals and Minerals Trust (the "Fund"),
formerly Dean Witter Precious Metals and Minerals Trust, 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
long-term capital appreciation. The Fund will attempt to achieve its investment
objective by investing principally in the securities of foreign and domestic
companies engaged in the exploration, mining, fabrication, processing,
distribution or trading of precious metals and minerals or in companies engaged
in financing, managing, controlling or operating companies engaged in these
activities and also by investing a portion of its assets in gold, silver,
platinum and palladium bullion and coins. The Fund was organized as a
Massachusetts business trust on December 28, 1989 and commenced operations on
August 6, 1990. On July 28, 1997, the Fund commenced offering three additional
classes of shares, with the then current shares designated as Class B shares.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts and disclosures. Actual results could differ from those
estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price (in
cases where securities are traded on more than one exchange, the securities are
valued on the exchange designated as the primary market pursuant to procedures
adopted by the Trustees); (2) 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
8
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998, CONTINUED
Witter Advisors Inc. (the "Investment Manager"), formerly Dean Witter
InterCapital Inc., that sale and bid prices are not reflective of a security's
market value, portfolio securities are valued at their fair value as determined
in good faith under procedures established by and under the general supervision
of the Trustees (valuation of debt securities for which market quotations are
not readily available may be based upon current market prices of securities
which are comparable in coupon, rating and maturity or an appropriate matrix
utilizing similar factors); and (4) short-term debt securities having a maturity
date of more than sixty days at time of purchase are valued on a mark-to-market
basis until sixty days prior to maturity and thereafter at amortized cost based
on their value on the 61st day. Short-term debt securities having a maturity
date of sixty days or less at the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date
except for certain dividends from foreign securities which are recorded as soon
as the Fund is informed after the ex-dividend date. Discounts are accreted over
the life of the respective securities. Interest income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. FOREIGN CURRENCY TRANSLATION -- The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, other assets and liabilities and forward foreign currency
contracts are translated at the exchange rates prevailing at the end of the
period; and (2) purchases, sales, income and expenses are translated at the
exchange rates prevailing on the respective dates of such transactions. The
resultant exchange gains and losses are included in the Statement of Operations
as realized and unrealized gain/loss on foreign exchange transactions. Pursuant
to U.S. Federal income tax regulations, certain foreign exchange gains/losses
included in realized and unrealized gain/loss are included in or are a reduction
of ordinary income for federal income tax purposes. The Fund does not isolate
that portion of the results of operations arising as a result of changes in the
foreign exchange rates from the changes in the market prices of the securities.
9
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998, CONTINUED
E. FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may enter into forward
foreign currency contracts which are valued daily at the appropriate exchange
rates. The resultant unrealized exchange gains and losses are included in the
Statement of Operations as unrealized foreign currency gain or loss and in the
Statement of Assets and Liabilities as part of the related foreign currency
denominated asset or liability. The Fund records realized gains or losses on
delivery of the currency or at the time the forward contract is extinguished
(compensated) by entering into a closing transaction prior to delivery.
F. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent that these differences are permanent in nature, such amounts are
reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.80% 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
10
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998, CONTINUED
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
lesser of: (a) the average daily aggregate gross sales of the Class B shares
since the inception of the Fund (not including reinvestment of dividend or
capital gain distributions) less the average daily aggregate net asset value of
the Class B shares redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or waived; or (b) the average daily net
assets of Class B; and (iii) Class C -- up to 1.0% of the average daily net
assets of Class C. In the case of Class A shares, amounts paid under the Plan
are paid to the Distributor for services provided. In the case of Class B and
Class C shares, amounts paid under the Plan are paid to the Distributor for (1)
services provided and the expenses borne by it and others in the distribution of
the shares of these Classes, including the payment of commissions for sales of
these Classes and incentive compensation to, and expenses of, Morgan Stanley
Dean Witter Financial Advisors and others who engage in or support distribution
of the shares or who service shareholder accounts, including overhead and
telephone expenses; (2) printing and distribution of prospectuses and reports
used in connection with the offering of these shares to other than current
shareholders; and (3) preparation, printing and distribution of sales literature
and advertising materials. In addition, the Distributor may utilize fees paid
pursuant to the Plan, in the case of Class B shares, to compensate Dean Witter
Reynolds Inc. ("DWR"), an affiliate of the Investment Manager and Distributor,
and other selected broker-dealers for their opportunity costs in advancing such
amounts, which compensation would be in the form of a carrying charge on any
unreimbursed expenses.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the
11
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998, CONTINUED
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
$3,830,463 at October 31, 1998.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the year ended October 31, 1998, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.23% and
1.0%, respectively.
The Distributor has informed the Fund that for the year ended October 31, 1998,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $81,003 and $1,677, respectively and
received approximately $4,714 in front-end sales charges from sales of the
Fund's Class A shares. The respective shareholders pay such charges which are
not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended October 31, 1998 aggregated
$15,521,451 and $10,677,356, respectively.
For the year ended October 31, 1998, the Fund incurred $13,415 in brokerage
commissions with DWR for portfolio transactions executed on behalf of the Fund.
For the year ended October 31, 1998, the Fund incurred $2,500 in brokerage
commissions 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 October 31, 1998, the Fund had
transfer agent fees and expenses payable of approximately $500.
12
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998, CONTINUED
5. SHARES OF BENEFICIAL INTEREST
Transaction in shares of beneficial interest were as follows:
[Enlarge/Download Table]
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997*
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
CLASS A SHARES
Sold............................................................. 163,290 $ 830,904 4,703 $ 37,724
Redeemed......................................................... (149,939) (771,988) -- --
----------- ------------ ----------- ------------
Net increase -- Class A.......................................... 13,351 58,916 4,703 37,724
----------- ------------ ----------- ------------
CLASS B SHARES
Sold............................................................. 10,593,880 59,088,953 12,331,939 111,539,261
Reinvestment of dividends and distributions...................... -- -- 402,436 4,004,238
Redeemed......................................................... (10,149,788) (56,742,708) (12,648,999) (115,262,441)
----------- ------------ ----------- ------------
Net increase -- Class B.......................................... 444,092 2,346,245 85,376 281,058
----------- ------------ ----------- ------------
CLASS C SHARES
Sold............................................................. 604,559 3,428,478 95,151 732,145
Redeemed......................................................... (465,261) (2,500,980) (25,742) (182,272)
----------- ------------ ----------- ------------
Net increase -- Class C.......................................... 139,298 927,498 69,409 549,873
----------- ------------ ----------- ------------
CLASS D SHARES
Sold............................................................. 362,666 2,036,922 1,259 10,010
Redeemed......................................................... (298,983) (1,818,453) -- --
----------- ------------ ----------- ------------
Net increase -- Class D.......................................... 63,683 218,469 1,259 10,010
----------- ------------ ----------- ------------
Net increase in Fund............................................. 660,424 $ 3,551,128 160,747 $ 878,665
=========== ============ =========== ============
---------------------
* For Class A, C and D, for the period July 28, 1997 (issue date) through
October 31, 1997.
6. FEDERAL INCOME TAX STATUS
At October 31, 1998, the Fund had a net capital loss carryover of approximately
$20,110,000 of which $10,239,000 will be available through October 31, 2005 and
$9,871,000 will be available through October 31, 2006 to offset future capital
gains to the extent provided by regulations.
As of October 31, 1998, the Fund had temporary book/tax differences attributable
to capital loss deferrals on wash sales and income from the mark-to-market of
passive foreign investment companies ("PFICs") and permanent book/tax
differences primarily attributable to a net operating loss and tax adjustments
on PFICs sold by the Fund. To reflect reclassifications arising from the
permanent differences, paid-in-capital was charged $404,421, accumulated net
realized loss was charged $152,096 and net investment loss was credited
$556,517.
13
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998, CONTINUED
7. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward foreign currency contracts ("forward contracts")
to facilitate settlement of foreign currency denominated portfolio transactions
or to manage foreign currency exposure associated with foreign currency
denominated securities.
Forward contracts involve elements of market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the foreign exchange rates underlying the forward
contracts. Risks may also arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
At October 31, 1998, there were no outstanding forward contracts.
14
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
[Enlarge/Download Table]
FOR THE YEAR ENDED OCTOBER 31
----------------------------------------------------------------
1998++ 1997*++ 1996 1995 1994
----------------------------------------------------------------------------------------------------------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period.... $ 6.85 $ 11.14 $ 9.77 $ 11.45 $ 10.80
------- ------- ------- ------- -------
Income (loss) from investment
operations:
Net investment loss.................. (0.09) (0.10) (0.10) (0.08) (0.06)
Net realized and unrealized gain
(loss)............................... (1.75) (3.35) 1.66 (1.38) 0.73
------- ------- ------- ------- -------
Total income (loss) from investment
operations............................. (1.84) (3.45) 1.56 (1.46) 0.67
------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income................ -- (0.13) -- -- --
Net realized gain.................... -- (0.71) (0.19) (0.22) (0.02)
------- ------- ------- ------- -------
Total dividends and distributions....... -- (0.84) (0.19) (0.22) (0.02)
------- ------- ------- ------- -------
Net asset value, end of period.......... $ 5.01 $ 6.85 $ 11.14 $ 9.77 $ 11.45
======= ======= ======= ======= =======
TOTAL RETURN+........................... (26.86)% (33.29)% 15.93% (12.78)% 6.18%
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ 2.78%(1) 2.36% 2.27% 2.29% 2.28%
Net investment loss..................... (1.55)%(1) (1.13)% (0.84)% (0.70)% (0.87)%
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands.............................. $30,005 $37,964 $60,841 $55,448 $73,444
Portfolio turnover rate................. 36% 53% 46% 23% 46%
---------------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date have been designated Class B shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charges. Calculated based on the
net asset value as of the last business day of the period.
(1) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
15
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
[Enlarge/Download Table]
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH OCTOBER
OCTOBER 31, 1998 31, 1997
-------------------------------------------------------------------------------------------------
CLASS A SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 6.86 $ 7.95
------- -------
Loss from investment operations:
Net investment loss...................................... (0.05) --
Net realized and unrealized loss......................... (1.76) (1.09)
------- -------
Total loss from investment operations....................... (1.81) (1.09)
------ ------
Net asset value, end of period.............................. $ 5.05 $ 6.86
======= =======
TOTAL RETURN+............................................... (26.38)% (13.71)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 2.01%(3) 1.61%(2)
Net investment loss......................................... (0.78)%(3) (0.08)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $91 $32
Portfolio turnover rate..................................... 36% 53%
CLASS C SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 6.84 $ 7.95
------- -------
Loss from investment operations:
Net investment loss...................................... (0.09) (0.02)
Net realized and unrealized loss......................... (1.74) (1.09)
------ ------
Total loss from investment operations....................... (1.83) (1.11)
------ ------
Net asset value, end of period.............................. $ 5.01 $ 6.84
======= =======
TOTAL RETURN+............................................... (26.75)% (13.96)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 2.78%(3) 2.37%(2)
Net investment loss......................................... (1.55)%(3) (0.79)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $1,046 $475
Portfolio turnover rate..................................... 36% 53%
---------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charges. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
16
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
[Enlarge/Download Table]
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
OCTOBER 31, 1998 OCTOBER 31, 1997
-------------------------------------------------------------------------------------------------
CLASS D SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 6.86 $ 7.95
------- -------
Income (loss) from investment operations:
Net investment income.................................... 0.02 --
Net realized and unrealized loss......................... (1.85) (1.09)
------- -------
Total loss from investment operations....................... (1.83) (1.09)
------ ------
Net asset value, end of period.............................. $ 5.03 $ 6.86
======= =======
TOTAL RETURN+............................................... (26.68)% (13.71)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 1.78%(3) 1.35%(2)
Net investment income (loss)................................ (0.55)%(3) 0.22%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $327 $9
Portfolio turnover rate..................................... 36% 53%
---------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
17
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND
MINERALS TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
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 Precious
Metals and Minerals Trust (the "Fund"), formerly Dean Witter Precious Metals and
Minerals Trust at October 31, 1998, 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
presented, 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 October
31, 1998 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
DECEMBER 7, 1998
18
(This page has been left blank intentionally.)
TRUSTEES
Michael Bozic MORGAN STANLEY DEAN WITTER
Charles A. Fiumefreddo PRECIOUS METALS
Edwin J. Garn AND MINERALS TRUST
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS [PHOTO]
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Robert Rossetti
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center -- Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS ANNUAL REPORT
OCTOBER 31, 1998
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and
trustees, fees, expenses and other pertinent information, please see the
prospectus of the Fund.
This report is not authorized for distribution to prospective investors in
the Fund unless preceded or accompanied by an effective prospectus.
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
LETTER TO THE SHAREHOLDERS April 30, 1999
Two World Trade Center,
New York, New York 10048
DEAR SHAREHOLDER:
The six-month period ended April 30, 1999 was one of stabilization in the gold
market. After two and a half years of declining prices, gold hit a 19-year low
of $273 per ounce in August 1998. Then, in the aftermath of the near-collapse
of a major hedge fund last summer, the Federal Reserve Board began to
aggressively ease monetary policy, which resulted in a weakening of the U.S.
dollar versus other major currencies and, consequently, a reversal in the price
of gold.
After a rally to $300 per ounce in September, the price of gold drifted to a
year-end level of $288 and remained between roughly $280 and $290 in the first
four months of 1999. The gold market had to deal with the prospects of
International Monetary Fund sales of official gold holdings to fund debt relief
for poor nations, the passage of a Swiss plebiscite to delink its currency from
gold, and a rebounding dollar. At the same time, industrial commodity prices
rose, on the increasing belief that the global economic cycle was bottoming.
Economists upgraded global GDP forecasts and analysts revised metal prices
upward, including the price of gold. Thus, the improving demand-driven economic
outlook, combined with limited supply-side adjustments on the part of
producers, set the stage for a more positive environment for precious metals.
PERFORMANCE AND PORTFOLIO
For the six-month period under review, Morgan Stanley Dean Witter Precious
Metals and Minerals Trust's Class B shares posted a total return of 3.59
percent versus 5.28 percent for the Lipper Gold Funds Index and 22.31 percent
for the Standard & Poor's 500 Composite Stock Price Index (S&P 500). For the
same period, the Fund's Class A, C and D shares produced total returns of 4.16
percent, 3.59 percent and 3.78 percent, respectively. Performance of the Fund's
four share classes varies because of differing expenses.
The Fund's performance reflected the generally lackluster environment of the
precious metals market. We believe, however, that this environment is
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
LETTER TO THE SHAREHOLDERS April 30, 1999, continued
likely to improve as pessimism about gold abates. The Fund's key holdings
include Stillwater Mining, Barrick Gold, Euro-Nevada Mining, Getchell Gold and
Placer Dome.
LOOKING AHEAD
On May 7, 1999, the Bank of England announced that it planned to sell 415
metric tons of its 715-metric-ton gold reserves. The United Kingdom plans to
sell 125 metric tons of its reserves by March 31, 2000, and reduce its holdings
to 300 metric tons over a three- to five-year period. The market's initial
response was negative, with the gold price dropping more than $10 per ounce.
However, we believe that this announcement by the U.K. will create a degree of
central bank transparency that should reduce ambiguity and eventually restore
investor confidence. The decision also demonstrates the seriousness of the gold
policy of the European Central Bank (ECB). The U.K. is likely to join the
European Monetary Union (EMU), which would put its gold holdings under the
jurisdiction of the ECB. The ECB is unlikely to approve gold sales; therefore,
the U.K. would have to sell its reserves before joining EMU. Finally, we
believe that the U.K.'s intention to sell gold is unlikely to spark other
official sector sales, because G-10 officials have indicated that they have no
intention to sell in light of the U.K. decision. Thus, after a month or two of
stabilization, we believe the gold market is likely to join the broad metals
market in rising to higher levels.
We believe that the long-term outlook for precious metals appears promising.
Demand is strong and production growth is slowing as high-cost mines continue
to close. Future trends may depend on the market's perception of official
sector sales and on the response from central bankers to the world's fragile
economic condition. If central banks move toward inflationary policies to help
stagnant economies recover from burdensome debt loads, we would expect a
recovery in the price of gold.
On May 1, 1999, Mitchell M. Merin was named President of the Morgan Stanley
Dean Witter Funds. Mr. Merin is also the President and Chief Operating Officer
of Asset Management of Morgan Stanley Dean Witter & Co. and President, Chief
Executive Officer and Director of Morgan Stanley Dean Witter Advisors Inc., the
Fund's Investment Manager. He also serves as Chairman, Chief Executive Officer
and Director of the Fund's distributor and transfer agent.
2
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
LETTER TO THE SHAREHOLDERS April 30, 1999, continued
We appreciate your ongoing support of Morgan Stanley Dean Witter Precious
Metals and Minerals Trust and look forward to continuing to serve your
investment needs.
Very truly yours,
/s/ Charles A. Fiumfreddo
CHARLES A. FIUMFREDDO
Chairman of the Board
/s/ Mitchell M. Merin
MITCHELL M. MERIN
President
3
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
PORTFOLIO OF INVESTMENTS April 30, 1999 (unaudited)
[Download Table]
NUMBER OF
SHARES VALUE
----------------- -----------------
COMMON STOCKS (94.4%)
AUSTRALIA (16.9%)
Precious Metals
800,000 Acacia Resources Ltd. .................. $ 1,111,152
800,000 Delta Gold NL .......................... 1,243,432
25,000 Lihir Gold Ltd. (ADR)* ................. 446,875
400,000 Newcrest Mining Ltd.* .................. 918,023
1,000,000 Normandy Mining Ltd. ................... 866,434
200,000 Rangers Minerals NL* ................... 522,506
1,250,000 Ross Mining NL ......................... 768,878
-----------
TOTAL AUSTRALIA ........................ 5,877,300
-----------
CANADA (44.6%)
Other Metals/Minerals
125,000 Aber Resources Ltd.* ................... 831,333
25,000 Dia Met Minerals Ltd. (Class A)*........ 338,533
-----------
1,169,866
-----------
Precious Metals
220,000 Agnico-Eagle Mines Ltd. ................ 1,357,559
131,300 Barrick Gold Corp. ..................... 2,645,514
135,000 Euro-Nevada Mining Corp. ............... 2,309,393
85,000 Franco Nevada Mining Corp. Ltd.......... 1,643,469
40,000 Francisco Gold Corp.* .................. 342,818
350,000 Geomaque Explorations Ltd.* ............ 347,960
200,000 Goldcorp Inc. (Class A)* ............... 1,206,719
170,000 IAMGOLD, International African
Mining Gold Corp.* ..................... 454,577
50,000 IAMGOLD, International African
Mining Gold Corp. -- 144A* ............. 133,699
300,000 Meridian Gold Inc.* .................... 1,725,000
150,000 Pacific Rim Mining Corp.* .............. 169,695
125,000 Placer Dome, Inc. (ADR) ................ 1,765,625
125,000 Repadre Capital Corp.* ................. 222,832
-----------
14,324,860
-----------
TOTAL CANADA ........................... 15,494,726
-----------
GHANA (2.6%)
Precious Metals
100,000 Ashanti Goldfield Co., Ltd. (GDR)....... 900,000
-----------
UNITED KINGDOM (1.9%)
Other Metals/Minerals
10,000 Rio Tinto PLC (ADR) .................... 681,250
-----------
UNITED STATES (28.3%)
Consumer Specialties
50,000 Lazare Kaplan International, Inc.*...... 450,000
-----------
Precious Metals
200,000 Battle Mountain Gold Co. ............... 562,500
[Download Table]
NUMBER OF
SHARES VALUE
----------------- -----------------
65,000 Getchell Gold Corp.* ................... $ 2,218,125
181,750 Homestake Mining Co. ................... 1,737,985
70,000 Newmont Mining Corp. ................... 1,684,375
112,500 Stillwater Mining Co.* ................. 3,185,156
-----------
9,388,141
-----------
TOTAL UNITED STATES .................... 9,838,141
-----------
ZIMBABWE (0.1%)
Other Metals/Minerals
120,000 Zimbabwe Platinum Mines Ltd.*........... 28,572
-----------
TOTAL COMMON STOCKS
(Identified Cost $34,098,234) .......... 32,819,989
-----------
[Download Table]
PRINCIPAL
AMOUNT IN
THOUSANDS
----------
SHORT-TERM INVESTMENT (a) (7.5%)
U.S. GOVERNMENT AGENCY
$ 2,600 Student Loan Marketing Assoc.
4.80% due 05/03/99
(Amortized Cost $2,599,307).............. 2,599,307
---------
[Download Table]
TOTAL INVESTMENTS
(Identified Cost $36,697,541) (b) ......... 101.9 % 35,419,296
LIABILITIES IN EXCESS OF CASH AND
OTHER ASSETS .............................. (1.9) (668,355)
------- -----------
NET ASSETS ................................ 100.0 % $34,750,941
======= ===========
--------------------------------
ADR American Depository Receipt.
GDR Global Depository Receipt.
* Non-income producing security.
(a) Security was purchased on a discount basis. The interest rate
shown has been adjusted to reflect a money market equivalent
yield.
(b) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$3,972,322 and the aggregate gross unrealized depreciation is
$5,250,567, resulting in net unrealized depreciation of
$1,278,245.
FORWARD FOREIGN CURRENCY CONTRACT OPEN AT APRIL 30, 1999:
[Download Table]
CONTRACT IN EXCHANGE DELIVERY UNREALIZED
TO DELIVER FOR DATE DEPRECIATION
------------ ------------- ------------ -------------
$ 172,334 AUD 260,166 05/05/1999 $ (260)
Currency Abbreviation:
AUD Australian Dollar.
SEE NOTES TO FINANCIAL STATEMENTS
4
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1999 (unaudited)
[Download Table]
ASSETS:
Investments in securities, at value
(identified cost $36,697,541) ................ $35,419,296
Cash ............................................ 64,731
Receivable for:
Shares of beneficial interest sold ......... 145,696
Dividends .................................. 12,500
Prepaid expenses and other assets ............... 30,001
-----------
TOTAL ASSETS ............................... 35,672,224
-----------
LIABILITIES:
Payable for:
Shares of beneficial interest
repurchased ............................. 652,862
Investments purchased ...................... 172,073
Plan of distribution fee ................... 24,806
Investment management fee .................. 20,402
Accrued expenses and other payables ............. 51,140
-----------
TOTAL LIABILITIES .......................... 921,283
-----------
NET ASSETS ................................. $34,750,941
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital ................................. $62,231,332
Net unrealized depreciation ..................... (1,278,242)
Accumulated net investment loss ................. (311,442)
Accumulated net realized loss ................... (25,890,707)
-----------
NET ASSETS ................................. $34,750,941
===========
CLASS A SHARES:
Net Assets ...................................... $ 236,645
Shares Outstanding (unlimited authorized,
$.01 par value) .............................. 44,971
NET ASSET VALUE PER SHARE .................. $ 5.26
===========
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net
asset value) ............................ $ 5.55
===========
CLASS B SHARES:
Net Assets ...................................... $32,170,143
Shares Outstanding (unlimited authorized,
$.01 par value) .............................. 6,195,943
NET ASSET VALUE PER SHARE .................. $ 5.19
===========
CLASS C SHARES:
Net Assets ...................................... $ 1,483,277
Shares Outstanding (unlimited authorized,
$.01 par value) .............................. 285,762
NET ASSET VALUE PER SHARE .................. $ 5.19
===========
CLASS D SHARES:
Net Assets ...................................... $ 860,876
Shares Outstanding (unlimited authorized,
$.01 par value) .............................. 164,832
NET ASSET VALUE PER SHARE .................. $ 5.22
===========
STATEMENT OF OPERATIONS
For the six months ended April 30, 1999 (unaudited)
[Download Table]
NET INVESTMENT LOSS:
INCOME
Dividends (net of $10,733 foreign
withholding tax) ............................... $ 203,038
Interest .......................................... 32,311
----------
TOTAL INCOME ................................. 235,349
----------
EXPENSES
Plan of distribution fee (Class A shares) ......... 323
Plan of distribution fee (Class B shares) ......... 140,092
Plan of distribution fee (Class C shares) ......... 6,859
Investment management fee ......................... 119,682
Transfer agent fees and expenses .................. 43,511
Professional fees ................................. 39,662
Registration fees ................................. 30,853
Shareholder reports and notices ................... 22,364
Custodian fees .................................... 7,321
Trustees' fees and expenses ....................... 5,935
Other ............................................. 2,850
----------
TOTAL EXPENSES ............................... 419,452
----------
NET INVESTMENT LOSS .......................... (184,103)
----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss on:
Investments .................................. (5,751,026)
Foreign exchange transactions ................ (2,590)
----------
NET LOSS ..................................... (5,753,616)
Net change in unrealized depreciation ............. 7,002,955
----------
NET GAIN ..................................... 1,249,339
----------
NET INCREASE ...................................... $1,065,236
==========
SEE NOTES TO FINANCIAL STATEMENTS
5
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
[Enlarge/Download Table]
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 1999 OCTOBER 31, 1998
---------------- -----------------
(unaudited)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss .................................. $ (184,103) $ (492,727)
Net realized loss .................................... (5,753,616) (9,649,583)
Net change in unrealized depreciation ................ 7,002,955 (420,822)
------------ -------------
NET INCREASE (DECREASE) ........................... 1,065,236 (10,563,132)
------------ -------------
Net increase from transactions in shares of beneficial
interest ........................................... 2,217,415 3,551,128
------------ -------------
NET INCREASE (DECREASE) ........................... 3,282,651 (7,012,004)
NET ASSETS:
Beginning of period .................................. 31,468,290 38,480,294
------------ -------------
END OF PERIOD
(Including accumulated net investment losses of
$311,442 and $127,339, respectively) .............. $ 34,750,941 $ 31,468,290
============ =============
SEE NOTES TO FINANCIAL STATEMENTS
6
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Precious Metals and Minerals Trust (the "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 long-term capital appreciation. The Fund will attempt to achieve
its investment objective by investing principally in the securities of foreign
and domestic companies engaged in the exploration, mining, fabrication,
processing, distribution or trading of precious metals and minerals or in
companies engaged in financing, managing, controlling or operating companies
engaged in these activities and also by investing a portion of its assets in
gold, silver, platinum and palladium bullion and coins. The Fund was organized
as a Massachusetts business trust on December 28, 1989 and commenced operations
on August 6, 1990. On July 28, 1997, the Fund converted to a multiple class
share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price
(in cases where securities are traded on more than one exchange, the securities
are valued on the exchange designated as the primary market pursuant to
procedures adopted by the Trustees); (2) 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"), that sale and bid prices are not reflective of a security's market
value, portfolio securities are valued at their fair value as determined in
good faith under procedures established by and under the general supervision of
the Trustees (valuation of debt securities for which market quotations are not
readily available may be based upon current market prices of securities which
are comparable in
7
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited) continued
coupon, rating and maturity or an appropriate matrix utilizing similar
factors); and (4) short-term debt securities having a maturity date of more
than sixty days at time of purchase are valued on a mark-to-market basis until
sixty days prior to maturity and thereafter at amortized cost based on their
value on the 61st day. Short-term debt securities having a maturity date of
sixty days or less at the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date
except for certain dividends from foreign securities which are recorded as soon
as the Fund is informed after the ex-dividend date. Discounts are accreted over
the life of the respective securities. Interest income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date
such items are recognized. Distribution fees are charged directly to the
respective class.
D. FOREIGN CURRENCY TRANSLATION -- The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, other assets and liabilities and forward foreign
currency contracts are translated at the exchange rates prevailing at the end
of the period; and (2) purchases, sales, income and expenses are translated at
the exchange rates prevailing on the respective dates of such transactions. The
resultant exchange gains and losses are included in the Statement of Operations
as realized and unrealized gain/loss on foreign exchange transactions. Pursuant
to U.S. Federal income tax regulations, certain foreign exchange gains/losses
included in realized and unrealized gain/loss are included in or are a
reduction of ordinary income for federal income tax purposes. The Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the changes in the market prices of
the securities.
E. FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may enter into forward
foreign currency contracts which are valued daily at the appropriate exchange
rates. The resultant unrealized exchange gains and losses are included in the
Statement of Operations as unrealized foreign currency gain or loss and in the
Statement of Assets and Liabilities as part of the related foreign currency
denominated asset or liability. The Fund records realized gains or losses on
delivery of the currency or at the time the forward contract is extinguished
(compensated) by entering into a closing transaction prior to delivery.
8
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited) continued
F. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which
may differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent that these differences are permanent in nature, such amounts are
reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.80% 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 lesser of: (a) the average daily aggregate gross sales of the Class B
shares since the inception of the Fund (not including reinvestment of dividend
or capital gain distributions) less the average daily aggregate net asset value
of the Class B shares redeemed since the
9
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited) continued
Fund's inception upon which a contingent deferred sales charge has been imposed
or waived; or (b) the average daily net assets of Class B; and (iii) Class C --
up to 1.0% of the average daily net assets of Class C. In the case of Class A
shares, amounts paid under the Plan are paid to the Distributor for services
provided. In the case of Class B and Class C shares, amounts paid under the Plan
are paid to the Distributor for (1) services provided and the expenses borne by
it and others in the distribution of the shares of these Classes, including the
payment of commissions for sales of these Classes and incentive compensation to,
and expenses of, Morgan Stanley Dean Witter Financial Advisors and others who
engage in or support distribution of the shares or who service shareholder
accounts, including overhead and telephone expenses; (2) printing and
distribution of prospectuses and reports used in connection with the offering of
these shares to other than current shareholders; and (3) preparation, printing
and distribution of sales literature and advertising materials. In addition, the
Distributor may utilize fees paid pursuant to the Plan, in the case of Class B
shares, to compensate Dean Witter Reynolds Inc. ("DWR"), an affiliate of the
Investment Manager and Distributor, and other selected broker-dealers for their
opportunity costs in advancing such amounts, which compensation would be in the
form of a carrying charge on any unreimbursed expenses.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund
pursuant to the Plan and contingent deferred sales charges paid by investors
upon redemption of Class B shares. Although there is no legal obligation for
the Fund to pay expenses incurred in excess of payments made to the Distributor
under the Plan and the proceeds of contingent deferred sales charges paid by
investors upon redemption of shares, if for any reason the Plan is terminated,
the Trustees will consider at that time the manner in which to treat such
expenses. The Distributor has advised the Fund that such excess amounts,
including carrying charges, totaled $4,024,012 at April 30, 1999.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the six months ended April 30, 1999, the distribution fee
was accrued for Class A shares and Class C shares at the annual rate of 0.22%
and 1.0%, respectively.
The Distributor has informed the Fund that for the six months ended April 30,
1999, it received contingent deferred sales charges from certain redemptions of
the Fund's Class A shares, Class B shares and Class C
10
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited) continued
shares of $6, $42,419 and $1,154, respectively and received approximately
$3,794 in front-end sales charges from sales of the Fund's Class A shares. The
respective shareholders pay such charges which are not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities,
excluding short-term investments, for the six months ended April 30, 1999
aggregated $6,305,194 and $5,942,553, respectively.
For the six months ended April 30, 1999, the Fund incurred $4,519 in brokerage
commissions with DWR 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 April 30, 1999, the Fund had
transfer agent fees and expenses payable of approximately $1,000.
5. SHARES OF BENEFICIAL INTEREST
Transaction in shares of beneficial interest were as follows:
[Enlarge/Download Table]
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 1999 OCTOBER 31, 1998
------------------------------- ---------------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
--------------- --------------- ---------------- ----------------
CLASS A SHARES
Sold ............................ 963,520 $ 4,845,905 163,290 $ 830,904
Redeemed ........................ (936,603) (4,730,193) (149,939) (771,988)
-------- ------------- -------- -------------
Net increase -- Class A ......... 26,917 115,712 13,351 58,916
-------- ------------- -------- -------------
CLASS B SHARES
Sold ............................ 2,898,905 14,373,073 10,593,880 59,088,953
Redeemed ........................ (2,693,338) (13,205,398) (10,149,788) (56,742,708)
---------- ------------- ----------- -------------
Net increase -- Class B ......... 205,567 1,167,675 444,092 2,346,245
---------- ------------- ----------- -------------
CLASS C SHARES
Sold ............................ 569,096 2,794,057 604,559 3,428,478
Redeemed ........................ (492,041) (2,314,046) (465,261) (2,500,980)
---------- ------------- ----------- -------------
Net increase -- Class C ......... 77,055 480,011 139,298 927,498
---------- ------------- ----------- -------------
CLASS D SHARES
Sold ............................ 285,836 1,405,372 362,666 2,036,922
Redeemed ........................ (185,946) (951,355) (298,983) (1,818,453)
---------- ------------- ----------- -------------
Net increase -- Class D ......... 99,890 454,017 63,683 218,469
---------- ------------- ----------- -------------
Net increase in Fund ............ 409,429 $ 2,217,415 660,424 $ 3,551,128
========== ============= =========== =============
11
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS April 30, 1999 (unaudited) continued
6. FEDERAL INCOME TAX STATUS
At October 31, 1998, the Fund had a net capital loss carryover of approximately
$20,110,000 of which $10,239,000 will be available through October 31, 2005 and
$9,871,000 will be available through October 31, 2006 to offset future capital
gains to the extent provided by regulations.
At October 31, 1998, the Fund had temporary book/tax differences attributable
to capital loss deferrals on wash sales and income from the mark-to-market of
passive foreign investment companies.
7. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward foreign currency contracts ("forward
contracts") to facilitate settlement of foreign currency denominated portfolio
transactions or to manage foreign currency exposure associated with foreign
currency denominated securities.
Forward contracts involve elements of market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The Fund bears the risk
of an unfavorable change in the foreign exchange rates underlying the forward
contracts. Risks may also arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
At April 30, 1999, there was an outstanding forward contract.
12
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
[Enlarge/Download Table]
FOR THE SIX
MONTHS ENDED
APRIL 30, 1999++
------------------------
(unaudited)
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $ 5.01
-----------
Income (loss) from investment operations:
Net investment loss ................................... (0.03)
Net realized and unrealized gain (loss) ............... 0.21
-----------
Total income (loss) from investment operations ......... 0.18
-----------
Less dividends and distributions from:
Net investment income ................................. --
Net realized gain ..................................... --
-----------
Total dividends and distributions ...................... --
-----------
Net asset value, end of period ......................... $ 5.19
===========
TOTAL RETURN+ .......................................... 3.59 %(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 2.82 %(2)(3)
Net investment loss .................................... (1.25)%(2)(3)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $ 32,170
Portfolio turnover rate ................................ 21 %(1)
FOR THE YEAR ENDED OCTOBER 31
-------------------------------------------------------------------
1998++ 1997*++ 1996 1995
------------------- --------------- --------------- ---------------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $ 6.85 $ 11.14 $ 9.77 $ 11.45
---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment loss ................................... ( 0.09) ( 0.10) ( 0.10) (0.08)
Net realized and unrealized gain (loss) ............... ( 1.75) ( 3.35) 1.66 (1.38)
---------- ---------- ---------- ----------
Total income (loss) from investment operations ......... ( 1.84) ( 3.45) 1.56 (1.46)
---------- ---------- ---------- ----------
Less dividends and distributions from:
Net investment income ................................. -- ( 0.13) -- --
Net realized gain ..................................... -- ( 0.71) ( 0.19) (0.22)
---------- ---------- ---------- ----------
Total dividends and distributions ...................... -- ( 0.84) ( 0.19) (0.22)
---------- ---------- ---------- ----------
Net asset value, end of period ......................... $ 5.01 $ 6.85 $ 11.14 $ 9.77
========== ========== ========== ==========
TOTAL RETURN+ .......................................... (26.86)% (33.29)% 15.93 % (12.78)%
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 2.78 %(3) 2.36 % 2.27 % 2.29 %
Net investment loss .................................... (1.55)%(3) (1.13)% (0.84)% (0.70)%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $30,005 $ 37,964 $60,841 $55,448
Portfolio turnover rate ................................ 36 % 53 % 46 % 23 %
FOR THE YEAR
ENDED OCTOBER
31
---------------
1994
---------------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $ 10.80
----------
Income (loss) from investment operations:
Net investment loss ................................... (0.06)
Net realized and unrealized gain (loss) ............... 0.73
----------
Total income (loss) from investment operations ......... 0.67
----------
Less dividends and distributions from:
Net investment income ................................. --
Net realized gain ..................................... (0.02)
----------
Total dividends and distributions ...................... (0.02)
----------
Net asset value, end of period ......................... $ 11.45
==========
TOTAL RETURN+ .......................................... 6.18 %
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 2.28 %
Net investment loss .................................... (0.87)%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $ 73,444
Portfolio turnover rate ................................ 46 %
-------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date have been designated Class B shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charges. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
13
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
FINANCIAL HIGHLIGHTS, continued
[Enlarge/Download Table]
FOR THE PERIOD
FOR THE SIX FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED THROUGH
APRIL 30, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
------------------------ ------------------ --------------------
(unaudited)
CLASS A SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............... $ 5.05 $ 6.86 $ 7.95
------ ------- --------
Income (loss) from investment operations:
Net investment loss ............................... (0.01) (0.05) --
Net realized and unrealized gain (loss) ........... 0.22 (1.76) (1.09)
------ ------- --------
Total income (loss) from investment operations ..... 0.21 (1.81) (1.09)
------ ------- --------
Net asset value, end of period ..................... $ 5.26 $ 5.05 $ 6.86
====== ======= ========
TOTAL RETURN+ ...................................... 4.16 %(1) (26.38)% (13.71)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................... 2.04 %(2)(3) 2.01%(3) 1.61%(2)
Net investment loss ................................ (0.47)%(2)(3) (0.78)%(3) (0.08)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ............ $ 237 $ 91 $ 32
Portfolio turnover rate ............................ 21%(1) 36 % 53 %
CLASS C SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............... $ 5.01 $ 6.84 $ 7.95
----------------- ------------- --------------
Income (loss) from investment operations:
Net investment loss ............................... (0.02) (0.09) (0.02)
Net realized and unrealized gain (loss) ........... 0.20 (1.74) (1.09)
----------------- ------------- --------------
Total income (loss) from investment operations ..... 0.18 (1.83) (1.11)
----------------- ------------- --------------
Net asset value, end of period ..................... $ 5.19 $ 5.01 $ 6.84
================= ============= ==============
TOTAL RETURN+ ...................................... 3.59 %(1) (26.75)% (13.96)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................... 2.82 %(2)(3) 2.78%(3) 2.37%(2)
Net investment loss ................................ (1.25)%(2)(3) (1.55)%(3) (0.79)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ............ $1,483 $ 1,046 $ 475
Portfolio turnover rate ............................ 21 %(1) 36 % 53%
--------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charges. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
14
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
FINANCIAL HIGHLIGHTS, continued
[Enlarge/Download Table]
FOR THE PERIOD
FOR THE SIX FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED THROUGH
APRIL 30, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
------------------------ ------------------ --------------------
(unaudited)
CLASS D SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $ 5.03 $ 6.86 $ 7.95
------- ------- --------
Income (loss) from investment operations:
Net investment income (loss) .......................... (0.02) 0.02 --
Net realized and unrealized gain (loss) ............... 0.21 (1.85) (1.09)
------- ------- --------
Total income (loss) from investment operations ......... 0.19 (1.83) (1.09)
------- ------- --------
Net asset value, end of period ......................... $ 5.22 $ 5.03 $ 6.86
======= ======= ========
TOTAL RETURN+ .......................................... 3.78 %(1) (26.68)% (13.71)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.82 %(2)(3) 1.78 %(3) 1.35 %(2)
Net investment income (loss) ........................... (0.25)%(2)(3) (0.55)%(3) 0.22 %(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $ 861 $ 327 $ 9
Portfolio turnover rate ................................ 21 %(1) 36 % 53 %
--------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
15
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Mitchell M. Merin
President
Barry Fink
Vice President, Secretary and General Counsel
George Paoletti
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
The financial statements included herein have been taken from the records of the
Fund without examination by the independent accountants and accordingly they
do not express an opinion thereon.
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and trustees,
fees, expenses and other pertinent information, please see the prospectus
of the Fund.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective prospectus.
MORGAN STANLEY
DEAN WITTER
PRECIOUS METALS
AND MINERALS TRUST
[GRAPHIC OMITTED]
SEMIANNUAL REPORT
APRIL 30, 1999
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE
DEVELOPMENT SECURITIES INC.
PART B
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relates to the shares of Morgan
Stanley Dean Witter Natural Resource Development Securities Inc. ("Natural
Resource") to be issued pursuant to an Agreement and Plan of Reorganization,
dated July 29, 1999, between Natural Resource and Morgan Stanley Dean Witter
Precious Metals and Minerals Trust ("Precious Metals") in connection with the
acquisition by Natural Resource of substantially all of the assets, subject to
stated liabilities, of Precious Metals. This Statement of Additional Information
does not constitute a prospectus. This Statement of Additional Information does
not include all information that a shareholder should consider before voting on
the proposals contained in the Proxy Statement and Prospectus, and, therefore,
should be read in conjunction with the related Proxy Statement and Prospectus,
dated September , 1999. A copy of the Proxy Statement and Prospectus may be
obtained without charge by mailing a written request to Natural Resource at Two
World Trade Center, New York, New York 10048 or by calling (800) 869-NEWS (TOLL
FREE). Please retain this document for future reference.
The date of this Statement of Additional Information is September , 1999.
B-1
TABLE OF CONTENTS
[Download Table]
PAGE
-----
INTRODUCTION ........................................... B-3
ADDITIONAL INFORMATION ABOUT NATURAL RESOURCE .......... B-3
FINANCIAL STATEMENTS ................................... B-4
B-2
INTRODUCTION
This Statement of Additional Information is intended to supplement the
information provided in the Proxy Statement and Prospectus dated September ,
1999 (the "Proxy Statement and Prospectus"). The Proxy Statement and Prospectus
has been sent to Precious Metals shareholders in connection with the
solicitation of proxies by the Board of Trustees of Precious Metals to be voted
at the Special Meeting of shareholders of Precious Metals to be held on December
21, 1999. This Statement of Additional Information incorporates by reference the
Statement of Additional Information of Natural Resource dated June 30, 1999 and
the Statement of Additional Information of Precious Metals dated February 22,
1999.
ADDITIONAL INFORMATION ABOUT NATURAL RESOURCE
INVESTMENT OBJECTIVES AND POLICIES
For additional information about Natural Resource's investment objectives
and policies, see "Description of the Fund and Its Investments and Risks" in
Natural Resource's Statement of Additional Information.
MANAGEMENT
For additional information about the Board of Trustees, officers and
management personnel of Natural Resource, see "Management of the Fund" and
"Investment Management and Other Services" in Natural Resource's Statement of
Additional Information.
INVESTMENT ADVISORY AND OTHER SERVICES
For additional information about Natural Resource's investment manager, see
"Investment Management and Other Services" in Natural Resource's Statement of
Additional Information. For additional information about Natural Resource's
independent auditors, see "Investment Management and Other Services" in Natural
Resource's Statement of Additional Information. For additional information about
other services provided to Natural Resource, see "Investment Management and
Other Services" in Natural Resource's Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE
For additional information about brokerage allocation practices, see
"Brokerage Allocation and Other Practices" in Natural Resource's Statement of
Additional Information.
DESCRIPTION OF FUND SHARES
For additional information about the voting rights and other
characteristics of the shares of Natural Resource, see "Capital Stock and Other
Securities" in Natural Resource's Statement of Additional Information.
PURCHASE, REDEMPTION AND PRICING OF SHARES
For additional information about the purchase and redemption of Natural
Resource's shares and the determination of net asset value, see "Purchase,
Redemption and Pricing of Shares" in Natural Resource's Statement of Additional
Information.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
For additional information about Natural Resource's policies regarding
dividends and distributions and tax matters affecting Natural Resource and its
shareholders, see "Taxation of the Fund and Shareholders" in Natural Resource's
Statement of Additional Information.
B-3
DISTRIBUTION OF SHARES
For additional information about Natural Resource's distributor and the
distribution agreement between Natural Resource and its distributor, see
"Investment Management and Other Services" and "Underwriters" in Natural
Resource's Statement of Additional Information.
PERFORMANCE DATA
For additional information about Natural Resource's performance, see
"Calculation of Performance Data" in Natural Resource's Statement of Additional
Information.
FINANCIAL STATEMENTS
Natural Resource's most recent audited financial statements are set forth
in Natural Resource's Annual Report for the fiscal year ended February 28, 1999.
A copy of the Annual Report accompanies, and is incorporated by reference in,
the Proxy Statement and Prospectus. Precious Metals' most recent audited
financial statements are set forth in Precious Metals' Annual Report for the
fiscal year ended October 31, 1998, and Precious Metals' updated, unaudited
financial statements are set forth in its unaudited Semi-Annual Report for the
six month period ended April 30, 1999, which are incorporated by reference in
the Proxy Statement and Prospectus.
B-4
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
PRO FORMA PORTFOLIO OF INVESTMENTS AS OF FEBRUARY 28, 1999
(UNAUDITED)
[Enlarge/Download Table]
MORGAN STANLEY DEAN
WITTER MORGAN STANLEY
NATURAL RESOURCE DEAN WITTER
DEVELOPMENT SECURITIES PRECIOUS METALS &
INC. MINERALS TRUST COMBINED
------------------------- ------------------ -------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES VALUE SHARES VALUE SHARES VALUE
----------- ------------- ----------- ------- ---------- -------------
COMMON STOCKS (97.5%)
BASIC ENERGY (38.0%)
Canadian Oil & Gas (0.5%)
Gulf Canada Resources, Ltd.* ..................... 175,000 $ 404,687 -- -- 175,000 $ 404,687
Ranger Oil Ltd. .................................. 174,831 491,712 -- -- 174,831 491,712
----------- ---- -----------
896,399 -- 896,399
----------- ---- -----------
Integrated Oil Companies (22.4%)
Atlantic Richfield Co. ........................... 50,000 2,731,250 -- -- 50,000 2,731,250
BP Amoco PLC (ADR) (United Kingdom) .............. 60,000 5,100,000 -- -- 60,000 5,100,000
Chevron Corp. .................................... 25,000 1,921,875 -- -- 25,000 1,921,875
Ente Nazionale Idrocarburi SpA (ADR) (Italy) ..... 45,000 2,655,000 -- -- 45,000 2,655,000
Exxon Corp. ...................................... 115,000 7,654,687 -- -- 115,000 7,654,687
Kerr-McGee Corp. ................................. 25,000 714,063 -- -- 25,000 714,063
Mobil Corp. ...................................... 95,000 7,902,812 -- -- 95,000 7,902,812
PennzEnergy Co. .................................. 35,000 328,125 -- -- 35,000 328,125
Royal Dutch Petroleum Co. (ADR)
(Netherlands) ................................... 117,000 5,133,375 -- -- 117,000 5,133,375
Texaco, Inc. ..................................... 95,000 4,423,437 -- -- 95,000 4,423,437
Unocal Corp. ..................................... 70,000 1,973,125 -- -- 70,000 1,973,125
YPF Sociedad Anonima (ADR) (Argentina) ........... 95,000 2,755,000 -- -- 95,000 2,755,000
----------- ---- -----------
43,292,749 -- 43,292,749
----------- ---- -----------
Natural Gas (0.7%)
KN Energy, Inc. .................................. 60,000 1,256,250 -- -- 60,000 1,256,250
----------- ---- -----------
Oil & Gas Production (5.5%)
Anardarko Petroleum Corp. ........................ 50,000 1,375,000 -- -- 50,000 1,375,000
Apache Corp. ..................................... 80,000 1,595,000 -- -- 80,000 1,595,000
Burlington Resources, Inc. ....................... 70,000 2,266,250 -- -- 70,000 2,266,250
Cabot Oil & Gas Corp. (Class A) .................. 55,000 601,562 -- -- 55,000 601,562
Devon Energy Corp. ............................... 25,000 585,937 -- -- 25,000 585,937
Noble Affiliates, Inc. ........................... 10,000 226,250 -- -- 10,000 226,250
Nuevo Energy Co.* ................................ 22,500 157,500 -- -- 22,500 157,500
Occidental Petroleum Corp. ....................... 80,000 1,205,000 -- -- 80,000 1,205,000
Snyder Oil Corp. ................................. 25,000 260,937 -- -- 25,000 260,937
St. Mary Land & Exploration Co. .................. 55,000 825,000 -- -- 55,000 825,000
Swift Energy Co.* ................................ 71,500 429,000 -- -- 71,500 429,000
Union Pacific Resources Group, Inc. .............. 55,000 491,563 -- -- 55,000 491,563
Vintage Petroleum, Inc. .......................... 80,000 355,000 -- -- 80,000 355,000
Wiser Oil Co. .................................... 100,000 168,750 -- -- 100,000 168,750
----------- ---- -----------
10,542,749 -- 10,542,749
----------- ---- -----------
Oil Refining/Marketing (3.2%)
Pennzoil-Quaker State Co. ........................ 35,000 435,313 -- -- 35,000 435,313
Petro-Canada (Canada) ............................ 40,000 429,908 -- -- 40,000 429,908
Sunoco, Inc. ..................................... 25,000 760,938 -- -- 25,000 760,938
Tosco Corp. ...................................... 35,000 724,063 -- -- 35,000 724,063
Total S.A. (ADR) (France) ........................ 75,000 3,871,875 -- -- 75,000 3,871,875
----------- ---- -----------
6,222,097 -- 6,222,097
----------- ---- -----------
Oil/Gas Transmission (5.7%)
El Paso Energy Corp. ............................. 70,000 2,550,625 -- -- 70,000 2,550,625
Enron Corp. ...................................... 45,000 2,925,000 -- -- 45,000 2,925,000
1
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
PRO FORMA PORTFOLIO OF INVESTMENTS AS OF FEBRUARY 28, 1999
(UNAUDITED)
[Enlarge/Download Table]
MORGAN STANLEY
DEAN WITTER MORGAN STANLEY
NATURAL RESOURCE DEAN WITTER
DEVELOPMENT SECURITIES PRECIOUS METALS &
INC. MINERALS TRUST COMBINED
------------------------- ---------------------- -------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES VALUE SHARES VALUE SHARES VALUE
----------- ------------- ----------- ----------- ---------- -------------
Enron Oil & Gas Co. .............................. 40,000 $ 660,000 -- -- 40,000 $ 660,000
Williams Companies, Inc. ......................... 135,000 4,995,000 -- -- 135,000 4,995,000
----------- ----- -----------
11,130,625 -- 11,130,625
----------- ----- -----------
TOTAL BASIC ENERGY ............................... 73,340,869 -- 73,340,869
----------- ----- -----------
ENERGY DEVELOPMENT & TECHNOLOGY
(13.4%)
Contract Drilling (2.5%)
Diamond Offshore Drilling, Inc. .................. 35,000 724,062 -- -- 35,000 724,062
ENSCO International, Inc. ........................ 75,000 665,625 -- -- 75,000 665,625
Global Marine, Inc.* ............................. 30,000 232,500 -- -- 30,000 232,500
Marine Drilling Company, Inc.* ................... 40,000 255,000 -- -- 40,000 255,000
Nabors Industries, Inc.* ......................... 65,000 747,500 -- -- 65,000 747,500
Noble Drilling Corp.* ............................ 25,000 309,375 -- -- 25,000 309,375
Patterson Energy, Inc.* .......................... 20,000 55,625 -- -- 20,000 55,625
Precision Drilling Corp. (Class A) (Canada)* ..... 25,000 229,687 -- -- 25,000 229,687
R & B Falcon Corp.* .............................. 88,500 486,750 -- -- 88,500 486,750
Santa Fe International Corp. ..................... 25,000 334,375 -- -- 25,000 334,375
Transocean Offshore Inc. ......................... 40,000 825,000 -- -- 40,000 825,000
----------- ----- -----------
4,865,499 -- 4,865,499
----------- ----- -----------
Diversified Manufacturing (2.4%)
Allegheny Teledyne Inc. .......................... 95,000 1,959,375 -- -- 95,000 1,959,375
AlliedSignal, Inc. ............................... 65,000 2,689,375 -- -- 65,000 2,689,375
----------- ----- -----------
4,648,750 -- 4,648,750
----------- ----- -----------
Oilfield Services/Equipment (8.5%)
Baker Hughes, Inc. ............................... 50,000 900,000 -- -- 50,000 900,000
BJ Services Co.* ................................. 25,000 351,563 -- -- 25,000 351,563
Cooper Cameron Corp.* ............................ 60,000 1,387,500 -- -- 60,000 1,387,500
Global Industries Ltd.* .......................... 110,000 556,875 -- -- 110,000 556,875
Halliburton Co. .................................. 125,000 3,531,250 -- -- 125,000 3,531,250
National-Oilwell, Inc.* .......................... 5,000 44,375 -- -- 5,000 44,375
Offshore Logistics, Inc.* ........................ 20,000 173,750 -- -- 20,000 173,750
Petroleum Geo -- Services ASA (ADR)
(Norway)* ....................................... 30,000 343,125 -- -- 30,000 343,125
Schlumberger, Ltd. ............................... 83,200 4,040,400 -- -- 83,200 4,040,400
Smith International, Inc.* ....................... 30,000 729,375 -- -- 30,000 729,375
Stolt Comex Seaway, S.A. (United Kingdom)* ....... 32,500 190,938 -- -- 32,500 190,938
Stolt Comex Seaway, S.A. (United Kingdom)* ....... 70,000 457,188 -- -- 70,000 457,188
Trico Marine Service, Inc.* ...................... 30,000 129,375 -- -- 30,000 129,375
UTI Energy Corp.* ................................ 55,000 319,688 -- -- 55,000 319,688
Varco International, Inc.* ....................... 90,000 697,500 -- -- 90,000 697,500
Veritas DGC Inc.* ................................ 65,000 613,438 -- -- 65,000 613,438
Weatherford International, Inc.* ................. 116,500 1,980,500 -- -- 116,500 1,980,500
----------- ----- -----------
16,446,840 -- 16,446,840
----------- ----- -----------
TOTAL ENERGY DEVELOPMENT &
TECHNOLOGY ...................................... 25,961,089 -- -- 25,961,089
----------- ----- -----------
METALS AND MATERIALS (46.1%)
Aluminum (1.9%)
Alcoa Inc. ....................................... 90,000 3,645,000 -- -- 90,000 3,645,000
----------- ----- -----------
Consumer Specialties (0.2%)
Lazare Kaplan International, Inc.* ............... -- -- 50,000 $368,750 50,000 368,750
----------- -------- -----------
2
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
PRO FORMA PORTFOLIO OF INVESTMENTS AS OF FEBRUARY 28, 1999
(UNAUDITED)
[Enlarge/Download Table]
MORGAN STANLEY
DEAN WITTER MORGAN STANLEY
NATURAL RESOURCE DEAN WITTER
DEVELOPMENT SECURITIES PRECIOUS METALS &
INC. MINERALS TRUST COMBINED
------------------------- ------------------------ ---------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES VALUE SHARES VALUE SHARES VALUE
----------- ------------- ----------- ------------- ------------ -------------
Construction/Agricultural Equipment/Trucks (0.8%)
Deere & Co. .................................... 45,000 $ 1,470,937 -- -- 45,000 $ 1,470,937
----------- --
Containers/Packaging (2.2%)
Owens-Illinois, Inc.* .......................... 78,000 1,867,125 -- -- 78,000 1,867,125
Temple-Inland, Inc. ............................ 40,000 2,397,500 -- -- 40,000 2,397,500
----------- -- -----------
4,264,625 -- 4,264,625
----------- -- -----------
Environmental Services (0.2%)
Casella Waste Systems Inc., (Class A)* ......... 15,500 315,812 -- -- 15,500 315,812
----------- -- -----------
Gold Mining (1.9%)
Delta Gold NL (Australia) ...................... -- -- 800,000 $1,176,862 800,000 1,176,862
Goldcorp Inc. (Class A) (Canada) ............... -- -- 50,000 298,547 50,000 298,547
IAMGOLD, International African Mining Gold
Corp. (Canada)* ............................... -- -- 50,000 155,907 50,000 155,907
IAMGOLD, International African Mining Gold
Corp. -- 144A** (Canada) ...................... -- -- 170,000 530,086 170,000 530,086
Ross Mining NL (Australia) ..................... -- -- 1,250,000 633,552 1,250,000 633,552
Sutton Resources Ltd. (Canada)* ................ -- -- 100,000 789,491 100,000 789,491
----------- ---------- -----------
-- 3,584,445 3,584,445
----------- ---------- -----------
Forest Products (0.9%)
Georgia-Pacific Group .......................... 25,000 1,831,250 -- -- 25,000 1,831,250
----------- ---------- -----------
Industrial Machinery/Components (0.8%)
Ingersoll-Rand Co. ............................. 34,200 1,624,500 -- -- 34,200 1,624,500
----------- ---------- -----------
Major Chemicals (5.9%)
Dow Chemical Co. ............................... 35,000 3,443,125 -- -- 35,000 3,443,125
Du Pont (E.I.) de Nemours & Co., Inc. .......... 75,000 3,848,437 -- -- 75,000 3,848,437
Monsanto Co. ................................... 90,000 4,100,625 -- -- 90,000 4,100,625
----------- ---------- -----------
11,392,187 -- 11,392,187
----------- ---------- -----------
Metals Fabrications (0.5%)
Reliance Steel & Aluminum Co. .................. 40,000 1,022,500 -- -- 40,000 1,022,500
----------- ---------- -----------
Paints/Coatings (0.8%)
PPG Industries, Inc. ........................... 30,000 1,561,875 -- -- 30,000 1,561,875
----------- ---------- -----------
Paper (7.3%)
Boise Cascade Corp. ............................ 50,000 1,553,125 -- -- 50,000 1,553,125
Bowater, Inc. .................................. 50,000 2,106,250 -- -- 50,000 2,106,250
Champion International Corp. ................... 50,000 1,850,000 -- -- 50,000 1,850,000
Mead Corp. ..................................... 100,000 3,043,750 -- -- 100,000 3,043,750
Union Camp Corp. ............................... 40,000 2,675,000 -- -- 40,000 2,675,000
Willamette Industries, Inc. .................... 80,000 2,915,000 -- -- 80,000 2,915,000
----------- ---------- -----------
14,143,125 -- 14,143,125
----------- ---------- -----------
Other Metals/Minerals (0.8%)
Argentina Gold Corp. (Canada) .................. -- -- 100,000 290,585 100,000 290,585
Freeport-McMoran Cooper & Gold, Inc.
(Class A) ..................................... -- -- 75,000 693,750 75,000 693,750
Rio Tinto PLC (ADR) (United Kingdom) ........... -- -- 10,000 503,750 10,000 503,750
Zimbabwe Platinimum Mines Ltd. (Zimbabwe)* ..... -- -- 120,000 26,332 120,000 26,332
----------- ---------- -----------
-- 1,514,417 1,514,417
----------- ---------- -----------
3
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
PRO FORMA PORTFOLIO OF INVESTMENTS AS OF FEBRUARY 28, 1999
(UNAUDITED)
[Enlarge/Download Table]
MORGAN STANLEY
MORGAN STANLEY DEAN WITTER DEAN WITTER
NATURAL RESOURCE PRECIOUS METALS &
DEVELOPMENT SECURITIES INC. MINERALS TRUST
--------------------------- --------------------------
NUMBER OF NUMBER OF
SHARES VALUE SHARES VALUE
----------- --------------- ----------- --------------
Precious Metals (16.3%)
Aber Resources Ltd. (Canada)* ..................... -- -- 90,000 $ 620,977
Acacia Resources Ltd. (Australia) ................. -- -- 800,000 1,063,133
Agnico-Eagle Mines Ltd. (Canada) .................. -- -- 220,000 1,211,438
Barrick Gold Corp. (Canada) ....................... 160,000 $ 2,830,000 85,000 1,503,438
Battle Mountain Gold Co. .......................... -- -- 300,000 1,012,500
Cambior Inc. (ADR) (Canada) ....................... -- -- 150,000 590,625
Euro-Navada Mining Corp. (Canada) ................. -- -- 135,000 1,952,497
Franco-Navada Mining Corp. Ltd. (Canada) .......... -- -- 75,000 1,159,357
Getchell Gold Corp.* .............................. 100,000 2,593,750 65,000 1,685,938
Geomaque Explorations Ltd. (Canada)* .............. -- -- 350,000 276,322
Homestake Mining Corp. ............................ -- -- 174,000 1,598,625
Lihir Gold Ltd. (ADR) (Australia)* ................ -- -- 25,000 409,376
Meridian Gold Inc. (Canada)* ...................... -- -- 300,000 1,687,500
Newmont Mining Corp. .............................. 100,000 1,725,000 60,000 1,035,000
Normandy Mining Ltd. (Australia) .................. -- -- 800,000 682,383
Pacific Rim Mining Corp.* ......................... -- -- 150,000 169,176
Placer Dome Inc. (Canada) ......................... 100,000 1,093,750 125,000 1,367,188
Repadre Capital Corp. (Canada)* ................... -- -- 125,000 221,837
Ranger Minerals NL (Australia)* ................... -- -- 200,000 432,671
Stillwater Mining Co.* ............................ 82,950 1,902,666 112,500 2,580,469
Vengold Inc. (Canada)* ............................ -- -- 224,000 68,360
------------- ------------
10,145,166 21,328,810
------------- ------------
Specialty Chemicals (1.7%)
Avery Dennison Corp. .............................. 60,000 3,221,250 -- --
------------- ------------
Specialty Steels (0.7%)
Nucor Corp. ....................................... 30,000 1,336,875 -- --
------------- ------------
Steel/Iron Ore (3.2%)
AK Steel Holding Corp. ............................ 80,000 1,745,000 -- --
British Steel PLC (ADR) (United Kingdom) .......... 95,000 1,870,313 -- --
Lone Star Technologies, Inc.* ..................... 45,000 582,188 -- --
USX-U.S. Steel Group .............................. 80,000 2,025,000 -- --
------------- ------------
6,222,501 --
------------- ------------
TOTAL METALS & BASIC MATERIALS .................... 62,197,603 26,796,422
------------- ------------
TOTAL COMMON STOCKS
(Identified Cost $178,309,725, $34,573,410 and
$212,883,135, respectively.) ..................... 161,499,561 26,796,422
------------- ------------
COMBINED
--------------------------
NUMBER OF
SHARES VALUE
---------- ---------------
Precious Metals (16.3%)
Aber Resources Ltd. (Canada)* ..................... 90,000 $ 620,977
Acacia Resources Ltd. (Australia) ................. 800,000 1,063,133
Agnico-Eagle Mines Ltd. (Canada) .................. 220,000 1,211,438
Barrick Gold Corp. (Canada) ....................... 245,000 4,333,438
Battle Mountain Gold Co. .......................... 300,000 1,012,500
Cambior Inc. (ADR) (Canada) ....................... 150,000 590,625
Euro-Navada Mining Corp. (Canada) ................. 135,000 1,952,497
Franco-Navada Mining Corp. Ltd. (Canada) .......... 75,000 1,159,357
Getchell Gold Corp.* .............................. 165,000 4,279,688
Geomaque Explorations Ltd. (Canada)* .............. 350,000 276,322
Homestake Mining Corp. ............................ 174,000 1,598,625
Lihir Gold Ltd. (ADR) (Australia)* ................ 25,000 409,376
Meridian Gold Inc. (Canada)* ...................... 300,000 1,687,500
Newmont Mining Corp. .............................. 160,000 2,760,000
Normandy Mining Ltd. (Australia) .................. 800,000 682,383
Pacific Rim Mining Corp.* ......................... 150,000 169,176
Placer Dome Inc. (Canada) ......................... 225,000 2,460,938
Repadre Capital Corp. (Canada)* ................... 125,000 221,837
Ranger Minerals NL (Australia)* ................... 200,000 432,671
Stillwater Mining Co.* ............................ 195,450 4,483,135
Vengold Inc. (Canada)* ............................ 224,000 68,360
-------------
31,473,976
-------------
Specialty Chemicals (1.7%)
Avery Dennison Corp. .............................. 60,000 3,221,250
Specialty Steels (0.7%)
Nucor Corp. ....................................... 30,000 1,336,875
Steel/Iron Ore (3.2%)
AK Steel Holding Corp. ............................ 80,000 1,745,000
British Steel PLC (ADR) (United Kingdom) .......... 95,000 1,870,313
Lone Star Technologies, Inc.* ..................... 45,000 582,188
USX-U.S. Steel Group .............................. 80,000 2,025,000
-------------
6,222,501
-------------
TOTAL METALS & BASIC MATERIALS .................... 88,994,025
-------------
TOTAL COMMON STOCKS
(Identified Cost $178,309,725, $34,573,410 and
$212,883,135, respectively.) ..................... 188,295,983
-------------
4
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
PRO FORMA PORTFOLIO OF INVESTMENTS AS OF FEBRUARY 28, 1999
(UNAUDITED)
[Enlarge/Download Table]
MORGAN STANLEY
MORGAN STANLEY DEAN WITTER DEAN WITTER
NATURAL RESOURCE PRECIOUS METALS &
DEVELOPMENT SECURITIES INC. MINERALS TRUST
--------------------------- -------------------------
PRINCIPAL PRINCIPAL
AMOUNT IN AMOUNT IN
THOUSANDS VALUE THOUSANDS VALUE
----------- --------------- ----------- -------------
SHORT-TERM INVESTMENT (A) (0.7%)
U.S. GOVERNMENT AGENCY
Federal Home Loan Mortgage Corp. 4.70% due
03/01/99 (Amortized Cost $0, $1,299,661 and
$1,299,661, respectively.)........................ -- $1,300 $ 1,299,661
-- -----------
TOTAL INVESTMENTS
(Identified Cost $178,309,725, $35,873,071 and
$214,182,796, respectively) (b) .................. $161,499,561 28,096,083
CASH AND OTHER ASSETS IN EXCESS OF
LIABILITIES ...................................... 3,450,760 68,774
------------ -----------
NET ASSETS ........................................ $164,950,321 $28,164,857
============ ===========
COMBINED
---------------------------
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
----------- ---------------
SHORT-TERM INVESTMENT (A) (0.7%)
U.S. GOVERNMENT AGENCY
Federal Home Loan Mortgage Corp. 4.70% due
03/01/99 (Amortized Cost $0, $1,299,661 and
$1,299,661, respectively.)........................ $ 1,300 $ 1,299,661
------------
TOTAL INVESTMENTS
(Identified Cost $178,309,725, $35,873,071 and
$214,182,796, respectively) (b) .................. 98.2% 189,595,644
CASH AND OTHER ASSETS IN EXCESS OF
LIABILITIES ...................................... 1.8 3,519,534
-------- ------------
NET ASSETS ........................................ 100.0% $193,115,178
======== ============
----------
Note: Percentages indicated parenthetically represent the net assets of the
combined Fund.
ADR American Depository Receipt.
* Non-income producing security.
** Resale is restricted to qualified institutional investors.
(a) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(b) The aggregate cost for federal income tax purposes approximates identified
cost.
[Enlarge/Download Table]
GROSS GROSS NET
UNREALIZED UNREALIZED UNREALIZED
APPRECIATION DEPRECIATION DEPRECIATION
-------------- -------------- -------------
Morgan Stanley Dean Witter Natural Resource Development
Securities Inc. ...................................... $22,003,093 $38,813,257 $16,810,164
Morgan Stanley Dean Witter Precious Metals & Minerals
Trust ................................................ $ 1,880,401 $ 9,657,389 $ 7,776,988
----------- ----------- -----------
Combined .............................................. $23,883,494 $48,470,646 $24,587,152
=========== =========== ===========
See Notes to Pro Forma Financial Statements
5
MORGAN STANLEY DEAN WITTER NATURAL RESOURCES DEVELOPMENT SECURITIES INC.
PRO FORMA FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1999 (UNAUDITED)
[Enlarge/Download Table]
MORGAN STANLEY MORGAN STANLEY
DEAN WITTER DEAN WITTER
NATURAL RESOURCE PRECIOUS METALS
DEVELOPMENT AND MINERALS
SECURITIES INC. TRUST
------------------ ----------------
ASSETS:
Investments in securities, at value (identified cost
$178,309,725, $35,873,071 and $214,182,796,
respectively) .......................................... $ 161,499,561 $ 28,096,083
Receivable for:
Investments sold ....................................... 3,676,977 1,334,276
Dividends .............................................. 416,280 54,702
Capital stock/shares of beneficial interest sold ....... 195,092 31,508
Foreign withholding taxes reclaimed .................... 34,594 --
Prepaid expenses and other assets ....................... 98,252 35,436
------------- --------------
TOTAL ASSETS ........................................... 165,920,756 29,552,005
------------- --------------
LIABILITIES:
Payable for:
Investments purchased .................................. -- 1,299,491
Plan of distribution fee ............................... 127,550 22,434
Capital stock/shares of beneficial repurchased
interest .............................................. 196,014 6,842
Investment management fee .............................. 88,601 18,106
Payable to bank ......................................... 447,129 810
Accrued expenses and other payables ..................... 111,141 39,465
------------- --------------
TOTAL LIABILITIES ...................................... 970,435 1,387,148
------------- --------------
NET ASSETS ............................................. $ 164,950,321 $ 28,164,857
============= ==============
COMPOSITION OF NET ASSETS:
Paid-in-capital ......................................... $ 193,467,539 $ 59,791,255
Net unrealized depreciation ............................. (16,810,164) (7,778,341)
Net investment loss ..................................... (52,409) (308,289)
Accumulated net realized loss ........................... (11,654,645) (23,539,768)
------------- --------------
NET ASSETS ............................................. $ 164,950,321 $ 28,164,857
============= ==============
CLASS A SHARES:
Net Assets .............................................. $ 691,035 $ 178,992
Shares Outstanding (unlimited authorized, $.01 par
value) ................................................. 68,091 39,016
NET ASSET VALUE PER SHARE .............................. $ 10.15 $ 4.59
============= ==============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value) ....... $ 10.71 $ 4.84
==== ============= ==============
CLASS B SHARES:
Net Assets .............................................. $ 147,527,336 $ 26,081,511
Shares Outstanding (unlimited authorized, $.01 par
value) ................................................. 14,708,614 5,749,295
NET ASSET VALUE PER SHARE .............................. $ 10.03 $ 4.54
============= ==============
CLASS C SHARES:
Net Assets .............................................. $ 1,277,627 $ 1,796,967
Shares Outstanding (unlimited authorized, $.01 par
value) ................................................. 127,480 395,965
NET ASSET VALUE PER SHARE .............................. $ 10.02 $ 4.54
============= ==============
CLASS D SHARES:
Net Assets .............................................. $ 15,454,323 $ 107,387
Shares Outstanding (unlimited authorized, $.01 par
value) ................................................. 1,516,381 23,576
NET ASSET VALUE PER SHARE .............................. $ 10.19 $ 4.55
============= ==============
PRO FORMA
ADJUSTMENTS COMBINED
--------------------- ---------------
ASSETS:
Investments in securities, at value (identified cost
$178,309,725, $35,873,071 and $214,182,796,
respectively) .......................................... -- $ 189,595,644
Receivable for:
Investments sold ....................................... -- 5,011,253
Dividends .............................................. -- 470,982
Capital stock/shares of beneficial interest sold ....... -- 226,600
Foreign withholding taxes reclaimed .................... -- 34,594
Prepaid expenses and other assets ....................... -- 133,688
------------- -------------
TOTAL ASSETS ........................................... -- 195,472,761
------------- -------------
LIABILITIES:
Payable for:
Investments purchased .................................. -- 1,299,491
Plan of distribution fee ............................... -- 149,984
Capital stock/shares of beneficial repurchased
interest .............................................. -- 202,856
Investment management fee .............................. -- 106,707
Payable to bank ......................................... -- 447,939
Accrued expenses and other payables ..................... -- 150,606
------------- -------------
TOTAL LIABILITIES ...................................... -- 2,357,583
------------- -------------
NET ASSETS ............................................. -- $ 193,115,178
============= =============
COMPOSITION OF NET ASSETS:
Paid-in-capital ......................................... -- $ 253,258,794
Net unrealized depreciation ............................. -- (24,588,505)
Net investment loss ..................................... -- (360,698)
Accumulated net realized loss ........................... -- (35,194,413)
------------- -------------
NET ASSETS ............................................. -- $ 193,115,178
============= =============
CLASS A SHARES:
Net Assets .............................................. -- $ 870,027
Shares Outstanding (unlimited authorized, $.01 par
value) ................................................. (21,381)(1) 85,726
NET ASSET VALUE PER SHARE .............................. $ 10.15
=============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value) ....... $ 10.71
==== =============
CLASS B SHARES:
Net Assets .............................................. -- $ 173,608,847
Shares Outstanding (unlimited authorized, $.01 par
value) ................................................. (3,148,945)(1) 17,308,964
NET ASSET VALUE PER SHARE .............................. $ 10.03
=============
CLASS C SHARES:
Net Assets .............................................. -- $ 3,074,594
Shares Outstanding (unlimited authorized, $.01 par
value) ................................................. (216,627)(1) 306,818
NET ASSET VALUE PER SHARE .............................. $ 10.02
=============
CLASS D SHARES:
Net Assets .............................................. -- $ 15,561,710
Shares Outstanding (unlimited authorized, $.01 par
value) ................................................. (13,038)(1) 1,526,919
NET ASSET VALUE PER SHARE .............................. $ 10.19
=============
----------
(1) Represents the difference between total additional shares to be issued
(see Note 2) and current Precious Metals Fund shares outstanding.
See Notes to Pro Forma Financial Statements
6
MORGAN STANLEY DEAN WITTER NATURAL RESOURCES DEVELOPMENT SECURITIES INC.
PRO FORMA FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED FEBRUARY 28, 1999 (UNAUDITED)
[Enlarge/Download Table]
MORGAN STANLEY MORGAN STANLEY
DEAN WITTER DEAN WITTER
NATURAL RESOURCE PRECIOUS METALS PRO FORMA
DEVELOPMENT AND MINERALS ADJUSTMENTS
SECURITIES INC. TRUST (NOTE 3) COMBINED
------------------ ----------------- ------------------- ----------------
NET INVESTMENT INCOME:
INCOME
Interest .......................................... $ 188,322 $ 114,112 -- $ 302,434
Dividends ......................................... 3,683,514 276,593 -- 3,960,107
------------- ------------ -- -------------
TOTAL INCOME ..................................... 3,871,836 390,705 -- 4,262,541
------------- ------------ -- -------------
EXPENSES
Plan of distribution fee (Class A shares) ......... 1,320 233 -- 1,553
Plan of distribution fee (Class B shares) ......... 2,124,861 297,397 -- 2,422,258
Plan of distribution fee (Class C shares) ......... 12,497 11,525 -- 24,022
Investment management fee ......................... 1,408,351 251,601 $ (50,987)(1) 1,608,965
Custodian fees .................................... 22,782 18,973 -- 41,755
Transfer agent fees and expenses .................. 342,988 103,119 11,000 (3) 457,107
Registration fees ................................. 93,922 74,223 (51,956)(2) 116,189
Professional fees ................................. 69,946 75,756 (75,756)(2)
37,500 (3) 107,446
Shareholder reports and notices ................... 87,009 43,607 (31,000)(2)
68,000 (3) 167,616
Directors/Trustees' fees and expenses ............. 17,187 14,603 (14,603)(2) 17,187
Other ............................................. 9,972 9,221 (8,757)(2) 10,436
------------- ------------ ---------- -------------
TOTAL EXPENSES ................................... 4,190,835 900,258 (116,559) 4,974,534
Less: amount reimbursed ........................... -- -- (50,000)(4) (50,000)
------------- ------------ ---------- -------------
NET EXPENSES ..................................... 4,190,835 900,258 (166,559) 4,924,534
------------- ------------ ---------- -------------
NET INVESTMENT INCOME (LOSS) ..................... (318,999) (509,553) 166,559 (661,993)
------------- ------------ ---------- -------------
NET REALIZED AND UNREALIZED GAIN
(LOSS):
Net realized gain/loss on:
Investments ...................................... (10,954,030) (9,356,753) -- (20,310,783)
Foreign exchange transactions .................... -- (254) -- (254)
------------- ------------ ---------- -------------
NET GAIN (LOSS) .................................. (10,954,030) (9,357,007) -- (20,311,037)
------------- ------------ ---------- -------------
Net change in unrealized appreciation/depreciation on:
Investments ...................................... (56,429,019) 1,748,235 -- (54,680,784)
Translation of other assets ...................... -- (1,448) -- (1,448)
------------- ------------ ---------- -------------
NET APPRECIATION/DEPRECIATION .................... (56,429,019) 1,746,787 -- (54,682,232)
------------- ------------ ---------- -------------
NET INCREASE (DECREASE) ........................... $ (67,702,048) $ (8,119,773) $ 166,559 $ (75,655,262)
============= ============ ========== =============
----------
(1) Reflects adjustment to investment management fees based on the surviving
Fund's fee schedule.
(2) Reflects elimination of duplicate services or fees.
(3) Solicitation costs in connection with the organization, which will be
borne by Precious Metals approximate $116,500.
(4) The Investment Manager has agreed to reimburse or waive $50,000 in
expenses of the Combined Fund for the first year of combined operations.
See Notes to Pro Forma Financial Statements
7
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION -- The Pro Forma Statement of Assets and Liabilities,
including the Portfolio of Investments, at February 28, 1999 and the related
Statement of Operations ("Pro Forma Statements") for the twelve months ended
February 28, 1999, reflect the accounts of Morgan Stanley Dean Witter Natural
Resource Development Securities Inc. ("MSDW Natural Resources") and Morgan
Stanley Dean Witter Precious Metals and Minerals Trust ("MSDW Precious Metals").
The Pro Forma Statements give effect to the proposed transfer of all assets and
liabilities of MSDW Precious Metals in exchange for shares in MSDW Natural
Resources. The Pro Forma Statements should be read in conjunction with the
historical financial statements of each Fund included in its Statement of
Additional Information.
2. SHARES OF BENEFICIAL INTEREST -- The pro forma net asset value per share
assumes the issuance of additional shares of MSDW Natural Resources which would
have been issued on February 28, 1999 in connection with the proposed
reorganization. Shareholders of MSDW Precious Metals would become shareholders
of MSDW Natural Resources receiving shares of the corresponding class of MSDW
Natural Resources equal to the value of their holdings in MSDW Precious Metals.
The amount of additional shares assumed to be issued was calculated based on the
February 28, 1999 net assets of MSDW Precious Metals and the net asset value per
share of MSDW Natural Resources as follows:
[Enlarge/Download Table]
CLASS A B C D
----------------------------------- ------------- ---------------- --------------- -------------
Additional Shares Issued .......... 17,635 2,600,350 179,338 10,538
Net Assets 2/28/99
MSDW Precious Metals ............. $ 178,992 $ 26,081,511 $ 1,796,967 $ 107,387
Net Asset Value Per Share
MSDW Natural Resources ........... $ 10.15 $ 10.03 $ 10.02 $ 10.19
3. PRO FORMA OPERATIONS -- The Pro Forma Statement of Operations assumes similar
rates of gross investment income for the investments of each Fund. Accordingly,
the combined gross investment income is equal to the sum of each Fund's gross
investment income. Certain expenses have been adjusted to reflect the expected
expenses of the combined entity. The pro-forma investment management fees and
plan of distribution fees of the combined Fund are based on the fee schedule in
effect for MSDW Natural Resources at the combined level of average net assets
for the twelve months ended February 28, 1999. The Pro Forma Statement of
Operations does not include the effect of any realized gains or losses, or
transaction fees incurred in connection with the realignment of the portfolio.
8
STATEMENT OF ADDITIONAL INFORMATION
JUNE 30, 1999
MORGAN STANLEY
DEAN WITTER
NATURAL RESOURCE
DEVELOPMENT
SECURITIES INC.
----------------------------------------------------------------------
This STATEMENT OF ADDITIONAL INFORMATION is not a PROSPECTUS. The PROSPECTUS
(dated June 30, 1999) for Morgan Stanley Dean Witter Natural Resource
Development Securities Inc. 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
Natural Resource Development Securities Inc.
Two World Trade Center
New York, New York 10048
(800) 869-NEWS
TABLE OF CONTENTS
--------------------------------------------------------------------------------
[Enlarge/Download Table]
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............................................. 12
III. Management of the Fund............................................................ 14
A. Board of Directors................................................................ 14
B. Management Information............................................................ 14
C. Compensation...................................................................... 18
IV. Control Persons and Principal Holders of Securities................................ 20
V. Investment Management and Other Services............................................ 20
A. Investment Manager................................................................ 20
B. Principal Underwriter............................................................. 21
C. Services Provided by the Investment Manager and Fund Expenses Paid by Third
Parties........................................................................... 21
D. Dealer Reallowances............................................................... 22
E. Rule 12b-1 Plan................................................................... 22
F. Other Service Providers........................................................... 26
VI. Brokerage Allocation and Other Practices........................................... 26
A. Brokerage Transactions............................................................ 26
B. Commissions....................................................................... 27
C. Brokerage Selection............................................................... 27
D. Directed Brokerage................................................................ 28
E. Regular Broker-Dealers............................................................ 28
VII. Capital Stock and Other Securities................................................ 28
VIII. Purchase, Redemption and Pricing of Shares....................................... 29
A. Purchase/Redemption of Shares..................................................... 29
B. Offering Price.................................................................... 29
IX. Taxation of the Fund and Shareholders.............................................. 30
X. Underwriters........................................................................ 32
XI. Calculation of Performance Data.................................................... 32
XII. Financial Statements.............................................................. 34
2
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.
"DIRECTORS"--The Board of Directors of the Fund.
"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 Natural Resource Development Securities Inc.,
a registered open-end investment company.
"INVESTMENT MANAGER"--Morgan Stanley Dean Witter Advisors Inc., a wholly-owned
investment advisor subsidiary of MSDW.
"INDEPENDENT DIRECTORS"--Directors 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.
3
I. FUND HISTORY
--------------------------------------------------------------------------------
The Fund was incorporated in the State of Maryland on December 22, 1980
under the name InterCapital Natural Resource Development Securities Inc. On
March 16, 1983 the Fund's shareholders approved a change in the Fund's name,
effective March 21, 1983, to Dean Witter Natural Resource Development Securities
Inc. Effective June 22, 1998, the Fund's name was changed to Morgan Stanley Dean
Witter Natural Resource Development Securities Inc.
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 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. The Fund
may not write covered options on portfolio securities exceeding in the aggregate
25% of the value of its total assets.
COVERED CALL WRITING. The Fund is permitted to write covered call options
on portfolio securities without limit. The Fund will receive from the purchaser,
in return for a call it has written, a "premium;" i.e., the price of the option.
Receipt of these premiums may better enable the Fund to earn a higher level of
current income than it would earn from holding the underlying securities 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
4
price of the call held is (i) equal to or less than the exercise price of the
call written or (ii) greater than the exercise price of the call written if the
difference is maintained by the Fund in cash, Treasury bills or other liquid
portfolio securities in a segregated account on the Fund's books.
Options written by the Fund normally have expiration dates of from up to
eighteen months from the date written. The exercise price of a call option may
be below, equal to or above the current market value of the underlying security
at the time the option is written.
COVERED PUT WRITING. A writer of a covered put option, 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. 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 10% of
its total assets, with a maximum of 5% of the Fund's assets invested in stock
index options. 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.
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.
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security which may be
written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). An
5
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.
STOCK INDEX OPTIONS. The Fund may invest in options on broadly based
indexes. Options on stock indexes are similar to options on stock except that,
rather than the right to take or make delivery of stock at a specified price, an
option on a stock index gives the holder the right to receive, upon exercise of
the option, an amount of cash if the closing level of the stock index upon which
the option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. This amount of cash is equal to
such difference between the closing price of the index and the exercise price of
the option expressed in dollars times a specified multiple. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount.
RISKS OF OPTIONS ON INDEXES. Because exercises of stock index options are
settled in cash, the Fund could not, if it wrote a call option, provide in
advance for its potential settlement obligations by acquiring and holding the
underlying securities. A call writer can offset some of the risk of its writing
position by holding a diversified portfolio of stocks similar to those on which
the underlying index is based. However, most investors cannot, as a practical
matter, acquire and hold a portfolio containing exactly the same stocks as the
underlying index, and, as a result, bear a risk that the value of the securities
held will vary from the value of the index. Even if an index call writer could
assemble a stock portfolio that exactly reproduced the composition of the
underlying index, the writer still would not be fully covered from a risk
standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the writer will not learn that it had been assigned
until the next business day, at the earliest. The time lag between exercise and
notice of assignment poses no risk for the writer of a covered call on a
specific underlying security, such as a common stock, because there the writer's
obligation is to deliver the underlying security, not to pay its value as of a
fixed time in the past. So long as the writer already owns the underlying
security, it can satisfy its settlement obligations by simply delivering it, and
the risk that its value may have declined since the exercise date is borne by
the exercising holder. In contrast, even if the writer of an index call holds
stocks that exactly match the composition of the underlying index, it will not
be able to satisfy its assignment obligations by delivering those stocks against
payment of the exercise price. Instead, it will be required to pay cash in an
amount based on the closing index value on the exercise date; and by the time it
learns that it has been assigned, the index may have declined, with a
corresponding decrease in the value of its stock portfolio. This "timing risk"
is an inherent limitation on the ability of index call writers to cover their
risk exposure by holding stock positions.
A holder of an index option who exercises it before the closing index value
for that day is available runs the risk that the level of the underlying index
may subsequently change. If a change causes the exercised option to fall
out-of-the-money, the exercising holder will be required to pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
6
If dissemination of the current level of an underlying index is interrupted,
or if trading is interrupted in stocks accounting for a substantial portion of
the value of an index, the trading of options on that index will ordinarily be
halted. If the trading of options on an underlying index is halted, an exchange
may impose restrictions prohibiting the exercise of such options.
FUTURES CONTRACTS. The Fund may purchase and sell interest rate 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 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.
7
The writer of an option on a futures contract is required to deposit initial
and variation margin pursuant to requirements similar to those applicable to
futures contracts. Premiums received from the writing of an option on a futures
contract are included in initial margin deposits.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Fund may not
enter into futures contracts or purchase related options thereon if, immediately
thereafter, the amount committed to margin plus the amount paid for premiums for
unexpired options on futures contracts exceeds 5% of the value of the Fund's
total assets, after taking into account unrealized gains and unrealized losses
on such contracts it has entered into, provided, however, that in the case of an
option that is in-the-money (the exercise price of the call (put) option is less
(more) than the market price of the underlying security) at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%.
However, there is no overall limitation on the percentage of the Fund's net
assets which may be subject to a hedge position.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. The prices
of securities and indexes subject to futures contracts (and thereby the futures
contract prices) may correlate imperfectly with the behavior of the cash prices
of the Fund's portfolio securities. Also, prices of futures contracts may not
move in tandem with the changes in prevailing interest rates and 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.
8
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. 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 of which is administered by
the FDIC), limited to $100,000 principal amount per certificate and to 10% or
less of the Fund's total assets in all such obligations and in all illiquid
assets, in the aggregate;
COMMERCIAL PAPER. Commercial paper rated within the two highest grades by
Standard & Poor's Corporation ("S&P") or the two highest grade by Moody's
Investors Service, Inc. ("Moody's") or, if not rated, issued by a company having
an outstanding debt issue rated at least AA by S&P or Aa by Moody's; and
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements. When
cash may be available for only a few days, it may be invested by the Fund in
repurchase agreements until such time as it may otherwise be invested or used
for payments of obligations of the Fund. These agreements, which may be viewed
as a type of secured lending by the Fund, typically involve the acquisition by
the Fund of debt securities from a selling financial institution such as a bank,
savings and loan association or broker-dealer. The agreement provides that the
Fund will sell back to the institution, and that the institution will
repurchase, the underlying security serving as collateral at a specified price
and at a fixed time in the future, usually not more than seven days from the
date of purchase. The collateral will be marked-to-market daily to determine
that the value of the collateral, as specified in the agreement, does not
decrease below the purchase price plus accrued interest. If such decrease
occurs, additional collateral will be requested and, when received, added to the
account to maintain full collateralization. The Fund will accrue interest from
the institution until the time when the repurchase is to occur. Although this
date is deemed by the Fund to be the maturity date of a repurchase agreement,
the maturities of securities subject to repurchase agreements are not subject to
any limits.
While repurchase agreements involve certain risks not associated with direct
investments in debt securities, the Fund follows procedures designed to minimize
such risks. These procedures include effecting repurchase transactions only with
large, well-capitalized and well-established financial institutions whose
financial condition will be continually monitored by the Investment Manager
subject to
9
procedures established by the Directors. In addition, as described above, the
value of the collateral underlying the repurchase agreement will be at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. In the event of a default or bankruptcy by a selling
financial institution, the Fund will seek to liquidate such collateral. However,
the exercising of the Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price, the
Fund could suffer a loss.
ZERO COUPON TREASURY SECURITIES. A portion of the securities purchased by
the Fund may be "zero coupon" securities. Such securities are purchased at a
discount from their face amount, giving the purchaser the right to receive their
full value at maturity. A zero coupon security pays no interest to its holder
during its life. Its value to an investor consists of the difference between its
face value at the time of maturity and the price for which it was acquired,
which is generally an amount significantly less than its face value (sometimes
referred to as a "deep discount" price).
The interest earned on such securities is, implicitly, automatically
compounded and paid out at maturity. While such compounding at a constant rate
eliminates the risk of receiving lower yields upon reinvestment of interest if
prevailing interest rates decline, the owner of a zero coupon security will be
unable to participate in higher yields upon reinvestment of interest received if
prevailing interest rates rise. For this reason, zero coupon securities are
subject to substantially greater market price fluctuations during periods of
changing prevailing interest rates than are comparable debt securities which
make current distributions of interest. Current federal tax law requires that a
holder (such as the Fund) of a zero coupon security accrue a portion of the
discount at which the security was purchased as income each year even though the
Fund receives no interest payments in cash on the security during the year.
LENDING PORTFOLIO SECURITIES. The Fund may lend its portfolio securities to
brokers, dealers and other financial institutions, provided that the loans are
callable at any time by the Fund, and are at all times secured by cash or cash
equivalents, which are maintained in a segregated account pursuant to applicable
regulations and that are equal to at least 100% of the market value, determined
daily, of the loaned securities. The advantage of these loans is that the Fund
continues to receive the income on the loaned securities while at the same time
earning interest on the cash amounts deposited as collateral, which will be
invested in short-term obligations.
As with any extensions of credit, there are risks of delay in recovery and,
in some cases, even loss of rights in the collateral should the borrower of the
securities fail financially. However, these loans of portfolio securities will
only be made to firms deemed by the Fund's management to be creditworthy and
when the income which can be earned from such loans justifies the attendant
risks. Upon termination of the loan, the borrower is required to return the
securities to the Fund. Any gain or loss in the market price during the loan
period would inure to the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of the rights
if the matters involved would have a material effect on the Fund's investment in
the loaned securities. The Fund will pay reasonable finder's, administrative and
custodial fees in connection with a loan of its securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From
time to time the Fund may purchase securities 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.
10
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 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 Directors, 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.
11
UNIT OFFERINGS. The Fund may also purchase unit offerings (where corporate
debt securities are offered as a unit with convertible securities, preferred or
common stocks, warrants, or any combination thereof).
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 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 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 more than 25% of the value of its total assets in securities
of issuers in any one industry. This restriction does not apply to bank
obligations or obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities.
4. Invest in securities of any issuer if, to the knowledge of the Fund,
any officer or director 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 directors who own more than 1/2 of 1% own in the aggregate more than 5%
of the outstanding securities of the issuer.
12
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 and
sell futures contracts and related options.
7. Borrow money, except that the Fund may borrow from a bank for
temporary or emergency purposes in amounts not exceeding 5% (taken at the
lower of cost or current value) of its total assets (not including the
amount borrowed).
8. Pledge its assets or assign or otherwise encumber them, except to
secure permitted borrowings. For the purposes 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; (b) borrowing money in
accordance with restrictions described above; or (c) lending portfolio
securities.
10. Make loans of money or securities, except: (a) by the purchase of
debt obligations in which the Fund may invest consistent with its investment
objective and policies; (b) by investment in repurchase agreements; or (c)
by lending its portfolio securities.
11. Make short sales of securities.
12. Purchase securities on margin, except for short-term loans as are
necessary for the clearance of purchases 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 and then only in an aggregate amount not to exceed 5% of
the Fund's total assets.
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 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.
13
III. MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------
A. BOARD OF DIRECTORS
The Board of Directors of the Fund oversees the management of the Fund but
does not itself manage the Fund. The Directors 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 Directors
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 Directors are generally characterized as
a duty of loyalty and a duty of care. The duty of loyalty requires a Director to
exercise his or her powers in the interest of the Fund and not the Director's
own interest or the interest of another person or organization. A Director
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 Director reasonably believes to be
in the best interest of the Fund and its shareholders.
B. MANAGEMENT INFORMATION
DIRECTORS AND OFFICERS. The Board of the Fund consists of eight (8)
Directors. These same individuals also serve as directors or trustees for all of
the Morgan Stanley Dean Witter Funds. Six Directors (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" Directors. The other two Directors (the "management Directors")
are affiliated with the Investment Manager. All of the Directors also serve as
Trustees of "Discover Brokerage Index Series," a mutual fund for which the
Investment Manager is the investment advisor.
The Directors 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 90 Morgan Stanley Dean Witter Funds and
Discover Brokerage Index Series, are shown below.
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NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
------------------------------------------------------ ----------------------------------------------------------
Michael Bozic (58) ................................... Vice Chairman of Kmart Corporation (since December, 1998);
Director Director or Trustee of the Morgan Stanley Dean Witter
c/o Kmart Corporation 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 and Discover
Chief Executive Officer and Director Brokerage Index Series; formerly Chairman, Chief Executive
Two World Trade Center Officer and Director of the Investment Manager, the
New York, New York Distributor and MSDW Services Company; Executive Vice
President and Director of Dean Witter Reynolds; Chairman
and Director of the Transfer Agent; formerly Director
and/or officer of various MSDW subsidiaries (until June
1998).
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NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
------------------------------------------------------ ----------------------------------------------------------
Edwin J. Garn (66) ................................... Director or Trustee of the Morgan Stanley Dean Witter
Director Funds and Discover Brokerage Index Series; formerly United
c/o Huntsman Corporation States Senator (R-Utah)(1974-1992) and Chairman, Senate
500 Huntsman Way Banking Committee (1980-1986); formerly Mayor of Salt Lake
Salt Lake City, Utah City, Utah (1971-1974); formerly Astronaut, Space Shuttle
Discovery (April 12-19, 1985); Vice Chairman, Huntsman
Corporation (chemical company); Director of Franklin Covey
(time management systems), BMW Bank of North America, Inc.
(industrial loan corporation), United Space Alliance
(joint venture between Lockheed Martin and the Boeing
Company) and Nuskin Asia Pacific (multilevel marketing);
member of the board of various civic and charitable
organizations.
Wayne E. Hedien (65) ................................. Retired; Director or Trustee of the Morgan Stanley Dean
Director 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 Natural
Counsel to the Independent Directors History; formerly associated with the Allstate Companies
114 West 47th Street (1966-1994), most recently as Chairman of The Allstate
New York, New York Corporation (March, 1993-December, 1994) and Chairman and
Chief Executive Officer of its wholly-owned subsidiary,
Allstate Insurance Company (July, 1989-December, 1994);
director of various other business and charitable
organizations.
Dr. Manuel H. Johnson (50) ........................... Senior Partner, Johnson Smick International, Inc., a
Director consulting firm; Co-Chairman and a founder of the Group of
c/o Johnson Smick International, Inc. Seven Council (G7C), an international economic commission;
1133 Connecticut Avenue, N.W. Chairman of the Audit Committee and Director or Trustee of
Washington, D.C. the Morgan Stanley Dean Witter Funds and Discover
Brokerage Index Series; Director of Greenwich Capital
Markets, Inc. (broker-dealer) and NVR, Inc. (home
construction); Chairman and Trustee of the Financial
Accounting Foundation (oversight organization of the
Financial Accounting Standards Board); formerly Vice
Chairman of the Board of Governors of the Federal Reserve
System (1986-1990) and Assistant Secretary of the U.S.
Treasury.
Michael E. Nugent (63) ............................... General Partner, Triumph Capital, L.P., a private in-
Director vestment partnership; Chairman of the Insurance Committee
c/o Triumph Capital, L.P. and Director or Trustee of the Morgan Stanley Dean Witter
237 Park Avenue Funds and Discover Brokerage Index Series; formerly Vice
New York, New York President, Bankers Trust Company and BT Capital
Corporation (1984-1988); director of various business
organizations.
15
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NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
------------------------------------------------------ ----------------------------------------------------------
Philip J. Purcell* (55) .............................. Chairman of the Board of Directors and Chief Executive
Director Officer of MSDW, Dean Witter Reynolds and Novus Credit
1585 Broadway Services Inc.; Director of the Distributor; Director or
New York, New York Trustee of the Morgan Stanley Dean Witter Funds and
Discover Brokerage Index Series; Director and/or officer
of various MSDW subsidiaries.
John L. Schroeder (68) ............................... Retired; Chairman of the Derivatives Committee and
Director Director or Trustee of the Morgan Stanley Dean Witter
c/o Gordon Altman Butowsky Funds and Discover Brokerage Index Series; Director of
Weitzen Shalov & Wein Citizens Utilities Company (telecommunications, gas,
Counsel to the Independent Directors electric and water utilities company); formerly Executive
114 West 47th Street Vice President and Chief Investment Officer of the Home
New York, New York 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
New York, New York June, 1998) of the Investment Manager and MSDW Services
Company; Chairman, Chief Executive Officer and Director of
the Distributor (since June, 1998); Chairman and Chief
Executive Officer (since June, 1998) and Director (since
January, 1998) of the Transfer Agent; Director of various
MSDW subsidiaries; President of the Morgan Stanley Dean
Witter Funds and Discover Brokerage Index Series (since
May, 1999); previously Chief Strategic Officer of the
Investment Manager and MSDW Services Company and Executive
Vice President of the Distributor (April, 1997-June,
1998), Vice President of the Morgan Stanley Dean Witter
Funds and Discover Brokerage Index Series (May,
1997-April, 1999), and Executive Vice President of Dean
Witter, Discover & Co.
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NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
------------------------------------------------------ ----------------------------------------------------------
Barry Fink (44) ...................................... Senior Vice President (since March, 1997) and Secretary
Vice President, Secretary and General Counsel (since February, 1997) and Director
and General Counsel (since July, 1998) of the Investment Manager and MSDW
Two World Trade Center Services Company; Senior Vice President (since March,
New York, New York 1997) and Assistant Secretary and Assistant General
Counsel (since February, 1997) of the Distributor;
Assistant Secretary of Dean Witter Reynolds (since August,
1996); Vice President, Secretary and General Counsel of
the Morgan Stanley Dean Witter Funds (since February,
1997); Vice President, Secretary and General Counsel of
Discover Brokerage Index Series; previously First Vice
President (June, 1993-February, 1997), Vice President and
Assistant Secretary and Assistant General Counsel of the
Investment Manager and MSDW Services Company and Assistant
Secretary of the Morgan Stanley Dean Witter Funds.
David F. Myers (44) .................................. Vice President of the Investment Manager.
Vice President
Two World Trade Center
New York, New York
Catherine Maniscalco (35) ............................ Vice President (since June, 1997) and a portfolio manager
Vice President (since March, 1995) of the Investment Manager; formerly a
Two World Trade Center portfolio management product specialist at National
New York, New York Investor Data Services (April, 1994-March, 1995).
Thomas F. Caloia (53) ................................ First Vice President and Assistant Treasurer of the
Treasurer Investment Manager, the Distributor and MSDW Services
Two World Trade Center Company; Treasurer of the Morgan Stanley Dean Witter Funds
New York, New York and Discover Brokerage Index Series.
------------------------------
* Denotes Directors 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 KENTON J. HINCHLIFFE, IRA N. ROSS, PAUL D. VANCE, 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 DIRECTORS AND THE COMMITTEES. Law and regulation establish both
general guidelines and specific duties for the Independent Directors. The Morgan
Stanley Dean Witter Funds seek as Independent Directors 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
17
there is often competition. To accept a position on the Funds' Boards, such
individuals may reject other attractive assignments because the Funds make
substantial demands on their time. All of the Independent Directors serve as
members of the Audit Committee. Three of them also serve as members of the
Derivatives Committee. In addition, three of the Directors, including two
Independent Directors, serve as members of the Insurance Committee.
The Independent Directors are charged with recommending to the full Board
approval of management, advisory and administration contracts, Rule 12b-1 plans
and distribution and underwriting agreements; continually reviewing Fund
performance; checking on the pricing of portfolio securities, brokerage
commissions, transfer agent costs and performance, and trading among Funds in
the same complex; and approving fidelity bond and related insurance coverage and
allocations, as well as other matters that arise from time to time. The
Independent Directors are required to select and nominate individuals to fill
any Independent Director vacancy on the Board of any Fund that has a Rule 12b-1
plan of distribution. Most of the Morgan Stanley Dean Witter Funds have a Rule
12b-1 plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of the services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; reviewing the adequacy of the Fund's system of internal
controls; and preparing and submitting Committee meeting minutes to the full
Board.
The Board of each Fund has a Derivatives Committee to approve parameters for
and monitor the activities of the Fund with respect to derivative investments,
if any, made by the Fund.
Finally, the Board of each Fund has formed an Insurance Committee to review
and monitor the insurance coverage maintained by the Fund.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT DIRECTORS FOR ALL
MORGAN STANLEY DEAN WITTER FUNDS. The Independent Directors and the Funds'
management believe that having the same Independent Directors 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
Directors for each of the Funds or even of sub-groups of Funds. They believe
that having the same individuals serve as Independent Directors 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 Directors 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
Directors serve on all Fund Boards enhances the ability of each Fund to obtain,
at modest cost to each separate Fund, the services of Independent Directors, of
the caliber, experience and business acumen of the individuals who serve as
Independent Directors of the Morgan Stanley Dean Witter Funds.
DIRECTOR AND OFFICER INDEMNIFICATION. The Fund's By Laws provides that no
Director, officer, employee or agent of the Fund is liable to the Fund or to a
shareholder, nor is any Director, 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. With the exceptions stated, the
By-Laws provides that a Director, 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 Director an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Directors, the Independent
Directors or Committees of the Board of Directors attended by the Director (the
Fund pays the Chairman of the Audit Committee an additional annual fee of
18
$750, and the Chairmen of the Derivatives and Insurance Committees additional
annual fees of $500). If a Board meeting and a meeting of the Independent
Directors or a Committee meeting, or a meeting of the Independent Directors
and/or more than one Committee meeting, take place on a single day, the
Directors are paid a single meeting fee by the Fund. The Fund also reimburses
such Directors for travel and other out-of-pocket expenses incurred by them in
connection with attending such meetings. Directors 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 Director.
The following table illustrates the compensation that the Fund paid to its
Independent Directors for the fiscal year ended February 28, 1999.
FUND COMPENSATION
[Download Table]
AGGREGATE
NAME OF INDEPENDENT COMPENSATION
DIRECTOR FROM THE FUND
------------------------- ---------------
Michael Bozic............ $ 1,550
Edwin J. Garn............ 1,700
Wayne E. Hedien.......... 1,700
Dr. Manuel H. Johnson.... 1,650
Michael E. Nugent........ 1,700
John L. Schroeder........ 1,700
The following table illustrates the compensation paid to the Fund's
Independent Directors for the calendar year ended December 31, 1998 for services
to the 90 Morgan Stanley Dean Witter Funds that were in operation at December
31, 1998. No compensation was paid to the Fund's Independent Directors by
Discover Brokerage Index Series for the calendar year ended December 31, 1998.
CASH COMPENSATION FROM MORGAN STANLEY DEAN WITTER FUNDS
[Download Table]
TOTAL CASH
COMPENSATION
FOR SERVICES
TO
90 MORGAN
NAME OF INDEPENDENT STANLEY DEAN
DIRECTOR WITTER FUNDS
--------------------------- -------------
Michael Bozic.............. $120,150
Edwin J. Garn.............. 132,450
Wayne E. Hedien............ 132,350
Dr. Manuel H. Johnson...... 155,681
Michael E. Nugent.......... 159,731
John L. Schroeder.......... 160,731
As of the date of this STATEMENT OF ADDITIONAL INFORMATION, 55 of the Morgan
Stanley Dean Witter Funds, including the Fund, have adopted a retirement program
under which an Independent Director 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 Director referred to as an "Eligible Director") 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 Director is entitled to receive
from the Adopting Fund, commencing as of his or her retirement date and
continuing for the remainder of his or her life, an annual retirement benefit
(the "Regular Benefit") equal to 30.22% of his or her Eligible Compensation plus
0.5036667% of such Eligible Compensation for each full month of service as an
Independent Director or Trustee of any Adopting Fund in excess of five years up
to a maximum of 60.44% after ten years of service. The foregoing percentages may
be changed by the Board.(1) "Eligible Compensation" is one-
------------------------
(1) An Eligible Director may elect alternative payments of his or her
retirement benefits based upon the combined life expectancy of the Eligible
Director and his or her spouse on the date of such Eligible Director's
retirement. In addition, the Eligible Director 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 Director and spouse, will be the actuarial equivalent
of the Regular Benefit.
19
fifth of the total compensation earned by such Eligible Director for service to
the Adopting Fund in the five year period prior to the date of the Eligible
Director'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 Directors by the Fund for the fiscal year ended February 28,
1999 and by the 55 Morgan Stanley Dean Witter Funds (including the Fund) for the
year ended December 31, 1998, and the estimated retirement benefits for the
Independent Trustees, to commence upon their retirement, from the Fund as of
February 28, 1999 and from the 55 Morgan Stanley Dean Witter Funds as of
December 31, 1998.
RETIREMENT BENEFITS FROM THE FUND AND ALL MORGAN STANLEY DEAN WITTER FUNDS
[Enlarge/Download Table]
FOR ALL ADOPTING FUNDS
---------------------------
ESTIMATED ESTIMATED ANNUAL
CREDITED BENEFITS
YEARS ESTIMATED RETIREMENT BENEFITS UPON RETIREMENT(2)
OF SERVICE PERCENTAGE ACCRUED AS EXPENSES -----------------------
AT OF ----------------------- FROM
NAME OF INDEPENDENT RETIREMENT ELIGIBLE BY THE BY ALL THE FROM ALL
DIRECTORS (MAXIMUM 10) COMPENSATION FUND ADOPTING FUNDS FUND ADOPTING FUNDS
------------------------- ------------ ------------ ------- -------------- ------- --------------
Michael Bozic............ 10 60.44% $ 412 $ 22,377 $ 1,029 $ 52,250
Edwin J. Garn............ 10 60.44 623 35,225 1,029 52,250
Wayne E. Hedien.......... 9 51.37 654 41,979 875 44,413
Dr. Manuel H. Johnson.... 10 60.44 251 14,047 1,029 52,250
Michael E. Nugent........ 10 60.44 441 25,336 1,029 52,250
John L. Schroeder........ 8 50.37 828 45,117 861 44,343
------------------------
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Director's elections described in Footnote (1)
above.
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
--------------------------------------------------------------------------------
The following owned more than 5% of the outstanding shares of Class A of the
Fund on June 9, 1999: Dean Witter Reynolds Inc. Custodian for Carolyn Bertelsen,
IRA Standard dated 05/24/95, 602 Palomar Road, Ojai, CA 93023-1740 - 13.85%;
Morgan Stanley Dean Witter Trust FSB ("MSDW Trust") Trustee for the benefit of
OBGYN of Lancaster, Harborside Financial Center, Plaza Two, Jersey City, NJ
07311 - 9.64%; Insulation & Refractories Service Inc. P/S/T U/A dated 03/01/79,
JG Whitsett, JW Whitsett, Freddie Veteto, Mary Harri, Carl W. Lovell Trustees,
462 Decatur, Memphis, TN 38105 - 9.46%; Ms. Sharon K. Komlofske, 1028 Elmwood
Avenue, Wilmette, IL 60091-1712 - 9.00% and MSDW Trust Trustee Prebon Yamane USA
Inc., 401(k) Profit Sharing plan, P.O. Box 957, Jersey City, NJ 07303-0957 -
5.73%. The following owned more than 5% of the outstanding shares of Class D of
the Fund on June 9, 1999: Fox & Co. C/F AFP Cuprum SA Para El Fondo De
Pensiones, Attn: Brown Bros Harriman & Co., P.O. Box 976, New York, NY
10268-0976 - 27.58%; Hare & Co. c/o The Bank of New York, P.O. Box 11203, New
York, NY 10286-1203 - 13.91%; Fox & Co. Custodian for the benefit of AFP Provida
SA Para El Fondo De Pensiones, Attn: Brown Bros Harriman & Co., P.O. Box 976,
New York, NY 10268-0976 - 12.49%; IAM & AW Local Lodge PM#2848, Multi-EMP Wage
Reduc 401(k) PSP 03/06/86 Trustee J. Winterhalter, P.O. Box 3039, Birmingham, MI
48012-3039 - 9.36%.
As of the date of this STATEMENT OF ADDITIONAL INFORMATION, the aggregate
number of shares of common stock of the Fund owned by the Fund's officers and
Directors as a group was less than 1% of the Fund's shares of common stock
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
20
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 following annual rates to the net assets of the Fund
determined as of the close of each business day: 0.625% to the portion of the
daily net assets not exceeding $250 million and 0.50% to the portion of the
daily net assets exceeding $250 million. 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 February 28, 1997, 1998 and 1999, the
Investment Manager accrued total compensation under the Management Agreement in
the amounts of $1,221,826, $1,752,565 and $1,408,351, respectively.
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 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
21
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 Directors' meetings and of preparing, printing and mailing of proxy
statements and reports to shareholders; fees and travel expenses of Directors 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 Directors 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 Directors) 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 Directors.
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 Directors; provided that in either
event such continuance is approved annually by the vote of a majority of the
Directors.
D. DEALER REALLOWANCES
Upon notice to selected broker-dealers, the Distributor may reallow up to
the full applicable front-end sales charge during periods specified in such
notice. During periods when 90% or more of the sales charge is reallowed, such
selected broker-dealers may be deemed to be underwriters as that term is defined
in the Securities Act.
E. RULE 12b-1 PLAN
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Investment Company Act (the "Plan") pursuant to which each Class, other than
Class D, pays the Distributor compensation accrued daily and payable monthly at
the following annual rates: 0.25% and 1.0% of the average daily net assets of
Class A and Class C, respectively, and, with respect to Class B, 1.0% of the
lesser of: (a) the average daily aggregate gross sales of the Fund's Class B
shares since the inception of the Plan on July 2, 1984 (not including
reinvestment of dividends or capital gains distributions), less the average
daily aggregate net asset value of the Fund's Class B shares redeemed since the
Plan's inception upon which a contingent deferred sales charge has been imposed
or upon which such charge has been waived, or (b) the average daily net assets
of Class B attributable to shares issued, net of related shares redeemed, since
the inception of the Plan.
22
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 February 28, in approximate amounts as provided in the table below
(the Distributor did not retain any of these amounts).
[Enlarge/Download Table]
1999 1998 1997
------------------------ ------------------------ ------------------------
Class A(2)......................... FSCs:(1) $ 10,626 FSCs:(1) $ 18,000 FSCs: N/A
CDSCs: $ 0 CDSCs: $ 0 CDSCs: N/A
Class B............................ CDSCs: $ 404,686 CDSCs: $ 372,894 CDSCs: $ 151,113
Class C(2)......................... CDSCs: $ 1,864 CDSCs: $ 885 CDSCs: N/A
------------------------
(1) FSCs apply to Class A only.
(2) This Class commenced operations on July 28, 1997.
The Distributor has informed the Fund that the entire fee payable by Class A
and a portion of the fees payable by each of Class B and Class C each year
pursuant to the Plan equal to 0.25% of such Class' average daily net assets are
currently each characterized as a "service fee" under the Rules of the National
Association of Securities Dealers, Inc. (of which the Distributor is a member).
The "service fee" 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 Directors receive and
review promptly after the end of each calendar quarter a written report provided
by the Distributor of the amounts expended under the Plan and the purpose for
which such expenditures were made. Class B shares of the Fund accrued amounts
payable to the Distributor under the Plan, during the fiscal year ended February
28, 1999, of $2,124,861. This amount is equal to 1.00% of the average daily net
assets of Class B for the fiscal year and was calculated pursuant to clause (b)
of the compensation formula under the Plan. For the fiscal year ended February
28, 1999, Class A and Class C shares of the Fund accrued payments under the Plan
amounting to $1,320 and $12,497, respectively, which amounts are equal to 0.24%
and 1.00% of the average daily net assets of Class A and Class C, respectively,
for the fiscal year.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method the Fund offers four
Classes, each with a different distribution arrangement.
With respect to Class A shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from proceeds of the FSC, commissions for the
sale of Class A shares, currently a gross sales credit of up to 5.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.25% of the current value of
the respective accounts for which they are the Financial Advisors or dealers of
record in all cases. On orders of $1 million or more (for which no sales charge
was paid) or net asset value purchases by employer-sponsored employee benefit
plans, whether or not qualified under the Internal Revenue Code, for which the
Transfer Agent serves as Trustee or Dean Witter Reynolds Retirement Plan
Services serves as recordkeeper pursuant to a written Recordkeeping Services
Agreement ("MSDW Eligible Plans"), the Investment Manager compensates Financial
Advisors by paying them, from its own funds, a gross sales credit of 1.0% of the
amount sold.
With respect to Class B shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class B shares, currently a gross sales credit of up to 5.0% of the amount
sold (except as provided in the following sentence) and an annual residual
commission, currently a residual of up to 0.25% of the current value (not
including reinvested dividends or distributions) of the amount sold in all
cases. In the case of Class B shares purchased by MSDW Eligible Plans, Dean
Witter Reynolds compensates its Financial Advisors by paying them, from its own
funds, a gross sales credit of 3.0% of the amount sold.
23
With respect to Class C shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class C shares, currently a gross sales credit of up to 1.0% of the amount
sold and an annual residual commission, currently up to 1.0% of the current
value of the respective accounts for which they are the Financial Advisors of
record.
With respect to Class D shares other than shares held by participants in the
Investment Manager's mutual fund asset allocation program, the Investment
Manager compensates Dean Witter Reynolds's Financial Advisors by paying them,
from its own funds, commissions for the sale of Class D shares, currently a
gross sales credit of up to 1.0% of the amount sold. There is a chargeback of
100% of the amount paid if the Class D shares are redeemed in the first year and
a chargeback of 50% of the amount paid if the Class D shares are redeemed in the
second year after purchase. The Investment Manager also compensates Dean Witter
Reynolds's Financial Advisors by paying them, from its own funds, an annual
residual commission, currently up to 0.10% of the current value of the
respective accounts for which they are the Financial Advisors of record (not
including accounts of participants in the Investment Manager's mutual fund asset
allocation program).
The gross sales credit is a charge which reflects commissions paid by Dean
Witter Reynolds to its Financial Advisors and Dean Witter Reynolds's
Fund-associated distribution-related expenses, including sales compensation, and
overhead and other branch office distribution-related expenses including (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 Directors, including, a majority of the Independent
Directors. 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
Directors 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 Directors 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.
24
Each Class paid 100% of the amounts accrued under the Plan with respect to
that Class for the fiscal year ended February 28, 1999 to the Distributor. The
Distributor and Dean Witter Reynolds estimate that they have spent, pursuant to
the Plan, $29,920,698 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)
13.13% ($3,929,525)-- advertising and promotional expenses; (ii) 1.17%
($351,239)--printing of prospectuses for distribution to other than current
shareholders; and (iii) 85.70% ($25,639,934)--other expenses, including the
gross sales credit and the carrying charge, of which 10.84% ($2,780,291)
represents carrying charges, 36.91% ($9,463,892) 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 52.25% ($13,395,751) 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 for
distribution during the fiscal year ended February 28, 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 $5,822,597 as of February 28, 1999 (the end of
the Fund's fiscal year), which was equal to 3.95% 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 Directors 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 $530 in the case of Class C at
December 31, 1998 (the end of the calendar year), which amount was equal to
0.05% of the 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 or 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 Director 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 Directors, including a majority of the Independent
Directors, consider whether the Plan should be continued. Prior to approving the
last continuation of the Plan, the Directors requested and received from the
Distributor and reviewed all the information which they deemed necessary to
arrive at an informed determination. In making their determination to continue
the Plan, the Directors considered: (1) the Fund's experience under the Plan and
whether such experience indicates
25
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 Directors, including each of the
Independent Directors, 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 Directors' 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 Directors 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 Directors 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 Directors shall be committed to the discretion of the Independent
Directors.
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.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
--------------------------------------------------------------------------------
A. BROKERAGE TRANSACTIONS
Subject to the general supervision of the Directors, 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
26
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 February 28, 1997, 1998 and 1999, the Fund paid a
total of $986,176, $638,253 and $333,733, 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 February 28, 1997, 1998 and 1999, the Fund did
not effect any principal transactions with Dean Witter Reynolds.
Brokerage transactions in securities listed on exchanges or admitted to
unlisted trading privileges may be effected through Dean Witter Reynolds, Morgan
Stanley & Co. and other affiliated brokers and dealers. In order for an
affiliated broker or dealer to effect any portfolio transactions on an exchange
for the Fund, the commissions, fees or other remuneration received by the
affiliated broker or dealer must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
an exchange during a comparable period of time. This standard would allow the
affiliated broker or dealer to receive no more than the remuneration which would
be expected to be received by an unaffiliated broker in a commensurate
arm's-length transaction. Furthermore, the Directors, including the Independent
Directors, 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 February 28, 1997, 1998 and 1999, the Fund
paid a total of $263,065, $129,925 and $57,167, respectively, in brokerage
commissions to Dean Witter Reynolds. During the fiscal year ended February 28,
1999, the brokerage commissions paid to Dean Witter Reynolds represented
approximately 17.13% 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 24.68% 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 February 28, 1998 and during the
fiscal year ended February 28, 1999, the Fund paid a total of $4,800 and $28,737
respectively, in brokerage commissions to Morgan Stanley & Co., which
broker-dealer became an affiliate of the Investment Manager on May 31, 1997 upon
consummation of the merger of Dean Witter, Discover & Co. with Morgan Stanley
Group Inc. During the fiscal year ended February 28, 1999, the brokerage
commissions paid to Morgan Stanley & Co. represented approximately 8.61% 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
9.07% of the aggregate dollar value of all portfolio transactions of the Fund
during the year for which commissions 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. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid in
all circumstances. The Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Investment Manager from obtaining a high quality of
27
brokerage and research services. In seeking to determine the reasonableness of
brokerage commissions paid in any transaction, the Investment Manager relies
upon its experience and knowledge regarding commissions generally charged by
various brokers and on its judgment in evaluating the brokerage and research
services received from the broker effecting the transaction. These
determinations are necessarily subjective and imprecise, as in most cases an
exact dollar value for those services is not ascertainable.
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 February 28, 1999, the Fund paid $247,373 in
brokerage commissions in connection with transactions in the aggregate amount of
$101,431,726 to brokers because of research services provided.
E. REGULAR BROKER-DEALERS
During the fiscal year ended February 28, 1999, the Fund did not purchase
securities issued by brokers or dealers that were among the ten brokers of the
ten dealers that executed transactions for or with the Fund in the largest
dollar amounts during the year. At February 28, 1999, the Fund did not own any
securities issued by any of these issuers.
VII. CAPITAL STOCK AND OTHER SECURITIES
--------------------------------------------------------------------------------
The Fund is authorized to issue 2 billion shares of common stock of $0.01
par value (500 million for each Class). Shares of the Fund, when issued, are
fully paid, non-assessable, fully transferrable and redeemable at the option of
the holder. Except for agreements entered into by the Fund in its ordinary
course of business within the limitations of the Fund's fundamental investment
policies (which may be modified only by shareholder vote), the Fund will not
issue any securities other than common stock.
All shares of common stock are equal as to earnings, assets and voting
privileges except that each Class will have exclusive voting privileges with
respect to matters relating to distribution expenses borne solely by such Class
or any other matter in which the interests of one Class differ from the
interests of any other Class. In addition, Class B shareholders will have the
right to vote on any proposed material increase in Class A's expenses, if such
proposal is submitted separately to Class A shareholders. Also, as discussed
herein, Class A, Class B and Class C bear the expenses related to the
distribution of their respective shares.
28
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
Directors may call special meetings of shareholders for action by shareholder
vote as may be required by the Investment Company Act or the Fund's By-Laws.
Under certain circumstances the Directors may be removed by action of the
Directors. In addition, under certain circumstances the shareholders may call a
meeting to remove Directors and the Fund is required to provide assistance in
communicating with shareholders about such a meeting. 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 Directors being selected, while the
holders of the remaining shares would be unable to elect any Directors.
VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
--------------------------------------------------------------------------------
A. PURCHASE/REDEMPTION OF SHARES
Information concerning how Fund shares are offered to the public (and how
they are redeemed and exchanged) is provided in the Fund's PROSPECTUS.
TRANSFER AGENT AS AGENT. With respect to the redemption or repurchase of
Fund shares, the application of proceeds to the purchase of new shares in the
Fund or any other Morgan Stanley Dean Witter Funds and the general
administration of the exchange privilege, the Transfer Agent acts as agent for
the Distributor and for the shareholder's authorized broker-dealer, if any, in
the performance of such functions. With respect to exchanges, redemptions or
repurchases, the Transfer Agent shall be liable for its own negligence and not
for the default or negligence of its correspondents or for losses in transit.
The Fund shall not be liable for any default or negligence of the Transfer
Agent, the Distributor or any authorized broker-dealer.
The Distributor and any authorized broker-dealer have appointed the Transfer
Agent to act as their agent in connection with the application of proceeds of
any redemption of Fund shares to the purchase of shares of any other Morgan
Stanley Dean Witter Fund and the general administration of the exchange
privilege. No commission or discounts will be paid to the Distributor or any
authorized broker-dealer for any transaction pursuant to the exchange privilege.
TRANSFERS OF SHARES. In the event a shareholder requests a transfer of Fund
shares to a new registration, the shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the CDSC or free of such charge (and with regard to the length
of time shares subject to the charge have been held), any transfer involving
less than all of the shares in an account will be made on a pro rata basis (that
is, by transferring shares in the same proportion that the transferred shares
bear to the total shares in the account immediately prior to the transfer). The
transferred shares will continue to be subject to any applicable CDSC as if they
had not been so transferred.
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) an equity portfolio
security listed or traded on the New York or American Stock Exchange or other
stock exchange is valued at its latest sale price on that exchange, prior to the
time when assets are valued; if there were no sales that day, the security is
valued
29
at the latest bid price (in cases where a security is traded on more than one
exchange, the security is valued on the exchange designated as the primary
market pursuant to procedures adopted by the Directors); and (2) all other
portfolio securities for which over-the-counter market quotations are readily
available are valued at the latest bid price. When market quotations are not
readily available, including circumstances under which it is determined by the
Investment Manager 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 Directors. For valuation purposes, quotations of foreign portfolio
securities, other assets and liabilities and forward contracts stated in foreign
currency are translated into U.S. dollar equivalents at the prevailing market
rates prior to the close of the New York Stock Exchange.
Short-term debt securities with remaining maturities of sixty days or less
at the time of purchase are valued at amortized cost, unless the Directors
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
Directors.
Listed options on debt securities are valued at the latest sale price on the
exchange on which they are listed unless no sales of such options have taken
place that day, in which case they will be valued at the mean between their
latest bid and asked prices. Unlisted options on debt securities and all options
on equity securities are valued at the mean between their latest bid and asked
prices. Futures are valued at the latest sale price on the commodities exchange
on which they trade unless the Directors 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 Directors.
Generally, trading in foreign securities, as well as corporate bonds, U.S.
Government securities and money market instruments, is substantially completed
each day at various times prior to the close of the New York Stock Exchange. The
values of such securities used in computing the net asset value of the Fund's
shares are determined as of such times. Foreign currency exchange rates are also
generally determined prior to the close of the New York Stock Exchange.
Occasionally, events which may affect the values of such securities and such
exchange rates may occur between the times at which they are determined and the
close of the New York Stock Exchange and will therefore not be reflected in the
computation of the Fund's net asset value. If events that may affect the value
of such securities occur during such period, then these securities may be valued
at their fair value as determined in good faith under procedures established by
and under the supervision of the Directors.
IX. TAXATION OF THE FUND AND SHAREHOLDERS
--------------------------------------------------------------------------------
The Fund generally will make two basic types of distributions: ordinary
dividends and long-term capital gain distributions. These two types of
distributions are reported differently on a shareholder's income tax return and
they are also subject to different rates of tax. The tax treatment of the
investment activities of the Fund will affect the amount and timing and
character of the distributions made by the Fund. Tax issues relating to the Fund
are not generally a consideration for shareholders such as tax exempt entities
and tax-advantaged retirement vehicles such as an IRA or 401(k) plan.
Shareholders are urged to consult their own tax professionals regarding specific
questions as to federal, state or local taxes.
INVESTMENT COMPANY TAXATION. The Fund intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986. As such, the Fund will not be subject to federal income tax on its net
investment income and capital gains, if any, to the extent that it distributes
such income and capital gains to its shareholders.
The Fund generally intends to distribute sufficient income and gains so that
the Fund will not pay corporate income tax on its earnings. The Fund also
generally intends to distribute to its shareholders in each calendar year a
sufficient amount of ordinary income and capital gains to avoid the imposition
of a
30
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%.
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.
Subject to certain exceptions, a corporate shareholder may be eligible for a
70% dividends received deduction to the extent that the Fund earns and
distributes qualifying dividends from its investments. Distributions of net
capital gains by the Fund will not be eligible for the dividends received
deduction.
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
31
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
--------------------------------------------------------------------------------
The Fund's shares are offered to the public on a continuous basis. The
Distributor, as the principal underwriter of the shares, has certain obligations
under the Distribution Agreement concerning the distribution of the shares.
These obligations and the compensation the Distributor receives are described
above in the sections titled "Principal Underwriter" and "Rule 12b-1 Plans."
XI. CALCULATION OF PERFORMANCE DATA
--------------------------------------------------------------------------------
From time to time, the Fund may quote its "total return" in advertisements
and sales literature. These figures are computed separately for Class A, Class
B, Class C and Class D shares. The Fund's "average annual total return"
represents an annualization of the Fund's total return over a particular period
and is computed by finding the annual percentage rate which will result in the
ending redeemable value of a hypothetical $1,000 investment made at the
beginning of a one, five or ten year period, or for the period from the date of
commencement of operations, if shorter than any of the foregoing. The ending
redeemable value is reduced by any contingent deferred sales charge ("CDSC") at
the end of the one, five, ten year or other period. For the purpose of this
calculation, it is assumed that all dividends and distributions are reinvested.
The formula for computing the average annual total return involves a percentage
obtained by dividing the ending redeemable value by the amount of the initial
investment (which in the case of Class A shares is reduced by the Class A
initial sales charge), taking a root of the quotient (where the root is
equivalent to the number of years in the period) and subtracting 1 from the
result. Based on this calculation, the average annual total returns for Class B
for the one year, five year and ten year periods ended February 28, 1999 were
-30.23%, 4.67% and 7.06%, respectively. The
32
average annual total returns of Class A for the fiscal year ended February 28,
1999 and for the period July 28, 1997 (inception of the Class) through February
28, 1999 were -29.93% and -20.18%, respectively. The average annual total
returns of Class C for the fiscal year ended February 28, 1999 and for the
period July 28, 1997 (inception of the Class) through February 28, 1999 were
-27.39% and -18.08%, respectively. The average annual total returns of Class D
for the fiscal year ended February 28, 1999 and for the period July 28, 1997
(inception of the Class) through February 28, 1999 were -25.86% and -17.22%,
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 B for the one year, five year and the ten year periods ended
February 28, 1999, were -26.60%, 4.96% and 7.06%, respectively. The average
annual total returns of Class A for the fiscal year ended February 28, 1999 and
for the period July 28, 1997 through February 28, 1999 were -26.04% and -17.42%,
respectively. The average annual total returns of Class C for the fiscal year
ended February 28, 1999 and for the period July 28, 1997 through February 28,
1999 were -26.67% and -18.08%, respectively. The average annual total returns of
Class D for the fiscal year ended February 28, 1999 and for the period July 28,
1997 through February 28, 1999 were -25.86% and -17.22%, respectively.
In addition, the Fund may compute its aggregate total return for each Class
for specified periods by determining the aggregate percentage rate which will
result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is assumed that
all dividends and distributions are reinvested. The formula for computing
aggregate total return involves a percentage obtained by dividing the ending
value (without reduction for any sales charge) by the initial $1,000 investment
and subtracting 1 from the result. Based on this calculation, the total returns
for Class B for the one year, five year and the ten year periods ended February
28, 1999, were -26.60%, 27.36% and 97.80%, respectively. The total returns of
Class A for the fiscal year ended February 28, 1999 and for the period July 28,
1997 through February 28, 1999 were -26.04% and -26.21%, respectively. The total
returns of Class C for the fiscal year ended February 28, 1999 and for the
period July 28, 1997 through February 28, 1999 were -26.67% and -27.14%,
respectively. The total returns of Class D for the fiscal year ended February
28, 1999 and for the period July 28, 1997 through February 28, 1999 were -25.86%
and -25.92%, 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 or declined to the following amounts at
February 28, 1999:
[Enlarge/Download Table]
INVESTMENT AT INCEPTION OF:
INCEPTION -----------------------------------
CLASS DATE: $10,000 $50,000 $100,000
----------------------------------------------- ---------- --------- ----------- -----------
Class A........................................ 07/28/97 $ 6,992 $ 35,419 $ 71,576
Class B........................................ 03/30/81 27,759 138,795 277,590
Class C........................................ 07/28/97 7,286 36,430 72,860
Class D........................................ 07/28/97 7,408 37,040 74,080
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by recognized organizations.
33
XII. FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
EXPERTS. The financial statements of the Fund for the fiscal year ended
February 28, 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.
34
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
PORTFOLIO OF INVESTMENTS FEBRUARY 28, 1999
[Enlarge/Download Table]
NUMBER OF
SHARES VALUE
------------------------------------------------------------------------------------------------------------
COMMON STOCKS (97.9%)
BASIC ENERGY (44.5%)
CANADIAN OIL & GAS (0.5%)
175,000 Gulf Canada Resources, Ltd. (Canada)*.............................................. $ 404,687
174,831 Ranger Oil Ltd..................................................................... 491,712
------------
896,399
------------
INTEGRATED OIL COMPANIES (26.3%)
50,000 Atlantic Richfield Co.............................................................. 2,731,250
60,000 BP Amoco PLC (ADR) (United Kingdom)................................................ 5,100,000
25,000 Chevron Corp....................................................................... 1,921,875
45,000 Ente Nazionale Idrocarburi SpA (ADR) (Italy)....................................... 2,655,000
115,000 Exxon Corp......................................................................... 7,654,687
25,000 Kerr-McGee Corp.................................................................... 714,063
95,000 Mobil Corp......................................................................... 7,902,812
35,000 PennzEnergy Co..................................................................... 328,125
117,000 Royal Dutch Petroleum Co. (ADR) (Netherlands)...................................... 5,133,375
95,000 Texaco, Inc........................................................................ 4,423,437
70,000 Unocal Corp........................................................................ 1,973,125
95,000 YPF Sociedad Anonima (ADR) (Argentina)............................................. 2,755,000
------------
43,292,749
------------
NATURAL GAS (0.8%)
60,000 KN Energy, Inc..................................................................... 1,256,250
------------
OIL & GAS PRODUCTION (6.4%)
50,000 Anardarko Petroleum Corp........................................................... 1,375,000
80,000 Apache Corp........................................................................ 1,595,000
70,000 Burlington Resources, Inc.......................................................... 2,266,250
55,000 Cabot Oil & Gas Corp. (Class A).................................................... 601,562
25,000 Devon Energy Corp.................................................................. 585,937
10,000 Noble Affiliates, Inc.............................................................. 226,250
22,500 Nuevo Energy Co.*.................................................................. 157,500
80,000 Occidental Petroleum Corp.......................................................... 1,205,000
25,000 Snyder Oil Corp.................................................................... 260,937
55,000 St. Mary Land & Exploration Co..................................................... 825,000
71,500 Swift Energy Co.*.................................................................. 429,000
55,000 Union Pacific Resources Group, Inc................................................. 491,563
80,000 Vintage Petroleum, Inc............................................................. 355,000
100,000 Wiser Oil Co....................................................................... 168,750
------------
10,542,749
------------
OIL REFINING/MARKETING (3.8%)
35,000 Pennzoil-Quaker State Co........................................................... 435,313
40,000 Petro-Canada (Canada).............................................................. 429,908
NUMBER OF
SHARES VALUE
------------------------------------------------------------------------------------------------------------
25,000 Sunoco, Inc........................................................................ $ 760,938
35,000 Tosco Corp......................................................................... 724,063
75,000 Total S.A. (ADR) (France).......................................................... 3,871,875
------------
6,222,097
------------
OIL/GAS TRANSMISSION (6.7%)
70,000 El Paso Energy Corp................................................................ 2,550,625
45,000 Enron Corp......................................................................... 2,925,000
40,000 Enron Oil & Gas Co................................................................. 660,000
135,000 Williams Companies, Inc............................................................ 4,995,000
------------
11,130,625
------------
TOTAL BASIC ENERGY................................................................. 73,340,869
------------
ENERGY DEVELOPMENT &
TECHNOLOGY (15.7%)
CONTRACT DRILLING (2.9%)
35,000 Diamond Offshore Drilling, Inc..................................................... 724,062
75,000 ENSCO International, Inc........................................................... 665,625
30,000 Global Marine, Inc.*............................................................... 232,500
40,000 Marine Drilling Company, Inc.*..................................................... 255,000
65,000 Nabors Industries, Inc.*........................................................... 747,500
25,000 Noble Drilling Corp.*.............................................................. 309,375
20,000 Patterson Energy, Inc.*............................................................ 55,625
25,000 Precision Drilling Corp. (Class A) (Canada)*....................................... 229,687
88,500 R & B Falcon Corp.*................................................................ 486,750
25,000 Santa Fe International Corp........................................................ 334,375
40,000 Transocean Offshore Inc............................................................ 825,000
------------
4,865,499
------------
DIVERSIFIED MANUFACTURING (2.8%)
95,000 Allegheny Teledyne Inc............................................................. 1,959,375
65,000 AlliedSignal, Inc.................................................................. 2,689,375
------------
4,648,750
------------
OILFIELD SERVICES/EQUIPMENT (10.0%)
50,000 Baker Hughes, Inc.................................................................. 900,000
25,000 BJ Services Co.*................................................................... 351,563
60,000 Cooper Cameron Corp.*.............................................................. 1,387,500
110,000 Global Industries Ltd.*............................................................ 556,875
125,000 Halliburton Co..................................................................... 3,531,250
5,000 National-Oilwell, Inc.*............................................................ 44,375
20,000 Offshore Logistics, Inc.*.......................................................... 173,750
30,000 Petroleum Geo - Services ASA (ADR) (Norway)*....................................... 343,125
83,200 Schlumberger, Ltd.................................................................. 4,040,400
30,000 Smith International, Inc.*......................................................... 729,375
32,500 Stolt Comex Seaway, S.A. (ADR) (United Kingdom)*................................... 190,938
SEE NOTES TO FINANCIAL STATEMENTS
35
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
PORTFOLIO OF INVESTMENTS FEBRUARY 28, 1999, CONTINUED
[Enlarge/Download Table]
NUMBER OF
SHARES VALUE
------------------------------------------------------------------------------------------------------------
70,000 Stolt Comex Seaway, S.A. (United Kingdom)*......................................... $ 457,188
30,000 Trico Marine Service, Inc.*........................................................ 129,375
55,000 UTI Energy Corp.*.................................................................. 319,688
90,000 Varco International, Inc.*......................................................... 697,500
65,000 Veritas DGC Inc.*.................................................................. 613,438
116,500 Weatherford International, Inc.*................................................... 1,980,500
------------
16,446,840
------------
TOTAL ENERGY DEVELOPMENT & TECHNOLOGY.............................................. 25,961,089
------------
METALS AND BASIC MATERIALS (37.7%)
ALUMINUM (2.2%)
90,000 Alcoa Inc.......................................................................... 3,645,000
------------
CONSTRUCTION/AGRICULTURAL EQUIPMENT/TRUCKS (0.9%)
45,000 Deere & Co......................................................................... 1,470,937
------------
CONTAINERS/PACKAGING (2.6%)
78,000 Owens-Illinois, Inc.*.............................................................. 1,867,125
40,000 Temple-Inland, Inc................................................................. 2,397,500
------------
4,264,625
------------
ENVIRONMENTAL SERVICES (0.2%)
15,500 Casella Waste Systems Inc., (Class A)*............................................. 315,812
------------
FOREST PRODUCTS (1.1%)
25,000 Georgia-Pacific Group.............................................................. 1,831,250
------------
INDUSTRIAL MACHINERY/COMPONENTS (1.0%)
34,200 Ingersoll-Rand Co.................................................................. 1,624,500
------------
MAJOR CHEMICALS (6.9%)
35,000 Dow Chemical Co.................................................................... 3,443,125
75,000 Du Pont (E.I.) de Nemours & Co., Inc............................................... 3,848,437
90,000 Monsanto Co........................................................................ 4,100,625
------------
11,392,187
------------
METALS FABRICATIONS (0.6%)
40,000 Reliance Steel & Aluminum Co....................................................... 1,022,500
------------
PAINTS/COATINGS (0.9%)
30,000 PPG Industries, Inc................................................................ 1,561,875
------------
PAPER (8.6%)
50,000 Boise Cascade Corp................................................................. 1,553,125
50,000 Bowater, Inc....................................................................... 2,106,250
50,000 Champion International Corp........................................................ 1,850,000
NUMBER OF
SHARES VALUE
------------------------------------------------------------------------------------------------------------
100,000 Mead Corp.......................................................................... $ 3,043,750
40,000 Union Camp Corp.................................................................... 2,675,000
80,000 Willamette Industries, Inc......................................................... 2,915,000
------------
14,143,125
------------
PRECIOUS METALS (6.1%)
160,000 Barrick Gold Corp. (Canada)........................................................ 2,830,000
100,000 Getchell Gold Corp.*............................................................... 2,593,750
100,000 Newmont Mining Corp................................................................ 1,725,000
100,000 Placer Dome Inc. (Canada).......................................................... 1,093,750
82,950 Stillwater Mining Co.*............................................................. 1,902,666
------------
10,145,166
------------
SPECIALTY CHEMICALS (2.0%)
60,000 Avery Dennison Corp................................................................ 3,221,250
------------
SPECIALTY STEELS (0.8%)
30,000 Nucor Corp......................................................................... 1,336,875
------------
STEEL/IRON ORE (3.8%)
80,000 AK Steel Holding Corp.............................................................. 1,745,000
95,000 British Steel PLC (ADR) (United Kingdom)........................................... 1,870,313
45,000 Lone Star Technologies, Inc.*...................................................... 582,188
80,000 USX-U.S. Steel Group............................................................... 2,025,000
------------
6,222,501
------------
TOTAL METALS & BASIC MATERIALS..................................................... 62,197,603
------------
[Enlarge/Download Table]
TOTAL INVESTMENTS
(IDENTIFIED COST $178,309,725) (a)........................................................ 97.9% 161,499,561
OTHER ASSETS IN EXCESS OF LIABILITIES..................................................... 2.1 3,450,760
----- -------------
NET ASSETS................................................................................ 100.0% $ 164,950,321
===== =============
---------------------
ADR American Depository Receipt.
* Non-income producing security.
(a) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $22,003,093 and the
aggregate gross unrealized depreciation is $38,813,257, resulting in net
unrealized depreciation of $16,810,164.
SEE NOTES TO FINANCIAL STATEMENTS
36
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1999
[Enlarge/Download Table]
ASSETS:
Investments in securities, at value
(identified cost $178,309,725).............................................................. $161,499,561
Receivable for:
Investments sold.......................................................................... 3,676,977
Dividends................................................................................. 416,280
Capital stock sold........................................................................ 195,092
Foreign withholding taxes reclaimed....................................................... 34,594
Prepaid expenses and other assets............................................................. 98,252
------------
TOTAL ASSETS............................................................................. 165,920,756
------------
LIABILITIES:
Payable for:
Capital stock repurchased................................................................. 196,014
Plan of distribution fee.................................................................. 127,550
Investment management fee................................................................. 88,601
Payable to bank............................................................................... 447,129
Accrued expenses and other payables........................................................... 111,141
------------
TOTAL LIABILITIES........................................................................ 970,435
------------
NET ASSETS............................................................................... $164,950,321
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $193,467,539
Net unrealized depreciation................................................................... (16,810,164)
Accumulated net investment loss............................................................... (52,409)
Accumulated net realized loss................................................................. (11,654,645)
------------
NET ASSETS............................................................................... $164,950,321
============
CLASS A SHARES:
Net Assets.................................................................................... $691,035
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE)................................... 68,091
NET ASSET VALUE PER SHARE................................................................ $10.15
============
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE)......................................... $10.71
============
CLASS B SHARES:
Net Assets.................................................................................... $147,527,336
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE)................................... 14,708,614
NET ASSET VALUE PER SHARE................................................................ $10.03
============
CLASS C SHARES:
Net Assets.................................................................................... $1,277,627
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE)................................... 127,480
NET ASSET VALUE PER SHARE................................................................ $10.02
============
CLASS D SHARES:
Net Assets.................................................................................... $15,454,323
Shares Outstanding (500,000,000 AUTHORIZED, $.01 PAR VALUE)................................... 1,516,381
NET ASSET VALUE PER SHARE................................................................ $10.19
============
SEE NOTES TO FINANCIAL STATEMENTS
37
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28, 1999
[Enlarge/Download Table]
NET INVESTMENT LOSS:
INCOME
Dividends (net of $93,493 foreign withholding tax)............................................ $ 3,683,514
Interest...................................................................................... 188,322
------------
TOTAL INCOME............................................................................. 3,871,836
------------
EXPENSES
Plan of distribution fee (Class A shares)..................................................... 1,320
Plan of distribution fee (Class B shares)..................................................... 2,124,861
Plan of distribution fee (Class C shares)..................................................... 12,497
Investment management fee..................................................................... 1,408,351
Transfer agent fees and expenses.............................................................. 342,988
Registration fees............................................................................. 93,922
Shareholder reports and notices............................................................... 87,009
Professional fees............................................................................. 69,946
Custodian fees................................................................................ 22,782
Directors' fees and expenses.................................................................. 17,187
Other......................................................................................... 9,972
------------
TOTAL EXPENSES........................................................................... 4,190,835
------------
NET INVESTMENT LOSS...................................................................... (318,999)
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss............................................................................. (10,954,030)
Net change in unrealized appreciation......................................................... (56,429,019)
------------
NET LOSS................................................................................. (67,383,049)
------------
NET DECREASE.................................................................................. $(67,702,048)
============
SEE NOTES TO FINANCIAL STATEMENTS
38
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
[Enlarge/Download Table]
FOR THE YEAR FOR THE YEAR
ENDED ENDED
FEBRUARY 28, FEBRUARY 28,
1999 1998*
---------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss......................................... $ (318,999) $ (351,725)
Net realized gain (loss).................................... (10,954,030) 13,069,671
Net change in unrealized appreciation....................... (56,429,019) 28,945,843
------------- -------------
NET INCREASE (DECREASE)................................ (67,702,048) 41,663,789
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class B shares.......................................... -- (105,075)
Net realized gain
Class A shares.......................................... (5,526) (9,967)
Class B shares.......................................... (2,604,507) (32,041,346)
Class C shares.......................................... (14,135) (36,377)
Class D shares.......................................... (114,256) (416,177)
------------- -------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................... (2,738,424) (32,608,942)
------------- -------------
Net increase (decrease) from capital stock transactions..... (52,899,959) 31,247,222
------------- -------------
NET INCREASE (DECREASE)................................ (123,340,431) 40,302,069
NET ASSETS:
Beginning of period......................................... 288,290,752 247,988,683
------------- -------------
END OF PERIOD
(INCLUDING NET INVESTMENT LOSSES OF $52,409 AND $49,179,
RESPECTIVELY)........................................... $ 164,950,321 $ 288,290,752
============= =============
---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
39
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1999
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Natural Resource Development Securities Inc. (the
"Fund"), formerly Dean Witter Natural Resource Development Securities Inc., 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 capital growth. The Fund invests primarily in common stock of
companies in the natural resources and related areas. The Fund was incorporated
in Maryland on December 22, 1980 and commenced operations on March 30, 1981. On
July 28, 1997, the Fund commenced offering three additional classes of shares,
with the then current shares, other than shares which were purchased prior to
July 2, 1984 (and with respect to such shares, certain shares acquired through
reinvestment of dividends and capital gains distributions (collectively the "Old
Shares")), designated as Class B shares. The Old Shares have been designated
Class D shares.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares, are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price (in
cases where securities are traded on more than one exchange, the securities are
valued on the exchange designated as the primary market pursuant to procedures
adopted by the Directors); (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
40
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1999, CONTINUED
value as determined in good faith under procedures established by and under the
general supervision of the Directors (valuation of debt securities for which
market quotations are not readily available may be based upon current market
prices of securities which are comparable in coupon, rating and maturity or an
appropriate matrix utilizing similar factors); and (4) short-term debt
securities having a maturity date of more than sixty days at time of purchase
are valued on a mark-to-market basis until sixty days prior to maturity and
thereafter at amortized cost based on their value on the 61st day. Short-term
debt securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. 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 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.
41
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1999, CONTINUED
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with the Investment Manager, the
Fund pays a management fee, accrued daily and payable monthly, by applying the
following annual rates to the net assets of the Fund determined at the close of
each business day: 0.625% to the portion of daily net assets not exceeding $250
million and 0.50% to the portion of daily net assets exceeding $250 million.
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
lesser of: (a) the average daily aggregate gross sales of the Class B shares
since the inception of the Fund (not including reinvestment of dividend or
capital gain distributions) less the average daily aggregate net asset value of
the Class B shares redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or waived; or (b) the average daily net
assets of Class B; and (iii) Class C -- up to 1.0% of the average daily net
assets of Class C. In the case of Class A shares, amounts paid under the Plan
are paid to the Distributor for services provided. In the case of Class B and
Class C shares, amounts paid under the Plan are paid to the Distributor for (1)
services provided and the expenses borne by it and others in the distribution of
the shares of these Classes, including the payment of commissions for sales of
these Classes and incentive compensation to, and expenses of, Morgan Stanley
Dean Witter Financial Advisors and others who engage in or support distribution
of the shares or who service shareholder accounts, including overhead and
telephone expenses; (2) printing and distribution of prospectuses and reports
used in connection with the offering of these shares to other than current
shareholders; and (3) preparation, printing and distribution of sales literature
and advertising materials. In addition, the Distributor may utilize fees paid
pursuant to the Plan, in the case of Class B shares,
42
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1999, CONTINUED
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 $5,822,597 at February 28, 1999.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the year ended February 28, 1999, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.24% and
1.0%, respectively.
The Distributor has informed the Fund that for the year ended February 28, 1999,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $404,686 and $1,864, respectively
and received $10,626 in front-end sales charges from sales of the Fund's Class A
shares. The respective shareholders pay such charges which are not an expense of
the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended February 28, 1999 aggregated
$57,916,923 and $107,740,740, respectively.
For the year ended February 28, 1999, the Fund incurred brokerage commissions of
$57,167 with DWR for portfolio transactions executed on behalf of the Fund.
43
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1999, CONTINUED
For the year ended February 28, 1999, the Fund incurred $28,737 in brokerage
commissions 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.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Directors of the Fund who will have served as independent
Directors for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregated pension costs for the year ended February 28, 1999
included in Director's fees and expenses in the Statement of Operations amounted
to $6,389. At February 28, 1999, the Fund had an accrued pension liability of
$52,405 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. FEDERAL INCOME TAX STATUS
At February 28, 1999, the Fund had a net capital loss carryover of approximately
$6,384,000 which will be available through February 28, 2007 to offset future
capital gains to the extent provided by regulations.
Capital losses incurred after October 31 ("post-October losses") within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $5,226,000 during fiscal 1999.
As of February 28, 1999, the Fund had temporary book/tax differences primarily
attributable to post-October losses and capital loss deferrals on wash sales and
permanent book/tax differences primarily attributable to a net operating loss.
To reflect reclassifications arising from the permanent differences,
paid-in-capital was charged $368,840, accumulated net realized loss was credited
$53,071 and net investment loss was credited $315,769.
44
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1999, CONTINUED
6. CAPITAL STOCK
Transactions in capital stock were as follows:
[Enlarge/Download Table]
FOR THE YEAR FOR THE YEAR
ENDED ENDED
FEBRUARY 28, 1999 FEBRUARY 28, 1998*+
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
CLASS A SHARES
Sold............................................................. 87,666 $ 1,046,452 27,229 $ 407,922
Reinvestment of distributions.................................... 383 5,103 673 8,808
Redeemed......................................................... (42,239) (490,436) (5,621) (78,162)
----------- -------------- ----------- ------------
Net increase - Class A........................................... 45,810 561,119 22,281 338,568
----------- -------------- ----------- ------------
CLASS B SHARES
Sold............................................................. 10,150,338 129,276,569 17,476,686 251,041,315
Reinvestment of dividends and distributions...................... 184,797 2,441,170 2,235,739 29,908,674
Redeemed......................................................... (15,417,509) (191,663,575) (17,865,123) (255,937,003)
----------- -------------- ----------- ------------
Net increase (decrease) - Class B................................ (5,082,374) (59,945,836) 1,847,302 25,012,986
----------- -------------- ----------- ------------
CLASS C SHARES
Sold............................................................. 448,875 5,948,277 214,875 2,958,438
Reinvestment of distributions.................................... 1,001 13,228 2,477 32,320
Redeemed......................................................... (430,175) (5,757,346) (109,573) (1,457,551)
----------- -------------- ----------- ------------
Net increase - Class C........................................... 19,701 204,159 107,779 1,533,207
----------- -------------- ----------- ------------
CLASS D SHARES
Sold............................................................. 1,402,605 15,983,255 292,553 4,265,324
Reinvestment of distributions.................................... 8,305 110,702 30,695 402,418
Redeemed......................................................... (842,093) (9,813,358) (21,545) (305,281)
----------- -------------- ----------- ------------
Net increase - Class D........................................... 568,817 6,280,599 301,703 4,362,461
----------- -------------- ----------- ------------
Net increase (decrease) in Fund.................................. (4,448,046) $ (52,899,959) 2,279,065 $ 31,247,222
=========== ============== =========== ============
---------------------
* For Class A, C and D shares, for the period July 28, 1997 (issue date)
through February 28, 1998.
+ On July 28, 1997, 645,861 shares representing $9,326,226 were transferred
to Class D.
45
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE
DEVELOPMENT SECURITIES INC.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
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 Natural
Resource Development Securities Inc. (the "Fund"), formerly Dean Witter Natural
Resource Development Securities Inc., at February 28, 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 February 28, 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
APRIL 13, 1999
1999 FEDERAL TAX NOTICE (UNAUDITED)
During the fiscal year ended February 28, 1999, 47.63% of the
income dividends qualified for the dividends received deduction
available to corporations.
46
STATEMENT OF ADDITIONAL INFORMATION MORGAN STANLEY
FEBRUARY 22, 1999 DEAN WITTER
PRECIOUS METALS
AND MINERALS TRUST
--------------------------------------------------------------------------------
This STATEMENT OF ADDITIONAL INFORMATION is not a PROSPECTUS. The PROSPECTUS
(dated February 22, 1999) for the Morgan Stanley Dean Witter Precious Metals and
Minerals Trust 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
Precious Metals and Minerals Trust
Two World Trade Center
New York, New York 10048
(800) 869-NEWS
TABLE OF CONTENTS
--------------------------------------------------------------------------------
[Enlarge/Download Table]
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............................................. 13
III. Management of the Fund............................................................ 14
A. Board of Trustees................................................................. 14
B. Management Information............................................................ 15
C. Compensation...................................................................... 19
IV. Control Persons and Principal Holders of Securities................................ 21
V. Investment Management and Other Services............................................ 21
A. Investment Manager................................................................ 21
B. Principal Underwriter............................................................. 22
C. Services Provided by the Investment Manager and Fund Expenses Paid by Third
Parties.......................................................................... 22
D. Dealer Reallowances............................................................... 23
E. Rule 12b-1 Plan................................................................... 23
F. Other Service Providers........................................................... 27
VI. Brokerage Allocation and Other Practices........................................... 27
A. Brokerage Transactions............................................................ 27
B. Commissions....................................................................... 28
C. Brokerage Selection............................................................... 29
D. Directed Brokerage................................................................ 29
E. Regular Broker-Dealers............................................................ 29
VII. Capital Stock and Other Securities................................................ 30
VIII. Purchase, Redemption and Pricing of Shares....................................... 30
A. Purchase/Redemption of Shares..................................................... 30
B. Offering Price.................................................................... 31
IX. Taxation of the Fund and Shareholders.............................................. 32
X. Underwriters........................................................................ 34
XI. Calculation of Performance Data.................................................... 34
XII. Financial Statements.............................................................. 35
2
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 Precious Metals and Minerals Trust, 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
I. FUND HISTORY
--------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust, under a
Declaration of Trust, on December 28, 1989, with the name Dean Witter Precious
Metals and Minerals Trust. Effective June 22, 1998, the Fund's name was changed
to Morgan Stanley Dean Witter Precious Metals and Minerals Trust.
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 long-term capital appreciation.
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."
OTHER PRECIOUS METALS RELATED INVESTMENTS. The Fund may invest in other
precious metals related investments including precious metals indexed debt
securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may enter into
forward foreign currency exchange contracts ("forward contracts") as a hedge
against fluctuations in future foreign exchange rates. The Fund may conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. A
forward contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
These contracts are traded in the interbank market conducted directly between
currency traders (usually large, commercial and investment banks) and their
customers. Forward contracts only will be entered into with United States banks
and their foreign branches, insurance companies and other dealers or foreign
banks whose assets total $1 billion or more. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades.
The Fund may enter into forward contracts under various circumstances. The
typical use of a forward contract is to "lock in" the price of a security in
U.S. dollars or some other foreign currency which the Fund is holding in its
portfolio. By entering into a forward contract for the purchase or sale, for a
fixed amount of dollars or other currency, of the amount of foreign currency
involved in the underlying security transactions, the Fund may be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar or other currency which is being used for
the security purchase and the foreign currency in which the security is
denominated during the period between the date on which the security is
purchased or sold and the date on which payment is made or received.
The Investment Manager also may from time to time utilize forward contracts
for other purposes. For example, they may be used to hedge a foreign security
held in the portfolio or a security which pays out principal tied to an exchange
rate between the U.S. dollar and a foreign currency, against a decline in value
of the applicable foreign currency. They also may be used to lock in the current
exchange rate of the currency in which those securities anticipated to be
purchased are denominated. At times, the Fund may enter into "cross-currency"
hedging transactions involving currencies other than those in which securities
are held or proposed to be purchased are denominated.
The Fund will not enter into forward currency contracts or maintain a net
exposure to these contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. It will, however, do so from time to time,
4
and investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the spread between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Fund at one rate, while offering a lesser rate of exchange should the
Fund desire to resell that currency to the dealer.
The Fund may be limited in its ability to enter into hedging transactions
involving forward contracts by the Internal Revenue Code requirements relating
to qualification as a regulated investment company.
Forward currency contracts may limit gains on portfolio securities that
could otherwise be realized had they not been utilized and could result in
losses. The contracts also may increase the Fund's volatility and may involve a
significant amount of risk relative to the investment of cash.
OPTIONS AND FUTURES TRANSACTIONS. The Fund may engage in transactions in
listed and OTC options. Listed options are issued or guaranteed by the exchange
on which they are traded or by a clearing corporation such as the Options
Clearing Corporation ("OCC"). Ownership of a listed call option gives the Fund
the right to buy from the OCC (in the U.S.) or other clearing corporation or
exchange, the underlying security or currency covered by the option at the
stated exercise price (the price per unit of the underlying security) by filing
an exercise notice prior to the expiration date of the option. The writer
(seller) of the option would then have the obligation to sell to the OCC (in the
U.S.) or other clearing corporation or exchange, the underlying security or
currency at that exercise price prior to the expiration date of the option,
regardless of its then current market price. Ownership of a listed put option
would give the Fund the right to sell the underlying security or currency to the
OCC (in the U.S.) or other clearing corporation or exchange, at the stated
exercise price. Upon notice of exercise of the put option, the writer of the put
would have the obligation to purchase the underlying security or currency from
the OCC (in the U.S.) or other clearing corporation or exchange, at the exercise
price.
COVERED CALL WRITING. The Fund is permitted to write covered call options
on portfolio securities and on the U.S. dollar and foreign currencies in which
they are denominated, without limit.
The Fund will receive from the purchaser, in return for a call it has
written, a "premium;" i.e., the price of the option. Receipt of these premiums
may better enable the Fund to earn a higher level of current income than it
would earn from holding the underlying securities (or currencies) alone.
Moreover, the premium received will offset a portion of the potential loss
incurred by the Fund if the securities (or currencies) underlying the option
decline in value.
The Fund may be required, at any time during the option period, to deliver
the underlying security (or currency) against payment of the exercise price on
any calls it has written. This obligation is terminated upon the expiration of
the option period or at such earlier time when the writer effects a closing
purchase transaction. A closing purchase transaction is accomplished by
purchasing an option of the same series as the option previously written.
However, once the Fund has been assigned an exercise notice, the Fund will be
unable to effect a closing purchase transaction.
Options written by the Fund normally have expiration dates of from up to
eighteen months from the date written. The exercise price of a call option may
be below, equal to or above the current market value of the underlying security
at the time the option is written.
COVERED PUT WRITING. 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 (or currency). The aggregate value of the obligations
underlying puts may not exceed 50% of the Fund's assets. The operation of and
limitations on covered put options in other respects are substantially identical
to those of call options.
5
PURCHASING CALL AND PUT OPTIONS. The Fund may purchase listed and OTC call
and put options in amounts equaling up to 10% of its total assets. The purchase
of a call option would enable the Fund, in return for the premium paid to lock
in a purchase price for a security or currency during the term of the option.
The purchase of a put option would enable the Fund, in return for a premium
paid, to lock in a price at which it may sell a security or currency during the
term of the option.
OPTIONS ON FOREIGN CURRENCIES. The Fund may purchase and write options on
foreign currencies for purposes similar to those involved with investing in
forward foreign currency exchange contracts.
OTC OPTIONS. OTC options are purchased from or sold (written) to dealers or
financial institutions which have entered into direct agreements with the Fund.
With OTC options, such variables as expiration date, exercise price and premium
will be agreed upon between the Fund and the transacting dealer, without the
intermediation of a third party such as the OCC. The Fund will engage in OTC
option transactions only with member banks of the Federal Reserve Bank System or
primary dealers in U.S. Government securities or with affiliates of such banks
or dealers.
RISKS OF OPTIONS TRANSACTIONS. The successful use of options depends on the
ability of the Investment Manager to forecast correctly interest rates, currency
exchange rates and/or market movements. If the market value of the portfolio
securities (or the currencies in which they are denominated) upon which call
options have been written increases, the Fund may receive a lower total return
from the portion of its portfolio upon which calls have been written than it
would have had such calls not been written. During the option period, the
covered call writer has, in return for the premium on the option, given up the
opportunity for capital appreciation above the exercise price should the market
price of the underlying security (or the value of its denominated currency)
increase, but has retained the risk of loss should the price of the underlying
security (or the value of its denominated currency) decline. The covered put
writer also retains the risk of loss should the market value of the underlying
security decline below the exercise price of the option less the premium
received on the sale of the option. In both cases, the writer has no control
over the time when it may be required to fulfill its obligation as a writer of
the option. Prior to exercise or expiration, an option position can only be
terminated by entering into a closing purchase or sale transaction. Once an
option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver or receive the underlying securities at the exercise price.
The Fund's ability to close out its position as a writer of an option is
dependent upon the existence of a liquid secondary market on option exchanges.
There is no assurance that such a market will exist, particularly in the case of
OTC options.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in options, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. In the case of OTC
options, if the transacting dealer fails to make or take delivery of the
securities underlying an option it has written, in accordance with the terms of
that option, due to insolvency or otherwise, the Fund would lose the premium
paid for the option as well as any anticipated benefit of the transaction.
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security which may be
written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). An exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
6
The markets in foreign currency options are relatively new and the Fund's
ability to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market.
There can be no assurance that a liquid secondary market will exist for a
particular option at any specific time.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and have no relationship to the investment merits of a foreign security. Because
foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that are not reflected in the options market.
STOCK INDEX OPTIONS. The Fund may invest in options on broadly based
indexes. Options on stock indexes are similar to options on stock except that,
rather than the right to take or make delivery of stock at a specified price, an
option on a stock index gives the holder the right to receive, upon exercise of
the option, an amount of cash if the closing level of the stock index upon which
the option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. This amount of cash is equal to
such difference between the closing price of the index and the exercise price of
the option expressed in dollars times a specified multiple. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount.
RISKS OF OPTIONS ON INDEXES. Because exercises of stock index options are
settled in cash, the Fund could not, if it wrote a call option, provide in
advance for its potential settlement obligations by acquiring and holding the
underlying securities. A call writer can offset some of the risk of its writing
position by holding a diversified portfolio of stocks similar to those on which
the underlying index is based. However, most investors cannot, as a practical
matter, acquire and hold a portfolio containing exactly the same stocks as the
underlying index, and, as a result, bear a risk that the value of the securities
held will vary from the value of the index. Even if an index call writer could
assemble a stock portfolio that exactly reproduced the composition of the
underlying index, the writer still would not be fully covered from a risk
standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the writer will not learn that it had been assigned
until the next business day, at the earliest. The time lag between exercise and
notice of assignment poses no risk for the writer of a covered call on a
specific underlying security, such as a common stock, because there the writer's
obligation is to deliver the underlying security, not to pay its value as of a
fixed time in the past. So long as the writer already owns the underlying
security, it can satisfy its settlement obligations by simply delivering it, and
the risk that its value may have declined since the exercise date is borne by
the exercising holder. In contrast, even if the writer of an index call holds
stocks that exactly match the composition of the underlying index, it will not
be able to satisfy its assignment obligations by delivering those stocks against
payment of the exercise price. Instead, it will be required to pay cash in an
amount based on the closing index value on the exercise date; and by the time it
learns that it has
7
been assigned, the index may have declined, with a corresponding decrease in the
value of its stock portfolio. This "timing risk" is an inherent limitation on
the ability of index call writers to cover their risk exposure by holding stock
positions.
A holder of an index option who exercises it before the closing index value
for that day is available runs the risk that the level of the underlying index
may subsequently change. If a change causes the exercised option to fall
out-of-the-money, the exercising holder will be required to pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
If dissemination of the current level of an underlying index is interrupted,
or if trading is interrupted in stocks accounting for a substantial portion of
the value of an index, the trading of options on that index will ordinarily be
halted. If the trading of options on an underlying index is halted, an exchange
may impose restrictions prohibiting the exercise of such options.
FUTURES CONTRACTS. The Fund may purchase and sell interest rate, currency
and index futures contracts that are traded on U.S. and foreign commodity
exchanges on such underlying securities as U.S. Treasury bonds, notes, bills and
GNMA Certificates and/or any foreign government fixed-income security, on
various currencies and on such indexes of U.S. and foreign securities as may
exist or come into existence.
A futures contract purchaser incurs an obligation to take delivery of a
specified amount of the obligation underlying the contract at a specified time
in the future for a specified price. A seller of a futures contract incurs an
obligation to deliver the specified amount of the underlying obligation at a
specified time in return for an agreed upon price. The purchase of a futures
contract enables the Fund, during the term of the contract, to lock in a price
at which it may purchase a security or currency and protect against a rise in
prices pending purchase of portfolio securities. The sale of a futures contract
enables the Fund to lock in a price at which it may sell a security or currency
and protect against declines in the value of portfolio securities.
Although most futures contracts call for actual delivery or acceptance of
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. Index futures contracts provide for
the delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value at the open or close of the last trading day
of the contract and the futures contract price. A futures contract sale is
closed out by effecting a futures contract purchase for the same aggregate
amount of the specific type of security (currency) and the same delivery date.
If the sale price exceeds the offsetting purchase price, the seller would be
paid the difference and would realize a gain. If the offsetting purchase price
exceeds the sale price, the seller would pay the difference and would realize a
loss. Similarly, a futures contract purchase is closed out by effecting a
futures contract sale for the same aggregate amount of the specific type of
security (currency) and the same delivery date. If the offsetting sale price
exceeds the purchase price, the purchaser would realize a gain, whereas if the
purchase price exceeds the offsetting sale price, the purchaser would realize a
loss. There is no assurance that the Fund will be able to enter into a closing
transaction.
MARGIN. If the Fund enters into a futures contract, it is initially
required to deposit an "initial margin" of cash or U.S. Government securities or
other liquid portfolio securities ranging from approximately 2% to 5% of the
contract amount. Initial margin requirements are established by the exchanges on
which futures contracts trade and may, from time to time, change. In addition,
brokers may establish margin deposit requirements in excess of those required by
the exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a broker's client but is, rather, a good faith deposit on the futures
contract which will be returned to the Fund upon the proper termination of the
futures contract. The margin deposits made are marked to market daily and the
Fund may be required to make subsequent deposits of cash or U.S. Government
securities, called "variation margin," which are reflective of price
fluctuations in the futures contract.
8
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write call and put
options on futures contracts and enter into closing transactions with respect to
such options to terminate an existing position. An option on a futures contract
gives the purchaser the right (in return for the premium paid), and the writer
the obligation, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option is accompanied by delivery of the accumulated balance in
the writer's futures margin account, which represents the amount by which the
market price of the futures contract at the time of exercise exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.
The writer of an option on a futures contract is required to deposit initial
and variation margin pursuant to requirements similar to those applicable to
futures contracts. Premiums received from the writing of an option on a futures
contract are included in initial margin deposits.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Fund may not
enter into futures contracts or purchase related options thereon if, immediately
thereafter, the amount committed to margin plus the amount paid for premiums for
unexpired options on futures contracts exceeds 5% of the value of the Fund's
total assets, after taking into account unrealized gains and unrealized losses
on such contracts it has entered into, provided, however, that in the case of an
option that is in-the-money (the exercise price of the call (put) option is less
(more) than the market price of the underlying security) at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%.
However, there is no overall limitation on the percentage of the Fund's net
assets which may be subject to a hedge position.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. The prices
of securities and indexes subject to futures contracts (and thereby the futures
contract prices) may correlate imperfectly with the behavior of the cash prices
of the Fund's portfolio securities (and the currencies in which they are
denominated). Also, prices of futures contracts may not move in tandem with the
changes in prevailing interest rates, market movements and/or currency exchange
rates against which the Fund seeks a hedge. A correlation may also be distorted
(a) temporarily, by short-term traders' seeking to profit from the difference
between a contract or security price objective and their cost of borrowed funds;
(b) by investors in futures contracts electing to close out their contracts
through offsetting transactions rather than meet margin deposit requirements;
(c) by investors in futures contracts opting to make or take delivery of
underlying securities rather than engage in closing transactions, thereby
reducing liquidity of the futures market; and (d) temporarily, by speculators
who view the deposit requirements in the futures markets as less onerous than
margin requirements in the cash market. Due to the possibility of price
distortion in the futures market and because of the possible imperfect
correlation between movements in the prices of securities and movements in the
prices of futures contracts, a correct forecast of interest rate, currency
exchange rate and/or market movement trends by the 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. In addition,
limitations imposed by an exchange or board of trade on which futures contracts
are traded may compel or prevent the Fund from closing out a contract which may
result in reduced gain or increased loss to the Fund. The absence of a liquid
market in futures contracts might cause the Fund to make or take delivery of the
underlying securities (currencies) at a time when it may be disadvantageous to
do so.
Exchanges 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
9
meet daily variation margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to take or make
delivery of the instruments underlying interest rate futures contracts it holds
at a time when it is disadvantageous to do so. The inability to close out
options and futures positions could also have an adverse impact on the Fund's
ability to effectively hedge its portfolio.
Futures contracts and options thereon which are purchased or sold on foreign
commodities exchanges may have greater price volatility than their U.S.
counterparts. Furthermore, foreign commodities exchanges may be less regulated
and under less governmental scrutiny than U.S. exchanges. Brokerage commissions,
clearing costs and other transaction costs may be higher on foreign exchanges.
Greater margin requirements may limit the Fund's ability to enter into certain
commodity transactions on foreign exchanges. Moreover, differences in clearance
and delivery requirements on foreign exchanges may occasion delays in the
settlement of the Fund's transactions effected on foreign exchanges.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
MONEY MARKET SECURITIES. The Fund may invest in various money market
securities for cash management purposes or when assuming a temporary defensive
position, which among others may include commercial paper, bank acceptances,
bank obligations, corporate debt securities, certificates of deposit, U.S.
Government securities, obligations of savings institutions, and repurchase
agreements. Such securities are limited to:
U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed as to
principal and interest by the United States or its agencies (such as the
Export-Import Bank of the United States, Federal Housing Administration and
Government National Mortgage Association) or its instrumentalities (such as the
Federal Home Loan Bank), including Treasury bills, notes and bonds;
BANK OBLIGATIONS. Obligations (including certificates of deposit, time
deposits and bankers' acceptances) of banks subject to regulation by the U.S.
Government and having total assets of $1 billion or more, and instruments
secured by such obligations, not including obligations of foreign branches of
domestic banks except to the extent below;
EURODOLLAR CERTIFICATES OF DEPOSIT. Eurodollar certificates of deposit
issued by foreign branches of domestic banks having total assets of $1 billion
or more;
OBLIGATIONS OF SAVINGS INSTITUTIONS. Certificates of deposit of savings
banks and savings and loan associations, having total assets of $1 billion or
more;
FULLY INSURED CERTIFICATES OF DEPOSIT. Certificates of deposit of banks and
savings institutions, having total assets of less than $1 billion, if the
principal amount of the obligation is federally insured by the Bank Insurance
Fund or the Savings Association Insurance Fund (each of which is administered by
the FDIC), limited to $100,000 principal amount per certificate and to 10% or
less of the Fund's total assets in all such obligations and in all illiquid
assets, in the aggregate; 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 Aa 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-
10
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 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.
LENDING PORTFOLIO SECURITIES. The Fund may lend its portfolio securities in
an amount not to exceed 25% of the value of its total assets. The Fund may lend
its portfolio securities to brokers, dealers and other financial institutions,
provided that the loans are callable at any time by the Fund, and are at all
times secured by cash or cash equivalents, which are maintained in a segregated
account pursuant to applicable regulations and that are equal to at least 100%
of the market value, determined daily, of the loaned securities. The advantage
of these loans is that the Fund continues to receive the income on the loaned
securities while at the same time earning interest on the cash amounts deposited
as collateral, which will be invested in short-term obligations.
As with any extensions of credit, there are risks of delay in recovery and,
in some cases, even loss of rights in the collateral should the borrower of the
securities fail financially. However, these loans of portfolio securities will
only be made to firms deemed by the Fund's management to be creditworthy and
when the income which can be earned from such loans justifies the attendant
risks. Upon termination of the loan, the borrower is required to return the
securities to the Fund. Any gain or loss in the market price during the loan
period would inure to the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of the rights
if the matters involved would have a material effect on the Fund's investment in
the loaned securities. The Fund will pay reasonable finder's, administrative and
custodial fees in connection with a loan of its securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From
time to time the Fund may purchase securities 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.
11
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 transaction and, in determining its net
asset value, will reflect the value of the security daily. At that time, the
Fund will also establish a segregated account on the Fund's books in which it
will maintain cash or cash equivalents or other liquid portfolio securities
equal in value to recognized commitments for such securities.
The value of the Fund's commitments to purchase the securities of any one
issuer, together with the value of all securities of such issuer owned by the
Fund, may not exceed 5% of the value of the Fund's total assets at the time the
initial commitment to purchase such securities is made. An increase in the
percentage of the Fund's assets committed to the purchase of securities on a
"when, as and if issued" basis may increase the volatility of its net asset
value. The Fund may also sell securities on a "when, as and if issued" basis
provided that the issuance of the security will result automatically from the
exchange or conversion of a security owned by the Fund at the time of sale.
PRIVATE PLACEMENTS. The Fund may invest up to 10% of its total 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 under current policy may not exceed
10% of the Fund's total 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
12
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 problems for individual companies and overall economic uncertainties.
Earnings of individual issuers will be affected by remediation costs, which may
be substantial and may be reported inconsistently in U.S. and foreign financial
statements. Accordingly, the Fund's investments may be adversely affected.
C. FUND POLICIES/INVESTMENT RESTRICTIONS
The investment objective, policies and restrictions listed below have been
adopted by the Fund as fundamental policies. Under the Investment Company Act of
1940 (the "Investment Company Act"), a fundamental policy may not be changed
without the vote of a majority of the outstanding voting securities of the Fund.
The Investment Company Act defines a majority as the lesser of (a) 67% or more
of the shares present at a meeting of shareholders, if the holders of 50% of the
outstanding shares of the Fund are present or represented by proxy; or (b) more
than 50% of the outstanding shares of the Fund. For purposes of the following
restrictions: (i) all percentage limitations apply immediately after a purchase
or initial investment; and (ii) any subsequent change in any applicable
percentage resulting from market fluctuations or other changes in total or net
assets does not require elimination of any security from the portfolio.
The Fund will:
1. Seek long-term capital appreciation.
The Fund may not:
1. With respect to 75% of its total assets, 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 in warrants (other than warrants acquired by the Fund as
part of a unit or attached to securities at the time of purchase) if, as a
result, the investments would exceed 5% of the value of the Fund's total
assets of which not more than 2% of the Fund's total assets may be invested
in warrants not listed on the New York or American Stock Exchange or a
recognized foreign stock exchange.
4. Invest in securities of any issuer if, to the knowledge of the
Fund, 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, 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 (other than precious metals or
minerals commodities or contracts), except the Fund may purchase or sell
(write) futures and related options thereon.
13
7. Borrow money, except that the Fund may borrow from a bank for
temporary or emergency purposes in amounts not exceeding 5% of its 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; (b) purchasing any
securities on a when-issued or delayed delivery basis; (c) purchasing or
selling futures contracts, forward foreign exchange contracts or options;
(d) borrowing money; or (e) lending portfolio securities.
10. Make loans of money or securities, except: (a) by the purchase of
publicly distributed debt obligations; (b) by investment in repurchase
agreements; or (c) by lending its portfolio securities.
11. Make short sales of securities.
12. Purchase securities on margin, except for the 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 10% of its total assets in "illiquid securities"
(securities for which market quotations are not readily available) and
repurchase agreements which have a maturity of longer than seven days.
16. 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.
17. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets or, by purchase in the open market of securities of closed-end
investment companies where no underwriter's or dealer's commission or
profit, other than customary broker's commissions, is involved and only if
immediately thereafter not more than 10% of the Fund's total assets would be
invested in such securities.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of total or net assets will not be considered a
violation of any of the foregoing restrictions.
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.
14
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 nine (9) Trustees.
These same individuals also serve as directors or trustees for all of the Morgan
Stanley Dean Witter Funds. Seven Trustees (77% 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 Index Series," a mutual
fund for which the Investment Manager is the investment advisor. Four of the
seven 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 84 Morgan Stanley Dean Witter Funds, the 11
TCW/DW Funds and Discover Brokerage Index Series, are shown below.
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NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
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Michael Bozic (58) ................................... Vice Chairman of Kmart Corporation (since December, 1998);
Trustee Director or Trustee of the Morgan Stanley Dean Witter
c/o Kmart Corporation Funds; Trustee of Discover Brokerage Index Series;
3100 West Big Beaver Road formerly Chairman and Chief Executive Officer of Levitz
Troy, Michigan Furniture Corporation (November, 1995-November, 1998) and
President and Chief Executive Officer of Hills Department
Stores (May, 1991-July, 1995); formerly variously
Chairman, Chief Executive Officer, President and Chief
Operating Officer (1987-1991) of the Sears Merchandise
Group of Sears, Roebuck and Co.; Director of Eaglemark
Financial Services, Inc. and Weirton Steel Corporation.
Charles A. Fiumefreddo* (65) ......................... Chairman, Director or Trustee, President and Chief
Chairman of the Board, President, Executive Officer of the Morgan Stanley Dean Witter Funds;
Chief Executive Officer and Trustee Chairman, Chief Executive Officer and Trustee of the
Two World Trade Center TCW/DW Funds; Trustee of Discover Brokerage Index Series;
New York, New York formerly Chairman, Chief Executive Officer and Director of
the 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).
15
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NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
------------------------------------------------------ ----------------------------------------------------------
Edwin J. Garn (66) ................................... Director or Trustee of the Morgan Stanley Dean Witter
Trustee Funds; Trustee of Discover Brokerage Index Series;
c/o Huntsman Corporation formerly United States Senator (R- Utah)(1974-1992) and
500 Huntsman Way Chairman, Senate Banking Committee (1980-1986); formerly
Salt Lake City, Utah Mayor of Salt Lake City, Utah (1971-1974); formerly
Astronaut, Space Shuttle Discovery (April 12-19, 1985);
Vice Chairman, Huntsman Corporation; Director of Franklin
Covey (time management systems), John Alden Financial
Corp. (health insurance), 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.
John R. Haire (74) ................................... Chairman of the Audit Committee and Director or Trustee of
Trustee the Morgan Stanley Dean Witter Funds; Chairman of the
Two World Trade Center Audit Committee and Trustee of the TCW/DW Funds; Chairman
New York, New York of the Audit Committee and Trustee of Discover Brokerage
Index Series; formerly Chairman of the Independent
Directors or Trustees of the Morgan Stanley Dean Witter
Funds and the TCW/DW Funds (until June, 1998); formerly
President, Council for Aid to Education (1978-1989) and
Chairman and Chief Executive Officer of Anchor
Corporation, an investment advisor (1964-1978).
Wayne E. Hedien (65) ................................. Retired; Director or Trustee of the Morgan Stanley Dean
Trustee Witter Funds; Trustee of Discover Brokerage Index Series;
c/o Gordon Altman Butowsky Director of The PMI Group, Inc. (private mortgage
Weitzen Shalov & Wein insurance); Trustee and Vice Chairman of The Field Museum
Counsel to the Independent Trustees of Natural History; formerly associated with the Allstate
114 West 47th Street Companies (1966-1994), most recently as Chairman of The
New York, New York Allstate Corporation (March, 1993-December, 1994) and
Chairman and Chief Executive Officer of its wholly-owned
subsidiary, Allstate Insurance Company (July,
1989-December, 1994); director of various other business
and charitable organizations.
Dr. Manuel H. Johnson (50) ........................... Senior Partner, Johnson Smick International, Inc., a
Trustee consulting firm; Co-Chairman and a founder of the Group of
c/o Johnson Smick International, Inc. Seven Council (G7C), an international economic commission;
1133 Connecticut Avenue, N.W. Director or Trustee of the Morgan Stanley Dean Witter
Washington, D.C. Funds; Trustee of the TCW/ DW Funds; Trustee of Discover
Brokerage Index Series; Director of NASDAQ (since June,
1995); Director of Greenwich Capital Markets, Inc.
(broker-dealer) and NVR, Inc. (home construction); Chair-
man 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.
16
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NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
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Michael E. Nugent (62) ............................... General Partner, Triumph Capital, L.P., a private
Trustee investment partnership; Director or Trustee of the Morgan
c/o Triumph Capital, L.P. Stanley Dean Witter Funds; Trustee of the TCW/DW Funds;
237 Park Avenue Trustee of Discover Brokerage Index Series; formerly Vice
New York, New York President, Bankers Trust Company and BT Capital
Corporation (1984-1988); director of various business
organizations.
Philip J. Purcell* (55) .............................. Chairman of the Board of Directors and Chief Executive
Trustee Officer of MSDW, Dean Witter Reynolds and Novus Credit
1585 Broadway Services Inc.; Director of the Distributor; Director or
New York, New York Trustee of the Morgan Stanley Dean Witter Funds; Trustee
of Discover Brokerage Index Series; Director and/or
officer of various MSDW subsidiaries.
John L. Schroeder (68) ............................... Retired; Director or Trustee of the Morgan Stanley Dean
Trustee Witter Funds; Trustee of the TCW/DW Funds; Trustee of
c/o Gordon Altman Butowsky Discover Brokerage Index Series; Director of Citizens
Weitzen Shalov & Wein Utilities Company; formerly Executive Vice President and
Counsel to the Independent Trustees Chief Investment Officer of the Home Insurance Company
114 West 47th Street (August, 1991-September, 1995).
New York, New York
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 Mor-
gan Stanley Dean Witter Funds and the TCW/DW Funds.
Robert Rossetti (51) ................................. Vice President of the Investment Manager (since May,
Vice President 1995); formerly Vice President at Merrill Lynch & Co. Inc.
Two World Trade Center (November, 1994-April, 1995) and prior thereto Vice
New York, New York President at Prudential Securities for six years.
17
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NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
------------------------------------------------------ ----------------------------------------------------------
Thomas F. Caloia (52) ................................ First Vice President and Assistant Treasurer of the
Treasurer Investment Manager and MSDW Services Company; Treasurer of
Two World Trade Center the Morgan Stanley Dean Witter Funds, the TCW/DW Funds and
New York, New York Discover Brokerage Index Series.
------------------------
* Denotes Trustees who are "interested persons" of the Fund as defined by the
Investment Company Act.
In addition, MITCHELL M. MERIN, President, and Chief Operating Officer of
Asset Management of MSDW, President, Chief Executive Officer and Director of the
Investment Manager and MSDW Services Company, Chairman and Director of the
Distributor and the Transfer Agent, Executive Vice President and Director of
DWR, and Director of various MSDW subsidiaries, 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 MARK BAVOSO, IRA N. ROSS and PAUL D. VANCE,
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 members of the Audit Committee. Three of them also serve as members of
the Derivatives Committee. In addition, three of the Trustees, including two
Independent Trustees, serve as members of the Insurance Committee.
The Independent Trustees are charged with recommending to the full Board
approval of management, advisory and administration contracts, Rule 12b-1 plans
and distribution and underwriting agreements; continually reviewing Fund
performance; checking on the pricing of portfolio securities, brokerage
commissions, transfer agent costs and performance, and trading among Funds in
the same complex; and approving fidelity bond and related insurance coverage and
allocations, as well as other matters that arise from time to time. The
Independent Trustees are required to select and nominate individuals to fill any
Independent Trustee vacancy on the Board of any Fund that has a Rule 12b-1 plan
of distribution. Most of the Morgan Stanley Dean Witter Funds have a Rule 12b-1
plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of the services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; reviewing the adequacy of the Fund's system of internal
controls; and preparing and submitting Committee meeting minutes to the full
Board.
18
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).
If a Board meeting and a meeting of the Independent Trustees or a Committee
meeting, or a meeting of the Independent Trustees and/or more than one Committee
meeting, take place on a single day, the Trustees are paid a single meeting fee
by the Fund. The Fund also reimburses such Trustees for travel and other
out-of-pocket expenses incurred by them in connection with attending such
meetings. Trustees and officers of the Fund who are or have been employed by the
Investment Manager or an affiliated company receive no compensation or expenses
reimbursed from the Fund for their services as Trustee. Mr. Haire currently
serves as Chairman of the Audit Committee. Prior to June 1, 1998, Mr. Haire also
served as Chairman of the Independent Trustees for which services the Fund paid
him an additional annual fee of $1,200.
The following table illustrates the compensation that the Fund paid to its
Independent Trustees for the fiscal year ended October 31, 1998.
FUND COMPENSATION
[Download Table]
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
-------------------------------------------------------------- ---------------
Michael Bozic................................................. $1,450
Edwin J. Garn................................................. 1,600
John R. Haire................................................. 2,850
Wayne E. Hedien............................................... 1,550
Dr. Manuel H. Johnson......................................... 1,550
Michael E. Nugent............................................. 1,600
John L. Schroeder............................................. 1,600
19
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. Haire,
Johnson, Nugent and Schroeder, the 11 TCW/DW Funds that were in operation at
December 31, 1998. Mr. Haire serves as Chairman of the Audit Committee of each
Morgan Stanley Dean Witter Fund and each TCW/DW Fund and, prior to June 1, 1998,
also served as Chairman of the Independent Directors or Trustees of those Funds.
With respect to Messrs. Haire, 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
[Enlarge/Download Table]
FOR SERVICE AS
CHAIRMAN OF TOTAL CASH
INDEPENDENT FOR SERVICE COMPENSATION
FOR SERVICE DIRECTORS/ AS FOR SERVICES
AS DIRECTOR OR TRUSTEES AND CHAIRMAN OF TO
TRUSTEE AND AUDIT INDEPENDENT 85 MORGAN
COMMITTEE MEMBER FOR SERVICE AS COMMITTEES OF TRUSTEES AND STANLEY
OF 85 MORGAN TRUSTEE AND 85 MORGAN AUDIT DEAN WITTER
STANLEY COMMITTEE MEMBER STANLEY COMMITTEES OF FUNDS AND
NAME OF DEAN WITTER OF 11 TCW/DW DEAN WITTER 11 TCW/DW 11 TCW/DW
INDEPENDENT TRUSTEE FUNDS FUNDS FUNDS FUNDS FUNDS
--------------------------- ---------------- ---------------- -------------- ------------- -------------
Michael Bozic.............. $120,150 -- -- -- $120,150
Edwin J. Garn.............. 132,450 -- -- -- 132,450
John R. Haire.............. 136,450 $66,931 $161,338 $ 14,725 319,444
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
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
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 not secured or funded by the Adopting
Funds.
------------------------
1 An Eligible Trustee may elect alternative payments of his or her retirement
benefits based upon the combined life expectancy of the Eligible Trustee
and his or her spouse on the date of such Eligible Trustee's retirement. In
addition, the Eligible Trustee may elect that the surviving spouse's
periodic payment of benefits will be equal to a lower percentage of the
periodic amount when both spouses were alive. The amount estimated to be
payable under this method, through the remainder of the later of the lives
of the Eligible Trustee and spouse, will be the actuarial equivalent of the
Regular Benefit.
20
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 THE MORGAN STANLEY DEAN WITTER FUNDS
[Enlarge/Download Table]
ESTIMATED
FOR ALL ADOPTING FUNDS RETIREMENT ANNUAL
--------------------------------- BENEFITS BENEFITS
ESTIMATED ACCRUED AS UPON
CREDITED YEARS ESTIMATED EXPENSES RETIREMENT
OF SERVICE AT PERCENTAGE OF BY ALL FROM ALL
RETIREMENT ELIGIBLE ADOPTING ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUNDS FUNDS(2)
------------------------------------------------------ --------------- --------------- ------------ --------
Michael Bozic......................................... 10 60.44% $ 22,377 $52,250
Edwin J. Garn......................................... 10 60.44 35,225 52,250
John R. Haire......................................... 10 60.44 (12,211)(3) 134,705
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
------------------------
2 Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1)
above.
3 This number reflects the effect of the extension of Mr. Haire's term as
Director or Trustee until May 1, 1999.
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
--------------------------------------------------------------------------------
The following owned 5% or more of the outstanding shares of Class A on
February 9, 1999: Peter Manhard and Lynn Manhard JTWROS, 634 Williams Way,
Vernon Hills, IL 60061-3252--10.22%; Dean Witter Reynolds, custodian for William
D. Hill, FBO Pooled account, VIP Plus profit sharing DTD 1/1/96, 232 Forest
Road, Hurricane, WV 25526-9341--53.1. The following owned 5% or more of the
outstanding shares of Class C on February 9, 1999: Alan J. Stransky and Colleen
R. Stransky JTWROS, 11679 Valleybrook Place, Carmel, IN 46033-3374--14.96%; Dean
Witter Reynolds, custodian for Griffith L. Thomas, FBO Griffith L. Thomas, money
purchase plan DTD 6/26/85, PO Box 642, Tillamook, OR 97141-0642--8.91%;
Elizabeth F. Sheppard, 311 Park Avenue S, Winter Park FL 32789-4317--7.41%. The
following owned 5% or more of the outstanding shares of Class D on February 9,
1999: Morgan Stanley Dean Witter Advisors Inc., Attn: Maurice Bendrihem, 2 World
Trade Center 73rd Fl., New York, NY 10048-0203; Hare & Co., c/o The Bank of New
York, PO Box 11203, New York, NY 10286-1203--37.05%; Yolanda R. Bertoli TTEE,
Yolanda R. Bertoli Revocable Living Trust dated 6/9/94, 1025 Wilder Ave #5-B,
Honolulu, HI 96822-2629--57.48.
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 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.
21
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 at the annual rate of 0.80% of the daily net assets of the Fund. The
management fee is allocated among the Classes pro rata based on the net assets
of the Fund attributable to each Class. For the fiscal years ended October 31,
1996, 1997 and 1998, the Investment Manager accrued total compensation under the
Management Agreement in the amounts of $523,635, $408,911 and $256,380,
respectively.
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 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.
22
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 remain in effect from year to year, provided
continuance of the Management Agreement is approved at least annually by the
vote of the holders of a majority, as defined in the Investment Company Act, of
the outstanding shares of the Fund, or by the Trustees; provided that in either
event such continuance is approved annually by the vote of a majority of the
Trustees.
D. DEALER REALLOWANCES
Upon notice to selected broker-dealers, the Distributor may reallow up to
the full applicable front-end sales charge during periods specified in such
notice. During periods when 90% or more of the sales charge is reallowed, such
selected broker-dealers may be deemed to be underwriters as that term is defined
in the Securities Act.
E. RULE 12b-1 PLAN
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Investment Company Act (the "Plan") pursuant to which each Class, other than
Class D, pays the Distributor compensation accrued daily and payable monthly at
the following annual rates: 0.25% and 1.0% of the average daily net assets of
Class A and Class C, respectively, and, with respect to Class B, 1.0% of the
lesser of: (a) the average daily aggregate gross sales of the Fund's Class B
shares since the inception of the Fund (not including reinvestment of dividends
or capital gains distributions), less the average daily aggregate net asset
value of the Fund's Class B shares redeemed since the Fund's inception upon
which a contingent deferred sales charge has been imposed or upon which such
charge has been waived, or (b) the average daily net assets of Class B.
The Distributor also receives the proceeds of front-end sales charges
("FSCs") and of contingent deferred sales charges ("CDSCs") imposed on certain
redemptions of shares, which are separate and apart from payments made pursuant
to the Plan. The Distributor has informed the Fund that it and/or
23
Dean Witter Reynolds received the proceeds of CDSCs and FSCs, for the last three
fiscal years ended October 31, in approximate amounts as provided in the table
below (the Distributor did not retain any of these amounts).
[Enlarge/Download Table]
1998 1997 1996
------------------- ----------------------- -----------------------
Class A................................ FSCs:(4) $ 4,714 FSCs: $ 0 FSCS: N/A
CDSCs: $ 0 CDSCs: $ 0 CDSC: N/A
Class B................................ CDSCs: $81,003 CDSCs: $168,786 CDSCs: $163,116
Class C................................ CDSCs: $ 1,677 CDSCs: $ 270 CDSC: N/A
------------------------
(4) FSCs apply to Class A only. This Class commenced operations on July 28,
1997.
The Distributor has informed the Fund that the entire fee payable by Class A
and a portion of the fees payable by each of Class B and Class C each year
pursuant to the Plan equal to 0.25% of such Class' average daily net assets are
currently each characterized as a "service fee" under the Rules of the National
Association of Securities Dealers, Inc. (of which the Distributor is a member).
The "service fee" is a payment made for personal service and/or the maintenance
of shareholder accounts. The remaining portion of the Plan fees payable by a
Class, if any, is characterized as an "asset-based sales charge" as such is
defined by the Rules of the Association.
Under the Plan and as required by Rule 12b-1, the Trustees receive and
review promptly after the end of each calendar quarter a written report provided
by the Distributor of the amounts expended under the Plan and the purpose for
which such expenditures were made. Class B shares of the Fund accrued amounts
payable to the Distributor under the Plan, during the fiscal year ended October
31, 1998, of $306,235. This amount is equal to 1.0% of the average daily net
assets of Class B for the fiscal year and was calculated pursuant to clause (b)
of the compensation formula under the Plan. For the fiscal year ended October
31, 1998, Class A and Class C shares of the Fund accrued payments under the Plan
amounting to $147 and $9,392, respectively, which amounts are equal to 0.23% and
1.00% of the average daily net assets of Class A and Class C, respectively, for
the fiscal year.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method the Fund offers four
Classes, each with a different distribution arrangement.
With respect to Class A shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from proceeds of the FSC, commissions for the
sale of Class A shares, currently a gross sales credit of up to 5.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.25% of the current value of
the respective accounts for which they are the Financial Advisors or dealers of
record in all cases. On orders of $1 million or more (for which no sales charge
was paid) or net asset value purchases by employer-sponsored employee benefit
plans, whether or not qualified under the Internal Revenue Code, for which the
Transfer Agent serves as Trustee or Dean Witter Reynolds Retirement Plan
Services serves as recordkeeper pursuant to a written Recordkeeping Services
Agreement ("MSDW Eligible Plans"), the Investment Manager compensates Financial
Advisors by paying them, from its own funds, a gross sales credit of 1.0% of the
amount sold.
With respect to Class B shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class B shares, currently a gross sales credit of up to 5.0% of the amount
sold (except as provided in the following sentence) and an annual residual
commission, currently a residual of up to 0.25% of the current value (not
including reinvested dividends or distributions) of the amount sold in all
cases. In the case of Class B shares purchased by MSDW Eligible Plans, Dean
Witter Reynolds compensates its Financial Advisors by paying them, from its own
funds, a gross sales credit of 3.0% of the amount sold.
24
With respect to Class C shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class C shares, currently a gross sales credit of up to 1.0% of the amount
sold and an annual residual commission, currently up to 1.0% of the current
value of the respective accounts for which they are the Financial Advisors of
record.
With respect to Class D shares other than shares held by participants in the
Investment Manager's mutual fund asset allocation program, the Investment
Manager compensates Dean Witter Reynolds's Financial Advisors by paying them,
from its own funds, commissions for the sale of Class D shares, currently a
gross sales credit of up to 1.0% of the amount sold. There is a chargeback of
100% of the amount paid if the Class D shares are redeemed in the first year and
a chargeback of 50% of the amount paid if the Class D shares are redeemed in the
second year after purchase. The Investment Manager also compensates Dean Witter
Reynolds's Financial Advisors by paying them, from its own funds, an annual
residual commission, currently up to 0.10% of the current value of the
respective accounts for which they are the Financial Advisors of record (not
including accounts of participants in the Investment Manager's mutual fund asset
allocation program).
The gross sales credit is a charge which reflects commissions paid by Dean
Witter Reynolds to its Financial Advisors and Dean Witter Reynolds's
Fund-associated distribution-related expenses, including sales compensation, and
overhead and other branch office distribution-related expenses including (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.
25
Each Class paid 100% of the amounts accrued under the Plan with respect to
that Class for the fiscal year ended October 31, 1998 to the Distributor. The
Distributor and Dean Witter Reynolds estimate that they have spent, pursuant to
the Plan, $8,157,643 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)
25.96% ($2,117,665)-- advertising and promotional expenses; (ii) 1.85%
($150,962)--printing of prospectuses for distribution to other than current
shareholders; and (iii) 72.19% ($5,889,016)--other expenses, including the gross
sales credit and the carrying charge, of which 7.81% ($460,185) represents
carrying charges, 37.70% ($2,220,392) 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 54.49% ($3,208,439) represents overhead and other branch
office distribution-related expenses. The amounts accrued by Class A and Class C
for distribution during the fiscal year ended October 31, 1998 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 $3,830,463 as of October 31, 1998 (the end of the
Fund's fiscal year), which was equal to 12.77% 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 there were no 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 in the case of Class C at December
31, 1998 (the end of the calendar year), and that there were no such expenses
that may be reimbursed in the subsequent year in the case of Class A on such
date. No interest or other financing charges will be incurred on any Class A or
Class C distribution expenses incurred by the Distributor under the Plan or on
any unreimbursed expenses due to the Distributor pursuant to the Plan.
No interested person of the Fund nor any Independent Trustee has any direct
financial interest in the operation of the Plan except to the extent that the
Distributor, the Investment Manager, Dean Witter Reynolds, MSDW Services Company
or certain of their employees may be deemed to have such an interest as a result
of benefits derived from the successful operation of the Plan or as a result of
receiving a portion of the amounts expended thereunder by the Fund.
On an annual basis the Trustees, including a majority of the Independent
Trustees, consider whether the Plan should be continued. Prior to approving the
last continuation of the Plan, the Trustees requested and received from the
Distributor and reviewed all the information which they deemed necessary to
arrive at an informed determination. In making their determination to continue
the Plan, the Trustees considered: (1) the Fund's experience under the Plan and
whether such experience indicates
26
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.
Wilmington Trust Company, Rodney Square North, Wilmington, Delaware 19890
acts as Sub-Custodian for the storing, transferring and delivering of the
precious metals owned by the Fund.
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.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
--------------------------------------------------------------------------------
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
27
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 October 31, 1996, 1997 and 1998, the Fund paid a
total of $227,064, $282,087 and $214,766, 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 October 31, 1996, 1997 and 1998, 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 October 31, 1996, 1997 and 1998, the Fund paid
a total of $30,640, $750 and $13,415, respectively, in brokerage commissions to
Dean Witter Reynolds. During the fiscal year ended October 31, 1998, the
brokerage commissions paid to Dean Witter Reynolds represented approximately
6.25% 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 4.16% 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 through October 31, 1997 and during the fiscal year
ended October 31, 1998, the Fund paid a total of $0 and $2,500, respectively, in
brokerage commissions to Morgan Stanley & Co., which broker-dealer became an
affiliate of the Investment Manager on May 31, 1997 upon consummation of the
merger of Dean Witter, Discover & Co. with Morgan Stanley Group Inc. During the
fiscal year ended October 31, 1998, the brokerage commissions paid to Morgan
Stanley & Co. represented approximately 1.16% 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 1.02% of the aggregate dollar
value of all portfolio transactions of the Fund during the year for which
commissions were paid.
28
C. BROKERAGE SELECTION
The policy of the Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid in
all circumstances. The Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Investment Manager from obtaining a high quality of
brokerage and research services. In seeking to determine the reasonableness of
brokerage commissions paid in any transaction, the Investment Manager relies
upon its experience and knowledge regarding commissions generally charged by
various brokers and on its judgment in evaluating the brokerage and research
services received from the broker effecting the transaction. These
determinations are necessarily subjective and imprecise, as in most cases an
exact dollar value for those services is not ascertainable.
The Fund anticipates that certain of its transactions involving foreign
securities will be effected on securities exchanges. Fixed commissions on such
transactions are generally higher than negotiated commissions on domestic
transactions. There is also generally less government supervision and regulation
of foreign securities exchanges and brokers than in the United States.
In seeking to implement the Fund's policies, the Investment Manager 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 October 31, 1998, the Fund paid $198,217 in
brokerage commissions in connection with transactions in the aggregate amount of
$24,082,466 to brokers because of research services provided.
E. REGULAR BROKER-DEALERS
During the fiscal year ended October 31, 1998, the Fund did not purchase
securities issued by brokers or dealers that were among the ten brokers or the
ten dealers that executed transactions for or with the Fund in the largest
dollar amounts during the year. As of October 31, 1998, the Fund did not own any
securities issued by any of these issuers.
29
VII. CAPITAL STOCK AND OTHER SECURITIES
--------------------------------------------------------------------------------
The shareholders of the Fund are entitled to a full vote for each full share
of beneficial interest held. The Fund is authorized to issue an unlimited number
of shares of beneficial interest. All shares of beneficial interest of the Fund
are of $0.01 par value and are equal as to earnings, assets and voting
privileges except that each Class will have exclusive voting privileges with
respect to matters relating to distribution expenses borne solely by such Class
or any other matter in which the interests of one Class differ from the
interests of any other Class. In addition, Class B shareholders will have the
right to vote on any proposed material increase in Class A's expenses, if such
proposal is submitted separately to Class A shareholders. Also, Class A, Class B
and Class C bear expenses related to the distribution of their respective
shares.
The Fund's Declaration of Trust permits the Trustees to authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios) and additional Classes of shares
within any series. The Trustees have not presently authorized any such
additional series or Classes of shares other than as set forth in the
PROSPECTUS.
The Fund'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 or by the shareholders.
Under Massachusetts law, shareholders of a business trust may, under certain
limited circumstances, be held personally liable as partners for the obligations
of the Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that notice
of such Fund obligations include such disclaimer, and provides for
indemnification out of the Fund's property for any shareholder held personally
liable for the obligations of the Fund. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations.
Given the above limitations on shareholder personal liability, and the nature of
the Fund's assets and operations, the possibility of the Fund being unable to
meet its obligations is remote and thus, in the opinion of Massachusetts counsel
to the Fund, the risk to Fund shareholders of personal liability is remote.
All of the Trustees have been elected by the shareholders of the Fund, most
recently at a Special Meeting of Shareholders held on May 21, 1997. The Trustees
themselves have the power to alter the number and the terms of office of the
Trustees (as provided for in the Declaration of Trust), and they may at any time
lengthen or shorten their own terms or make their terms of unlimited duration
and appoint their own successors, provided that always at least a majority of
the Trustees has been elected by the shareholders of the Fund.
VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
--------------------------------------------------------------------------------
A. PURCHASE/REDEMPTION OF SHARES
Information concerning how Fund shares are offered to the public (and how
they are redeemed and exchanged) is provided in the Fund's PROSPECTUS.
TRANSFER AGENT AS AGENT. With respect to the redemption or repurchase of
Fund shares, the application of proceeds to the purchase of new shares in the
Fund or any other Morgan Stanley Dean Witter Funds and the general
administration of the exchange privilege, the Transfer Agent acts as agent for
the Distributor and for the shareholder's authorized broker-dealer, if any, in
the performance of such functions. With respect to exchanges, redemptions or
repurchases, the Transfer Agent shall be liable for
30
its own negligence and not for the default or negligence of its correspondents
or for losses in transit. The Fund shall not be liable for any default or
negligence of the Transfer Agent, the Distributor or any authorized
broker-dealer.
The Distributor and any authorized broker-dealer have appointed the Transfer
Agent to act as their agent in connection with the application of proceeds of
any redemption of Fund shares to the purchase of shares of any other Morgan
Stanley Dean Witter Fund and the general administration of the exchange
privilege. No commission or discounts will be paid to the Distributor or any
authorized broker-dealer for any transaction pursuant to the exchange privilege.
TRANSFERS OF SHARES. In the event a shareholder requests a transfer of Fund
shares to a new registration, the shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the CDSC or free of such charge (and with regard to the length
of time shares subject to the charge have been held), any transfer involving
less than all of the shares in an account will be made on a pro rata basis (that
is, by transferring shares in the same proportion that the transferred shares
bear to the total shares in the account immediately prior to the transfer). The
transferred shares will continue to be subject to any applicable CDSC as if they
had not been so transferred.
B. OFFERING PRICE
The Fund's Class B, Class C and Class D shares are offered at net asset
value per share and the Class A shares are offered at net asset value per share
plus any applicable FSC which is distributed among the Fund's Distributor, Dean
Witter Reynolds and other authorized dealers as described in the section "V.
Investment Management and Other Services -- E. Rule 12b-1 Plan."
The price of Fund shares, called "net asset value," is based on the value of
the Fund's portfolio securities. Net asset value per share of each Class is
calculated by dividing the value of the portion of the Fund's securities and
other assets attributable to that Class, less the liabilities attributable to
that Class, by the number of shares of that Class outstanding. The assets of
each Class of shares are invested in a single portfolio. The net asset value of
each Class, however, will differ because the Classes have different ongoing
fees.
In the calculation of the Fund's net asset value: (1) an equity portfolio
security listed or traded on the New York or American Stock Exchange or other
stock exchange is valued at its latest sale price on that exchange, prior to the
time when assets are valued; if there were no sales that day, the security is
valued at the latest bid price (in cases where a security is traded on more than
one exchange, the security is valued on the exchange designated as the primary
market pursuant to procedures adopted by the Trustees); and (2) all other
portfolio securities for which over-the-counter market quotations are readily
available are valued at the latest bid price. When market quotations are not
readily available, including circumstances under which it is determined by the
Investment Manager that sale or bid prices are not reflective of a security's
market value, portfolio securities are valued at their fair value as determined
in good faith under procedures established by and under the general supervision
of the Fund's Trustees. For valuation purposes, quotations of foreign portfolio
securities, other assets and liabilities and forward contracts stated in foreign
currency are translated into U.S. dollar equivalents at the prevailing market
rates prior to the close of the New York Stock Exchange.
Gold and silver bullion will be valued at the last spot settlement price on
the Commodity Exchange, Inc. and other precious metals (such as platinum and
palladium) and minerals will be valued at the last spot settlement price or, if
not available, the settlement price of the nearest contract month on the New
York Mercantile Exchange. If prices are not available on any of these exchanges
on any given day, the relevant precious metal or mineral will be valued at
prices in the bullion markets or other markets approved by the Trustees for that
purpose; if there is no readily available market quotation, then bullion will be
valued in a manner, at fair value, as determined in good faith by the Trustees.
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.
31
Certain of the Fund's portfolio securities may be valued by an outside
pricing service approved by the Fund's Trustees. The pricing service may utilize
a matrix system incorporating security quality, maturity and coupon as the
evaluation model parameters, and/or research evaluations by its staff, including
review of broker-dealer market price quotations in determining what it believes
is the fair valuation of the portfolio securities valued by such pricing
service.
Listed options on debt securities are valued at the latest sale price on the
exchange on which they are listed unless no sales of such options have taken
place that day, in which case they will be valued at the mean between their
latest bid and asked prices. Unlisted options on debt securities and all options
on equity securities are valued at the mean between their latest bid and asked
prices. Futures are valued at the latest sale price on the commodities exchange
on which they trade unless the Trustees determine such price does not reflect
their market value, in which case they will be valued at their fair value as
determined in good faith under procedures established by and under the
supervision of the Trustees.
Generally, trading in foreign securities, as well as corporate bonds, U.S.
Government securities and money market instruments, is substantially completed
each day at various times prior to the close of the New York Stock Exchange. The
values of such securities used in computing the net asset value of the Fund's
shares are determined as of such times. Foreign currency exchange rates are also
generally determined prior to the close of the New York Stock Exchange.
Occasionally, events which may affect the values of such securities and such
exchange rates may occur between the times at which they are determined and the
close of the New York Stock Exchange and will therefore not be reflected in the
computation of the Fund's net asset value. If events that may affect the value
of such securities occur during such period, then these securities may be valued
at their fair value as determined in good faith under procedures established by
and under the supervision of the Trustees.
IX. TAXATION OF THE FUND AND SHAREHOLDERS
--------------------------------------------------------------------------------
The Fund generally will make two basic types of distributions: ordinary
dividends and long-term capital gain distributions. These two types of
distributions are reported differently on a shareholder's income tax return and
they are also subject to different rates of tax. The tax treatment of the
investment activities of the Fund will affect the amount and timing and
character of the distributions made by the Fund. Tax issues relating to the Fund
are not generally a consideration for shareholders such as tax exempt entities
and tax-advantaged retirement vehicles such as an IRA or 401(k) plan.
Shareholders are urged to consult their own tax professionals regarding specific
questions as to federal, state or local taxes.
INVESTMENT COMPANY TAXATION. The Fund intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986. As such, the Fund will not be subject to federal income tax on its net
investment income and capital gains, if any, to the extent that it distributes
such income and capital gains to its shareholders.
The Fund generally intends to distribute sufficient income and gains so that
the Fund will not pay corporate income tax on its earnings. The Fund also
generally intends to distribute to its shareholders in each calendar year a
sufficient amount of ordinary income and capital gains to avoid the imposition
of a 4% excise tax. However, the Fund may instead determine to retain all or
part of any net long-term capital gains in any year for reinvestment. In such
event, the Fund will pay federal income tax (and possibly excise tax) on such
retained gains.
Gains or losses on sales of securities by the Fund will be long-term capital
gains or losses if the securities have a tax holding period of more than one
year. Gains or losses on the sale of securities with a tax holding period of one
year or less will be short-term gains or losses.
Gains or losses on the Fund's transactions in listed non-equity options,
futures and options on futures generally are treated as 60% long-term and 40%
short-term. When the Fund engages in options and futures transactions, various
tax rules may accelerate or defer recognition of certain gains and losses,
change the character of certain gains or losses, or alter the holding period of
other investments
32
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%.
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.
Subject to certain exceptions, a corporate shareholder may be eligible for a
70% dividends received deduction to the extent that the Fund earns and
distributes qualifying dividends from its investments in United States
corporations. Distributions of net capital gains by the Fund will not be
eligible for the dividends received deduction.
After the end of each calendar year, shareholders will be sent full
information on their dividends and capital gain distributions for tax purposes,
including the portion taxable as ordinary income, 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
33
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
--------------------------------------------------------------------------------
The Fund's shares are offered to the public on a continuous basis. The
Distributor, as the principal underwriter of the shares, has certain obligations
under the Distribution Agreement concerning the distribution of the shares.
These obligations and the compensation the Distributor receives are described
above in the sections titled "Principal Underwriter" and "Rule 12b-1 Plans."
XI. CALCULATION OF PERFORMANCE DATA
--------------------------------------------------------------------------------
From time to time, the Fund may quote its "total return" in advertisements
and sales literature. These figures are computed separately for Class A, Class
B, Class C and Class D shares. The Fund's "average annual total return"
represents an annualization of the Fund's total return over a particular period
and is computed by finding the annual percentage rate which will result in the
ending redeemable value of a hypothetical $1,000 investment made at the
beginning of a one, five or ten year period, or for the period from the date of
commencement of operations, if shorter than any of the foregoing. The ending
redeemable value is reduced by any contingent deferred sales charge ("CDSC") at
the end of the one, five, ten year or other period. For the purpose of this
calculation, it is assumed that all dividends and distributions are reinvested.
The formula for computing the average annual total return involves a percentage
obtained by dividing the ending redeemable value by the amount of the initial
investment (which in the case of Class A shares is reduced by the Class A
initial sales charge), taking a root of the quotient (where the root is
equivalent to the number of years in the period) and subtracting 1 from the
result. The average annual total returns for Class B for the one year, five year
and the life of the Fund periods ended October 31, 1998 were -30.52%, -12.44%
and -6.52%, respectively. The average annual total returns of Class A for the
fiscal year ended October 31, 1998 and for the period July 28, 1997 (inception
of the Class) through October 31, 1998 were -30.25% and -33.18%, respectively.
The average annual total returns of Class C for the fiscal year ended October
31, 1998 and for the period July 28, 1997 (inception of the Class) through
October 31, 1998 were -27.49% and -30.69%, respectively. The average annual
total returns of Class D for the fiscal year ended October 31, 1998 and for the
period July 28, 1997 (inception of the Class) through October 31, 1998 were
-26.68% and -30.47%, 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
34
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 B for the
one year, five year and the life of the Fund periods ended October 31, 1998,
were -26.86%, -12.13% and -6.52%, respectively. Based on this calculation, the
average annual total returns of Class A for the fiscal year ended October 31,
1998 and for the period July 28, 1997 through October 31, 1998 were -26.38% and
-30.25%, respectively, the average annual total returns of Class C for the
fiscal year ended October 31, 1998 and for the period July 28, 1997 through
October 31, 1998 were -26.75% and -30.69%, respectively, and the average annual
total returns of Class D for the fiscal year ended October 31, 1998 and for the
period July 28, 1997 through October 31, 1998 were -26.68% and -30.47%,
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 B for the one year, five year and the life of the Fund periods
ended October 31, 1998, were -26.86%, -47.61% and -42.60%, respectively. Based
on the foregoing calculation, the total returns of Class A for the fiscal year
ended October 31, 1998 and for the period July 28, 1997 through October 31, 1998
were -26.38% and -36.48%, respectively, the total returns of Class C for the
fiscal year ended October 31, 1998 and for the period July 28, 1997 through
October 31, 1998 were -26.75% and -36.98%, respectively, and the total returns
of Class D for the fiscal year ended October 31, 1998 and for the period July
28, 1997 through October 31, 1998 were -26.68% and -36.73%, 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 (declined) to the following amounts at
October 31, 1998:
[Enlarge/Download Table]
INVESTMENT AT INCEPTION OF:
INCEPTION -------------------------------
CLASS DATE: $10,000 $50,000 $100,000
------------------------------------------------------------------- ---------- --------- --------- ---------
Class A............................................................ 07/28/97 $ 6,019 $ 30,490 $ 61,614
Class B............................................................ 08/06/90 5,740 28,700 57,400
Class C............................................................ 07/28/97 6,302 31,510 63,020
Class D............................................................ 07/28/97 6,327 31,635 63,270
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
October 31, 1998 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.
35
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1998
[Enlarge/Download Table]
NUMBER OF
SHARES VALUE
----------------------------------------------------------------------------------------------------------------
COMMON STOCKS (99.1%)
AUSTRALIA (18.0%)
GOLD MINING
600,000 Delta Gold NL.......................................................................... $ 980,928
500,000 Resolute Ltd........................................................................... 430,560
1,250,000 Ross Mining NL......................................................................... 811,200
-----------
2,222,688
-----------
PRECIOUS METALS
700,000 Acacia Resources Ltd................................................................... 1,113,840
300,000 Lihir Gold Ltd.*....................................................................... 415,584
25,000 Lihir Gold Ltd. (ADR)*................................................................. 662,500
800,000 Normandy Mining Ltd.................................................................... 713,856
200,000 Ranger Minerals NL*.................................................................... 549,120
-----------
3,454,900
-----------
TOTAL AUSTRALIA........................................................................ 5,677,588
-----------
CANADA (45.9%)
GOLD MINING
50,000 IAMGOLD, International African Mining Gold Corp.*...................................... 141,005
50,000 IAMGOLD, International African Mining Gold Corp. - 144A*............................... 141,005
100,000 Sutton Resources Ltd.*................................................................. 385,738
200,000 Yamana Resources, Inc.*................................................................ 154,295
-----------
822,043
-----------
PRECIOUS METALS
90,000 Aber Resources Ltd.*................................................................... 504,700
200,000 Agnico-Eagle Mines Ltd................................................................. 998,379
85,000 Barrick Gold Corp...................................................................... 1,816,875
200,000 Cambior Inc. (ADR)..................................................................... 1,000,000
135,000 Euro-Nevada Mining Corp................................................................ 2,109,238
75,000 Franco Nevada Mining Corp. Ltd......................................................... 1,446,515
350,000 Geomaque Explorations Ltd.*............................................................ 349,433
200,000 Greenstone Resources Ltd.*............................................................. 286,548
300,000 Meridian Gold Inc.*.................................................................... 1,556,250
125,000 Placer Dome, Inc. (ADR)................................................................ 1,968,750
100,000 Prime Resources Group, Inc. (ADR)...................................................... 849,271
125,000 Repadre Capital Corp.*................................................................. 202,593
650,000 Vengold Inc.*.......................................................................... 526,742
-----------
13,615,294
-----------
TOTAL CANADA........................................................................... 14,437,337
-----------
UNITED KINGDOM (3.1%)
OTHER METALS/MINERALS
20,000 Rio Tinto PLC (ADR).................................................................... 990,000
-----------
UNITED STATES (32.0%)
CONSUMER SPECIALTIES
50,000 Lazare Kaplan International, Inc.*..................................................... 387,500
-----------
NUMBER OF
SHARES VALUE
----------------------------------------------------------------------------------------------------------------
OTHER METALS/MINERALS
75,000 Freeport-McMoran Copper & Gold, Inc. (Class A)......................................... $ 895,313
20,000 Freeport-McMoran Copper & Gold, Inc. (Class B)......................................... 246,250
-----------
1,141,563
-----------
PRECIOUS METALS
300,000 Battle Mountain Gold Co................................................................ 1,631,250
125,000 Crown Resources Corp.*................................................................. 312,500
85,000 Getchell Gold Corp.*................................................................... 1,487,500
100,000 Homestake Mining Co.................................................................... 1,187,500
70,375 Newmont Mining Corp.................................................................... 1,495,469
75,000 Stillwater Mining Co.*................................................................. 2,428,125
-----------
8,542,344
-----------
TOTAL UNITED STATES.................................................................... 10,071,407
-----------
ZIMBABWE (0.1%)
OTHER METALS/MINERALS
120,000 Zimbabwe Platinum Mines Ltd.*.......................................................... 29,203
-----------
TOTAL COMMON STOCKS
(IDENTIFIED COST $39,486,619).......................................................... 31,205,535
-----------
[Enlarge/Download Table]
PRINCIPAL
AMOUNT IN
THOUSANDS
----------
SHORT-TERM INVESTMENT (2.2%)
REPURCHASE AGREEMENT
$ 684 The Bank of New York 5.125% due 11/02/98 (dated 10/30/98; proceeds $683,945)
(IDENTIFIED COST $683,653) (a)....................................................... 683,653
-----------
[Enlarge/Download Table]
TOTAL INVESTMENTS
(IDENTIFIED COST $40,170,272) (b).......................................................... 101.3 % 31,889,188
LIABILITIES IN EXCESS OF OTHER ASSETS...................................................... (1.3) (420,898)
------ ------------
NET ASSETS................................................................................. 100.0 % $ 31,468,290
===== ============
---------------------
ADR American Depository Receipt.
* Non-income producing security.
(a) Collateralized by $697,301 Student Loan Marketing Association 5.077% due
11/19/98 valued at $697,326.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $2,346,405 and the
aggregate gross unrealized depreciation is $10,627,489, resulting in net
unrealized depreciation of $8,281,084.
SEE NOTES TO FINANCIAL STATEMENTS
36
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
[Enlarge/Download Table]
ASSETS:
Investments in securities, at value
(identified cost $40,170,272)............................................................... $ 31,889,188
Receivable for:
Shares of beneficial interest sold........................................................ 149,650
Dividends................................................................................. 30,654
Prepaid expenses and other assets............................................................. 39,781
------------
TOTAL ASSETS............................................................................. 32,109,273
------------
LIABILITIES:
Payable for:
Shares of beneficial interest repurchased................................................. 283,981
Investments purchased..................................................................... 254,856
Plan of distribution fee.................................................................. 27,378
Investment management fee................................................................. 22,099
Accrued expenses and other payables........................................................... 52,669
------------
TOTAL LIABILITIES........................................................................ 640,983
------------
NET ASSETS............................................................................... $ 31,468,290
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $ 60,013,917
Net unrealized depreciation................................................................... (8,281,197)
Accumulated net investment loss............................................................... (127,339)
Accumulated net realized loss................................................................. (20,137,091)
------------
NET ASSETS............................................................................... $ 31,468,290
============
CLASS A SHARES:
Net Assets.................................................................................... $91,152
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 18,054
NET ASSET VALUE PER SHARE................................................................ $5.05
=====
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE)........................................ $5.33
=====
CLASS B SHARES:
Net Assets.................................................................................... $30,005,023
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 5,990,376
NET ASSET VALUE PER SHARE................................................................ $5.01
=====
CLASS C SHARES:
Net Assets.................................................................................... $1,045,540
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 208,707
NET ASSET VALUE PER SHARE................................................................ $5.01
=====
CLASS D SHARES:
Net Assets.................................................................................... $326,575
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 64,942
NET ASSET VALUE PER SHARE................................................................ $5.03
=====
SEE NOTES TO FINANCIAL STATEMENTS
37
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1998
[Enlarge/Download Table]
NET INVESTMENT LOSS:
INCOME
Dividends (net of $14,613 foreign withholding tax)............................................ $ 247,239
Interest...................................................................................... 145,797
------------
TOTAL INCOME............................................................................. 393,036
------------
EXPENSES
Plan of distribution fee (Class A shares)..................................................... 147
Plan of distribution fee (Class B shares)..................................................... 306,235
Plan of distribution fee (Class C shares)..................................................... 9,392
Investment management fee..................................................................... 256,380
Registration fees............................................................................. 88,745
Transfer agent fees and expenses.............................................................. 86,657
Professional fees............................................................................. 53,618
Shareholder reports and notices............................................................... 49,175
Custodian fees................................................................................ 16,621
Trustees' fees and expenses................................................................... 10,804
Other......................................................................................... 7,989
------------
TOTAL EXPENSES........................................................................... 885,763
------------
NET INVESTMENT LOSS...................................................................... (492,727)
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss on:
Investments............................................................................... (9,648,954)
Foreign exchange transactions............................................................. (629)
------------
NET LOSS................................................................................. (9,649,583)
------------
Net change in unrealized appreciation/depreciation on:
Investments............................................................................... (420,844)
Translation of other assets and liabilities denominated in foreign currencies............. 22
------------
NET DEPRECIATION......................................................................... (420,822)
------------
NET LOSS................................................................................. (10,070,405)
------------
NET DECREASE.................................................................................. $(10,563,132)
============
SEE NOTES TO FINANCIAL STATEMENTS
38
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
[Enlarge/Download Table]
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1998 1997*
-----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss................................................... $ (492,727) $ (575,376)
Net realized loss..................................................... (9,649,583) (9,101,223)
Net change in unrealized depreciation................................. (420,822) (9,193,959)
------------- -------------
NET DECREASE..................................................... (10,563,132) (18,870,558)
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class B shares.................................................... -- (656,572)
Net realized gain
Class B shares.................................................... -- (3,712,483)
------------- -------------
TOTAL DIVIDENDS AND DISTRIBUTIONS................................ -- (4,369,055)
------------- -------------
Net increase from transactions in shares of beneficial interest....... 3,551,128 878,665
------------- -------------
NET DECREASE..................................................... (7,012,004) (22,360,948)
NET ASSETS:
Beginning of period................................................... 38,480,294 60,841,242
------------- -------------
END OF PERIOD
(INCLUDING NET INVESTMENT LOSSES OF $127,339 AND $191,129,
RESPECTIVELY)..................................................... $ 31,468,290 $ 38,480,294
============ ============
---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
39
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Precious Metals and Minerals Trust (the "Fund"),
formerly Dean Witter Precious Metals and Minerals Trust, 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
long-term capital appreciation. The Fund will attempt to achieve its investment
objective by investing principally in the securities of foreign and domestic
companies engaged in the exploration, mining, fabrication, processing,
distribution or trading of precious metals and minerals or in companies engaged
in financing, managing, controlling or operating companies engaged in these
activities and also by investing a portion of its assets in gold, silver,
platinum and palladium bullion and coins. The Fund was organized as a
Massachusetts business trust on December 28, 1989 and commenced operations on
August 6, 1990. On July 28, 1997, the Fund commenced offering three additional
classes of shares, with the then current shares designated as Class B shares.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts and disclosures. Actual results could differ from those
estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price (in
cases where securities are traded on more than one exchange, the securities are
valued on the exchange designated as the primary market pursuant to procedures
adopted by the Trustees); (2) 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
40
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998, CONTINUED
Witter Advisors Inc. (the "Investment Manager"), formerly Dean Witter
InterCapital Inc., that sale and bid prices are not reflective of a security's
market value, portfolio securities are valued at their fair value as determined
in good faith under procedures established by and under the general supervision
of the Trustees (valuation of debt securities for which market quotations are
not readily available may be based upon current market prices of securities
which are comparable in coupon, rating and maturity or an appropriate matrix
utilizing similar factors); and (4) short-term debt securities having a maturity
date of more than sixty days at time of purchase are valued on a mark-to-market
basis until sixty days prior to maturity and thereafter at amortized cost based
on their value on the 61st day. Short-term debt securities having a maturity
date of sixty days or less at the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date
except for certain dividends from foreign securities which are recorded as soon
as the Fund is informed after the ex-dividend date. Discounts are accreted over
the life of the respective securities. Interest income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. FOREIGN CURRENCY TRANSLATION -- The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, other assets and liabilities and forward foreign currency
contracts are translated at the exchange rates prevailing at the end of the
period; and (2) purchases, sales, income and expenses are translated at the
exchange rates prevailing on the respective dates of such transactions. The
resultant exchange gains and losses are included in the Statement of Operations
as realized and unrealized gain/loss on foreign exchange transactions. Pursuant
to U.S. Federal income tax regulations, certain foreign exchange gains/losses
included in realized and unrealized gain/loss are included in or are a reduction
of ordinary income for federal income tax purposes. The Fund does not isolate
that portion of the results of operations arising as a result of changes in the
foreign exchange rates from the changes in the market prices of the securities.
41
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998, CONTINUED
E. FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may enter into forward
foreign currency contracts which are valued daily at the appropriate exchange
rates. The resultant unrealized exchange gains and losses are included in the
Statement of Operations as unrealized foreign currency gain or loss and in the
Statement of Assets and Liabilities as part of the related foreign currency
denominated asset or liability. The Fund records realized gains or losses on
delivery of the currency or at the time the forward contract is extinguished
(compensated) by entering into a closing transaction prior to delivery.
F. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent that these differences are permanent in nature, such amounts are
reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.80% 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
42
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998, CONTINUED
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
lesser of: (a) the average daily aggregate gross sales of the Class B shares
since the inception of the Fund (not including reinvestment of dividend or
capital gain distributions) less the average daily aggregate net asset value of
the Class B shares redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or waived; or (b) the average daily net
assets of Class B; and (iii) Class C -- up to 1.0% of the average daily net
assets of Class C. In the case of Class A shares, amounts paid under the Plan
are paid to the Distributor for services provided. In the case of Class B and
Class C shares, amounts paid under the Plan are paid to the Distributor for (1)
services provided and the expenses borne by it and others in the distribution of
the shares of these Classes, including the payment of commissions for sales of
these Classes and incentive compensation to, and expenses of, Morgan Stanley
Dean Witter Financial Advisors and others who engage in or support distribution
of the shares or who service shareholder accounts, including overhead and
telephone expenses; (2) printing and distribution of prospectuses and reports
used in connection with the offering of these shares to other than current
shareholders; and (3) preparation, printing and distribution of sales literature
and advertising materials. In addition, the Distributor may utilize fees paid
pursuant to the Plan, in the case of Class B shares, to compensate Dean Witter
Reynolds Inc. ("DWR"), an affiliate of the Investment Manager and Distributor,
and other selected broker-dealers for their opportunity costs in advancing such
amounts, which compensation would be in the form of a carrying charge on any
unreimbursed expenses.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the
43
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998, CONTINUED
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
$3,830,463 at October 31, 1998.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the year ended October 31, 1998, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.23% and
1.0%, respectively.
The Distributor has informed the Fund that for the year ended October 31, 1998,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $81,003 and $1,677, respectively and
received approximately $4,714 in front-end sales charges from sales of the
Fund's Class A shares. The respective shareholders pay such charges which are
not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended October 31, 1998 aggregated
$15,521,451 and $10,677,356, respectively.
For the year ended October 31, 1998, the Fund incurred $13,415 in brokerage
commissions with DWR for portfolio transactions executed on behalf of the Fund.
For the year ended October 31, 1998, the Fund incurred $2,500 in brokerage
commissions 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 October 31, 1998, the Fund had
transfer agent fees and expenses payable of approximately $500.
44
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998, CONTINUED
5. SHARES OF BENEFICIAL INTEREST
Transaction in shares of beneficial interest were as follows:
[Enlarge/Download Table]
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997*
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
CLASS A SHARES
Sold............................................................. 163,290 $ 830,904 4,703 $ 37,724
Redeemed......................................................... (149,939) (771,988) -- --
----------- ------------ ----------- ------------
Net increase -- Class A.......................................... 13,351 58,916 4,703 37,724
----------- ------------ ----------- ------------
CLASS B SHARES
Sold............................................................. 10,593,880 59,088,953 12,331,939 111,539,261
Reinvestment of dividends and distributions...................... -- -- 402,436 4,004,238
Redeemed......................................................... (10,149,788) (56,742,708) (12,648,999) (115,262,441)
----------- ------------ ----------- ------------
Net increase -- Class B.......................................... 444,092 2,346,245 85,376 281,058
----------- ------------ ----------- ------------
CLASS C SHARES
Sold............................................................. 604,559 3,428,478 95,151 732,145
Redeemed......................................................... (465,261) (2,500,980) (25,742) (182,272)
----------- ------------ ----------- ------------
Net increase -- Class C.......................................... 139,298 927,498 69,409 549,873
----------- ------------ ----------- ------------
CLASS D SHARES
Sold............................................................. 362,666 2,036,922 1,259 10,010
Redeemed......................................................... (298,983) (1,818,453) -- --
----------- ------------ ----------- ------------
Net increase -- Class D.......................................... 63,683 218,469 1,259 10,010
----------- ------------ ----------- ------------
Net increase in Fund............................................. 660,424 $ 3,551,128 160,747 $ 878,665
=========== ============ =========== ============
---------------------
* For Class A, C and D, for the period July 28, 1997 (issue date) through
October 31, 1997.
6. FEDERAL INCOME TAX STATUS
At October 31, 1998, the Fund had a net capital loss carryover of approximately
$20,110,000 of which $10,239,000 will be available through October 31, 2005 and
$9,871,000 will be available through October 31, 2006 to offset future capital
gains to the extent provided by regulations.
As of October 31, 1998, the Fund had temporary book/tax differences attributable
to capital loss deferrals on wash sales and income from the mark-to-market of
passive foreign investment companies ("PFICs") and permanent book/tax
differences primarily attributable to a net operating loss and tax adjustments
on PFICs sold by the Fund. To reflect reclassifications arising from the
permanent differences, paid-in-capital was charged $404,421, accumulated net
realized loss was charged $152,096 and net investment loss was credited
$556,517.
45
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1998, CONTINUED
7. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward foreign currency contracts ("forward contracts")
to facilitate settlement of foreign currency denominated portfolio transactions
or to manage foreign currency exposure associated with foreign currency
denominated securities.
Forward contracts involve elements of market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the foreign exchange rates underlying the forward
contracts. Risks may also arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
At October 31, 1998, there were no outstanding forward contracts.
46
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
[Enlarge/Download Table]
FOR THE YEAR ENDED OCTOBER 31
----------------------------------------------------------------
1998++ 1997*++ 1996 1995 1994
----------------------------------------------------------------------------------------------------------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period.... $ 6.85 $ 11.14 $ 9.77 $ 11.45 $ 10.80
-------- -------- -------- -------- --------
Income (loss) from investment
operations:
Net investment loss.................. (0.09) (0.10) (0.10) (0.08) (0.06)
Net realized and unrealized gain
(loss)............................... (1.75) (3.35) 1.66 (1.38) 0.73
-------- -------- -------- -------- --------
Total income (loss) from investment
operations............................. (1.84) (3.45) 1.56 (1.46) 0.67
-------- -------- -------- -------- --------
Less dividends and distributions from:
Net investment income................ -- (0.13) -- -- --
Net realized gain.................... -- (0.71) (0.19) (0.22) (0.02)
-------- -------- -------- -------- --------
Total dividends and distributions....... -- (0.84) (0.19) (0.22) (0.02)
-------- -------- -------- -------- --------
Net asset value, end of period.......... $ 5.01 $ 6.85 $ 11.14 $ 9.77 $ 11.45
======== ======== ======== ======== ========
TOTAL RETURN+........................... (26.86)% (33.29)% 15.93% (12.78)% 6.18%
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ 2.78%(1) 2.36% 2.27% 2.29% 2.28%
Net investment loss..................... (1.55)%(1) (1.13)% (0.84)% (0.70)% (0.87)%
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands.............................. $30,005 $37,964 $60,841 $55,448 $73,444
Portfolio turnover rate................. 36% 53% 46% 23% 46%
---------------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date have been designated Class B shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charges. Calculated based on the
net asset value as of the last business day of the period.
(1) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
47
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
[Enlarge/Download Table]
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
OCTOBER 31, 1998 OCTOBER 31, 1997
-------------------------------------------------------------------------------------------------
CLASS A SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 6.86 $ 7.95
------- -------
Loss from investment operations:
Net investment loss...................................... (0.05) --
Net realized and unrealized loss......................... (1.76) (1.09)
------- -------
Total loss from investment operations....................... (1.81) (1.09)
------- -------
Net asset value, end of period.............................. $ 5.05 $ 6.86
======= =======
TOTAL RETURN+............................................... (26.38)% (13.71)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 2.01%(3) 1.61%(2)
Net investment loss......................................... (0.78)%(3) (0.08)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $91 $32
Portfolio turnover rate..................................... 36% 53%
CLASS C SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 6.84 $ 7.95
------- -------
Loss from investment operations:
Net investment loss...................................... (0.09) (0.02)
Net realized and unrealized loss......................... (1.74) (1.09)
------- -------
Total loss from investment operations....................... (1.83) (1.11)
------- -------
Net asset value, end of period.............................. $ 5.01 $ 6.84
======= =======
TOTAL RETURN+............................................... (26.75)% (13.96)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 2.78%(3) 2.37%(2)
Net investment loss......................................... (1.55)%(3) (0.79)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $1,046 $475
Portfolio turnover rate..................................... 36% 53%
---------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charges. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
48
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
[Enlarge/Download Table]
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
OCTOBER 31, 1998 OCTOBER 31, 1997
-------------------------------------------------------------------------------------------------
CLASS D SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 6.86 $ 7.95
------- -------
Income (loss) from investment operations:
Net investment income.................................... 0.02 --
Net realized and unrealized loss......................... (1.85) (1.09)
------- -------
Total loss from investment operations....................... (1.83) (1.09)
------ ------
Net asset value, end of period.............................. $ 5.03 $ 6.86
======= =======
TOTAL RETURN+............................................... (26.68)% (13.71)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 1.78%(3) 1.35%(2)
Net investment income (loss)................................ (0.55)%(3) 0.22%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $327 $9
Portfolio turnover rate..................................... 36% 53%
---------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
49
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND
MINERALS TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST
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 Precious
Metals and Minerals Trust (the "Fund"), formerly Dean Witter Precious Metals and
Minerals Trust at October 31, 1998, 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
presented, 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 October
31, 1998 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
DECEMBER 7, 1998
50
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC.
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
The response to this item is incorporated herein by reference to Exhibits
1 and 2 under Item 16 below and by reference to Item 27 of, Post-Effective
Amendment No. 26 to Registrant's Registration Statement on Form N-1A, dated
June 30, 1999, which was filed electronically pursuant to Regulation S-T on
June 24, 1999 ("Post-Effective Amendment No. 26") as an amendment to
Registrant's Registration Statement on Form N-1A (File Nos. 811-3129 and
2-70421) (the "Registration Statement").
ITEM 16. EXHIBITS
(1) Articles of Incorporation dated October 21, 1993 ("Articles") (incorporated
herein by reference to Exhibit 1(a) of Registrant's Post-Effective
Amendment No. 18 filed on April 23, 1996 ("Post-Effective Amendment No.
18")); Amendment to Article Establishing and Designating Additional
Classes of Stock (incorporated herein by reference to Exhibit 1 to
Post-Effective Amendment No. 21 filed on July 18, 1997 ("Post Effective
Amendment No. 21"))
(2) Amended and Restated By-Laws of Registrant dated as of May 1, 1999
(incorporated herein by reference to Exhibit 2 to the Registrant's
Post-Effective Amendment No. 25 filed on April 29, 1999 ("Post-Effective
Amendment No. 25"))
(3) Not Applicable
(4) Copy of Agreement and Plan of Reorganization (filed herewith as Exhibit A
to the Proxy Statement and Prospectus)
(5) Not Applicable
(6) Investment Management Agreement (incorporated herein by reference to
Exhibit 5 to Post-Effective Amendment No. 25)
(7) (a) Distribution Agreement between Registrant and Morgan Stanley Dean
Witter Distributors Inc. (incorporated herein by reference to Exhibit
5(a) to Post-Effective Amendment No. 25)
(b) Multiple Class Distribution Agreement between Registrant and Morgan
Stanley Dean Witter Distributors, Inc. (incorporated herein by
reference to Exhibit 6 of Post-Effective Amendment No. 21.
(c) Form of Selected Dealer Agreement (incorporated herein by reference to
Exhibit 5(b) to Registrant's Post-Effective Amendment No. 25
(8) Not Applicable
(9) (a) Custody Agreement dated February 24, 1994 (incorporated herein by
reference to Exhibit 8(a) to Post-Effective Amendment No. 18)
(b) Amended and Restated Transfer Agency and Services Agreement between
Registrant and Morgan Stanley Dean Witter Trust FSB (incorporated
herein by reference to Exhibit 8(a) of Post-Effective Amendment No. 25)
C-1
(10) (a) Amended and Restated Plan of Distribution pursuant to Rule 12b-1,
dated July 28, 1997 (incorporated herein by reference to Exhibit 15 to
Post-Effective Amendment No. 21)
(b) Morgan Stanley Dean Witter Funds Multiple Class Plan pursuant to Rule
18f-3 (incorporated herein by reference to Exhibit 15 to Post-Effective
Amendment No. 25)
(11) (a) Opinion and consent of Mayer, Brown & Platt
(b) Opinion and consent of Piper & Marbury L.L.P.
(12) Opinion and consent of Mayer, Brown & Platt regarding tax matters
(13) Form of Services Agreement between Morgan Stanley Dean Witter Advisors
Inc. and Morgan Stanley Dean Witter Services Company Inc. (incorporated
herein by reference to Exhibit 8(b) to Post-Effective Amendment No. 25)
(14) Consent of Independent Accountants
(15) Not Applicable
(16) Powers of Attorney
(17) (a) Registrant's Rule 24f-2 Notice pursuant to Rule 24f-2 under the
Investment Company Act of 1940, for its fiscal year ended February 28,
1999 (incorporated herein by reference to Form 24f-2 filed with the
Securities and Exchange Commission on April 16, 1999)
(b) Form of Proxy
(c) Voting Information Card (incorporated herein by reference to Exhibit 17
of the Initial Registration Statement on Form N-14).
ITEM 17. UNDERTAKINGS
1. The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of the prospectus which is a part
of this registration statement on Form N-14 by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c) of the Securities
Act of 1933, the reoffering prospectus will contain the information called for
by the applicable registration form for reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
items of the applicable form.
2. The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to this
registration statement on Form N-14 and will not be used until the amendment is
effective, and that, in determining any liability under the Securities Act of
1933, each post-effective amendment shall be deemed to be a new registration
statement for the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide offering of
them.
C-2
SIGNATURES
As required by the Securities Act of 1933, this registration statement has
been signed on behalf of the registrant, in the City of New York and State of
New York, on the 25th day of August, 1999.
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE
DEVELOPMENT SECURITIES INC.
By: /s/ Barry Fink
Barry Fink
Vice President and Secretary
As required by the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the dates
indicated.
[Enlarge/Download Table]
SIGNATURE TITLE DATE
------------------------------ ------------------------------------ ----------------
1. Principal Executive Officer
/s/ Charles A. Fiumefreddo President, Chief Executive Officer,
............................
Trustee and Chairman August 25, 1999
2. Principal Financial Officer
/s/ Thomas F. Caloia Treasurer and Principal
............................
Accounting Officer August 25, 1999
3. Majority of Trustees
/s/ Michael Bozic Trustee August 25, 1999
............................
/s/ Edwin J. Garn Trustee August 25, 1999
............................
/s/ John R. Haire Trustee August 25, 1999
............................
/s/ Wayne E. Hedien Trustee August 25, 1999
............................
/s/ Manuel H. Johnson Trustee August 25, 1999
............................
/s/ Michael E. Nugent Trustee August 25, 1999
............................
/s/ John L. Schroeder Trustee August 25, 1999
............................
/s/ Philip J. Purcell Trustee August 25, 1999
............................
C-3
Dates Referenced Herein and Documents Incorporated by Reference
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