Document/Exhibit Description Pages Size
1: 485BPOS Post-Effective Amendment 90 434K
2: EX-99.1(D) Miscellaneous Exhibit 6 21K
5: EX-99.10(A) Miscellaneous Exhibit 1 6K
6: EX-99.14 Miscellaneous Exhibit 5 30K
7: EX-99.16(A) Miscellaneous Exhibit 12 51K
8: EX-99.16(B) Miscellaneous Exhibit 3 14K
3: EX-99.7(C) Miscellaneous Exhibit 5 20K
4: EX-99.7(D) Miscellaneous Exhibit 8 38K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 28, 2001
REGISTRATION NOS.: 33-10363
811-4917
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 18 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 /X/
AMENDMENT NO. 19 /X/
-------------------
MORGAN STANLEY FEDERAL SECURITIES TRUST
(A MASSACHUSETTS BUSINESS TRUST)
(FORMERLY NAMED MORGAN STANLEY DEAN WITTER FEDERAL SECURITIES TRUST)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
C/O MORGAN STANLEY TRUST
HARBORSIDE FINANCIAL CENTER, PLAZA TWO
JERSEY CITY, NEW JERSEY 07311
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 869-6397
BARRY FINK, ESQ.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(NAME AND ADDRESS OF AGENT FOR SERVICE)
-------------------
COPY TO:
STUART M. STRAUSS, ESQ.
MAYER, BROWN & PLATT
1675 BROADWAY
NEW YORK, NEW YORK 10019
-------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Post-Effective Amendment becomes effective.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[Download Table]
immediately upon filing pursuant to paragraph (b)
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X on December 31, 2001 pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)
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on (date) pursuant to paragraph (a) of rule 485.
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AMENDING THE PROSPECTUS AND UPDATING FINANCIAL STATEMENTS
-------------------------------------------------------
-------------------------------------------------------
[MORGAN STANLEY LOGO]
Morgan Stanley Federal Securities Trust
A MUTUAL FUND THAT SEEKS
A HIGH LEVEL OF CURRENT INCOME
[COVER PHOTO]
Prospectus - December 31, 2001
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.................................. 7
Shareholder Information PRICING FUND SHARES.............................. 8
HOW TO BUY SHARES................................ 8
HOW TO EXCHANGE SHARES........................... 10
HOW TO SELL SHARES............................... 11
DISTRIBUTIONS.................................... 13
TAX CONSEQUENCES................................. 13
SHARE CLASS ARRANGEMENTS......................... 14
Financial Highlights ................................................. 21
Morgan Stanley Funds ................................................. INSIDE BACK COVER
THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE FUND.
PLEASE READ IT CAREFULLY AND KEEP IT FOR FUTURE REFERENCE.
[Sidebar]
INCOME
An investment objective having the goal of selecting securities to pay out
income rather than rise in price.
[End Sidebar]
The Fund
[ICON] INVESTMENT OBJECTIVE
--------------------------------------------------------------------------------
Morgan Stanley Federal Securities Trust seeks a high level of current income.
[ICON] PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------
The Fund will normally invest at least 80% of its
assets in U.S. Government securities. In making
investment decisions, the Fund's "Investment
Manager," Morgan Stanley Investment Advisors Inc.,
considers economic developments, interest rate levels
and other factors. The Fund is not limited as to the
maturities of the U.S. government securities in which
it may invest.
U.S. Government Securities. The U.S. government securities (including zero
coupon securities) that the Fund may purchase include:
- U.S. Treasury bills, notes and bonds, all of which are direct obligations of
the U.S. Government.
- Securities (including mortgage-backed securities) issued by agencies and
instrumentalities of the U.S. Government which are backed by the full faith
and credit of the United States. Among the agencies and instrumentalities
issuing these obligations are the Government National Mortgage Association and
the Federal Housing Administration.
- Securities (including mortgage-backed securities) issued by agencies and
instrumentalities which are not backed by the full faith and credit of the
United States, but whose issuing agency or instrumentality has the right to
borrow, to meet its obligations, from the U.S. Treasury. Among these agencies
and instrumentalities are the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation.
- Securities issued by agencies and instrumentalities which are backed solely by
the credit of the issuing agency or instrumentality. Among these agencies and
instrumentalities are the Federal Farm Credit System and the Federal Home Loan
Banks.
Zero coupon securities are purchased at a discount and either (i) pay no
interest, or (ii) accrue interest, but make no payments until maturity.
Mortgage-Backed Securities. One type of mortgage-backed security, in which the
Fund may invest, is a mortgage pass-through security. These securities represent
a participation interest in a pool of residential mortgage loans originated by
U.S. Governmental or private lenders such as banks. They differ from
conventional debt securities, which provide for periodic payment of interest in
fixed amounts and principal payments at maturity or on specified call dates.
Mortgage pass-through securities provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments made by the
individual borrowers on the pooled mortgage loans. Mortgage pass-through
securities may be collateralized by mortgages with fixed rates of interest or
adjustable rates.
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 securities described
above, the Fund may also invest in options and futures.
1
Collateralized Mortgage Obligations. Collateralized mortgage obligations
("CMOs") are debt obligations collateralized by mortgage loans or mortgage
pass-through securities (collectively "Mortgage Assets"). Payments of principal
and interest on the Mortgage Assets and any reinvestment income are used to make
payments on the CMOs. CMOs are issued in multiple classes. Each class has a
fixed or floating rate and a stated maturity or final distribution date. The
principal and interest on the Mortgage Assets may be allocated among the classes
in a number of different ways. Certain classes will, as a result of the
allocation, have more predictable cash flows than others.
As a general matter, the more predictable the cash flow, the lower the yield
relative to other Mortgage Assets. The less predictable the cash flow, the
higher the yield and the greater the risk. The Fund may invest in any class of
CMO.
[ICON] PRINCIPAL RISKS
--------------------------------------------------------------------------------
There is no assurance that the Fund will achieve its investment objective. The
Fund's share price and yield will fluctuate with changes in the market value
and/or yield of the Fund's portfolio securities. Neither the value nor the yield
of the U.S. government securities that the Fund invests in (or the value or
yield of the Fund's shares) is guaranteed by the U.S. Government. 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.
U.S. Government Securities. A principal risk of investing in the Fund is
associated with its U.S. government securities, which are fixed-income
securities. All fixed-income securities, such as bonds, are subject to two types
of risk: credit risk and interest rate risk. Credit risk refers to the
possibility that the issuer of a security will be unable to make interest
payments and/or repay the principal on its debt.
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 current interest.) As merely illustrative of the relationship between
fixed-income securities and interest rates, the following table shows how
interest rates affect bond prices.
[Enlarge/Download Table]
Price per $1,000 of a Bond if Interest Rates:
-------------------------------------------------
How Interest Rates Affect Bond Prices Increase Decrease
------------------------------------------------------ --------------------- ---------------------
Bond Maturity Coupon 1% 2% 1% 2%
------------------------------------------------------------------------------------------------------------------------
1 year N/A $1,000 $1,000 $1,000 $1,000
------------------------------------------------------------------------------------------------------------------------
5 years 5.75% $ 992 $ 959 $1,063 $1,101
------------------------------------------------------------------------------------------------------------------------
10 years 5.75% $ 976 $ 913 $1,118 $1,120
------------------------------------------------------------------------------------------------------------------------
30 years 6.25% $ 973 $ 858 $1,287 $1,502
------------------------------------------------------------------------------------------------------------------------
COUPONS REFLECT YIELDS ON TREASURY SECURITIES AS OF DECEMBER 31, 2000. THE TABLE
IS NOT REPRESENTATIVE OF PRICE CHANGES FOR MORTGAGE-BACKED SECURITIES
PRINCIPALLY BECAUSE OF PREPAYMENTS. IN ADDITION, THE TABLE IS AN ILLUSTRATION
AND DOES NOT REPRESENT EXPECTED YIELDS OR SHARE PRICE CHANGES OF ANY MORGAN
STANLEY MUTUAL FUND.
2
While the credit risk associated with U.S. government securities generally is
considered to be minimal, the interest rate risk can be substantial. The Fund is
not limited as to the maturities of the securities in which it may invest. Thus,
a rise in the general level of interest rates may cause the price of the Fund's
portfolio securities to fall substantially.
Mortgage-Backed Securities. Mortgage-backed securities in which the Fund may
invest have different risk characteristics than traditional debt securities.
Although generally the value of fixed-income securities increases during periods
of falling interest rates and decreases during periods of rising rates, this is
not always the case with mortgage-backed securities. This is due to the fact
that principal on underlying mortgages may be prepaid at any time as well as
other factors. Generally, prepayments will increase during a period of falling
interest rates and decrease during a period of rising interest rates. The rate
of prepayments also may be influenced by economic and other factors. Prepayment
risk includes the possibility that, as interest rates fall, securities with
stated interest rates may have the principal prepaid earlier than expected,
requiring the Fund to invest the proceeds at generally lower interest rates.
Investments in mortgage-backed securities are made based upon, among other
things, expectations regarding the rate of prepayments on underlying mortgage
pools. Rates of prepayment, faster or slower than expected by the Investment
Manager, could reduce the Fund's yield, increase the volatility of the Fund
and/or cause a decline in net asset value. Certain mortgage-backed securities
may be more volatile and less liquid than other traditional types of debt
securities.
Collateralized Mortgage Obligations. The principal and interest on the Mortgage
Assets comprising a CMO may be allocated among the several classes of a CMO in
many ways. The general goal in allocating cash flows on Mortgage Assets to the
various classes of a CMO is to create certain tranches on which the expected
cash flows have a higher degree of predictability than do the underlying
Mortgage Assets. As a general matter, the more predictable the cash flow is on a
particular CMO tranche, the lower the anticipated yield on that tranche at the
time of issue will be relative to the prevailing market yields on the Mortgage
Assets. As part of the process of creating more predictable cash flows on
certain tranches of a CMO, one or more tranches generally must be created that
absorb most of the changes in the cash flows on the underlying Mortgage Assets.
The yields on these tranches are generally higher than prevailing market yields
on other mortgage related securities with similar average lives. Principal
prepayments on the underlying Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Because of the uncertainty of the cash flows on these tranches, the market
prices and yields of these tranches are more volatile and may increase or
decrease in value substantially with changes in interest rates and/or the rates
of prepayment. Due to the possibility that prepayments (on home mortgages and
other collateral) will alter the cash flow on CMOs, it is not possible to
determine in advance the final maturity date or average life. Faster prepayment
will shorten the average life and slower prepayments will lengthen it. In
addition, if the collateral securing CMOs or any third party guarantees are
insufficient to make payments, the Fund could sustain a loss.
Other Risks. The performance of the Fund also will depend on whether or not the
Investment Manager is successful in applying the Fund's investment strategies.
The Fund is also subject to other risks from its permissible investments
including the risks associated with its options and futures 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
[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.
AVERAGE ANNUAL
TOTAL RETURNS
This table compares the Fund's average annual total 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]
[ICON] PAST PERFORMANCE
--------------------------------------------------------------------------------
The bar chart and table below provide some indication of the risks of investing
in the Fund. The Fund's past performance does not indicate how the Fund will
perform in the future.
ANNUAL TOTAL RETURNS -- Calendar Years
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED
GRAPHIC
[Download Table]
1991 14.24%
...92 6.47%
...93 9.14%
...94 -5.04%
...95 18.76%
...96 0.92%
...97 8.94%
...98 9.12%
...99 -4.55%
2000 10.53%
THE BAR CHART REFLECTS THE PERFORMANCE OF CLASS B
SHARES; THE PERFORMANCE OF THE OTHER CLASSES WILL
DIFFER BECAUSE THE CLASSES HAVE DIFFERENT ONGOING
FEES. THE PERFORMANCE INFORMATION IN THE BAR CHART
DOES NOT REFLECT THE DEDUCTION OF SALES CHARGES; IF
THESE AMOUNTS WERE REFLECTED, RETURNS WOULD BE LESS
THAN SHOWN. YEAR-TO-DATE TOTAL RETURN AS OF
SEPTEMBER 30, 2001 WAS 6.12%.
During the periods shown in the bar chart, the
highest return for a calendar quarter was 6.35%
(quarter ended June 30, 1995) and the lowest return
for a calendar quarter was -4.02% (quarter ended
March 31, 1994).
[Download Table]
AVERAGE ANNUAL TOTAL RETURNS (as of December 31, 2000)
-----------------------------------------------------------------------------
Past 1 Year Past 5 Years Past 10 Years
-----------------------------------------------------------------------------
Class A(1) 6.31% -- --
-----------------------------------------------------------------------------
Class B 5.53% 4.52% 6.60%
-----------------------------------------------------------------------------
Class C(1) 9.49% -- --
-----------------------------------------------------------------------------
Class D(1) 11.60% -- --
-----------------------------------------------------------------------------
Lehman Brothers U.S. Government
Index(2) 13.24% 6.49% 7.92%
-----------------------------------------------------------------------------
[Download Table]
1 CLASSES A, C AND D COMMENCED OPERATIONS ON JULY 28, 1997.
2 THE LEHMAN BROTHERS U.S. GOVERNMENT INDEX IS A BROAD-BASED
MEASURE OF ALL U.S. GOVERNMENT AND TREASURY SECURITIES. THE
INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. THE
INDEX IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN
INVESTMENT.
4
[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 October 31, 2001.
[End Sidebar]
[ICON] FEES AND EXPENSES
--------------------------------------------------------------------------------
The table below briefly describes the fees and expenses that you may pay if you
buy and hold shares of the Fund. The Fund offers four Classes of shares: Classes
A, B, C and D. Each Class has a different combination of fees, expenses and
other features, which should be considered in selecting a Class of shares. The
Fund does not charge account or exchange fees. See the "Share
Class Arrangements" section for further fee and expense information.
[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) 4.25%(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 0.55% 0.55% 0.55% 0.55%
---------------------------------------------------------------------------------
Distribution and service (12b-1) fees 0.20% 0.85% 0.85% None
---------------------------------------------------------------------------------
Other expenses 0.16% 0.16% 0.16% 0.16%
---------------------------------------------------------------------------------
Total annual Fund operating expenses 0.91% 1.56% 1.56% 0.71%
---------------------------------------------------------------------------------
[Download Table]
(1) REDUCED FOR PURCHASES OF $25,000 AND OVER.
(2) INVESTMENTS THAT ARE NOT SUBJECT TO ANY SALES CHARGE AT THE
TIME OF PURCHASE ARE SUBJECT TO A CONTINGENT DEFERRED SALES
CHARGE ("CDSC") OF 1.00% THAT WILL BE IMPOSED IF YOU SELL
YOUR SHARES WITHIN ONE YEAR AFTER PURCHASE, EXCEPT FOR
CERTAIN SPECIFIC CIRCUMSTANCES.
(3) THE CDSC IS SCALED DOWN TO 1.00% DURING THE SIXTH YEAR,
REACHING ZERO THEREAFTER. SEE "SHARE CLASS ARRANGEMENTS" FOR
A COMPLETE DISCUSSION OF THE CDSC.
(4) ONLY APPLICABLE IF YOU SELL YOUR SHARES WITHIN ONE YEAR
AFTER PURCHASE.
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 $514 $703 $ 907 $1,497 $514 $703 $907 $1,497
------------------------------------------------------------------------- --------------------------------------------------
Class B $659 $793 $1,050 $1,856 $159 $493 $850 $1,856
------------------------------------------------------------------------- --------------------------------------------------
Class C $259 $493 $ 850 $1,856 $159 $493 $850 $1,856
------------------------------------------------------------------------- --------------------------------------------------
Class D $ 73 $227 $ 395 $ 883 $ 73 $227 $395 $ 883
------------------------------------------------------------------------- --------------------------------------------------
While Class B and Class C shares do not have any front-end sales charges, their
higher ongoing annual expenses (due to higher 12b-1 fees) mean that over time
you could end up paying more for these shares than if you were to pay front-end
sales charges for Class A.
[ICON] ADDITIONAL INVESTMENT STRATEGY INFORMATION
--------------------------------------------------------------------------------
This section provides additional information relating to the Fund's principal
investment strategies.
Other Securities. The Fund also may invest up to 20% of its assets in interest
rate futures, options on these futures contracts, and money market instruments.
Options and futures may be used to seek to protect against a decline in
securities prices from changes in prevailing interest rates or an increase in
prices of securities that may be purchased.
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 net 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. When the Fund takes a defensive position, it may not
achieve its investment objective.
The percentage limitations relating to the composition of the Fund's portfolio
apply at the time the Fund acquires an investment. Subsequent percentage changes
that result from market fluctuations will not require the Fund to sell any
portfolio security. However, the Fund may be required to sell its illiquid
securities holdings, if any, in response to fluctuations in the value of such
holdings. The Fund may change its principal investment strategies without
shareholder approval; however, you would be notified of any changes.
6
[Sidebar]
MORGAN STANLEY INVESTMENT ADVISORS INC.
The Investment Manager is widely recognized as a leader in the mutual fund
industry and together with Morgan Stanley Services Company Inc., its
wholly-owned subsidiary, had approximately $135 billion in assets under
management as of November 30, 2001.
[End Sidebar]
[ICON] ADDITIONAL RISK INFORMATION
--------------------------------------------------------------------------------
This section provides additional information relating to the principal risks of
investing in the Fund.
Options and Futures. If the Fund invests in options and/or futures, its
participation in these markets would subject the Fund's portfolio to certain
risks. The Investment Manager's predictions of movements in the direction of
interest rate movements may be inaccurate, and the adverse consequences to the
Fund (e.g., a reduction in the Fund's net asset value or a reduction in the
amount of income available for distribution) may leave the Fund in a worse
position than if these strategies were not used. Other risks inherent in the use
of options and futures include, for example, the possible imperfect correlation
between the price of options and futures contracts and movements in the prices
of the securities being hedged, and the possible absence of a liquid secondary
market for any particular instrument.
[ICON] FUND MANAGEMENT
--------------------------------------------------------------------------------
The Fund has retained the Investment Manager --
Morgan Stanley Dean Witter Investment 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 address is
1221 Avenue of the Americas, New York, NY 10020.
The Fund is managed by the Taxable Fixed-Income team.
Current members of the team include W. David
Armstrong, a Managing Director of the Investment
Manager, Paul F. O'Brien, an Executive Director of
the
Investment Manager, and David S. Horowitz, a Vice President of the Investment
Manager.
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, 2001, the Fund
accrued total compensation to the Investment Manager amounting to 0.55% of the
Fund's average daily net assets.
7
[Sidebar]
CONTACTING A FINANCIAL ADVISOR
If you are new to the Morgan Stanley Family of Funds and would like to contact a
Financial Advisor, call toll-free 1-866-MORGAN8 for the telephone number of the
Morgan Stanley office nearest you. You may also access our office locator on our
Internet site at:
www.morganstanley.com/funds
[End Sidebar]
Shareholder Information
[ICON] PRICING FUND SHARES
--------------------------------------------------------------------------------
The price of Fund shares (excluding sales charges), called "net asset value," is
based on the value of the Fund's portfolio securities. While the assets of each
Class are invested in a single portfolio of securities, the net asset value of
each Class will differ because the Classes have different ongoing distribution
fees.
The net asset value per share of the Fund is determined once daily at 4:00 p.m.
Eastern time on each day that the New York Stock Exchange is open (or, on days
when the New York Stock Exchange closes prior to 4:00 p.m., at such earlier
time). Shares will not be priced on days that the New York Stock Exchange is
closed.
The value of the Fund's portfolio securities is based on the securities' market
price when available. When a market price is not readily available, including
circumstances under which the Investment Manager determines that a security's
market price is not accurate, a portfolio security is valued at its fair value,
as determined under procedures established by the Fund's Board of Trustees. In
these cases, the Fund's net asset value will reflect certain portfolio
securities' fair value rather than their market price.
An exception to the Fund's general policy of using market prices concerns its
short-term debt portfolio securities. Debt securities with remaining maturities
of sixty days or less at the time of purchase are valued at amortized cost.
However, if the cost does not reflect the securities' market value, these
securities will be valued at their fair value.
[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 Financial Advisor or
other authorized financial representative. Your
Financial Advisor will assist you, step-by-step, with
the procedures to invest in the Fund. You may also
purchase shares directly by calling the Fund's
transfer agent and requesting an application.
Because every investor has different immediate
financial needs and long-term investment goals, the
Fund offers investors four Classes of shares: Classes
A, B, C and D. Class D shares are only offered to a
limited group of investors. Each Class of shares
offers a distinct structure of sales charges,
distribution and service fees, and other features
that are designed to address a variety of needs. Your
Financial Advisor or other authorized financial
representative can help you decide which Class may be
most appropriate for you. When
purchasing Fund shares, you must specify which Class of shares you wish to
purchase.
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. If you purchase Fund shares through a
Financial Advisor, you begin earning dividends on the fourth business day
following placement of your purchase order. If you purchase Fund shares through
the Fund's transfer agent, you begin earning dividends on the next business day
following placement of your order. We reserve the right to reject any order for
the purchase of Fund shares.
8
[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 Financial Advisor for
further information about this service.
[End Sidebar]
[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*
--------------------------------------------------------------------------------
[Download Table]
* PROVIDED YOUR SCHEDULE OF INVESTMENTS TOTALS $1,000 IN
TWELVE MONTHS.
There is no minimum investment amount if you purchase Fund shares through:
(1) the Investment Manager's mutual fund asset allocation plan, (2) a program,
approved by the Fund's distributor, in which you pay an asset-based fee for
advisory, administrative and/or brokerage services, (3) the following programs
approved by the Fund's distributor: (i) qualified state tuition plans described
in Section 529 of the Internal Revenue Code and (ii) certain other investment
programs that do not charge an asset-based fee, or (4) 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
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 Federal
Securities Trust.
- Mail the letter and check to Morgan Stanley Trust at P.O. Box 1040, Jersey
City, NJ 07303.
9
[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. In
addition, Class A shares of the Fund may be exchanged for shares of an FSC Fund
(funds subject to a front-end sales charge). See the inside back cover of this
PROSPECTUS for each Morgan Stanley Fund's designation as a Multi-Class Fund,
No-Load Fund, Money Market Fund or FSC Fund. If a Morgan Stanley Fund is not
listed, consult the inside back cover of that fund's current prospectus for its
designation.
Exchanges may be made after shares of the fund acquired by purchase have been
held for thirty days. There is no waiting period for exchanges of shares
acquired by exchange or dividend reinvestment. The current prospectus for each
fund describes its investment objective(s), policies and investment minimums,
and should be read before investment. Since exchanges are available only into
continuously offered Morgan Stanley Funds, exchanges are not available into any
new Morgan Stanley Fund during its initial offering period, or when shares of a
particular Morgan Stanley Fund are not being offered for purchase.
Exchange Procedures. You can process an exchange by contacting your Morgan
Stanley Financial Advisor or other authorized financial representative.
Otherwise, you must forward an exchange privilege authorization form to the
Fund's transfer agent -- Morgan Stanley Trust -- 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 Fund (except a Money Market Fund) is made on
the basis of the next calculated net asset values of the funds involved after
the exchange instructions are accepted. When exchanging into a Money Market
Fund, the Fund's shares are sold at their next calculated net asset value and
the Money Market Fund's shares are purchased at their net asset value on the
following business day.
The Fund may terminate or revise the exchange privilege upon required notice.
The check writing privilege is not available for Money Market Fund shares you
acquire in an exchange.
Telephone Exchanges. For your protection when calling Morgan Stanley Trust, 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 Financial Advisor or other authorized financial
representative regarding restrictions on the exchange of such shares.
10
Tax Considerations of Exchanges. If you exchange shares of the Fund for shares
of another Morgan Stanley 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.
Limitations on Exchanges. Certain patterns of past exchanges and/or purchase or
sale transactions involving the Fund or other Morgan Stanley Funds may result in
the Fund limiting or prohibiting, at its discretion, additional purchases and/or
exchanges. Determinations in this regard may be made based on the frequency or
dollar amount of the previous exchanges or purchase or sale transactions. You
will be notified in advance of limitations on 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 Fund that
are exchanged for shares of another.
For further information regarding exchange privileges, you should contact your
Morgan Stanley 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
Financial Advisor 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 name of the Fund;
- 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.
------------------------------------------------------------------------------------
11
[Download Table]
Options Procedures
------------------------------------------------------------------------------------
By Letter, continued 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 Trust. (You
should contact Morgan Stanley Trust 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 Trust 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 Family of
Withdrawal Plan Funds has a total market value of at least $10,000, you may
[ICON] 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 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, your sale will not be effected until it has been verified
that the check has been honored.
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.
12
[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 Fund that you own.
Contact your Morgan Stanley Financial Advisor for further information about this
service.
[End Sidebar]
However, before the Fund sells your shares in this manner, we will notify you
and allow you sixty days to make an additional investment in an amount that will
increase the value of your account to at least the required amount before the
sale is processed. No CDSC will be imposed on any involuntary sale.
Margin Accounts. If you have pledged your Fund shares in a margin account,
contact your Morgan Stanley 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 interest from
fixed-income investments. These amounts are passed
along to Fund shareholders as "income dividend
distributions." The Fund realizes capital gains
whenever it sells securities for a higher price than
it paid for them. These amounts may be passed along
as "capital gain distributions."
The Fund declares income dividends separately for
each Class. Distributions paid on Class A and
Class D shares usually will be higher than for
Class B and Class C because distribution fees that
Class B and Class C pay are higher. Normally, income
dividends are declared on each day the New York Stock
Exchange is open for business, and are distributed to
shareholders monthly. Capital gains, if any, are
usually distributed in December. The Fund,
however, may retain and reinvest any long-term capital gains. The Fund may at
times make payments from sources other than income or capital gains that
represent a return of a portion of your investment.
Distributions are reinvested automatically in additional shares of the same
Class and automatically credited to your account, unless you request in writing
that all distributions be paid in cash. If you elect the cash option, processing
of your dividend checks begins immediately following the monthly payment date,
and the Fund will mail a monthly dividend check to you normally during the first
seven days of the following month. No interest will accrue on uncashed checks.
If you wish to change how your distributions are paid, your request should be
received by the Fund's transfer agent, Morgan Stanley Trust, at least five
business days prior to the record date of the distributions.
[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 Fund.
13
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
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 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
(approximately 30% currently) 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 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:
[Enlarge/Download Table]
Maximum
Class Sales Charge Annual 12b-1 Fee
--------------------------------------------------------------------------------------------------------------
A Maximum 4.25% 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 0.85%
--------------------------------------------------------------------------------------------------------------
C 1.0% CDSC during the first year 0.85%
--------------------------------------------------------------------------------------------------------------
D None None
--------------------------------------------------------------------------------------------------------------
14
[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]
CLASS A SHARES Class A shares are sold at net asset value plus an initial sales
charge of up to 4.25%. 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. This fee is lower than the distribution
fee paid by Class B or Class C.
The Fund will not accept a purchase order for Class A shares that qualifies for
investment in Class D.
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:
[Download Table]
Front-End Sales Charge
------------------------------------------------
Amount of Percentage of Approximate Percentage
Single Transaction Public Offering Price of Net Amount Invested
---------------------------------------------------------------------------------
Less than $25,000 4.25% 4.44%
---------------------------------------------------------------------------------
$25,000 but less than $50,000 4.00% 4.17%
---------------------------------------------------------------------------------
$50,000 but less than $100,000 3.50% 3.63%
---------------------------------------------------------------------------------
$100,000 but less than $250,000 2.75% 2.83%
---------------------------------------------------------------------------------
$250,000 but less than $500,000 2.25% 2.30%
---------------------------------------------------------------------------------
$500,000 but less than $1
million 1.75% 1.78%
---------------------------------------------------------------------------------
$1 million and over 0.00% 0.00%
---------------------------------------------------------------------------------
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 (or
Class A shares purchased at
15
$1 million or more), and 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 Financial Advisor or other authorized
financial representative (or Morgan Stanley Trust if you purchase directly
through the Fund), at the time a purchase order is placed, that the purchase
qualifies for the reduced sales 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 Morgan Stanley DW
Inc. ("Morgan Stanley DW") 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 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 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 Trust provides discretionary trustee
services.
- Persons participating in a fee-based investment program (subject to all of its
terms and conditions, including termination fees, and 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.
- Qualified state tuition plans described in Section 529 of the Internal Revenue
Code and donor-advised charitable gift funds (subject to all applicable terms
and conditions) and certain other investment programs that do not charge an
asset-based fee and have been approved by the Fund's distributor.
- Employer-sponsored employee benefit plans, whether or not qualified under the
Internal Revenue Code, for which (i) Morgan Stanley Trust serves as trustee
(ii) Morgan Stanley's Retirement Plan Services serves as recordkeeper under a
written Recordkeeping Services Agreement or (iii) an entity independent from
Morgan Stanley serves as recordkeeper under an alliance or similar agreement
with Morgan Stanley's Retirement Plan Services (together, "Morgan Stanley
Eligible Plans"), provided that, in the case of (i) and (ii) above, any such
plan has at least 200 eligible employees.
16
[Sidebar]
CONTINGENT DEFERRED SALES CHARGE OR CDSC
A fee you pay when you sell shares of certain Morgan Stanley Funds purchased
without an initial sales charge. This fee declines the longer you hold your
shares as set forth in the table.
[End Sidebar]
-A Morgan Stanley 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 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 or Trustees of the Morgan Stanley 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.
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.
The Fund will generally not accept a purchase order for Class B shares in the
amount of $100,000 or more.
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.
17
- Sales in connection with the following retirement plan "distributions":
(i) lump-sum or other distributions from a qualified corporate or
self-employed retirement plan following retirement (or, in the case of a "key
employee" of a "top heavy" plan, following attainment of age 59 1/2); (ii)
distributions from an IRA or 403(b) Custodial Account following attainment of
age 59 1/2 ; or (iii) a tax-free return of an excess IRA contribution (a
distribution does not include a direct transfer of IRA, 403(b) Custodial
Account or retirement plan assets to a successor custodian or trustee).
- Sales of shares held for you as a participant in a Morgan Stanley 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 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.
- Sales of shares if you simultaneously invest the proceeds in the Investment
Manager's mutual fund asset allocation program, pursuant to which investors
pay an asset-based fee. Any shares you acquire in connection with the
Investment Manager's mutual fund asset allocation program are subject to all
of the terms and conditions of that program, including termination fees, and
mandatory sale or transfer restrictions on termination.
All waivers will be granted only following the Fund's distributor receiving
confirmation of your entitlement. If you believe you are eligible for a CDSC
waiver, please contact your Financial Advisor or call (800) 869-NEWS.
Distribution Fee. Class B shares also are subject to an annual distribution
(12b-1) fee of 0.85% 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. This fee is higher than the annual distribution fee paid by Class A.
Conversion Feature. After ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund with no initial sales charge. The
ten year period runs from the last day of the month in which the shares were
purchased, or in the case of Class B shares acquired through an exchange, from
the last day of the month in which the original Class B shares were purchased;
the shares will convert to Class A shares based on their relative net asset
values in the month following the ten year period. At the same time, an equal
proportion of Class B shares acquired through automatically reinvested
distributions will convert to Class A shares on the same basis. (Class B shares
held before May 1, 1997, however, will convert to Class A shares in May 2007.)
In the case of Class B shares held in a Morgan Stanley 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 Fund
purchased by that plan.
18
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 the month) during which you held shares of a fund that does NOT
charge a CDSC WILL NOT BE COUNTED. Thus, in effect the "holding period" for
purposes of calculating the CDSC is frozen upon exchanging into a fund that does
not charge a CDSC.
For example, if you held Class B shares of the Fund for one year, exchanged to
Class B of another Morgan Stanley 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 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. The Fund will not accept
a purchase order for Class C shares in the amount of $1 million or more.
Distribution Fee. Class C shares are subject to an annual distribution (12b-1)
fee of 0.85% of the average daily net assets of that Class. This fee is higher
than the annual distribution fee paid by Class A. 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 Morgan Stanley 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
termination fees, and mandatory sale or transfer restrictions on termination)
pursuant to which they pay an asset-based fee.
19
- Persons participating in a fee-based investment program (subject to all of its
terms and conditions, including termination fees, and 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. With respect to Class D shares held
through the Morgan Stanley Choice Program, at such time as those Fund shares
are no longer held through the program, the shares will be automatically
converted into Class A shares (which are subject to higher expenses than
Class D shares) based on the then current relative net asset values of the two
Classes.
- Certain investment programs that do not charge an asset-based fee and have
been approved by the Fund's distributor. However, Class D shares are not
offered for investments made through Section 529 plans or donor-advised
charitable gift funds (regardless of the size of the investment).
- 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 Morgan Stanley DW.
- 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.
A purchase order meeting the requirements for investment in Class D will only be
accepted for Class D shares.
Meeting Class D Eligibility Minimums. To meet the $5 million ($25 million for
Morgan Stanley 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 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 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.
(Class D shares are offered without any distribution fee). 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 periods indicated. Certain information reflects
financial results for a single Fund share throughout each period. 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 Deloitte & Touche LLP, independent
auditors, whose report, along with the Fund's financial statements, is included
in the annual report, which is available upon request.
Class A Shares
--------------------------------------------------------------------------------
[Enlarge/Download Table]
For the Period
For the Year Ended October 31, July 28, 1997*
------------------------------------------ through
2001 2000 1999 1998 October 31, 1998
-----------------------------------------------------------------------------------------------------------------------
Selected Per Share Data:
-----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.98 $9.01 $9.79 $9.45 $9.26
-----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
-----------------------------------------------------------------------------------------------------------------------
Net investment income 0.54 0.63 0.62 0.64 0.16
-----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 0.53 (0.03) (0.78) 0.34 0.19
-----------------------------------------------------------------------------------------------------------------------
Total income (loss) from investment operations 1.07 0.60 (0.16) 0.98 0.35
-----------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS FROM NET INVESTMENT INCOME (0.54) (0.63) (0.62) (0.64) (0.16)
-----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.51 $8.98 $9.01 $9.79 $9.45
-----------------------------------------------------------------------------------------------------------------------
Total Return+ 12.28% 6.97% (1.66)% 10.75% 3.78%(1)
-----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
-----------------------------------------------------------------------------------------------------------------------
Expenses 0.91%(3) 0.82%(3) 0.91%(3) 0.93%(3) 0.92%(2)
-----------------------------------------------------------------------------------------------------------------------
Net investment income 5.90%(3) 7.05%(3) 6.65%(3) 6.70%(3) 6.60%(2)
-----------------------------------------------------------------------------------------------------------------------
Supplemental Data:
-----------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $8,593 $4,821 $4,272 $4,894 $2,051
-----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 157% 64% 17% 13% 12%
-----------------------------------------------------------------------------------------------------------------------
[Download Table]
* THE DATE SHARES WERE FIRST ISSUED.
+ 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.
21
Class B Shares
--------------------------------------------------------------------------------
[Enlarge/Download Table]
For the Year Ended October 31,
----------------------------------------------------------------
2001 2000 1999 1998 1997*
---------------------------------------------------------------------------------------------------------------------
Selected Per Share Data:
---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.85 $8.87 $9.72 $9.36 $9.25
---------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
---------------------------------------------------------------------------------------------------------------------
Net investment income 0.47 0.55 0.55 0.58 0.59
---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 0.50 (0.02) (0.85) 0.36 0.11
---------------------------------------------------------------------------------------------------------------------
Total income (loss) from investment operations 0.97 0.53 (0.30) 0.94 0.70
---------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS FROM NET INVESTMENT INCOME (0.47) (0.55) (0.55) (0.58) (0.59)
---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.35 $8.85 $8.87 $9.72 $9.36
---------------------------------------------------------------------------------------------------------------------
Total Return+ 11.38% 6.26% (3.09)% 10.35% 7.89%
---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
---------------------------------------------------------------------------------------------------------------------
Expenses 1.56%(1) 1.57%(1) 1.55%(1) 1.54%(1) 1.53%
---------------------------------------------------------------------------------------------------------------------
Net investment income 5.25%(1) 6.30%(1) 6.01%(1) 6.09%(1) 6.41%
---------------------------------------------------------------------------------------------------------------------
Supplemental Data:
---------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $490,351 $456,418 $540,916 $639,212 $623,049
---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 157% 64% 17% 13% 12%
---------------------------------------------------------------------------------------------------------------------
[Download Table]
* PRIOR TO JULY 28, 1997, THE FUND ISSUED ONE CLASS OF SHARES. ALL SHARES OF THE
FUND HELD PRIOR TO THAT DATE HAVE BEEN DESIGNATED CLASS B SHARES.
+ 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.
22
Class C Shares
--------------------------------------------------------------------------------
[Enlarge/Download Table]
For the Period
For the Year Ended October 31, July 28, 1997*
--------------------------------------------- through
2001 2000 1999 1998 October 31, 1997
-----------------------------------------------------------------------------------------------------------------------
Selected Per Share Data:
-----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.93 $8.95 $9.80 $9.44 $9.26
-----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
-----------------------------------------------------------------------------------------------------------------------
Net investment income 0.48 0.56 0.56 0.58 0.15
-----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 0.50 (0.02) (0.85) 0.36 0.18
-----------------------------------------------------------------------------------------------------------------------
Total income (loss) from investment operations 0.98 0.54 (0.29) 0.94 0.33
-----------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS FROM NET INVESTMENT INCOME (0.48) (0.56) (0.56) (0.58) (0.15)
-----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.43 $8.93 $8.95 $9.80 $9.44
-----------------------------------------------------------------------------------------------------------------------
Total Return+ 11.33% 6.26% (3.03)% 10.30% 3.54%(1)
-----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
-----------------------------------------------------------------------------------------------------------------------
Expenses 1.56%(3) 1.57%(3) 1.55%(3) 1.54%(3) 1.52%(2)
-----------------------------------------------------------------------------------------------------------------------
Net investment income 5.25%(3) 6.30%(3) 6.01%(3) 6.09%(3) 5.86%(2)
-----------------------------------------------------------------------------------------------------------------------
Supplemental Data:
-----------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $15,248 $10,191 $10,995 $7,204 $721
-----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 157% 64% 17% 13% 12%
-----------------------------------------------------------------------------------------------------------------------
[Download Table]
* THE DATE SHARES WERE FIRST ISSUED.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET
VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
23
Class D Shares
--------------------------------------------------------------------------------
[Enlarge/Download Table]
For the Period
For the Year Ended October 31, July 28, 1997*
------------------------------------------ through
2001 2000 1999 1998 October 31, 1997
-----------------------------------------------------------------------------------------------------------------------
Selected Per Share Data:
-----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.84 $8.86 $9.69 $9.33 $9.26
-----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
-----------------------------------------------------------------------------------------------------------------------
Net investment income 0.55 0.63 0.63 0.66 0.17
-----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 0.49 (0.02) (0.83) 0.36 0.07
-----------------------------------------------------------------------------------------------------------------------
Total income (loss) from investment operations 1.04 0.61 (0.20) 1.02 0.24
-----------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS FROM NET INVESTMENT INCOME (0.55) (0.63) (0.63) (0.66) (0.17)
-----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.33 $8.84 $8.86 $9.69 $9.33
-----------------------------------------------------------------------------------------------------------------------
Total Return+ 12.23% 7.17% (2.08)% 11.30% 2.62%(1)
-----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
-----------------------------------------------------------------------------------------------------------------------
Expenses 0.71%(3) 0.72%(3) 0.70%(3) 0.69%(3) 0.63%(2)
-----------------------------------------------------------------------------------------------------------------------
Net investment income 6.10%(3) 7.15%(3) 6.86%(3) 6.94%(3) 6.40%(2)
-----------------------------------------------------------------------------------------------------------------------
Supplemental Data:
-----------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $6,206 $4,378 $5,590 $1,956 $69
-----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 157% 64% 17% 13% 12%
-----------------------------------------------------------------------------------------------------------------------
[Download Table]
* THE DATE SHARES WERE FIRST ISSUED.
+ 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
Morgan Stanley Funds
-----------------------------------------
- GLOBAL/INTERNATIONAL FUNDS
Competitive Edge Fund - "Best Ideas" Portfolio
European Growth Fund
Fund of Funds - International Portfolio
Global Dividend Growth Securities
Global Utilities Fund
International Fund
International SmallCap Fund
International Value Equity Fund
Japan Fund
Latin American Growth Fund
Pacific Growth Fund
- GROWTH FUNDS
21st Century Trend Fund
Aggressive Equity Fund
All Star Growth Fund
American Opportunities Fund
Capital Growth Securities
Developing Growth Securities Trust
Financial Services Trust
Growth Fund
Health Sciences Trust
Information Fund
KLD Social Index Fund
Market Leader Trust
Mid-Cap Equity Trust
Mid-Cap Value Fund
Nasdaq-100 Index Fund
Natural Resource Development Securities
New Discoveries Fund
Next Generation Trust
Small Cap Growth Fund
Special Value Fund
Tax-Managed Growth Fund
Technology Fund
- GROWTH + INCOME FUNDS
Balanced Growth Fund
Balanced Income Fund
Convertible Securities Trust
Dividend Growth Securities
Equity Fund
Fund of Funds - Domestic Portfolio
Income Builder Fund
Real Estate Fund
S&P 500 Index Fund
S&P 500 Select Fund
Strategist Fund
Total Market Index Fund
Total Return Trust
Utilities Fund
Value Fund
Value-Added Market Series/ Equity Portfolio
- INCOME FUNDS
Diversified Income Trust
Federal Securities Trust
High Yield Securities
Intermediate Income Securities
Limited Duration Fund (NL)
Liquid Asset Fund (MM)
North American Government Income Trust
Short-Term U.S. Treasury Trust
U.S. Government Money Market Trust (MM)
U.S. Government Securities Trust
- TAX-FREE INCOME FUNDS
California Tax-Free Daily Income Trust (MM)
California Tax-Free Income Fund
Hawaii Municipal Trust (FSC)
Limited Term Municipal Trust (NL)
Multi-State Municipal Series Trust (FSC)
New York Municipal Money Market Trust (MM)
New York Tax-Free Income Fund
Tax-Exempt Securities Trust
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 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.
[MORGAN STANLEY LOGO]
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
Financial Advisor or by visiting our Internet site at:
www.morganstanley.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 (202) 942-8090. Reports and
other information about the Fund are available on the EDGAR Database on the
SEC's Internet site (www.sec.gov) and copies of this information may be
obtained, after paying a duplicating fee, by electronic request at the following
E-mail address: publicinfo@sec.gov, or by writing the Public Reference Section
of the SEC, Washington, DC 20549-0102.
TICKER SYMBOLS:
[Download Table]
Class A: FDLAX Class C: FDLCX
--------------------- ---------------------
Class B: FDLBX Class D: FDLDX
--------------------- ---------------------
(THE FUND'S INVESTMENT COMPANY ACT FILE NO. IS 811-4917)
Morgan Stanley
Federal Securities Trust
[COVER PHOTO]
A MUTUAL FUND THAT
SEEKS A HIGH LEVEL
OF CURRENT INCOME
Prospectus - December 31, 2001
[Download Table]
STATEMENT OF ADDITIONAL INFORMATION MORGAN STANLEY
DECEMBER 31, 2001 FEDERAL SECURITIES
TRUST
--------------------------------------------------------------------------------
This STATEMENT OF ADDITIONAL INFORMATION is not a prospectus. The PROSPECTUS
(dated December 31, 2001) for the Morgan Stanley Federal Securities Trust may be
obtained without charge from the Fund at its address or telephone number listed
below or from Morgan Stanley DW Inc. at any of its branch offices.
Morgan Stanley
Federal Securities Trust
c/o Morgan Stanley Trust
Harborside Financial Center, Plaza Two,
Jersey City, NJ 07311
(800) 869-NEWS
TABLE OF CONTENTS
--------------------------------------------------------------------------------
[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.................. 11
III. Management of the Fund................................. 13
A. Board of Trustees...................................... 13
B. Management Information................................. 13
C. Compensation........................................... 18
IV. Control Persons and Principal Holders of Securities..... 19
V. Investment Management and Other Services................. 20
A. Investment Manager..................................... 20
B. Principal Underwriter.................................. 20
C. Services Provided by the Investment Manager............ 21
D. Dealer Reallowances.................................... 22
E. Rule 12b-1 Plan........................................ 22
F. Other Service Providers................................ 26
G. Codes of Ethics........................................ 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.
"DISTRIBUTOR"--Morgan Stanley Distributors Inc., a wholly-owned broker-dealer
subsidiary of Morgan Stanley.
"FINANCIAL ADVISORS"--Morgan Stanley authorized financial services
representatives.
"FUND"--Morgan Stanley Federal Securities Trust, a registered open-end
investment company.
"INDEPENDENT TRUSTEES"--Trustees who are not "interested persons" (as defined by
the Investment Company Act) of the Fund.
"INVESTMENT MANAGER"--Morgan Stanley Investment Advisors Inc., a wholly-owned
investment advisor subsidiary of Morgan Stanley.
"MORGAN STANLEY"--Morgan Stanley Dean Witter & Co., a preeminent global
financial services firm.
"MORGAN STANLEY & CO."--Morgan Stanley & Co. Incorporated, a wholly-owned
broker-dealer subsidiary of Morgan Stanley.
"MORGAN STANLEY DW"--Morgan Stanley DW Inc., a wholly-owned broker-dealer
subsidiary of MSDW.
"MORGAN STANLEY 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.
"MORGAN STANLEY SERVICES"--Morgan Stanley Services Company Inc., a wholly-owned
fund services subsidiary of the Investment Manager.
"TRANSFER AGENT"--Morgan Stanley Trust, a wholly-owned transfer agent subsidiary
of Morgan Stanley.
"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 November 20, 1986, with the name Dean Witter Government
Securities Plus. On August 17, 1992, the Fund's name was changed by the Trustees
to Dean Witter Federal Securities Trust. Effective June 22, 1998, the Fund's
name was changed to Morgan Stanley Dean Witter Federal Securities Trust.
Effective June 18, 2001, the Fund's name was changed to Morgan Stanley Federal
Securities 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 a high level of current income.
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."
COLLATERALIZED MORTGAGE OBLIGATIONS. The Fund may invest in CMOs--
collateralized mortgage obligations. CMOs are debt obligations collateralized by
mortgage loans or mortgage pass-through securities (collectively "Mortgage
Assets"). Payments of principal and interest on the Mortgage Assets and any
reinvestment income are used to make payments on the CMOs. CMOs are issued in
multiple classes. Each class has a specific fixed or floating coupon rate and a
stated maturity or final distribution date. The principal and interest on the
Mortgage Assets may be allocated among the classes in a number of different
ways. Certain classes will, as a result of the collection, have more predictable
cash flows than others. As a general matter, the more predictable the cash flow,
the lower the yield relative to other Mortgage Assets. The less predictable the
cash flow, the higher the yield and the greater the risk. The Fund may invest in
any class of CMO.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. Certain CMOs may have variable or floating
interest rates and others may be stripped (securities which provide only the
principal or interest feature of the underlying security).
Certain mortgage-backed securities in which the Fund may invest (E.G.,
certain classes of CMOs) may increase or decrease in value substantially with
changes in interest rates and/or the rates of prepayment. In addition, if the
collateral securing CMOs or any third party guarantees are insufficient to make
payments, the Fund could sustain a loss.
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 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.
4
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 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 incurs an obligation
to buy the security underlying the option from the purchaser of the put, at the
option's exercise price at any time during the option period, at the purchaser's
election. Through the writing of a put option, the Fund would receive income
from the premium paid by purchasers. The potential gain on a covered put option
is limited to the premium received on the option (less the commissions paid on
the transaction). During the option period, the Fund may be required, at any
time, to make payment of the exercise price against delivery of the underlying
security. A put option is "covered" if the Fund maintains cash, Treasury bills
or other liquid portfolio securities with a value equal to the exercise price in
a segregated account on the Fund's books, or holds a put on the same security as
the put written where the exercise price of the put held is equal to or greater
than the exercise price of the put written. The 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.
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 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
5
such calls not been written. During the option period, the covered call writer
has, in return for the premium on the option, given up the opportunity for
capital appreciation above the exercise price should the market price of the
underlying security increase, but has retained the risk of loss should the price
of the underlying security decline. The covered put writer also retains the risk
of loss should the market value of the underlying security decline below the
exercise price of the option less the premium received on the sale of the
option. In both cases, the writer has no control over the time when it may be
required to fulfill its obligation as a writer of the option. Prior to exercise
or expiration, an option position can only be terminated by entering into a
closing purchase or sale transaction. Once an option writer has received an
exercise notice, it cannot effect a closing purchase transaction in order to
terminate its obligation under the option and must deliver or receive the
underlying securities at the exercise price.
The Fund's ability to close out its position as a writer of an option is
dependent upon the existence of a liquid secondary market on option exchanges.
There is no assurance that such a market will exist, particularly in the case of
OTC options.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in options, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. In the case of OTC
options, if the transacting dealer fails to make or take delivery of the
securities underlying an option it has written, in accordance with the terms of
that option, due to insolvency or otherwise, the Fund would lose the premium
paid for the option as well as any anticipated benefit of the transaction.
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security which may be
written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). An exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
There can be no assurance that a liquid secondary market will exist for a
particular option at any specific time.
INTEREST RATE FUTURES CONTRACTS. As a purchaser of an interest rate futures
contract ("futures contracts"), the Fund incurs an obligation to take delivery
of a specified amount of the obligation underlying the futures contract at a
specified time in the future for a specified price. As a seller of a futures
contract, the Fund incurs an obligation to deliver the specified amount of the
underlying obligation at a specified time in return for an agreed upon price.
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
6
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, 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, U.S. government
securities or other liquid portfolio securities, called "variation margin,"
which are reflective of price fluctuations in the futures contract.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write call and put
options on futures contracts and enter into closing transactions with respect to
such options to terminate an existing position. An option on a futures contract
gives the purchaser the right (in return for the premium paid), and the writer
the obligation, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option is accompanied by delivery of the accumulated balance in
the writer's futures margin account, which represents the amount by which the
market price of the futures contract at the time of exercise exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.
The writer of an option on a futures contract is required to deposit initial
and variation margin pursuant to requirements similar to those applicable to
futures contracts. Premiums received from the writing of an option on a futures
contract are included in initial margin deposits.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Fund may not
enter into futures contracts or purchase related options thereon if, immediately
thereafter, the amount committed to margin plus the amount paid for premiums for
unexpired options on futures contracts exceeds 5% of the value of the Fund's
total assets, after taking into account unrealized gains and unrealized losses
on such contracts it has entered into, provided, however, that in the case of an
option that is in-the-money (the exercise price of the call (put) option is less
(more) than the market price of the underlying security) at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%.
However, there is no overall limitation on the percentage of the Fund's net
assets which may be subject to a hedge position.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. The prices
of securities and indexes subject to futures contracts (and thereby the futures
contract prices) may correlate imperfectly with the behavior of the cash prices
of the Fund's portfolio securities. Also, prices of futures contracts may not
move in tandem with the changes in prevailing interest rates and/or market
movements against which the Fund seeks a hedge. A correlation may also be
distorted (a) temporarily, by short-term traders seeking to profit from the
difference between a contract or security price objective and their cost of
borrowed funds; (b) by investors in futures contracts electing to close out
their contracts through offsetting transactions rather than meet margin deposit
requirements; (c) by investors in futures contracts opting to make or take
delivery of underlying securities rather than engage in closing transactions,
thereby reducing liquidity of the futures market; and (d) temporarily, by
speculators who view the deposit requirements in the futures markets as less
onerous than margin requirements in the cash market. Due
7
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.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
If the Fund maintains a short position in a futures contract or has sold a
call option in a futures contract, it will cover this position by holding, in a
segregated account maintained on the books of the Fund, cash, U.S. government
securities or other liquid portfolio securities equal in value (when added to
any initial or variation margin on deposit) to the market value of the
securities underlying the futures contract or the exercise price of the option.
Such a position may also be covered by owning the securities underlying the
futures contract, or by holding a call option permitting the Fund to purchase
the same contract at a price no higher than the price at which the short
position was established.
In addition, if the Fund holds a long position in a futures contract or has
sold a put option on a futures contract, it will hold cash, U.S. government
securities or other liquid portfolio securities equal to the purchase price of
the contract or the exercise price of the put option (less the amount of initial
or variation margin on deposit) in a segregated account maintained on the books
of the Fund. Alternatively, the Fund could cover its long position by purchasing
a put option on the same futures contract with an exercise price as high or
higher than the price of the contract held by the Fund.
8
MONEY MARKET SECURITIES. In addition to the short-term fixed-income
securities in which the Fund may otherwise invest, the Fund may invest in
various money market securities for cash management purposes or when assuming a
temporary defensive position, which among others may include commercial paper,
bank acceptances, bank obligations, corporate debt securities, certificates of
deposit, U.S. government securities and obligations of savings institutions.
Such securities are limited to:
U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed as to
principal and interest by the United States or its agencies (such as the
Export-Import Bank of the United States. Federal Housing Administration and
Government National Mortgage Association) or its instrumentalities (such as the
Federal Home Loan Bank), including Treasury bills, notes and bonds;
BANK OBLIGATIONS. Obligations (including certificates of deposit, time
deposits and bankers' acceptances) of banks subject to regulation by the U.S.
Government and having total assets of $1 billion or more, and instruments
secured by such obligations, not including obligations of foreign branches of
domestic banks except to the extent below;
EURODOLLAR CERTIFICATES OF DEPOSIT. Eurodollar certificates of deposit
issued by foreign branches of domestic banks having total assets of $1 billion
or more;
OBLIGATIONS OF SAVINGS INSTITUTIONS. Certificates of deposit of savings
banks and savings and loan associations, having total assets of $1 billion or
more;
FULLY INSURED CERTIFICATES OF DEPOSIT. Certificates of deposit of banks and
savings institutions, having total assets of less than $1 billion, if the
principal amount of the obligation is federally insured by the Bank Insurance
Fund or the Savings Association Insurance Fund (each or which is administered by
the FDIC), limited to $100,000 principal amount per certificate and to 10% or
less of the Fund's total assets in all such obligations and in all illiquid
assets in the aggregate;
COMMERCIAL PAPER. Commercial paper rated within the two highest grades by
Standard & Poor's Corporation ("S&P") or 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 approved by the
Trustees 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. 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.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. For purposes other than
meeting redemptions, the Fund may invest up to 10% of its total assets in
reverse repurchase agreements and dollar rolls.
9
Reverse repurchase agreements involve sales by the Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. Generally, the effect of such a transaction is that
the Fund can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities.
The Fund may enter into dollar rolls in which the Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. The Fund is compensated by the difference between the current sales price
and the lower forward price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale.
The Fund will establish a segregated account in which it will maintain cash,
U.S. government securities or other liquid portfolio securities equal in value
to its obligations in respect of reverse repurchase agreements and dollar rolls.
Reverse repurchase agreements and dollar rolls involve the risk that the market
value of the securities the Fund is obligated to repurchase under the agreement
may decline below the repurchase price. In the event the buyer of securities
under a reverse repurchase agreement or dollar roll files for bankruptcy or
becomes insolvent, the Fund's use of the proceeds of the agreement may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls are speculative techniques
involving leverage, and are considered borrowings by the Fund.
LEVERAGING. The Fund may borrow money, but only from a bank and in an
amount up to 25% of the value of the Fund's total assets taken at the lower of
market value or cost, not including the amount borrowed, in an effort to obtain
additional income by leveraging its investments through purchasing securities
with the borrowed funds. These borrowings will be subject to current margin
requirements of the Federal Reserve Board and where necessary the Fund may use
any or all of its securities as collateral for such borrowings. Any investment
gains made with the additional monies in excess of interest paid will cause the
net asset value of the Fund's shares to rise to a greater extent than would
otherwise be the case. Conversely, if the investment performance of the
additional monies fails to cover their cost to the Fund, net asset value will
decrease to a greater extent than would otherwise be the case. This is the
speculative factor involved in leverage.
The investment policy provides that the Fund may not purchase or sell a
security on margin. The margin and bank borrowing restrictions will prevent the
ordinary purchase of a security which involves a cash borrowing from a broker of
any part of the purchase price of a security.
The Fund may also borrow from banks as a temporary measure for extraordinary
or emergency purposes, and for these purposes and leveraging combined, in no
event an amount greater than 25% of the value of the Fund's total assets.
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. The Fund will not lend more than 25% of the
value of its net assets.
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
10
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.
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.
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, as amended (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 a high level of current income.
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
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 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 or commodities contracts except that
the Fund may purchase or sell (write) interest rate futures contracts and
related options thereon.
11
7. Borrow money, except from banks for investment purposes or as a
temporary measure for extraordinary or emergency purposes in an amount up to
25% of the Fund's total assets, within the limits set forth in the
Investment Company Act or enter into reverse repurchase agreements in an
amount exceeding 10% of the Fund's total assets other than for purposes of
meeting redemptions.
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 reverse repurchase agreement;
(b) borrowing money; or (c) purchasing any securities on a when-issued,
delayed delivery or forward commitment basis.
10. Make loans of money or securities, except: (a) by the purchase of
publicly distributed debt obligations; (b) by investment in repurchase or
reverse purchase agreements; or (c) by lending its portfolio securities.
11. Make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without payment
of any further consideration, for securities of the same issue as, and equal
in amount to, the securities sold short, and unless not more than 10% of the
Fund's net assets (taken at market value) is held as collateral for such
sales at any one time.
12. Purchase securities on margin, except short-term loans as are
necessary for the clearance of portfolio securities. The deposit or payment
by the Fund of initial or variation margin in connection with futures
contracts or related options thereon is not considered the purchase of a
security on margin.
13. Engage in the underwriting of securities, except insofar as the
Fund may be deemed an underwriter under the Securities Act in disposing of a
portfolio security.
14. Invest for the purpose of exercising control or management of any
other issuer.
15. Invest more than 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 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.
18. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
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.
PORTFOLIO TURNOVER
For the fiscal years ended October 31, 2001 and 2000, the Fund's portfolio
turnover rates were 157% and 64%, respectively. This variation resulted from the
portfolio manager's response to varying market conditions during these periods.
12
III. MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------
A. BOARD OF TRUSTEES
The Board of Trustees of the Fund oversees the management of the Fund but
does not itself manage the Fund. The Trustees review various services provided
by or under the direction of the Investment Manager to ensure that the Fund's
general investment policies and programs are properly carried out. The Trustees
also conduct their review to ensure that administrative services are provided to
the Fund in a satisfactory manner.
Under state law, the duties of the Trustees are generally characterized as a
duty of loyalty and a duty of care. The duty of loyalty requires a Trustee to
exercise his or her powers in the interest of the Fund and not the Trustee's own
interest or the interest of another person or organization. A Trustee satisfies
his or her duty of care by acting in good faith with the care of an ordinarily
prudent person and in a manner the Trustee reasonably believes to be in the best
interest of the Fund and its shareholders.
B. MANAGEMENT INFORMATION
TRUSTEES AND OFFICERS. The Board of the Fund consists of nine
(9) Trustees. These same individuals also serve as directors or trustees for all
of the Morgan Stanley Funds. Six Trustees (67% 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, Morgan Stanley. These are the
"non-interested" or "independent" Trustees. The other three Trustees (the
"management Trustees") are affiliated with the Investment Manager.
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 Morgan Stanley Funds (there were 97 such funds
as of the calendar year ended December 31, 2000), are shown below.
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NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
----------------------------------------- -----------------------------------------------------
Michael Bozic (60) ..................... Retired; Director or Trustee of the Morgan Stanley
Trustee Funds; formerly Vice Chairman of Kmart Corporation
c/o Mayer, Brown & Platt (December 1998-October 2000), Chairman and Chief
Counsel to the Independent Trustees Executive Officer of Levitz Furniture Corporation
1675 Broadway (November 1995-November 1998) and President and Chief
New York, New York 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 Weirton Steel
Corporation.
Charles A. Fiumefreddo* (68) ........... Chairman, Director or Trustee and Chief Executive
Chairman of the Board, Officer of the Morgan Stanley Funds; formerly
Chief Executive Officer and Trustee Chairman, Chief Executive Officer and Director of the
c/o Morgan Stanley Trust Investment Manager, the Distributor and Morgan
Harborside Financial Center, Plaza Two, Stanley Services, Executive Vice President and
Jersey City, New Jersey Director of Morgan Stanley DW, Chairman and Director
of the Transfer Agent, and Director and/or officer of
various Morgan Stanley subsidiaries (until June
1998).
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[Enlarge/Download Table]
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
----------------------------------------- -----------------------------------------------------
Edwin J. Garn (69) ..................... Director or Trustee of the Morgan Stanley Funds;
Trustee formerly United States Senator (R-Utah)(1974-1992)
c/o Summit Ventures LLC and Chairman, Senate Banking Committee (1980-1986);
1 Utah Center formerly Mayor of Salt Lake City, Utah (1971-1974);
201 S. Main Street formerly Astronaut, Space Shuttle Discovery
Salt Lake City, Utah (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 Utah Regional
Advisory Board of Pacific Corp.; member of the board
of various civic and charitable organizations.
Wayne E. Hedien (67) ................... Retired; Director or Trustee of the Morgan Stanley
Trustee Funds; Director of The PMI Group, Inc. (private
c/o Mayer, Brown & Platt mortgage insurance); Trustee and Vice Chairman of The
Counsel to the Independent Trustees Field Museum of Natural History; formerly associated
1675 Broadway with the Allstate Companies (1966-1994), most
New York, New York recently as Chairman of The Allstate Corporation
(March 1993-December 1994) and Chairman and Chief
Executive Officer of its wholly-owned subsidiary,
Allstate Insurance Company (July 1989-December 1994);
director of various other business and charitable
organizations.
James F. Higgins* (53) ................. Chairman of the Individual Group of Morgan Stanley
Trustee (since August 2000); Director of the Transfer Agent,
c/o Morgan Stanley Trust the Distributor and Dean Witter Realty Inc.; Director
Harborside Financial Center, Plaza Two, or Trustee of the Morgan Stanley Funds (since June
Jersey City, New Jersey 2000); previously President and Chief Operating
Officer of the Private Client Group of Morgan Stanley
(May 1999-August 2000), President and Chief Operating
Officer of Individual Securities of Morgan Stanley
(February 1997-May 1999), President and Chief
Operating Officer of Dean Witter Securities of Morgan
Stanley (1995-February 1997) and Director (1985-1997)
of Morgan Stanley.
Dr. Manuel H. Johnson (52) ............. Senior Partner, Johnson Smick International, Inc., a
Trustee consulting firm; Co-Chairman and a founder of the
c/o Johnson Smick International, Inc. Group of Seven Council (G7C), an international
1133 Connecticut Avenue, N.W. economic commission; Chairman of the Audit Committee
Washington, D.C. and Director or Trustee of the Morgan Stanley Funds;
Director of 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 and
Assistant Secretary of the U.S. Treasury.
14
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NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
----------------------------------------- -----------------------------------------------------
Michael E. Nugent (65) ................. General Partner, Triumph Capital, L.P., a private
Trustee investment partnership; Chairman of the Insurance
c/o Triumph Capital, L.P. Committee and Director or Trustee of the Morgan
237 Park Avenue Stanley Funds; director/trustee of various investment
New York, New York companies managed by Morgan Stanley Investment
Management Inc. and Morgan Stanley Investments LP
(since July 2001); formerly Vice President, Bankers
Trust Company and BT Capital Corporation; director of
various business organizations.
Philip J. Purcell* (58) ................ Chairman of the Board of Directors and Chief
Trustee Executive Officer of Morgan Stanley, Morgan Stanley
1585 Broadway DW and Novus Credit Services Inc.; Director of the
New York, New York Distributor; Director or Trustee of the Morgan
Stanley Funds; Director of American Airlines, Inc.
and its parent company, AMR Corporation; Director
and/or officer of various Morgan Stanley subsidiar-
ies.
John L. Schroeder (71) ................. Retired; Chairman of the Derivatives Committee and
Trustee Director or Trustee of the Morgan Stanley Funds;
c/o Mayer, Brown & Platt Director of Citizens Communications Company
Counsel to the Independent Trustees (telecommunications company); formerly Executive Vice
1675 Broadway President and Chief Investment Officer of the Home
New York, New York Insurance Company (August 1991-September 1995).
Mitchell M. Merin (48) ................. President and Chief Operating Officer of Morgan
President Stanley Investment Management (since December 1998);
1221 Avenue of the Americas President and Director (since April 1997) and Chief
New York, New York Executive Officer (since June 1998) of the Investment
Manager and Morgan Stanley Services; 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
Morgan Stanley subsidiaries; President of the Morgan
Stanley Funds (since May 1999); Trustee of various
Van Kampen investment companies (since December
1999); previously Chief Strategic Officer of the
Investment Manager and Morgan Stanley Services and
Executive Vice President of the Distributor (April
1997-June 1998), Vice President of the Morgan Stanley
Funds (May 1997-April 1999), and Executive Vice
President of Dean Witter, Discover & Co.
15
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NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
----------------------------------------- -----------------------------------------------------
Barry Fink (46) ........................ General Counsel (since May 2000) and Managing
Vice President, Director (since December 2000) of Morgan Stanley
Secretary and General Counsel Investment Management; Managing Director (since
1221 Avenue of the Americas December 2000) and Secretary and General Counsel
New York, New York (since February 1997) and Director (since July 1998)
of the Investment Manager and Morgan Stanley
Services; Vice President, Secretary and General
Counsel of the Morgan Stanley Funds (since February
1997); Vice President and Secretary of the
Distributor; previously, Senior Vice President (March
1997-December 1999), First Vice President; Assistant
Secretary and Assistant General Counsel of the
Investment Manager and Morgan Stanley Services.
W. David Armstrong (43) ................ Managing Director of the Investment Manager and
Vice President Managing Director and member of the Interest Rate
One Tower Bridge, Research Team of Morgan Stanley Investments LP an
West Conshohocken, Pennsylvania affiliate of the Investment Manager; previously
Senior Vice President of Lehman Brothers (April
1995-February 1998). Vice President of various Morgan
Stanley Funds.
David S. Horowitz (28) ................. Vice President and member of the Mortgage and
Vice President Quantitative Research Team of the Investment Manager
One Tower Bridge, and Morgan Stanley Investments LP. Vice President of
West Conshohocken, Pennsylvania various Morgan Stanley Funds.
Paul F. O'Brien (45) ................... Executive Director of the Investment Manager and
Vice President member of the Interest Rate Research Team of Morgan
One Tower Bridge, Stanley Investments LP. Vice President of various
West Conshohocken, Pennsylvania Morgan Stanley Funds.
Thomas F. Caloia (55) .................. First Vice President and Assistant Treasurer of the
Treasurer Investment Manager, the Distributor and Morgan
c/o Morgan Stanley Trust Stanley Services; Treasurer of the Morgan Stanley
Harborside Financial Center, Plaza Two, Funds.
Jersey City, New Jersey
------------
*Denotes Trustees who are "interested persons" of the Fund as defined by the
Investment Company Act.
RONALD E. ROBISON, Managing Director, Chief Administrative Officer and
Director of the Investment Manager and Morgan Stanley Services and Chief
Executive Officer and Director of the Transfer Agent, ROBERT S. GIAMBRONE,
Executive Director of the Investment Manager, Morgan Stanley Services, the
Distributor and the Transfer Agent and Director of the Transfer Agent, JOSEPH J.
MCALINDEN, Managing Director and Chief Investment Officer of the Investment
Manager and Director of the Transfer Agent, JONATHAN R. PAGE and JAMES F.
WILLISON, Managing Directors of the Investment Manager, and KENTON J.
HINCHLIFFE, an Executive Director of the Investment Manager, are Vice Presidents
of the Fund.
In addition, A. THOMAS SMITH III, Managing Director and General Counsel of
the Investment Manager and Morgan Stanley Services, is a Vice President and
Assistant Secretary of the Fund, and TODD LEBO, LOU ANNE D. MCINNIS, CARSTEN
OTTO and RUTH ROSSI, Executive Directors and Assistant General Counsels of the
Investment Manager and Morgan Stanley Services, MARILYN K. CRANNEY, First Vice
President and Assistant General Counsel of the Investment Manager and Morgan
Stanley Services, and NATASHA KASSIAN and GEORGE SILFEN, Vice Presidents and
Assistant General Counsels of the Investment Manager and Morgan Stanley
Services, are Assistant Secretaries of the Fund.
16
INDEPENDENT DIRECTORS/TRUSTEES AND THE COMMITTEES. Law and regulation
establish both general guidelines and specific duties for the independent
directors/trustees. The Morgan Stanley Funds seek as independent
directors/trustees individuals of distinction and experience in business and
finance, government service or academia; these are people whose advice and
counsel are in demand by others and for whom there is often competition. To
accept a position on the funds' boards, such individuals may reject other
attractive assignments because the funds make substantial demands on their time.
All of the independent directors/trustees serve as members of the Audit
Committee. In addition, three of the directors/trustees, including two
independent directors/trustees, serve as members of the Derivatives Committee
and the Insurance Committee.
The independent directors/trustees are charged with recommending to the full
board approval of man-agement, advisory and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing Fund performance; checking on the pricing of portfolio securities,
brokerage commissions, transfer agent costs and performance, and trading among
Funds in the same complex; and approving fidelity bond and related insurance
coverage and allocations, as well as other matters that arise from time to time.
The independent directors/trustees are required to select and nominate
individuals to fill any independent director/trustee vacancy on the board of any
fund that has a Rule 12b-1 plan of distribution. Most of the Morgan Stanley
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 auditors; directing
investigations into matters within the scope of the independent auditors'
duties, including the power to retain outside specialists; re-viewing with the
independent auditors the audit plan and results of the auditing engagement;
approving professional services provided by the independent auditors and other
accounting firms prior to the performance of the services; reviewing the
independence of the independent auditors; 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/TRUSTEES FOR
ALL MORGAN STANLEY FUNDS. The independent directors/trustees and the Funds'
management believe that having the same independent directors/trustees for each
of the Morgan Stanley Funds avoids the duplication of effort that would arise
from having different groups of individuals serving as independent
directors/trustees for each of the funds or even of sub-groups of funds. They
believe that having the same individuals serve as independent directors/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
directors/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 directors/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 directors/trustees, of the caliber,
experience and business acumen of the individuals who serve as independent
directors/trustees of the Morgan Stanley 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
17
property for satisfaction of claims arising in connection with the affairs of
the Fund. With the exceptions stated, the Declaration of Trust provides that a
Trustee, officer, employee or agent is entitled to be indemnified against all
liability in connection with the affairs of the Fund.
C. COMPENSATION
The Fund pays each Independent Trustee an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Trustees, the Independent
Trustees or Committees of the Board of Trustees attended by the Trustee (the
Fund pays the Chairman of the Audit Committee an additional annual fee of $750
and the Chairmen of the Derivatives and Insurance Committee additional annual
fees of $500). If a Board meeting and a meeting of the Independent Trustees or a
Committee meeting, or a meeting of the Independent Trustees and/or more than one
Committee meeting, take place on a single day, the Trustees are paid a single
meeting fee by the Fund. The Fund also reimburses such Trustees for travel and
other out-of-pocket expenses incurred by them in connection with attending such
meetings. Trustees and officers of the Fund who are or have been employed by the
Investment Manager or an affiliated company receive no compensation or expense
reimbursement from the Fund for their services as Trustee.
The following table illustrates the compensation that the Fund paid to its
Independent Trustees for the fiscal year ended October 31, 2001.
FUND COMPENSATION
[Download Table]
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
--------------------------- -------------
Michael Bozic............................................... $1,600
Edwin J. Garn............................................... 1,600
Wayne E. Hedien............................................. 1,600
Dr. Manuel H. Johnson....................................... 2,350
Michael E. Nugent........................................... 2,100
John L. Schroeder........................................... 2,100
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 2000 for services
to the 97 Morgan Stanley Funds that were in operation at December 31, 2000.
CASH COMPENSATION FROM MORGAN STANLEY FUNDS
[Download Table]
TOTAL CASH
COMPENSATION
FOR SERVICES TO
97 MORGAN
NAME OF INDEPENDENT TRUSTEE STANLEY FUNDS
--------------------------- ---------------
Michael Bozic............................................... $146,917
Edwin J. Garn............................................... 151,717
Wayne E. Hedien............................................. 151,567
Dr. Manuel H. Johnson....................................... 223,655
Michael E. Nugent........................................... 199,759
John L. Schroeder........................................... 194,809
As of the date of this STATEMENT OF ADDITIONAL INFORMATION, 53 of the Morgan
Stanley Funds, including the Fund, have adopted a retirement program under which
an independent director/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/trustee of any Morgan Stanley Fund that has adopted the
retirement program (each such Fund referred to as an "Adopting Fund" and each
such director/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.
18
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.
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the Fund for the fiscal year ended October 31,
2001 and by the 53 Morgan Stanley Funds (including the Fund) for the year ended
December 31, 2000, and the estimated retirement benefits for the Independent
Trustees, to commence upon their retirement, from the Fund as of October 31,
2001 and from the 53 Morgan Stanley Funds as of December 31, 2000.
RETIREMENT BENEFITS FROM THE FUND AND ALL MORGAN STANLEY FUNDS
[Enlarge/Download Table]
FOR ALL ADOPTING FUNDS
----------------------------- RETIREMENT BENEFITS ESTIMATED ANNUAL
ESTIMATED ACCRUED AS BENEFITS
CREDITED EXPENSES UPON RETIREMENT(2)
YEARS ESTIMATED ------------------- -------------------
OF SERVICE AT PERCENTAGE OF BY ALL FROM FROM ALL
RETIREMENT ELIGIBLE BY THE ADOPTING THE ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS
--------------------------- ------------- ------------- -------- -------- -------- --------
Michael Bozic................ 10 60.44% $ 371 $20,001 $ 907 $52,885
Edwin J. Garn................ 10 60.44 529 29,348 907 52,817
Wayne E. Hedien.............. 9 51.37 705 37,886 771 44,952
Dr. Manuel H. Johnson........ 10 60.44 382 21,187 1,360 77,817
Michael E. Nugent............ 10 60.44 643 36,202 1,209 69,506
John L. Schroeder............ 8 50.37 1,200 65,337 960 53,677
------------------------
(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 spouces were alive. The amount estimated to be
payable under this method, through the remainder of the later of the lives
of the Eligible Trustee and spouse, will be the actuarial equivalent of the
Regular Benefit.
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1)
above.
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
--------------------------------------------------------------------------------
The following owned 5% or more of the outstanding shares of Class A as of
December 7, 2001: Rochester Housing Authority, 140 West Ave., Rochester, N.Y.
14611--40.617% and Banco Popular, Trustee for Pepsi Cola Hourly Defined Benefit
Plan, P.O. Box 2600, Toa Baja, Puerto Rico 00951--8.989%. The following owned 5%
or more of the outstanding shares of Class C as of December 7, 2001: Stephen
Mattingly, 4965 W. Maplewood Pl., Littleton, CO 80123--5.275%. The following
owned 5% or more of the outstanding shares of Class D as of December 7, 2001:
Morgan Stanley DW, Custodian for Jerry Ercolano, IRA Rollover, 225 West Bailey
Rd., Naperville, IL 60565--6.471%.
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.
19
V. INVESTMENT MANAGEMENT AND OTHER SERVICES
--------------------------------------------------------------------------------
A. INVESTMENT MANAGER
The Investment Manager to the Fund is Morgan Stanley Investment Advisors
Inc., a Delaware corporation, whose address is 1221 Avenue of the Americas, New
York, NY 10020. The Investment Manager is a wholly-owned subsidiary of Morgan
Stanley, a Delaware corporation. Morgan Stanley 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 Fund's daily net assets:
-0.55% of the portion of the daily net assets of the Fund not
exceeding $1 billion;
-0.525% of the portion of the Fund's daily net assets exceeding $1
billion but not exceeding $1.5 billion;
-0.50% of the portion of the Fund's daily net assets exceeding
$1.5 billion but not exceeding $2 billion;
-0.475% of the portion of the Fund's daily net assets exceeding $2
billion but not exceeding $2.5 billion;
-0.45% of the portion of the Fund's daily net assets exceeding
$2.5 billion but not exceeding $5 billion;
-0.425% of the portion of the Fund's daily net assets exceeding $5
billion but not exceeding $7.5 billion;
-0.40% of the portion of the Fund's daily net assets exceeding
$7.5 billion but not exceeding $10 billion;
-0.375% of the portion of the Fund's daily net assets exceeding
$10 billion but not exceeding $12.5 billion; and
-0.35% of the portion of the Fund's daily net assets exceeding
$12.5 billion.
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, 1999, 2000 and 2001, the Investment Manager accrued total
compensation under the Management Agreement in the amounts of $3,328,750,
$2,765,873 and $2,744,836, respectively.
The Investment Manager has retained its wholly-owned subsidiary, Morgan
Stanley Services, 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 Morgan Stanley DW, 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 Morgan Stanley.
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 cost of educational and/or business-related trips, and educational and/or
promotional and business-related expenses. 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
20
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
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 auditors and attorneys is, in the opinion of the Investment
Manager, necessary or desirable). The Investment Manager also bears the cost of
telephone service, heat, light, power and other utilities provided to the Fund.
Expenses not expressly assumed by the Investment Manager under the
Management Agreement or by the Distributor, will be paid by the Fund. These
expenses will be allocated among the four Classes of shares pro rata based on
the net assets of the Fund attributable to each Class, except as described
below. Such expenses include, but are not limited to: expenses of the Plan of
Distribution pursuant to Rule 12b-1; charges and expenses of any registrar,
custodian, stock transfer and dividend disbursing agent; brokerage commissions;
taxes; engraving and printing share certificates; registration costs of the Fund
and its shares under federal and state securities laws; the cost and expense of
printing, including typesetting, and distributing prospectuses of the Fund and
supplements thereto to the Fund's shareholders; all expenses of shareholders'
and Trustees' meetings and of preparing, printing and mailing of proxy
statements and reports to shareholders; fees and travel expenses of Trustees or
members of any advisory board or committee who are not employees of the
Investment Manager or any corporate affiliate of the Investment Manager; all
expenses incident to any dividend, withdrawal or redemption options; charges and
expenses of any outside service used for pricing of the Fund's shares; fees and
expenses of legal counsel, including counsel to the Trustees who are not
interested persons of the Fund or of the Investment Manager (not including
compensation or expenses of attorneys who are employees of the Investment
Manager); fees and expenses of the Fund's independent auditors; 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.
21
The Management Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Investment Manager is not liable to the Fund or any
of its investors for any act or omission by the Investment Manager or for any
losses sustained by the Fund or its investors.
The Management Agreement will remain in effect from year to year, provided
continuance of the Management Agreement is approved at least annually by the
vote of the holders of a majority, as defined in the Investment Company Act, of
the outstanding shares of the Fund, or by the Trustees; provided that in either
event such continuance is approved annually by the vote of a majority of the
Trustees, including a majority of the Independent 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 maximum annual rates: 0.25% and 0.85% of the average daily net
assets of Class A and Class C, respectively, and, with respect to Class B, 0.85%
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 Morgan Stanley
DW 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]
2001 2000 1999
----------------- ----------------- -----------------
Class A....................... FSCs:(1) $ 61,587 FSCs:(1) $ 9,869 FSCs:(1) $ 18,000
CDSCs: $ 171 CDSCs: $ 2,432 CDSCs: $ 22,000
Class B....................... CDSCs: $415,675 CDSCs: $390,423 CDSCs: $499,000
Class C....................... CDSCs: $ 2,770 CDSCs: $ 7,871 CDSCs: $ 15,000
------------------------
(1) FSCs apply to Class A only.
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 0.20% of the average daily net assets of
Class B and 0.25% of the average daily net assets of Class C 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, 2001, of $4,007,940. This amount is equal to 0.85% of the average
daily net assets of Class B for the fiscal year
22
and was calculated pursuant to clause (b) of the compensation formula under the
Plan. For the fiscal year ended October 31, 2001, Class A and Class C shares of
the Fund accrued payments under the Plan amounting to $17,196 and $114,324,
respectively, which amounts are equal to 0.20% and 0.85% 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, Morgan Stanley DW 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 4.0% of the amount sold
(except as provided in the following sentence) and an annual residual
commission, currently a residual of up to 0.20% 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
(i) the Transfer Agent serves as Trustee (ii) Morgan Stanley's Retirement Plan
Services serves as recordkeeper pursuant to a written Recordkeeping Services
Agreement or (iii) an entity independent from Morgan Stanley serves as
recordkeeper under an alliance or similar agreement wit Morgan Stanley's
Retirement Plan Services ("Morgan Stanley 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, Morgan Stanley DW 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 4.0% of the amount sold
(except as provided in the following sentence) and an annual residual
commission, currently a residual of up to 0.20% 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 Morgan Stanley Eligible Plans,
Morgan Stanley DW compensates its Financial Advisors by paying them, from its
own funds, a gross sales credit of 3.0% of the amount sold.
With respect to Class C shares, Morgan Stanley DW 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 0.85% 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 and in the Morgan
Stanley Choice Program, the Investment Manager compensates Morgan Stanley DW'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 Morgan Stanley DW'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 and the Morgan Stanley Choice
Program).
The gross sales credit is a charge which reflects commissions paid by Morgan
Stanley DW to its Financial Advisors and Morgan Stanley DW's Fund-associated
distribution-related expenses, including sales compensation, and overhead and
other branch office distribution-related expenses including (a) the expenses of
operating Morgan Stanley DW'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.
23
The Investment Manager pays a retention fee to Financial Advisors at an
annual rate of 0.05% of the value of shares of the Fund and held for at least
one year. Shares purchased through the reinvestment of dividends will be
eligible for a retention fee, provided that such dividends were earned on shares
otherwise eligible for a retention fee payment. Shares owned in variable
annuities, closed-end fund shares and shares held in 401(k) plans where the
Transfer Agent or Morgan Stanley's Retirement Plan Services is either
recordkeeper or trustee are not eligible for a retention fee.
The retention fees are paid by the Investment Manager from its own assets,
which may include profits from investment management fees payable under the
Management Agreement, as well as from borrowed funds.
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").
These expenses may include the cost of Fund-related educational and/or
business-related trips or payment of Fund-related educational and/or promotional
expenses of Financial Advisors. For example, the Distributor has implemented a
compensation program available only to Financial Advisors meeting specified
criteria under which certain marketing and/or promotional expenses of those
Financial Advisors are paid by the Distributor out of compensation it receives
under the Plan. 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 0.85%, in the case of Class C, of the average net assets of the
respective Class during the month. No interest or other financing charges, if
any, incurred on any distribution expenses on behalf of Class A and Class C will
be reimbursable under the Plan. With respect to Class A, in the case of all
expenses other than expenses representing the service fee, and, with respect to
Class C, in the case of all expenses other than expenses representing a gross
sales credit or a residual to Financial Advisors and other authorized financial
representatives, such amounts shall be determined at the beginning of each
calendar quarter by the Trustees, including, a majority of the Independent
Trustees. Expenses representing the service fee (for Class A) or a gross sales
credit or a residual to Financial Advisors and other authorized financial
representatives (for Class C) may be reimbursed without prior determination. In
the event that the Distributor proposes that monies shall be reimbursed for
other than such expenses, then in making quarterly determinations of the amounts
that may be reimbursed by the Fund, the Distributor will provide and the
Trustees will review a quarterly budget of projected distribution expenses to be
incurred on behalf of the Fund, together with a report explaining the purposes
and anticipated benefits of incurring such expenses. The Trustees will determine
which particular expenses, and the portions thereof, that may be borne by the
Fund, and in making such a determination shall consider the scope of the
Distributor's commitment to promoting the distribution of the Fund's Class A and
Class C shares.
Each Class paid 100% of the amounts accrued under the Plan with respect to
that Class for the fiscal year ended October 31, 2001 to the Distributor. The
Distributor and Morgan Stanley DW estimate that they have spent, pursuant to the
Plan, $194,802,695 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) 3.87% ($7,545,261)--advertising and promotional expenses; (ii) 0.26%
($504,543)--printing of prospectuses for distribution to other than current
shareholders; and (iii) 95.87% ($186,752,891)--other expenses, including the
gross sales credit and the carrying charge, of which 18.01% ($33,641,421)
represents carrying charges, 33.94% ($63,388,149) represents commission credits
to Morgan Stanley DW's branch offices and other
24
selected broker-dealers for payments of commissions to Financial Advisors and
other authorized financial representatives, and 48.05% ($89,723,321) 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 during the fiscal year ended October 31, 2001 were service fees. 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 Morgan
Stanley DW 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 $18,517,707 as of October 31, 2001 (the end of the
Fund's fiscal year), which was equal to 3.78% 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 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 there were no
such expenses that may be reimbursed in the subsequent year in the Class of
Class A or Class B at December 31, 2000 (end of Calendar year). 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, Morgan Stanley DW, Morgan Stanley Services
or certain of their employees may be deemed to have such an interest as a result
of benefits derived from the successful operation of the Plan or as a result of
receiving a portion of the amounts expended thereunder by the Fund.
On an annual basis the Trustees, including a majority of the Independent
Trustees, consider whether the Plan should be continued. Prior to approving the
last continuation of the Plan, the Trustees requested and received from the
Distributor and reviewed all the information which they deemed necessary to
arrive at an informed determination. In making their determination to continue
the Plan, the Trustees considered: (1) the Fund's experience under the Plan and
whether such experience indicates that the Plan is operating as anticipated;
(2) the benefits the Fund had obtained, was obtaining and would be likely to
obtain under the Plan, including that: (a) the Plan is essential in order to
give Fund investors a choice of alternatives for payment of distribution and
service charges and to enable the Fund to continue to grow and avoid a pattern
of net redemptions which, in turn, are essential for effective investment
management; and (b) without the compensation to individual brokers and the
reimbursement of distribution and account maintenance expenses of Morgan Stanley
DW's branch offices made possible by the 12b-1 fees, Morgan Stanley DW could not
establish and maintain an effective system for distribution, servicing of Fund
shareholders and maintenance of shareholder accounts; and (3) what
25
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 Trust 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, NJ 07311.
(2) CUSTODIAN AND INDEPENDENT AUDITORS
The Bank of New York, 100 Church Street, New York, NY 10007 is the Custodian
of the Fund's assets. Any of the Fund's cash balances with either Custodian in
excess of $100,000 are unprotected by federal deposit insurance. These balances
may, at times, be substantial.
Deloitte & Touche LLP, Two World Financial Center, New York, NY 10281,
serves as the independent auditors of the Fund. The independent auditors 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 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.
G. CODES OF ETHICS
The Fund, the Investment Manager and the Distributor have each adopted a
Code of Ethics pursuant to Rule 17j-1 under the Investment Company Act. The
Codes of Ethics are designed to detect and prevent improper personal trading.
The Codes of Ethics permit personnel subject to the Codes to invest in
securities, including securities that may be purchased, sold or held by the
Fund, subject to a number of restrictions and controls including prohibitions
against purchases of securities in an Initial Public Offering and a preclearance
requirement with respect to personal securities transactions.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
--------------------------------------------------------------------------------
A. BROKERAGE TRANSACTIONS
Subject to the general supervision of the Trustees of the Fund, the
Investment Manager is responsible for the investment decisions and the placing
of the orders for portfolio transactions for the Fund. The
26
Fund's portfolio transactions will occur primarily with issuers, underwriters or
major dealers in U.S. Government securities acting as principals. Such
transactions are normally on a net basis and do not involve payment of brokerage
commissions. The cost of securities purchased from an underwriter usually
includes a commission paid by the issuer to the underwriters; transactions with
dealers normally reflect the spread between bid and asked prices. Options and
futures transactions will usually be effected through a broker and a commission
will be charged.
For the fiscal years ended October 31, 1999, 2000 and 2001, the Fund paid a
total of $84,914, $75,973 and $21,175, 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 Morgan Stanley DW. The Fund will limit
its transactions with Morgan Stanley DW 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 Morgan
Stanley DW only when the price available from Morgan Stanley DW is better than
that available from other dealers.
During the fiscal years ended October 31, 1999, 2000 and 2001, the Fund did
not effect any principal transactions with Morgan Stanley DW.
Brokerage transactions in securities listed on exchanges or admitted to
unlisted trading privileges may be effected through Morgan Stanley DW, 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, 1999, 2000 and 2001, the Fund did
not pay any brokerage commissions to Morgan Stanley DW or Morgan Stanley & Co.
C. BROKERAGE SELECTION
The policy of the Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions.
In seeking to implement the Fund's policies, the Investment Manager effects
transactions with those brokers and dealers who the Investment Manager believes
provide the most favorable prices and are capable of providing efficient
executions. If the Investment Manager believes the prices and executions are
obtainable from more than one broker or dealer, it may give consideration to
placing portfolio transactions with those brokers and dealers who also furnish
research and other services to the Fund or the Investment Manager. The services
may include, but are not limited to, any one or more of the following:
information as to the availability of securities for purchase or sale;
statistical or factual information or opinions pertaining to investment; wire
services; and appraisals or evaluations of portfolio securities. The information
and services received by the Investment Manager from brokers and dealers may be
utilized by the Investment Manager and any of its asset management affiliates in
the management of accounts of some of their other clients and may not in all
cases benefit the Fund directly.
27
The Investment Manager and certain of its affiliates 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 and its affiliates to cause purchase and sale
transactions to be allocated among clients whose assets they manage (including
the Fund) in such manner as they deem equitable. In making such allocations
among the Fund and other client accounts, various factors may be considered,
including the respective investment objectives, the relative size of portfolio
holdings of the same or comparable securities, the availability of cash for
investment, the size of investment commitments generally held and the opinions
of the persons responsible for managing the portfolios of the Fund and other
client accounts. The Investment Manager and its affiliates may operate one or
more order placement facilities and each facility will implement order
allocation in accordance with the procedures described above. From time to time,
each facility may transact in a security at the same time as other facilities
are trading in that security.
D. DIRECTED BROKERAGE
During the fiscal year ended October 31, 2001, the Fund did not pay any
brokerage commissions to brokers because of research services provided.
E. REGULAR BROKER-DEALERS
During the fiscal year ended October 31, 2001, the Fund did not purchase
securities issued by brokers or dealers that were among the ten brokers or the
ten dealers which executed transactions for or with the Fund in the largest
dollar amounts during the year. At October 31, 2001, the Fund did not own any
securities issued by any of such issuers.
VII. CAPITAL STOCK AND OTHER SECURITIES
--------------------------------------------------------------------------------
The shareholders of the Fund are entitled to a full vote for each full share
of beneficial interest held. The Fund is authorized to issue an unlimited number
of shares of beneficial interest. All shares of beneficial interest of the Fund
are of $0.01 par value and are equal as to earnings, assets and voting
privileges except that each Class will have exclusive voting privileges with
respect to matters relating to distribution expenses borne solely by such
Class or any other matter in which the interests of one Class differ from the
interests of any other Class. In addition, Class B shareholders will have the
right to vote on any proposed material increase in Class A's expenses, if such
proposal is submitted separately to Class A shareholders. Also, Class A, Class B
and Class C bear expenses related to the distribution of their respective
shares.
The Fund's Declaration of Trust permits the Trustees to authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios) and additional Classes of shares
within any series. The Trustees have not presently authorized any such
additional series or Classes of shares other than as set forth in the
PROSPECTUS.
The Fund is not required to hold annual meetings of shareholders and in
ordinary circumstances the Fund does not intend to hold such meetings. The
Trustees may call special meetings of shareholders for action by shareholder
vote as may be required by the Investment Company Act or the Declaration of
Trust. Under certain circumstances, the Trustees may be removed by action of the
Trustees. In addition, under certain circumstances, the shareholders may call a
meeting to remove the Trustees 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 Trustees being selected, while the
holders of the remaining shares would be unable to elect any Trustees.
Under Massachusetts law, shareholders of a business trust may, under certain
limited circumstances, be held personally liable as partners for the obligations
of the Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that notice
of such Fund obligations include such disclaimer, and provides for
indemnification out of the Fund's property for any shareholder held personally
liable for the obligations of the Fund. Thus, the risk
28
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, except for James F. Higgins, 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 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 is liable for its own negligence and not for the default or negligence of
its correspondents or for losses in transit. The Fund is not 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 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.
OUTSIDE BROKERAGE ACCOUNTS. If a shareholder wishes to maintain his or her
fund account through a brokerage company other than Morgan Stanley DW, he or she
may do so only if the Distributor has entered into a selected dealer agreement
with that brokerage company. Accounts maintained through a brokerage company
other than Morgan Stanley DW may be subject to certain restrictions on
subsequent purchases and exchanges. Please contact your brokerage company or the
Transfer Agent for more information.
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,
Morgan Stanley DW 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
29
share of each Class is calculated by dividing the value of the portion of the
Fund's securities and other assets attributable to that Class, less the
liabilities attributable to that Class, by the number of shares of that
Class outstanding. The assets of each Class of shares are invested in a single
portfolio. The net asset value of each Class, however, will differ because the
Classes have different ongoing fees.
In the calculation of the Fund's net asset value: (1) all portfolio
securities for which over-the-counter market quotations are readily available
are valued at the latest bid price prior to the time of valuation, and (2) when
market quotations are not readily available, including circumstances under which
it is determined by the Investment Manager that sale or bid prices are not
reflective of a security's market value, portfolio securities are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Fund's Trustees (valuation of securities
for which market quotations are not readily available may also be based upon
current market prices of securities which are comparable in coupon, rating and
maturity or an appropriate matrix utilizing similar factors).
Short-term debt securities with remaining maturities of sixty days or less
at the time of purchase are valued at amortized cost, unless the Trustees
determine such does not reflect the securities' market value, in which case
these securities will be valued at their fair value as determined by the
Trustees.
Certain of the Fund's portfolio securities may be valued by an outside
pricing service approved by the Fund's Trustees. The pricing service may utilize
a matrix system incorporating security quality, maturity and coupon as the
evaluation model parameters, and/or research evaluations by its staff, including
review of broker-dealer market price quotations in determining what it believes
is the fair valuation of the portfolio securities valued by such pricing
service.
Listed options on debt securities are valued at the latest sale price on the
exchange on which they are listed unless no sales of such options have taken
place that day, in which case they will be valued at the mean between their
latest bid and asked prices. Unlisted options on debt securities are valued at
the mean between their latest bid and asked prices. Futures are valued at the
latest sale price on the commodities exchange on which they trade unless the
Trustees determine such price does not reflect their market value, in which case
they will be valued at their fair value as determined in good faith under
procedures established by and under the supervision of the Trustees.
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, 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 amended. 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 at the time of such sale. Gains or losses on the
30
sale of securities with a tax holding period of one year or less will be
short-term capital gains or losses. Special tax rules may change the normal
treatment of gains and losses recognized by the Fund when the Fund invests in
options and futures transactions. Those special tax rules can, among other
things, affect the treatment of capital gain or loss as long-term or short-term.
The application of these special rules would therefore also affect the 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 income 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. Under current law, the maximum tax rate on long-
term capital gains realized by non-corporate shareholders generally is 20%. A
special lower tax rate of 18% on long-term capital gains is available to
non-corporate shareholders to the extent the distributions of long-term capital
gains are derived from securities which the Fund purchased after December 31,
2000, and held for more than five years.
Shareholders are generally taxed on any ordinary dividend or capital gain
distributions from the Fund in the year they are actually distributed. However,
if any such dividends or distributions are declared in October, November or
December and paid in January then such amounts will be treated for tax purposes
as received by the shareholders on December 31, to shareholders of record of
such month.
Shareholders who are not citizens or residents of the United States and
certain foreign entities may be subject to withholding of United States tax on
distributions made by the Fund of investment income and short-term capital
gains.
After the end of each calendar year, shareholders will be sent information
on their dividends and capital gain distributions for tax purposes, including
the portion taxable as ordinary income and the portion taxable as long-term
capital gains.
PURCHASES AND REDEMPTIONS AND EXCHANGES OF FUND SHARES. Any dividend or
capital gains distribution received by a shareholder from any investment company
will have the effect of reducing the net asset value of the shareholder's stock
in that company by the exact amount of the dividend or capital gains
distribution. Furthermore, such dividends and capital gains distributions are
subject to federal income taxes. If the net asset value of the shares should be
reduced below a shareholder's cost as a result of the payment of dividends or
the distribution of realized long-term capital gains, such payment or
distribution would be in part a return of the shareholder's investment but
nonetheless would be taxable to the shareholder. Therefore, an investor should
consider the tax implications of purchasing Fund shares immediately prior to a
distribution record date.
In general, a sale of shares results in capital gain or loss, and for
individual shareholders, is taxable at a federal rate dependent upon the length
of time the shares were held. A redemption of a shareholder's Fund shares is
normally treated as a sale for tax purposes. Fund shares held for a period of
one
31
year or less at the time of such sale or redemption will, for tax purposes,
generally result in short-term capital gains or losses and those held for more
than one year will generally result in long-term capital gains or losses. Under
current law, the maximum tax rate on long-term capital gains realized by non-
corporate shareholders is generally 20%. A special lower tax rate of 18% on
long-term capital gains is available for non-corporate shareholders who
purchased shares after December 31, 2000, and held such shares for more than
five years. This special lower tax rate of 18% for five-year property does not
apply to non-corporate shareholders holding Fund shares which were purchased on
or prior to December 31, 2000, unless such shareholders make an election to
treat the Fund shares as being sold and re-acquired on January 1, 2001. A
shareholder making such election may realize capital gains. Any loss realized by
shareholders upon a sale or redemption of shares within six months of the date
of their purchase will be treated as a long-term capital loss to the extent of
any distributions of net long-term capital gains with respect to such shares
during the six-month period.
Gain or loss on the sale or redemption of shares in the Fund is measured by
the difference between the amount received and the tax basis of the shares.
Shareholders should keep records of investments made (including shares acquired
through reinvestment of dividends and distributions) so they can compute the tax
basis of their shares. Under certain circumstances a shareholder may compute and
use an average cost basis in determining the gain or loss on the sale or
redemption of shares.
Exchanges of Fund shares for shares of another fund, including shares of
other Morgan Stanley 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 Plan."
XI. CALCULATION OF PERFORMANCE DATA
--------------------------------------------------------------------------------
From time to time the Fund may quote its "yield" and/or its "total return"
in advertisements and sales literature. These figures are computed separately
for Class A, Class B, Class C and Class D shares. Yield is calculated for any
30-day period as follows: the amount of interest income for each security in the
Fund's portfolio is determined in accordance with regulatory requirements; the
total for the entire portfolio constitutes the Fund's gross income for the
period. Expenses accrued during the period are subtracted to arrive at "net
investment income" of each Class. The resulting amount is divided by the product
of the maximum offering price per share on the last day of the period,
multiplied by the average number of shares of the applicable Class outstanding
during the period that were entitled to dividends. This amount is added to 1 and
raised to the sixth power. 1 is then subtracted from the result and the
difference is multiplied by 2 to arrive at the annualized yield. For the 30-day
period ended October 31, 2001, the yield, calculated pursuant to the formula
described above, was approximately 4.54%, 4.15%, 4.15% and 4.99% for Class A,
Class B, Class C and Class D, respectively.
The Fund's "average annual total return" represents an annualization of the
Fund's total return over a particular period and is computed by finding the
annual percentage rate which will result in the ending redeemable value of a
hypothetical $1,000 investment made at the beginning of a one, five or ten year
period, or for the period from the date of commencement of operations, if
shorter than any of the foregoing. The ending redeemable value is reduced by any
contingent deferred sales charge ("CDSC")
32
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, five and ten
year periods ended October 31, 2001 were 6.38%, 6.12% and 6.40%, respectively.
The average annual total returns of Class A for the fiscal year ended
October 31, 2001 and for the period July 28, 1997 (inception of the Class)
through October 31, 2001 were 7.51% and 6.35%, respectively. The average annual
total returns of Class C for the fiscal year ended October 31, 2001 and for the
period July 28, 1997 (inception of the Class) through October 31, 2001 were
10.33% and 6.55%, respectively. The average annual total returns of Class D for
the fiscal year ended October 31, 2001 and for the period July 28, 1997
(inception of the Class) through October 31, 2001 were 12.23% and 7.21%,
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, five and ten year periods ended October 31,
2001, were 11.38%, 6.43% and 6.40%, respectively. Based on this calculation, the
average annual total returns of Class A for the fiscal year ended October 31,
2001 and for the period July 28, 1997 through October 31, 2001 were 12.28% and
7.44%, respectively, the average annual total returns of Class C for the fiscal
year ended October 31, 2001 and for the period July 28, 1997 through
October 31, 2001 were 11.33% and 6.55%, respectively, and the average annual
total returns of Class D for the fiscal year ended October 31, 2001 and for the
period July 28, 1997 through October 31, 2001 were 12.23% and 7.21%,
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, five and ten year period ended October 31,
2001, were 11.38%, 36.56% and 85.95%, respectively. Based on the foregoing
calculation, the total returns of Class A for the fiscal year ended October 31,
2001 and for the period July 28, 1997 through October 31, 2001 were 12.28% and
35.76%, respectively, the total returns of Class C for the fiscal year ended
October 31, 2001 and for the period July 28, 1997 through October 31, 2001 were
11.33% and 31.01%, respectively, and the total returns of Class D for the fiscal
year ended October 31, 2001 and for the period July 28, 1997 through
October 31, 2001 were 12.23% and 34.50%, 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
$9,575, $48,250 and $97,250 in the case of Class A (investments of $10,000,
$50,000 and
33
$100,000 adjusted for the initial sales charge) or by $10,000, $50,000 and
$100,000 in the case of each of Class B, Class C and Class D, as the case may
be. Investments of $10,000, $50,000 and $100,000 in each Class at inception of
the Class would have grown to the following amounts at October 31, 2001:
[Enlarge/Download Table]
INVESTMENT AT INCEPTION OF:
INCEPTION --------------------------------
CLASS DATE: $10,000 $50,000 $100,000
----- --------- -------- --------- ---------
Class A............................................ 07/28/97 $12,999 $ 65,504 $132,027
Class B............................................ 03/31/87 26,848 134,240 268,480
Class C............................................ 07/28/97 13,101 65,505 131,010
Class D............................................ 07/28/97 13,450 67,250 134,500
The after-tax returns of the Fund may also be advertised or otherwise
reported. This is generally calculated in a manner similar to the computation of
average annual total returns discussed above, except that the calculation also
reflects the effect of taxes on returns.
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by recognized organizations.
XII. FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
EXPERTS. The financial statements of the Fund for the fiscal year ended
October 31, 2001 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 Deloitte & Touche LLP, independent
auditors, 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 Federal Securities Trust
PORTFOLIO OF INVESTMENTS / / OCTOBER 31, 2001
[Download Table]
PRINCIPAL DESCRIPTION
AMOUNT IN AND COUPON
THOUSANDS MATURITY DATE RATE VALUE
----------------------------------------------------------------------
U.S. Government & Agency Obligations (45.4%)
U.S. GOVERNMENT AGENCIES (7.4%)
$ 5,000 Federal National Mortgage Assoc.
12/24/07.......................... 6.48% $ 5,203,660
27,000 Federal National Mortgage Assoc.
05/15/30+......................... 7.25 33,195,933
------------
38,399,593
------------
U.S. TREASURY BONDS (32.2%)
17,500 11/15/22........................... 7.625 23,243,553
49,350 08/15/21+.......................... 8.125 68,203,230
10,400 08/15/20........................... 8.75 15,094,622
11,600 08/15/13........................... 12.00 16,982,214
30,000 11/15/11........................... 14.00 44,163,270
------------
167,686,889
------------
U.S. TREASURY NOTES (5.8%)
7,000 08/31/02........................... 6.25 7,241,444
23,000 11/15/01........................... 7.50 23,042,228
------------
30,283,672
------------
Total U.S. Government & Agency Obligations
(COST $230,951,484)......................... 236,370,154
------------
Mortgage-Backed Securities (50.6%)
FEDERAL HOME LOAN MORTGAGE CORP. (2.1%)
7,326 10/01/10 - 02/01/20................ 9.50 7,792,531
2,386 09/01/15 - 10/01/19................ 10.00 2,683,401
542 02/01/16 - 10/01/18................ 10.50 614,114
------------
11,090,046
------------
FEDERAL HOME LOAN MORTGAGE CORP. PC
GOLD (32.3%)
75,197 03/01/16 - 09/01/16................ 6.00 77,358,677
50,072 05/01/31 - 07/01/31................ 6.50 51,543,717
37,084 02/01/23 - 07/01/31................ 8.00 39,181,628
------------
168,084,022
------------
FEDERAL NATIONAL MORTGAGE ASSOC. (10.2%)
34,354 05/01/31........................... 6.50 35,331,342
14,682 05/01/24 - 06/01/31................ 8.00 15,512,756
1,550 01/01/22 - 04/01/25................ 8.50 1,645,567
SEE NOTES TO FINANCIAL STATEMENTS
35
Morgan Stanley Federal Securities Trust
PORTFOLIO OF INVESTMENTS / / OCTOBER 31, 2001 CONTINUED
[Download Table]
PRINCIPAL DESCRIPTION
AMOUNT IN AND COUPON
THOUSANDS MATURITY DATE RATE VALUE
----------------------------------------------------------------------
Mortgage-Backed Securities (Continued)
FEDERAL NATIONAL MORTGAGE ASSOC. (CONTINUED)
$ 496 09/01/16 - 05/01/20................ 9.50% $ 528,945
66 03/01/16 - 02/01/18................ 9.75 70,640
------------
53,089,250
------------
GOVERNMENT NATIONAL MORTGAGE ASSOC. (4.1%)
15,181 08/15/25 - 05/15/29................ 6.50 15,674,760
342 01/15/29 - 08/15/29................ 7.50 358,838
4,206 10/15/19 - 10/15/24................ 8.50 4,467,137
304 05/15/16 - 11/15/20................ 10.00 324,421
37 09/15/18........................... 11.00 40,377
------------
20,865,533
------------
GOVERNMENT NATIONAL MORTGAGE ASSOC. II (1.9%)
7,349 01/20/29 - 02/20/29................ 6.50 7,555,170
2,446 05/20/30........................... 8.00 2,582,073
------------
10,137,243
------------
Total Mortgage-Backed Securities
(COST $254,503,693)......................... 263,266,094
------------
[Download Table]
COUPON MATURITY
RATE DATE
------------ -----------
Short-Term Investment (3.8%)
Repurchase Agreement
19,632 Joint repurchase agreement
account
(dated 10/31/01 proceeds
$19,633,422) (a)
(COST $19,632,000)............ 2.607% 11/01/01 19,632,000
--------------
[Download Table]
Total Investments
(COST $505,087,177) (B)...... 99.8% 519,268,248
Other Assets In Excess of
Liabilities.................. 0.2 1,129,583
----- ------------
Net Assets.................... 100.0% $520,397,831
===== ============
---------------------
+ A PORTION OF THIS SECURITY IS SEGREGATED IN CONNECTION WITH OPEN FUTURES
CONTRACTS.
(A) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE
AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED
APPRECIATION IS $17,380,065 AND THE AGGREGATE GROSS UNREALIZED
DEPRECIATION IS $3,198,994, RESULTING IN NET UNREALIZED APPRECIATION OF
$14,181,071.
SEE NOTES TO FINANCIAL STATEMENTS
36
Morgan Stanley Federal Securities Trust
PORTFOLIO OF INVESTMENTS / / OCTOBER 31, 2001 CONTINUED
Futures Contracts Open at October 31, 2001:
[Enlarge/Download Table]
DESCRIPTION,
NUMBER OF DELIVERY MONTH, UNDERLYING FACE UNREALIZED
CONTRACTS LONG/SHORT AND YEAR AMOUNT AT VALUE GAIN/LOSS
-----------------------------------------------------------------------------------------------------
135 Long U.S. Treasury Future
December 2001 $ 28,647,421 $ 697,111
(103) Short U.S. Treasury Note
December 2001 (11,315,516) (170,820)
(235) Short U.S. Treasury Note
December 2001 (26,206,173) (729,522)
(177) Short U.S. Treasury Bond
December 2001 (19,547,438) (680,813)
---------
$(884,044)
Net Loss.......................................................
=========
SEE NOTES TO FINANCIAL STATEMENTS
37
Morgan Stanley Federal Securities Trust
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
OCTOBER 31, 2001
[Download Table]
Assets:
Investments in securities, at value (cost
$505,087,177).................................... $519,268,248
Receivable for:
Interest........................................ 7,330,357
Shares of beneficial interest sold.............. 413,008
Principal paydowns.............................. 365,635
Prepaid expenses and other assets................. 52,655
-----------
Total Assets.................................. 527,429,903
-----------
Liabilities:
Payable for:
Shares of beneficial interest repurchased....... 5,334,972
Variation margin................................ 574,597
Distribution fee................................ 384,158
Investment management fee....................... 254,943
Dividends and distributions to shareholders..... 136,691
Payable to bank................................... 198,047
Accrued expenses.................................. 148,664
-----------
Total Liabilities............................. 7,032,072
-----------
Net Assets.................................... $520,397,831
===========
Composition of Net Assets:
Paid-in-capital................................... $536,585,776
Net unrealized appreciation....................... 13,297,027
Accumulated undistributed net investment income... 443,607
Accumulated net realized loss..................... (29,928,579)
-----------
Net Assets.................................... $520,397,831
===========
Class A Shares:
Net Assets........................................ $8,592,969
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR
VALUE)........................................... 903,985
Net Asset Value Per Share..................... $ 9.51
===========
Maximum Offering Price Per Share,
(NET ASSET VALUE PLUS 4.44% OF NET ASSET
VALUE)....................................... $ 9.93
===========
Class B Shares:
Net Assets........................................ $490,350,924
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR
VALUE)........................................... 52,426,763
Net Asset Value Per Share..................... $ 9.35
===========
Class C Shares:
Net Assets........................................ $15,248,282
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR
VALUE)........................................... 1,616,258
Net Asset Value Per Share..................... $ 9.43
===========
Class D Shares:
Net Assets........................................ $6,205,656
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR
VALUE)........................................... 665,130
Net Asset Value Per Share..................... $ 9.33
===========
SEE NOTES TO FINANCIAL STATEMENTS
38
Morgan Stanley Federal Securities Trust
Financial Statements CONTINUED
Statement of Operations
FOR THE YEAR ENDED OCTOBER 31, 2001
[Download Table]
Net Investment Income:
Interest Income................................... $33,985,499
----------
Expenses
Distribution fee (Class A shares)................. 17,196
Distribution fee (Class B shares)................. 4,007,940
Distribution fee (Class C shares)................. 114,324
Investment management fee......................... 2,744,836
Transfer agent fees and expenses.................. 440,138
Registration fees................................. 94,343
Shareholder reports and notices................... 72,073
Professional fees................................. 70,050
Custodian fees.................................... 67,780
Trustees' fees and expenses....................... 19,286
Other............................................. 28,909
----------
Total Expenses................................ 7,676,875
----------
Net Investment Income......................... 26,308,624
----------
Net Realized and Unrealized Gain:
Net realized gain/loss on:
Investments..................................... 14,598,792
Futures contracts............................... (4,599,992)
Options written................................. 15,047
----------
Net Gain...................................... 10,013,847
----------
Net change in unrealized depreciation............. 17,348,843
Net Gain...................................... 27,362,690
----------
Net Increase...................................... $53,671,314
==========
SEE NOTES TO FINANCIAL STATEMENTS
39
Morgan Stanley Federal Securities Trust
Financial Statements CONTINUED
Statement of Changes in Net Assets
[Download Table]
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2001 OCTOBER 31, 2000
---------------- ----------------
Increase (Decrease) in Net Assets:
Operations:
Net investment income................... $ 26,308,624 $ 31,802,192
Net realized gain....................... 10,013,847 1,431,092
Net change in unrealized
appreciation/depreciation.............. 17,348,843 (4,503,807)
------------ ------------
Net Increase........................ 53,671,314 28,729,477
------------ ------------
Dividends to Shareholders from Net
Investment Income:
Class A shares.......................... (502,509) (334,672)
Class B shares.......................... (24,779,979) (30,522,209)
Class C shares.......................... (696,193) (641,985)
Class D shares.......................... (329,662) (303,326)
------------ ------------
Total Dividends..................... (26,308,343) (31,802,192)
------------ ------------
Net increase (decrease) from
transactions in shares of beneficial
interest............................... 17,226,485 (82,892,591)
------------ ------------
Net Increase (Decrease)............. 44,589,456 (85,965,306)
------------ ------------
Net Assets:
Beginning of period..................... 475,808,375 561,773,681
------------ ------------
End of Period (Including accumulated
undistributed net investment income of
$443,607 and $0, respectively)......... $520,397,831 $475,808,375
============ ============
SEE NOTES TO FINANCIAL STATEMENTS
40
Morgan Stanley Federal Securities Trust
NOTES TO FINANCIAL STATEMENTS / / OCTOBER 31, 2001
1. Organization and Accounting Policies
Morgan Stanley Federal Securities Trust (the "Fund"), formerly Morgan Stanley
Dean Witter Federal Securities 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 to earn a high level of
current income. The Fund commenced operations on March 31, 1987. On July 28,
1997, the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) all 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; (2) listed options
are valued at the latest sale price on the exchange on which they are listed
unless no sales of such options have taken place that day, in which case they
are valued at the mean between their latest bid and asked price; (3) futures
contracts are valued at the latest sale price on the commodities exchange on
which they trade; (4) when market quotations are not readily available,
including circumstances under which it is determined by Morgan Stanley
Investment Advisors Inc. (the "Investment Manager"), formerly Morgan Stanley
Dean Witter Advisors Inc., that the sale or bid prices are not reflective of a
security's market value, portfolio securities are valued at their fair value as
determined in good faith under procedures established by and under the general
supervision of the Trustees (valuation of debt securities for which market
quotations are not readily available may be based upon current market prices of
securities which are comparable in coupon, rating and maturity or an appropriate
matrix utilizing similar factors); (5) certain portfolio securities may be
valued by an outside pricing service approved by the Trustees. The pricing
service may utilize a matrix system incorporating security quality, maturity and
coupon as the evaluation model parameters, and/or research and evaluations by
its staff, including review of broker-dealer market price
41
Morgan Stanley Federal Securities Trust
NOTES TO FINANCIAL STATEMENTS / / OCTOBER 31, 2001 CONTINUED
quotations, if available, in determining what it believes is the fair valuation
of the portfolio securities valued by such pricing service; and (6) short-term
debt securities having a maturity date of more than sixty days at the time of
purchase are valued on a mark-to-market basis until sixty days prior to maturity
and thereafter at amortized cost based on their value on the 61st day.
Short-term debt securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.
B. Accounting for Investments -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily.
C. Joint Repurchase Agreement Account -- Pursuant to an Exemptive Order issued
by the Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Manager, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements for cash, or U.S. Treasury or
federal agency obligations.
D. 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.
E. Options and Futures -- (1) Written options on debt obligations: When the Fund
writes a call or put option, an amount equal to the premium received is included
in the Fund's Statement of Assets and Liabilities as a liability which is
subsequently marked-to-market to reflect the current market value. If a written
option either expires or the Fund enters into a closing purchase transaction,
the Fund realizes a gain or loss without regard to any unrealized gain or loss
on the underlying security and the liability related to such option is
extinguished. If a written call option is exercised, the Fund realizes a gain or
loss from the sale of the underlying security and the proceeds from such sale
are increased by the premium originally received. If a written put option is
exercised, the amount of the premium originally received reduces the cost of the
security which the Fund purchases upon exercise of the option; (2) Purchased
options on debt obligations: When the Fund purchases a call or put option, the
premium paid is recorded as an investment which is subsequently marked-to-market
to reflect the current market value. If a purchased option expires, the Fund
will realize a loss to the extent of the premium paid. If the Fund enters into a
closing sale transaction, a gain or loss is realized for the difference between
the proceeds from the sale and the cost of the option. If a put option is
exercised, the cost of the security sold upon exercise will be increased by the
42
Morgan Stanley Federal Securities Trust
NOTES TO FINANCIAL STATEMENTS / / OCTOBER 31, 2001 CONTINUED
premium originally paid. If a call option is exercised, the cost of the security
purchased upon exercise will be increased by the premium originally paid;
(3) Options on futures contracts: if a written option expires, the Fund realizes
a gain. If a written call or put option is exercised, the premium received will
decrease or increase the unrealized loss or gain on the futures contract. If the
Fund enters into a closing purchase transaction, the Fund realizes a gain or
loss without regard to any unrealized gain or loss on the underlying futures
contract and the liability related to such option is extinguished; (4) Futures
contracts: A futures contract is an agreement between two parties to buy and
sell financial instruments at a set price on a future date. Upon entering into
such a contract, the Fund is required to pledge to the broker cash, U.S.
Government securities or other liquid portfolio securities equal to the minimum
initial margin requirements of the applicable futures exchange. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount of cash
equal to the daily fluctuation in the value of the contract. Such receipts or
payments known as variation margin are recorded by the Fund as unrealized gains
or losses. Upon closing of the contract, the Fund realizes a gain or loss equal
to the difference between the value of the contract at the time it was opened
and the value at the time it was closed.
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 substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
G. Dividends and Distributions to Shareholders -- The Fund records dividends and
distributions to its shareholders on the ex-dividend date. The 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 tax purposes 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
following annual rates to the Fund's net assets determined at the close of each
business day: 0.55% to the portion of daily net assets not exceeding
$1 billion; 0.525% to the portion of daily net assets exceeding $1 billion but
not exceeding $1.5 billion;
43
Morgan Stanley Federal Securities Trust
NOTES TO FINANCIAL STATEMENTS / / OCTOBER 31, 2001 CONTINUED
0.50% to the portion of daily net assets exceeding $1.5 billion but not
exceeding $2 billion; 0.475% to the portion of daily net assets exceeding $2
billion but not exceeding $2.5 billion; 0.45% to the portion of daily net assets
exceeding $2.5 billion but not exceeding $5 billion; 0.425% to the portion of
daily net assets exceeding $5 billion but not exceeding $7.5 billion; 0.40% to
the portion of daily net assets exceeding $7.5 billion but not exceeding
$10 billion; 0.375% to the portion of daily net assets exceeding $10 billion but
not exceeding $12.5 billion; and 0.35% to the portion of daily net assets
exceeding $12.5 billion.
3. Plan of Distribution
Shares of the Fund are distributed by Morgan Stanley 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 -- 0.85% 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 0.85% of the average daily net assets of
Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled
approximately $18,518,000 at October 31, 2001.
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 0.85% 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 Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the year ended October 31, 2001, the distribution fee was accrued for
Class A shares and Class C shares at the annual rate of 0.20% and 0.85%,
respectively.
44
Morgan Stanley Federal Securities Trust
NOTES TO FINANCIAL STATEMENTS / / OCTOBER 31, 2001 CONTINUED
The Distributor has informed the Fund that for the year ended October 31, 2001,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of approximately $200,
$416,000 and $3,000, respectively and received approximately $62,000 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
Purchases and sales/prepayments of portfolio securities, excluding short-term
investments, for the year ended October 31, 2001 were $697,134,926 and
$718,949,170, respectively.
Transactions in written options for the year ended October 31, 2001 were as
follows:
[Download Table]
CONTRACTS PREMIUMS
--------- ---------
Option contracts written, outstanding at
beginning of the period................ -- $ --
Options written......................... 500 392,228
Options closed.......................... (300) (213,774)
Options exercised....................... (200) (178,454)
Options expired......................... -- --
--------- ---------
Option contracts written, outstanding at
end of the period...................... -- $ --
========= =========
Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is
the Fund's transfer agent. At October 31, 2001, the Fund had transfer agent fees
and expenses payable of approximately $6,500.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees 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. Aggregate pension costs for the year ended October 31, 2001 included
in Trustees' fees and expenses in the Statement of Operations amounted to
$8,007. At October 31, 2001, the Fund had an accrued pension liability of
$56,430 which is included in accrued expenses in the Statement of Assets and
Liabilities.
45
Morgan Stanley Federal Securities Trust
NOTES TO FINANCIAL STATEMENTS / / OCTOBER 31, 2001 CONTINUED
5. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
[Enlarge/Download Table]
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2001 OCTOBER 31, 2000
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
CLASS A SHARES
Sold.......................... 14,819,239 $ 135,455,636 6,489,634 $ 57,621,601
Reinvestment of dividends..... 31,735 290,264 27,856 246,613
Redeemed...................... (14,483,897) (132,444,371) (6,454,550) (57,263,299)
----------- ------------- ----------- -------------
Net increase -- Class A....... 367,077 3,301,529 62,940 604,915
----------- ------------- ----------- -------------
CLASS B SHARES
Sold.......................... 31,041,632 280,038,843 28,272,528 246,845,233
Reinvestment of dividends..... 1,603,788 14,454,587 1,998,950 17,421,227
Redeemed...................... (31,774,946) (286,389,627) (39,670,884) (345,885,470)
----------- ------------- ----------- -------------
Net increase (decrease) --
Class B...................... 870,474 8,103,803 (9,399,406) (81,619,010)
----------- ------------- ----------- -------------
CLASS C SHARES
Sold.......................... 2,791,816 25,581,351 1,907,176 16,921,690
Reinvestment of dividends..... 50,997 463,904 45,607 401,053
Redeemed...................... (2,368,022) (21,743,242) (2,039,464) (18,041,761)
----------- ------------- ----------- -------------
Net increase (decrease) --
Class C...................... 474,791 4,302,013 (86,681) (719,018)
----------- ------------- ----------- -------------
CLASS D SHARES
Sold.......................... 1,670,998 15,137,556 6,061,166 52,868,442
Reinvestment of dividends..... 29,076 261,493 25,877 225,055
Redeemed...................... (1,530,494) (13,879,909) (6,222,581) (54,252,975)
----------- ------------- ----------- -------------
Net increase (decrease) --
Class D...................... 169,580 1,519,140 (135,538) (1,159,478)
----------- ------------- ----------- -------------
Net increase (decrease) in
Fund......................... 1,881,922 $ 17,226,485 (9,558,685) $ (82,892,591)
=========== ============= =========== =============
6. Purposes of and Risks Relating to Certain Financial Instruments
To hedge against adverse interest rate and market risks on portfolio positions
or anticipated positions in U.S. Government securities, or in the case of
written options, to close out long or short positions in futures contracts, the
Fund may enter into written options on interest rate futures and interest rate
futures contracts ("derivative instruments").
These derivative instruments involve elements of market risk in excess of the
amount reflected in the Statement of Assets and Liabilities. The Fund bears the
risk of an unfavorable change in the value of the underlying securities.
46
Morgan Stanley Federal Securities Trust
NOTES TO FINANCIAL STATEMENTS / / OCTOBER 31, 2001 CONTINUED
At October 31, 2001, the Fund had outstanding interest rate futures contracts.
7. Federal Income Tax Status
During the year ended October 31, 2001, the Fund utilized approximately
$9,555,000 of its net capital loss carryover. At October 31, 2001, the Fund had
a net capital loss carryover of approximately $24,640,000, to offset future
capital gains to the extent provided by regulations, available through
October 31 of the following years:
[Download Table]
AMOUNT IN THOUSANDS
---------------------
2002 2004 2007
------- ---- ------
$21,569 $690 $2,381
------- ---- ------
At October 31, 2001, the Fund was required for Federal income tax purposes to
defer approximately $5,003,000 of realized losses on certain closed options and
futures contracts.
As of October 31, 2001, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on straddles and permanent book/tax
differences primarily attributable to reclassifications of net losses on
paydowns. To reflect reclassifications arising from the permanent differences,
accumulated net realized loss was charged $603,520, accumulated undistributed
net investment income was credited $443,326 and paid-in-capital was credited
$160,194.
8. Change in Accounting Policy
Effective November 1, 2001, the Fund will adopt the provisions of the AICPA
Audit and Accounting Guide for Investment Companies, as revised, related to
premiums and discounts on debt securities. The cumulative effect of this
accounting change will have no impact on the net assets of the Fund, but will
result in an adjustment to the cost of securities and a corresponding adjustment
to undistributed net investment income based on securities held as of
October 31, 2001.
47
Morgan Stanley Federal Securities Trust
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
[Enlarge/Download Table]
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31, JULY 28, 1997*
------------------------------------------------------ THROUGH
2001 2000 1999 1998 OCTOBER 31, 1997
----------- ----------- ----------- ----------- ----------------
Class A Shares
Selected Per Share Data:
Net asset value,
beginning of period..... $ 8.98 $ 9.01 $ 9.79 $ 9.45 $ 9.26
------- ------- ------ ------ -------
Income (loss) from
investment operations:
Net investment
income................ 0.54 0.63 0.62 0.64 0.16
Net realized and
unrealized gain
(loss)................ 0.53 (0.03) (0.78) 0.34 0.19
------- ------- ------ ------ -------
Total income (loss) from
investment operations... 1.07 0.60 (0.16) 0.98 0.35
------- ------- ------ ------ -------
Less dividends from net
investment income....... (0.54) (0.63) (0.62) (0.64) (0.16)
------- ------- ------ ------ -------
Net asset value, end of
period.................. $ 9.51 $ 8.98 $ 9.01 $ 9.79 $ 9.45
======= ======= ====== ====== =======
Total Return+............ 12.28% 6.97% (1.66)% 10.75% 3.78%(1)
Ratios to Average Net
Assets:
Expenses................. 0.91%(3) 0.82%(3) 0.91%(3) 0.93%(3) 0.92%(2)
Net investment income.... 5.90%(3) 7.05%(3) 6.65%(3) 6.70%(3) 6.60%(2)
Supplemental Data:
Net assets, end of
period, in thousands.... $8,593 $4,821 $4,272 $4,894 $2,051
Portfolio turnover
rate.................... 157% 64% 17% 13% 12%
---------------------
* THE DATE SHARES WERE FIRST ISSUED.
+ 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
48
Morgan Stanley Federal Securities Trust
FINANCIAL HIGHLIGHTS CONTINUED
[Enlarge/Download Table]
FOR THE YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997*
----------- ----------- ----------- ----------- -----------
Class B Shares
Selected Per Share Data:
Net asset value,
beginning of period..... $ 8.85 $ 8.87 $ 9.72 $ 9.36 $ 9.25
-------- -------- -------- -------- --------
Income (loss) from
investment operations:
Net investment
income................ 0.47 0.55 0.55 0.58 0.59
Net realized and
unrealized gain
(loss)................ 0.50 (0.02) (0.85) 0.36 0.11
-------- -------- -------- -------- --------
Total income (loss) from
investment operations... 0.97 0.53 (0.30) 0.94 0.70
-------- -------- -------- -------- --------
Less dividends from net
investment income....... (0.47) (0.55) (0.55) (0.58) (0.59)
-------- -------- -------- -------- --------
Net asset value, end of
period.................. $ 9.35 $ 8.85 $ 8.87 $ 9.72 $ 9.36
======== ======== ======== ======== ========
Total Return+............ 11.38% 6.26% (3.09)% 10.35% 7.89%
Ratios to Average Net
Assets:
Expenses................. 1.56%(1) 1.57%(1) 1.55%(1) 1.54%(1) 1.53%
Net investment income.... 5.25%(1) 6.30%(1) 6.01%(1) 6.09%(1) 6.41%
Supplemental Data:
Net assets, end of
period, in thousands.... $490,351 $456,418 $540,916 $639,212 $623,049
Portfolio turnover
rate.................... 157% 64% 17% 13% 12%
---------------------
* 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.
+ 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
49
Morgan Stanley Federal Securities Trust
FINANCIAL HIGHLIGHTS CONTINUED
[Enlarge/Download Table]
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31, JULY 28, 1997*
-------------------------------------------------------- THROUGH
2001 2000 1999 1998 OCTOBER 31, 1997
----------- ----------- ----------- ----------- ----------------
Class C Shares
Selected Per Share Data:
Net asset value,
beginning of period..... $ 8.93 $ 8.95 $ 9.80 $ 9.44 $ 9.26
------- ------- ------- ------ ------
Income (loss) from
investment operations:
Net investment
income................ 0.48 0.56 0.56 0.58 0.15
Net realized and
unrealized gain
(loss)................ 0.50 (0.02) (0.85) 0.36 0.18
------- ------- ------- ------ ------
Total income (loss) from
investment operations... 0.98 0.54 (0.29) 0.94 0.33
------- ------- ------- ------ ------
Less dividends from net
investment income....... (0.48) (0.56) (0.56) (0.58) (0.15)
------- ------- ------- ------ ------
Net asset value, end of
period.................. $ 9.43 $ 8.93 $ 8.95 $ 9.80 $ 9.44
======= ======= ======= ====== ======
Total Return+............ 11.33% 6.26% (3.03)% 10.30% 3.54%(1)
Ratios to Average Net
Assets:
Expenses................. 1.56%(3) 1.57%(3) 1.55%(3) 1.54%(3) 1.52%(2)
Net investment income.... 5.25%(3) 6.30%(3) 6.01%(3) 6.09%(3) 5.86%(2)
Supplemental Data:
Net assets, end of
period, in thousands.... $15,248 $10,191 $10,995 $7,204 $721
Portfolio turnover
rate.................... 157% 64% 17% 13% 12%
---------------------
* THE DATE SHARES WERE FIRST ISSUED.
+ 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
50
Morgan Stanley Federal Securities Trust
FINANCIAL HIGHLIGHTS CONTINUED
[Enlarge/Download Table]
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31, JULY 28, 1997*
-------------------------------------------------------- THROUGH
2001 2000 1999 1998 OCTOBER 31, 1997
----------- ----------- ----------- ----------- ----------------
Class D Shares
Selected Per Share Data:
Net asset value,
beginning of period..... $ 8.84 $ 8.86 $ 9.69 $ 9.33 $ 9.26
------ ------ ------ ------ ------
Income (loss) from
investment operations:
Net investment
income................ 0.55 0.63 0.63 0.66 0.17
Net realized and
unrealized gain
(loss)................ 0.49 (0.02) (0.83) 0.36 0.07
------ ------ ------ ------ ------
Total income (loss) from
investment operations... 1.04 0.61 (0.20) 1.02 0.24
------ ------ ------ ------ ------
Less dividends from net
investment income....... (0.55) (0.63) (0.63) (0.66) (0.17)
------ ------ ------ ------ ------
Net asset value, end of
period.................. $ 9.33 $ 8.84 $ 8.86 $ 9.69 $ 9.33
====== ====== ====== ====== ======
Total Return+............ 12.23% 7.17% (2.08)% 11.30% 2.62%(1)
Ratios to Average Net
Assets:
Expenses................. 0.71%(3) 0.72%(3) 0.70%(3) 0.69%(3) 0.63%(2)
Net investment income.... 6.10%(3) 7.15%(3) 6.86%(3) 6.94%(3) 6.40%(2)
Supplemental Data:
Net assets, end of
period, in thousands.... $6,206 $4,378 $5,590 $1,956 $69
Portfolio turnover
rate.................... 157% 64% 17% 13% 12%
---------------------
* THE DATE SHARES WERE FIRST ISSUED.
+ 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
51
Morgan Stanley Federal Securities Trust
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Trustees of
Morgan Stanley Federal Securities Trust:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Federal Securities Trust (the "Fund"), formerly Morgan Stanley Dean
Witter Federal Securities Trust, including the portfolio of investments, as of
October 31, 2001, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2001, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Federal Securities Trust as of October 31, 2001, 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 accounting principles generally
accepted in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
DECEMBER 11, 2001
2001 FEDERAL TAX NOTICE (UNAUDITED)
Of the Fund's ordinary income dividends paid during the fiscal
year ended October 31, 2001, 68.70% was attributable to qualifying
Federal obligations. Please consult your tax advisor to determine
if any portion of the dividends you received is exempt from state
income tax.
52
MORGAN STANLEY FEDERAL SECURITIES TRUST
PART C OTHER INFORMATION
ITEM 23. EXHIBITS
1(a). Declaration of Trust of Registrant, dated November 20, 1986, is
incorporated by reference to Exhibit 1(a) of Post-Effective Amendment
No. 10 to the Registration Statement on Form N-1A, filed on January
25, 1996.
1(b). Instrument Establishing and Designating Additional Classes is
incorporated by reference to Exhibit 1 of Post-Effective Amendment
No. 12 to the Registration Statement on Form N-1A, filed on July
17, 1997.
1(c). Amendment to the Declaration of Trust of the Registrant, dated June
22, 1998, is incorporated by reference to Exhibit 1 of Post-Effective
Amendment No. 14 to the Registration Statement on Form N-1A, filed on
December 28, 1998.
1(d). Amendment to the Declaration of Trust of the Registrant, dated June
18, 2001, filed herein.
2. Amended and Restated By-Laws of the Registrant, dated May 1, 1999, is
incorporated by reference to Exhibit 2 of Post-Effective Amendment
No. 16 to the Registration Statement on Form N-1A, filed on January
31, 2000.
3. Not applicable.
4. Amended Investment Management Agreement between the Registrant and
Morgan Stanley Investment Advisors Inc., dated April 30, 1998, is
incorporated by reference to Exhibit 5 of Post-Effective Amendment
No. 14 to the Registration Statement on Form N-1A, filed on December
28, 1998.
5(a). Amended Distribution Agreement between the Registrant and Morgan
Stanley Distributors Inc., dated June 22, 1998, is incorporated by
reference to Exhibit 6(a) of Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A, filed on December 28, 1998.
5(b). Selected Dealers Agreement between Morgan Stanley Distributors Inc.
and Morgan Stanley DW Inc., dated June 7, 1993, is incorporated by
reference to Exhibit 6 of Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A, filed on January 25, 1996.
5(c). Omnibus Selected Dealer Agreement between Morgan Stanley Distributors
Inc. and National Financial Services Corporation, dated October 17,
1998, is incorporated by reference to Exhibit 6(b) of Post-Effective
Amendment No. 14 to the Registration Statement on Form N-1A filed on
December 28, 1999.
6. Amended and Restated Retirement Plan for Non-Interested Trustees or
Directors, dated May 8, 1997, is incorporated by reference to Exhibit
6 of Post-Effective Amendment No. 16 to the Registration Statement on
Form N-1A, filed on January 31, 2000.
7(a). Custodian Agreement between The Bank of New York and the Registrant,
dated September 20, 1991, is incorporated by reference to Exhibit 8
of Post-Effective Amendment No. 10 to the Registration Statement on
Form N-1A, filed on January 25, 1996.
7(b). Amendment to the Custodian Agreement between The Bank of New York and
the Registrant, dated April 17,1996, is incorporated by reference to
Exhibit 8 of Post-Effective Amendment No. 11 to the Registration
Statement on Form N-1A, filed on December 24, 1996.
7(c). Amendment, dated June 15, 2001, to the Custody Agreement of the
Registrant, filed herein.
7(d). Foreign Custody Manager Agreement between The Bank of New York and
the Registrant, dated June 15, 2001, filed herein.
8(a). Amended and Restated Transfer Agency Agreement between the Registrant
and Morgan Stanley Trust, dated September 1, 2000, is incorporated by
reference to Exhibit 8 (a) of Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A, filed on February 8, 2001.
8(b). Amended Services Agreement between Morgan Stanley Investment Advisors
Inc. and Morgan Stanley Services Company Inc., dated June 22, 1998,
is incorporated by reference to Exhibit 9 of Post-Effective Amendment
No. 14 to the Registration Statement on Form N-1A, filed on December
28, 1998.
9. Opinion of Sheldon Curtis, Esq., dated January 12, 1987, is
incorporated by reference to Exhibit 9 of Post-Effective Amendment
No. 16 to the Registration Statement on Form N-1A, filed on January
31, 2000.
10. Consent of Independent Auditors, filed herein.
11. Not applicable.
12. Not applicable.
13. Amended and Restated Plan of Distribution pursuant to Rule 12b-1
between the Registrant and Morgan Stanley Distributors Inc., dated
July 28, 1997, is incorporated by reference to Exhibit 15 of
Post-Effective Amendment No. 12 to the Registration Statement on Form
N-1A, filed on July 17, 1997.
14. Amended Multiple Class Plan pursuant to Rule 18f-3, dated March 12,
2001, filed herein.
15. Not applicable
16(a). Code of Ethics of Morgan Stanley Investment Advisors Inc., Morgan
Stanley Distributors Inc., as well as other Morgan Stanley affiliated
entities, filed herein.
16(b). Code of Ethics of the Morgan Stanley Funds, filed herein.
Other. Powers of Attorney of Trustees are incorporated by reference to
Exhibit (Other) of Post-Effective Amendment No. 9 to the Registration
Statement on Form N-1A, filed on December 23, 1994, Exhibit (Other)
of Post-Effective Amendment No.13 to the Registration Statement on
Form N-1A, filed on December 24, 1997 and Exhibit (Other) of
Post-Effective Amendment No. 17 to the Registration Statement on Form
N-1A, filed on February 8, 2001.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND.
None
ITEM 25. INDEMNIFICATION.
Pursuant to Section 5.3 of the Registrant's Declaration of Trust and under
Section 4.8 of the Registrant's By-Laws, the indemnification of the Registrant's
trustees, officers, employees and agents is permitted if it is determined that
they acted under the belief that their actions were in or not opposed to the
best interest of the Registrant, and, with respect to any criminal proceeding,
they had reasonable
2
cause to believe their conduct was not unlawful. In addition, indemnification is
permitted only if it is determined that the actions in question did not render
them liable by reason of willful misfeasance, bad faith or gross negligence in
the performance of their duties or by reason of reckless disregard of their
obligations and duties to the Registrant. Trustees, officers, employees and
agents will be indemnified for the expense of litigation if it is determined
that they are entitled to indemnification against any liability established in
such litigation. The Registrant may also advance money for these expenses
provided that they give their undertakings to repay the Registrant unless their
conduct is later determined to permit indemnification.
Pursuant to Section 5.2 of the Registrant's Declaration of Trust and
paragraph 8 of the Registrant's Investment Management Agreement, neither the
Investment Manager nor any trustee, officer, employee or agent of the Registrant
shall be liable for any action or failure to act, except in the case of bad
faith, willful misfeasance, gross negligence or reckless disregard of duties to
the Registrant.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a trustee, officer, or controlling person of the Registrant
in connection with the successful defense of any action, suit or proceeding) is
asserted against the Registrant by such trustee, officer or controlling person
in connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act, and will
be governed by the final adjudication of such issue.
The Registrant hereby undertakes that it will apply the indemnification
provision of its by-laws in a manner consistent with Release 11330 of the
Securities and Exchange Commission under the Investment Company Act of 1940, so
long as the interpretation of Sections 17(h) and 17(i) of such Act remains in
effect.
The Registrant, in conjunction with the Investment Manager, the
Registrant's Trustees, and other registered investment management companies
managed by the Investment Manager, maintains insurance on behalf of any person
who is or was a Trustee, officer, employee, or agent of the Registrant, or who
is or was serving at the request of the Registrant as a trustee, director,
officer, employee or agent of another trust or corporation, against any
liability asserted against him and incurred by him or arising out of his
position. However, in no event will Registrant maintain insurance to indemnify
any such person for any act for which the Registrant itself is not permitted to
indemnify him.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
See "Fund Management" in the Prospectus regarding the business of the
investment advisor. The following information is given regarding officers of
Morgan Stanley Investment Advisors Inc. ("Morgan Stanley Advisors"). Morgan
Stanley Advisors is a wholly-owned subsidiary of Morgan Stanley & Co.
THE PRINCIPAL ADDRESSES ARE AS FOLLOWS:
MORGAN STANLEY FUNDS
MORGAN STANLEY SERVICES COMPANY INC. ("MORGAN STANLEY SERVICES")
c/o Morgan Stanley Trust, Harborside Financial Center,
Plaza Two, Jersey City, New Jersey 07311
3
MORGAN STANLEY DISTRIBUTORS INC. ("MORGAN STANLEY DISTRIBUTORS")
MORGAN STANLEY DW INC. ("MORGAN STANLEY DW")
MORGAN STANLEY INVESTMENT ADVISORS
MORGAN STANLEY INVESTMENT MANAGEMENT
MORGAN STANLEY INVESTMENT MANAGEMENT INC.
MORGAN STANLEY INVESTMENT GROUP INC. ("MORGAN STANLEY INVESTMENT GROUP")
THE UNIVERSAL INSTITUTIONAL FUNDS, INC. ("UNIVERSAL INSTITUTIONAL FUNDS")
1221 Avenue of the Americas New York, New York 10020.
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT LTD.
MORGAN STANLEY & CO. INTERNATIONAL LIMITED ("MORGAN STANLEY & CO.
INTERNATIONAL")
25 Cabot Square, London, England.
MORGAN STANLEY INVESTMENTS LP
MORGAN STANLEY INSTITUTIONAL FUND TRUST
MORGAN STANLEY DISTRIBUTION, INC.
One Tower Bridge, West Conshohocken, PA 19428.
VAN KAMPEN INVESTMENT ASSET MANAGEMENT INC. ("VAN KAMPEN")
1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, IL 60181
MORGAN STANLEY TRUST ("MORGAN STANLEY TRUST")
Harborside Financial Center, Plaza Two, Jersey City, New Jersey 07311.
[Enlarge/Download Table]
NAME AND POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION OR EMPLOYMENT,
MORGAN STANLEY INVESTMENT ADVISORS INCLUDING NAME, PRINCIPAL ADDRESS AND NATURE OF CONNECTION
---------------------------------- ---------------------------------------------------------------
Mitchell M. Merin President and Chief Operating Officer of Morgan Stanley
President, Chief Executive Officer Investment Management; Chairman, Chief Executive Officer and
and Director Director of Morgan Stanley Distributors and Morgan Stanley
Trust; President, Chief Executive Officer and Director of
Morgan Stanley Services; President of the Morgan Stanley
Funds; Executive Vice President and Director of Morgan
Stanley DW; Director of Morgan Stanley Investment Management
Inc.; Member of the Executive Committee of Morgan Stanley
Investments LP; Director of various Morgan Stanley
subsidiaries; Trustee of various Van Kampen investment
companies.
Barry Fink Managing Director and General Counsel of Morgan Stanley
Managing Director Investment Management; Managing Director, Secretary and
Secretary and Director Director of Morgan Stanley Services; Vice President and
Secretary of Morgan Stanley Distributors; Vice President,
Secretary and General Counsel of the Morgan Stanley Funds.
A. Thomas Smith III Managing Director and General Counsel of Morgan Stanley
Managing Director and Services; Vice President and Assistant Secretary of the
General Counsel Morgan Stanley Funds.
Joseph J. McAlinden Chief Investment Officer and Managing Director of Morgan
Managing Director and Stanley Investment Management Inc.; Chief Investment Officer
Chief Investment Officer and Managing Director of Morgan Stanley Investments LP;
Director of Morgan Stanley Trust.
Barton M. Biggs Chairman, Senior Advisor, Managing Director and Director
Managing Director of Morgan Stanley Investment Management Inc. and Managing
And Senior Advisor Director of Morgan Stanley Investments LP.
4
[Enlarge/Download Table]
NAME AND POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION OR EMPLOYMENT,
MORGAN STANLEY INVESTMENT ADVISORS INCLUDING NAME, PRINCIPAL ADDRESS AND NATURE OF CONNECTION
---------------------------------- --------------------------------------------------------------
Thomas L. Bennett Managing Director and Director of Morgan Stanley Investment
Managing Director Management Inc.; Director of the Universal Institutional Funds;
Managing Director and Executive Committee member of Morgan
Stanley Investments LP; Chairman of Morgan Stanley Institutional
Fund Trust; Director of Morgan Stanley Distribution, Inc.
Ronald E. Robison Managing Director, Chief Administrative Officer and
Managing Director, and Director of Morgan Stanley Services and Chief Executive
Chief Administrative Officer and Officer and Director of Morgan Stanley Trust.
Director
Dominic P. Caldecott Managing Director of Morgan Stanley Investment Management
Managing Director Inc., Morgan Stanley Investments LP and Morgan Stanley Dean
Witter Investment
Management Ltd.; Vice President and Investment Manager of
Morgan Stanley & Co. International.
Rajesh K. Gupta Managing Director and Chief Administrative Officer-
Managing Director and Investments of Morgan Stanley Investment Management Inc.
Chief Administrative Officer- and Morgan Stanley Investments LP.
Investments
Robert S. Giambrone Executive Director of Morgan Stanley Services, Morgan
Executive Director Stanley Distributors and Morgan Stanley Trust; Director of
Morgan Stanley Trust.
John B. Kemp, III President of Morgan Stanley Distributors.
Executive Director
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Morgan Stanley Distributors Inc., a Delaware corporation, is the principal
underwriter of the Registrant. Morgan Stanley Distributors is also the principal
underwriter of the following investment companies:
(1) Active Assets California Tax-Free Trust
(2) Active Assets Government Securities Trust
(3) Active Assets Institutional Money Trust
(4) Active Assets Money Trust
(5) Active Assets Premier Money Trust
(6) Active Assets Tax-Free Trust
(7) Morgan Stanley 21st Century Trend Fund
(8) Morgan Stanley Aggressive Equity Fund
(9) Morgan Stanley All Star Growth Fund
(10) Morgan Stanley American Opportunities Fund
(11) Morgan Stanley Balanced Growth Fund
(12) Morgan Stanley Balanced Income Fund
(13) Morgan Stanley California Tax-Free Daily Income Trust
(14) Morgan Stanley California Tax-Free Income Fund
(15) Morgan Stanley Capital Growth Securities
(16) Morgan Stanley Competitive Edge Fund, "BEST IDEAS PORTFOLIO"
(17) Morgan Stanley Convertible Securities Trust
5
(18) Morgan Stanley Developing Growth Securities Trust
(19) Morgan Stanley Diversified Income Trust
(20) Morgan Stanley Dividend Growth Securities Inc.
(21) Morgan Stanley Equity Fund
(22) Morgan Stanley European Growth Fund Inc.
(23) Morgan Stanley Federal Securities Trust
(24) Morgan Stanley Financial Services Trust
(25) Morgan Stanley Fund of Funds
(26) Morgan Stanley Global Dividend Growth Securities
(27) Morgan Stanley Global Utilities Fund
(28) Morgan Stanley Growth Fund
(29) Morgan Stanley Hawaii Municipal Trust
(30) Morgan Stanley Health Sciences Trust
(31) Morgan Stanley High Yield Securities Inc.
(32) Morgan Stanley Income Builder Fund
(33) Morgan Stanley Information Fund
(34) Morgan Stanley Intermediate Income Securities
(35) Morgan Stanley International Fund
(36) Morgan Stanley International SmallCap Fund
(37) Morgan Stanley International Value Equity Fund
(38) Morgan Stanley Japan Fund
(39) Morgan Stanley KLD Social Index Fund
(40) Morgan Stanley Latin American Growth Fund
(41) Morgan Stanley Limited Duration Fund
(42) Morgan Stanley Limited Term Municipal Trust
(43) Morgan Stanley Liquid Asset Fund Inc.
(44) Morgan Stanley Market Leader Trust
(45) Morgan Stanley Mid-Cap Equity Trust
(46) Morgan Stanley Mid-Cap Value Fund
(47) Morgan Stanley Multi-State Municipal Series Trust
(48) Morgan Stanley Nasdaq-100 Index Fund
(49) Morgan Stanley Natural Resource Development Securities Inc.
(50) Morgan Stanley New Discoveries Fund
(51) Morgan Stanley New York Municipal Money Market Trust
(52) Morgan Stanley New York Tax-Free Income Fund
(53) Morgan Stanley Next Generation Trust
(54) Morgan Stanley North American Government Income Trust
(55) Morgan Stanley Pacific Growth Fund Inc.
(56) Morgan Stanley Prime Income Trust
(57) Morgan Stanley Real Estate Fund
(58) Morgan Stanley S&P 500 Index Fund
(59) Morgan Stanley S&P 500 Select Fund
(60) Morgan Stanley Short-Term U.S. Treasury Trust
(61) Morgan Stanley Small Cap Growth Fund
(62) Morgan Stanley Special Value Fund
(63) Morgan Stanley Strategist Fund
(64) Morgan Stanley Tax-Exempt Securities Trust
(65) Morgan Stanley Tax-Free Daily Income Trust
(66) Morgan Stanley Tax-Managed Growth Fund
(67) Morgan Stanley Technology Fund
(68) Morgan Stanley Total Market Index Fund
(69) Morgan Stanley Total Return Trust
6
(70) Morgan Stanley U.S. Government Money Market Trust
(71) Morgan Stanley U.S. Government Securities Trust
(72) Morgan Stanley Utilities Fund
(73) Morgan Stanley Value-Added Market Series
(74) Morgan Stanley Value Fund
(75) Morgan Stanley Variable Investment Series
(b) The following information is given regarding directors and officers of
Morgan Stanley Distributors not listed in Item 26 above. The principal address
of Morgan Stanley Distributors is 1221 Avenue of the Americas, New York, New
York 10020. Other than Messrs. Higgins and Purcell, who are Trustees of the
Registrant, none of the following persons has any position or office with the
Registrant.
NAME POSITIONS AND OFFICE WITH MORGAN STANLEY DISTRIBUTORS
----- ------------------------------------------------------
James F. Higgins Director
Philip J. Purcell Director
John Schaeffer Director
Charles Vadala Senior Vice President and Financial Principal.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder are
maintained by the Investment Manager at its offices, except records relating to
holders of shares issued by the Registrant, which are maintained by the
Registrant's Transfer Agent, at its place of business as shown in the
prospectus.
ITEM 29. MANAGEMENT SERVICES
Registrant is not a party to any such management-related service contract.
ITEM 30. UNDERTAKINGS
Registrant hereby undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York on the 28th day of December, 2001.
MORGAN STANLEY FEDERAL SECURITIES TRUST
By: /s/ Barry Fink
-------------------
Barry Fink
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 18 has been signed below by the following persons
in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
(1) Principal Executive Officer Chairman, Chief Executive
Officer and Trustee
By: /s/ Charles A. Fiumefreddo 12/28/01
----------------------
Charles A. Fiumefreddo
(2) Principal Financial Office Treasurer and Principal
Accounting Officer
By: /s/ Thomas F. Caloia 12/28/01
----------------------
Thomas F. Caloia
(3) Majority of the Trustees
Charles A. Fiumefreddo (Chairman)
James F. Higgins
Philip J. Purcell
By: /s/ Barry Fink 12/28/01
----------------------
Barry Fink
Attorney-in-Fact
Michael Bozic Manuel H. Johnson
Edwin J. Garn Michael E. Nugent
Wayne E. Hedien John L. Schroeder
By: /s/ David M. Butowsky 12/28/01
-----------------
David M. Butowsky
Attorney-in-Fact
MORGAN STANLEY FEDERAL SECURITIES TRUST
EXHIBIT INDEX
1(d). Amendment to the Declaration of Trust of the Registrant, dated June
18, 20001
7(c). Amendment dated June 15, 2001 to the Custody Agreement of the
Registrant
7(d). Foreign Custody Manager Agreement between the Bank of New York and
the Registrant, dated June 15, 2001
10. Consent of Independent Auditors
14. Amended Multiple Class Plan pursuant to Rule 18f-3, dated March 12,
2001
16(a). Code of Ethics of Morgan Stanley Investment Advisors Inc., Morgan
Stanley Distributors Inc., as well as other Morgan Stanley affiliated
entities
16(b). Code of Ethics of the Morgan Stanley Funds
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘485BPOS’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 12/31/01 | | 1 | | 30 |
| Filed on / Effective on: | | 12/28/01 | | 1 |
| | 12/11/01 | | 81 |
| | 12/7/01 | | 48 |
| | 11/30/01 | | 10 |
| | 11/1/01 | | 76 |
| | 10/31/01 | | 8 | | 81 | | | 24F-2NT, N-30D, NSAR-B |
| | 9/30/01 | | 7 |
| | 6/18/01 | | 33 | | 82 | | | 497 |
| | 6/15/01 | | 83 | | 90 |
| | 3/12/01 | | 83 | | 90 |
| | 2/8/01 | | 83 | | | | | 485BPOS |
| | 1/1/01 | | 61 |
| | 12/31/00 | | 5 | | 61 |
| | 10/31/00 | | 41 | | 75 | | | 24F-2NT, N-30D, NSAR-B |
| | 9/1/00 | | 83 |
| | 1/31/00 | | 82 | | 83 | | | 485BPOS |
| | 12/28/99 | | 82 |
| | 10/31/99 | | 49 | | 56 | | | 24F-2NT, N-30D, NSAR-B |
| | 5/1/99 | | 82 |
| | 12/28/98 | | 82 | | 83 | | | 485APOS |
| | 10/31/98 | | 24 | | | | | 24F-2NT, N-30D, NSAR-B |
| | 10/17/98 | | 82 |
| | 9/11/98 | | 23 |
| | 6/22/98 | | 33 | | 83 | | | 497 |
| | 4/30/98 | | 82 | | | | | N-30D, NSAR-A |
| | 12/24/97 | | 83 | | | | | 485BPOS |
| | 10/31/97 | | 26 | | 80 | | | 24F-2NT, N-30D, NSAR-B |
| | 7/28/97 | | 7 | | 83 | | | 497J |
| | 7/17/97 | | 82 | | 83 | | | 485BPOS |
| | 5/21/97 | | 58 | | | | | DEFS14A |
| | 5/8/97 | | 82 |
| | 5/1/97 | | 21 |
| | 12/24/96 | | 82 | | | | | 485BPOS |
| | 1/25/96 | | 82 | | | | | 485BPOS |
| | 6/30/95 | | 7 |
| | 12/23/94 | | 83 | | | | | 485BPOS |
| | 3/31/94 | | 7 |
| | 6/7/93 | | 82 |
| | 8/17/92 | | 33 |
| List all Filings |
4 Subsequent Filings that Reference this Filing
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