Document/Exhibit Description Pages Size
1: 485BPOS Post-Effective Amendment 89 423K
2: EX-99.(D) Miscellaneous Exhibit 26 128K
3: EX-99.(I)(1) Miscellaneous Exhibit 1 9K
4: EX-99.(I)(2) Miscellaneous Exhibit 2 13K
5: EX-99.(J) Miscellaneous Exhibit 1 7K
6: EX-99.(M) Miscellaneous Exhibit 15 47K
7: EX-99.(P)(1) Miscellaneous Exhibit 22 65K
8: EX-99.(P)(2) Miscellaneous Exhibit 4 16K
9: EX-99.OTHER Miscellaneous Exhibit 12 39K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 2004
REGISTRATION NO. 333-59140
811-10359
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 3 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 /X/
AMENDMENT NO. 4 /X/
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MORGAN STANLEY
MID-CAP VALUE FUND
(A MASSACHUSETTS BUSINESS TRUST)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 869-6397
AMY R. DOBERMAN, ESQ.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(NAME AND ADDRESS OF AGENT FOR SERVICE)
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COPY TO:
CARL FRISCHLING, ESQ. STUART M. STRAUSS, ESQ.
KRAMER LEVIN NAFTALIS & FRANKEL LLP CLIFFORD CHANCE US LLP
919 THIRD AVENUE 31 WEST 52ND STREET
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10019
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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):
/ / Immediately upon filing pursuant to paragraph (b)
/X/ On October 29, 2004 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / On (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)
/ / On (date) pursuant to paragraph (a)(2) of Rule 485.
AMENDING THE PROSPECTUS AND UPDATING FINANCIAL STATEMENTS
If appropriate, check the following box:
/ / This post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
================================================================================
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY MID-CAP VALUE FUND
A MUTUAL FUND THAT SEEKS ABOVE-AVERAGE TOTAL RETURN
[MORGAN STANLEY LOGO]
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.
PROSPECTUS
OCTOBER 29, 2004
CONTENTS
[Download Table]
THE FUND
Investment Objective 1
Principal Investment Strategies 1
Principal Risks 2
Past Performance 4
Fees and Expenses 6
Additional Investment Strategy Information 7
Additional Risk Information 8
Fund Management 9
SHAREHOLDER INFORMATION
Pricing Fund Shares 11
How to Buy Shares 11
How to Exchange Shares 13
How to Sell Shares 14
Distributions 16
Tax Consequences 17
Share Class Arrangements 18
Additional Information 25
FINANCIAL HIGHLIGHTS 26
MORGAN STANLEY FUNDS Inside Back Cover
This PROSPECTUS contains important information about the Fund. Please read it
carefully and keep it for future reference.
THE FUND
INVESTMENT OBJECTIVES
[GRAPHIC]
Morgan Stanley Mid-Cap Value Fund seeks above-average total return.
PRINCIPAL INVESTMENT STRATEGIES
[GRAPHIC]
The Fund will normally invest at least 80% of its assets in common stock and
other equity securities, including depositary receipts and securities
convertible into common stock, of companies traded on a U.S. securities exchange
with market capitalizations that fall within the range of companies included in
the Russell Midcap Value Index. As of September 30, 2004, these market
capitalizations range between $525 million and $15.24 billion. In pursuing its
investment objective, the Fund's "Investment Manager," Morgan Stanley Investment
Advisors Inc., seeks attractively valued companies experiencing a change that
the Investment Manager believes could have a positive impact on a company's
outlook, such as a change in management, industry dynamics or operational
efficiency. In determining whether securities should be sold, the Investment
Manager considers a number of factors, including appreciation to fair value,
fundamental change in the company or changes in economic or market trends. The
Investment Manager may purchase stocks that typically do not pay dividends.
Common stock is a share ownership or equity interest in a corporation. It may or
may not pay dividends, as some companies reinvest all of their profits back into
their businesses, while others pay out some of their profits to shareholders as
dividends. A depositary receipt is generally issued by a bank or financial
institution and represents an ownership interest in the common stock or other
equity securities of a foreign company. A convertible security is a bond,
preferred stock or other security that may be converted into a prescribed amount
of common stock at a particular time and price.
The Fund may invest up to 20% of its net assets in foreign securities. This
percentage limitation, however, does not apply to securities of foreign
companies that are listed in the United States on a national securities
exchange. In addition, the Fund may invest up to 20% of its assets in investment
grade fixed-income securities and may use options and futures, REITs, swaps and
forward foreign currency exchange contracts.
[SIDENOTE]
TOTAL RETURN
AN INVESTMENT OBJECTIVE HAVING THE GOAL OF SELECTING SECURITIES WITH THE
POTENTIAL TO RISE IN PRICE AND PAY OUT INCOME.
1
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.
PRINCIPAL RISKS
[GRAPHIC]
There is no assurance that the Fund will achieve its investment objective. The
Fund's share price and return will fluctuate with changes in the market value of
the Fund's portfolio securities. When you sell Fund shares, they may be worth
less than what you paid for them and, accordingly, you can lose money investing
in this Fund.
COMMON STOCKS. A principal risk of investing in the Fund is associated with its
common stock investments. In general, stock values fluctuate in response to
activities specific to the company as well as general market, economic and
political conditions. Stock prices can fluctuate widely in response to these
factors.
MEDIUM CAPITALIZATION COMPANIES. Investing in securities of medium-sized
companies may involve greater risk than is customarily associated with investing
in more established companies. Often, medium-sized companies and the industries
in which they are focused are still evolving, and they are more sensitive to
changing market conditions than larger companies in more established industries.
Their securities may be more volatile and have returns that vary, sometimes
significantly, from the overall stock market.
FOREIGN SECURITIES. The Fund's investments in foreign securities may involve
risks that are in addition to the risks associated with domestic securities. One
additional risk is currency risk. While the price of Fund shares is quoted in
U.S. dollars, the Fund generally converts U.S. dollars to a foreign market's
local currency to purchase a security in that market. If the value of that local
currency falls relative to the U.S. dollar, the U.S. dollar value of the foreign
security will decrease. This is true even if the foreign security's local price
remains unchanged.
Foreign securities also have risks related to economic and political
developments abroad, including expropriations, confiscatory taxation, exchange
control regulation, limitations on the use or transfer of Fund assets and any
effects of foreign social, economic or political instability. Foreign companies,
in general, are not subject to the regulatory requirements of U.S. companies
and, as such, there may be less publicly available information about these
companies. Moreover, foreign accounting, auditing and financial reporting
standards generally are different from those applicable to U.S. companies.
Finally, in the event of a default of any foreign debt obligations, it may be
more difficult for the Fund to obtain or enforce a judgment against the issuers
of the securities.
Securities of foreign issuers may be less liquid than comparable securities of
U.S. issuers and, as such, their price changes may be more volatile.
Furthermore, foreign exchanges and broker-dealers are generally subject to less
government and exchange scrutiny and regulation than their U.S. counterparts. In
addition, differences in clearance and settlement procedures in foreign markets
may occasion delays in settlements of the Fund's trades effected in those
markets and could result in losses to the Fund due to subsequent declines in the
value of the securities subject to the trades.
2
Depositary receipts involve substantially identical risks to those associated
with direct investment in foreign securities. In addition, the underlying
issuers of certain depositary receipts, particularly unsponsored or unregistered
depositary receipts, are under no obligation to distribute shareholder
communications to the holders of such receipts, or to pass through to them any
voting rights with respect to the deposited securities.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities which
subject the Fund to the risks associated with both fixed-income securities and
common stocks. Fixed-income securities are subject to two types of risk: credit
risk and interest rate risk. Credit risk refers to the possibility that the
issuer of a security will be unable to make interest payments and/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. To the extent that a convertible security's investment value is greater
than its conversion value, its price will be likely to increase when interest
rates fall and decrease when interest rates rise, as with a fixed-income
security. If the conversion value exceeds the investment value, the price of the
convertible security will tend to fluctuate directly with the price of the
underlying equity security.
OTHER RISKS. The performance of the Fund also will depend on whether or not the
Investment Manager is successful in applying the Fund's investment strategy. The
Fund is subject to other risks from its permissible investments, including the
risks associated with its forward foreign currency exchange contracts, swaps,
options and futures, REITs and fixed-income investments. For more information
about these risks, see the "Additional Risk Information" section.
Shares of the Fund are not bank deposits and are not guaranteed or insured by
the FDIC or any other government agency.
3
PAST PERFORMANCE
[GRAPHIC]
The bar chart and table below provide some indication of the risks of investing
in the Fund. The Fund's past performance (before and after taxes) does not
indicate how the Fund will perform in the future.
[CHART]
ANNUAL TOTAL RETURNS--CALENDAR YEARS
[Download Table]
2002 -28.19%
2003 39.14%
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, 2004 was 2.19%.
During the period shown in the bar chart, the highest return for a calendar
quarter was 21.74% (quarter ended June 30, 2003) and the lowest return for a
calendar quarter was -19.23% (quarter ended September 30, 2002).
[SIDENOTE]
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 TWO CALENDAR YEARS.
4
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 2003)
[Enlarge/Download Table]
LIFE OF FUND
PAST I YEAR (SINCE 10/29/01)
Class A--Return Before Taxes 32.75% 2.45%
Class B--Returns Before Taxes 34.14% 2.96%
Class B--Returns After Taxes on Distributions(1) 34.14% 2.95%
Class B--Returns After Taxes on Distributions and Sale of Fund Shares 22.19% 2.52%
Class C--Return Before Taxes 38.14% 4.28%
Class D--Return Before Taxes 40.50% 5.31%
Russell Midcap Value Index(2) 38.07% 15.71%
Lipper Mid-Cap Core Funds Index(3) 36.58% 10.98%
(1) These returns do not reflect any tax consequences from a sale of your
shares at the end of each period, but they do reflect any applicable sales
charges on such a sale.
(2) The Russell Midcap Value Index measures the performance of those Russell
Midcap companies with lower price-to-book ratios and lower forecasted
growth values. The stocks are also members of the Russell 1000 Value Index.
Indexes are unmanaged and their returns do not include any sales charges or
fees. Such costs would lower performance. It is not possible to invest
directly in an index.
(3) The Lipper Mid-Cap Core Funds Index is an equally weighted performance
index of the largest qualifying funds (based on net assets) in the Lipper
Mid-Cap Core Funds Index classification. The Index, which is adjusted for
capital gains distributions and income dividends, is unmanaged and should
not be considered an investment. There are currently 30 funds represented
in this index.
Included in the table above are the after-tax returns for the Fund's Class B
shares. The after-tax returns for the Fund's other Classes will vary from the
Class B shares' returns. After-tax returns are calculated using the historical
highest individual federal marginal income tax rates during the period shown and
do not reflect the impact of state and local taxes. Actual after-tax returns
depend on an investor's tax situation and may differ from those shown, and
after-tax returns are not relevant to investors who hold their Fund shares
through tax-deferred arrangements, such as 401(k) plans or individual retirement
accounts. After-tax returns may be higher than before-tax returns due to foreign
tax credits and/or an assumed benefit from capital losses that would have been
realized had Fund shares been sold at the end of the relevant periods, as
applicable.
[SIDENOTE]
AVERAGE ANNUAL TOTAL RETURNS
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS WITH THOSE OF TWO
BROAD MEASURES 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 (UNLESS OTHERWISE NOTED).
5
FEES AND EXPENSES
[GRAPHIC]
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.
SHAREHOLDER FEES
[Enlarge/Download Table]
CLASS A CLASS B CLASS C CLASS D
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 5.25%(1) None None None
Maximum deferred sales charge (load) (as a
percentage based on the lesser of the offering
price or net asset value at redemption) None(2) 5.00%(3) 1.00%(4) None
ANNUAL FUND OPERATING EXPENSES
[Download Table]
CLASS A CLASS B CLASS C CLASS D
Management fee 0.80% 0.80% 0.80% 0.80%
Distribution and service (12b-1) fees 0.24% 1.00% 0.92% None
Other expenses 0.36% 0.36% 0.36% 0.36%
Total annual Fund operating expenses 1.40% 2.16% 2.08% 1.16%
(1) Reduced for purchases of $25,000 and over.
(2) Effective December 1, 2004, investments that are not subject to any sales
charges at the time of purchase are subject to a contingent deferred sales
charge ("CDSC") of 1.00% that will be imposed if you sell the shares within
18 months after purchase, except for certain specific circumstances. With
respect to shares purchased prior to December 1, 2004, a CDSC of 1.00% will
be imposed if you sell your shares within one year after purchase, except
for certain specific circumstances.
(3) The CDSC is scaled down to 1.00% during the sixth year, reaching zero
thereafter. See "Share Class Arrangements" for a complete discussion of the
CDSC.
(4) Only applicable if you sell your shares within one year after purchase.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund, your investment has a
5% return each year, and the Fund's operating expenses remain the same. Although
your actual costs may be higher or lower, the table below shows 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.
[SIDENOTE]
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 AUGUST 31, 2004.
6
[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 $ 660 $ 945 $ 1,251 $ 2,117 $ 660 $ 945 $ 1,251 $ 2,117
Class B $ 719 $ 976 $ 1,359 $ 2,493 $ 219 $ 676 $ 1,159 $ 2,493
Class C $ 311 $ 652 $ 1,119 $ 2,410 $ 211 $ 652 $ 1,119 $ 2,410
Class D $ 118 $ 368 $ 638 $ 1,409 $ 118 $ 368 $ 638 $ 1,409
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 shares.
ADDITIONAL INVESTMENT STRATEGY INFORMATION
[GRAPHIC]
This section provides additional information relating to the Fund's principal
investment strategies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund's investments also may
include forward foreign currency exchange contracts, which involve the purchase
or sale of a specific amount of foreign currency at the current price with
delivery at a specified future date. The Fund may use these contracts to hedge
against adverse movements in the foreign currencies in which portfolio
securities are denominated. In addition, the Fund may use these instruments to
modify its exposure to various currency markets.
OPTIONS AND FUTURES. The Fund may invest in put and call options and futures on
its portfolio securities and stock indexes. The Fund may use options and futures
to protect against a decline in the Fund's securities or an increase in prices
of securities that may be purchased.
SWAPS. Swap transactions are contracts in which the Fund agrees to exchange
the return or interest rate on one instrument for the return or interest rate
on another instrument. The payment streams are calculated by reference to a
specified index and agreed upon notational amount. A "specified index" may
include currencies, interest rates, fixed-income indices, securities indices,
total return on interest rate indices or commodity indices. Swaps may be used
to manage the maturity and duration of a fixed-income portfolio, or to gain
exposure to a market without directly investing in securities traded in that
market. Currency swaps generally involve an agreement to pay interest streams
in one currency based on a specified index in exchange for receiving interest
streams denominated in another currency. Interest rate caps, floors and
collars are swaps in which one party pays a single or periodic fixed amount
or premium and the other party pays periodic amounts based on the movement of
a specified index.
DEFENSIVE INVESTING. The Fund may take temporary "defensive" positions in
attempting to respond to adverse market conditions. The Fund may invest any
amount of its assets in cash or money market instruments in a defensive posture
when the Investment Manager believes it is advisable to do so. Although taking a
defensive posture is designed to protect the Fund from an anticipated market
downturn, it could have the effect of reducing the benefit from any upswing in
the market. When the Fund takes a defensive position, it may not achieve its
investment objective.
7
PORTFOLIO TURNOVER. The Fund may engage in active and frequent trading of its
portfolio securities. The Financial Highlights table at the end of this
PROSPECTUS shows the Fund's portfolio turnover rates during the recent fiscal
period. A portfolio turnover rate of 200%, for example, is equivalent to the
Fund buying and selling all of its securities two times during the course of the
year. A high portfolio turnover rate (over 100%) could result in high brokerage
costs and an increase in taxable capital gains distributions to the Fund's
shareholders. See the sections on "Distributions" and "Tax Consequences."
The percentage limitations relating to the composition of the Fund's portfolio
apply at the time the Fund acquires an investment. Subsequent percentage changes
that result from market fluctuations generally 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.
ADDITIONAL RISK INFORMATION
[GRAPHIC]
This section provides additional information relating to the principal risks of
investing in the Fund.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Use of forward foreign currency
exchange contracts involves risks. If the Investment Manager employs a strategy
that does not correlate well with the Fund's investments or the currencies in
which the investments are denominated, currency contracts could result in a
loss. The contracts also may increase the Fund's volatility and, thus, could
involve a significant risk.
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. If the Investment Manager's predictions of movements in the direction of
the stock markets are inaccurate, 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. Certain options may be over-the-counter options which are
options negotiated with dealers; there is no secondary market for these
investments.
FIXED-INCOME SECURITIES. All fixed-income securities are subject to two types of
risk: credit risk and interest rate risk. Credit risk refers to the possibility
that the issuer of a security will be unable to make interest payments and/or
repay the principal on its debt. Interest rate risk refers to fluctuations in
the value of a fixed-income security resulting from changes in the general level
of interest rates. When the general level of interest rates goes up, the prices
of most fixed-income securities go down. When the general level of interest
rates goes down, the prices of most fixed-income securities go up. (Zero coupon
securities are typically subject to greater price fluctuations than comparable
securities that pay interest.)
REAL ESTATE INVESTMENT TRUSTS ("REITS"). REITs pool investors' funds for
investments primarily in commercial real estate properties. Like mutual funds,
REITs have expenses, including advisory and administration fees, that are
8
paid by their shareholders. As a result, you will absorb duplicate levels of
fees when the Fund invests in REITs. The performance of any Fund REIT
holdings ultimately depends on the types of real property in which the REITs
invest and how well the property is managed. A general downturn in real
estate values also can hurt REIT performance. In addition, REITs are subject
to certain provisions under federal tax law. The failure of a company to
qualify as a REIT could have adverse consequences for the Fund, including
significantly reducing return to the Fund on its investment in such company.
SWAPS. Swaps do not involve the delivery of securities, other underlying
assets or principal. Accordingly, the risk of loss with respect to swaps is
limited to the net amount of payments that the Fund is contractually
obligated to make, or, in the case of the other party to a swap defaulting,
the net amount of payments that the Fund is contractually entitled to
receive. Currency swaps usually involve the delivery of the entire principal
value of one designated currency in exchange for the other designated
currency. Therefore, the entire principal value of a currency swap is subject
to the risk that the other party to the swap will default on its contractual
delivery obligations. If there is a default by the counterparty, the Fund may
have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, the
swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been
fully developed and, accordingly, they are less liquid than swaps.
FUND MANAGEMENT
[GRAPHIC]
The Fund has retained the Investment Manager--Morgan Stanley Investment Advisors
Inc.--to provide administrative services and 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, a preeminent global financial services firm that maintains
leading market positions in each of its three primary businesses: securities,
asset management and credit services. Morgan Stanley is a full service
securities firm engaged in securities trading and brokerage activities, as well
as providing investment banking, research and analysis, financing and financial
advisory services. The Investment Manager's address is 1221 Avenue of the
Americas, New York, NY 10020.
The Fund's portfolio is managed within the Equity Income team. Current members
of the team include James A. Gilligan, a Managing Director of the Investment
Manager, James O. Roeder, an Executive Director of the Investment Manager,
Thomas Bastian and Sergio Marcheli, Vice Presidents of the Investment Manager,
and Vincent E. Vizachero, a Senior Associate 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
[SIDENOTE]
MORGAN STANLEY INVESTMENT ADVISORS INC.
THE INVESTMENT MANAGER IS WIDELY RECOGNIZED AS A LEADER IN THE MUTUAL FUND
INDUSTRY AND HAD APPROXIMATELY $110 BILLION IN ASSETS UNDER MANAGEMENT OR
ADMINISTRATION AS OF SEPTEMBER 30, 2004.
9
August 31, 2004, the Fund accrued total compensation to the Investment
Manager amounting to 0.80% of the Fund's average daily net assets.
The Board of Trustees of the Fund approved amending and restating, effective
November 1, 2004, the existing investment management agreement for the Fund
("Current Investment Management Agreement") to remove the administration
services component from the Current Investment Management Agreement. The Fund's
Investment Manager will continue to provide investment advisory services under
the amended and restated investment advisory agreement. The administration
services previously provided to the Fund by the Investment Manager will be
provided by Morgan Stanley Services Company Inc. ("Administrator") pursuant to a
separate administration agreement entered into by the Fund with the
Administrator for a fee of 0.08% of the Fund's daily net assets.
Under the amended and restated investment advisory agreement, the advisory fee
will be reduced to 0.72% of the portion of daily net assets not exceeding $1
billion; and 0.65% of the portion of daily net assets exceeding $1 billion.
Although the entities providing administration services to the Fund have
changed, the Morgan Stanley personnel performing such services will remain the
same. Furthermore, the changes will not result in any increase in the amount of
total combined fees paid by the Fund for investment advisory and administration
services, or any decrease in the nature or quality of the investment advisory or
administration services received by the Fund.
10
SHAREHOLDER INFORMATION
PRICING FUND SHARES
[GRAPHIC]
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. With respect to
securities that are primarily listed on foreign exchanges, the value of the
Fund's portfolio securities may change on days when you will not be able to
purchase or sell your shares.
An exception to the Fund's general policy of using market prices concerns its
short-term debt portfolio securities. Debt securities with remaining maturities
of 60 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.
HOW TO BUY SHARES
[GRAPHIC]
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. The Fund's transfer
agent, in its sole discretion, may allow you to purchase shares directly by
calling and requesting an application.
To help the government fight the funding of terrorism and money laundering
activities, federal law requires all financial institutions to obtain, verify
and record information that identifies each person
[SIDENOTE]
CONTACTING A FINANCIAL ADVISOR
IF YOU ARE NEW TO THE MORGAN STANLEY FUNDS AND WOULD LIKE TO CONTACT A MORGAN
STANLEY 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
11
who opens an account. What this means to you: When you open an account, we will
ask your name, address, date of birth and other information that will allow us
to identify you. If we are unable to verify your identity, we reserve the right
to restrict additional transactions and/or liquidate your account at the next
calculated net asset value after your account is closed (less any applicable
sales/account charges and/or tax penalties) or take any other action required by
law.
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 Morgan Stanley 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. The Fund, in its sole discretion, may waive
the minimum initial and additional investment amounts in certain cases. We
reserve the right to reject any order for the purchase of Fund shares.
MINIMUM INVESTMENT AMOUNTS
[Enlarge/Download Table]
MINIMUM INVESTMENT
-------------------------
INVESTMENT OPTIONS INITIAL ADDITIONAL
Regular Accounts $ 1,000 $ 100
Individual Retirement Account $ 1,000 $ 100
Coverdell Education Savings Account $ 500 $ 100
EASYINVEST(R)
(Automatically from your checking or savings account or Money Market Fund) $ 100* $ 100*
* Provided your schedule of investments totals $1,000 in twelve months.
There is no minimum investment amount if you purchase Fund shares through: (1)
the Investment Manager's mutual fund asset allocation program; (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 or (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.
[SIDENOTE]
EASYINVEST(R)
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.
12
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 Mid-Cap
Value Fund.
- Mail the letter and check to Morgan Stanley Trust at P.O. Box 1040, Jersey
City, NJ 07303.
HOW TO EXCHANGE SHARES
[GRAPHIC]
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 or the Limited Duration 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 an FSC Fund. If a Morgan Stanley Fund is not listed, consult the
inside back cover of that fund's prospectus for its designation.
Exchanges may be made after shares of the fund acquired by purchase have been
held for 30 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 Morgan Stanley 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.
13
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.
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 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.
HOW TO SELL SHARES
[GRAPHIC]
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.
[Enlarge/Download Table]
OPTIONS PROCEDURES
------------------------------------------------------------------------------------------------------
Contact Your To sell your shares, simply call your Morgan Stanley Financial Advisor or other
Financial Advisor authorized financial representative. Payment will be sent to the address to
which the account is registered or deposited in your brokerage account.
14
[Enlarge/Download Table]
OPTIONS PROCEDURES
------------------------------------------------------------------------------------------------------
By Letter You can also sell your shares by writing a "letter of instruction" that
includes:
- 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.
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 Funds has a total
Withdrawal Plan market value of at least $10,000, you may elect to withdraw amounts of $25 or
more, or in any whole percentage of a fund's balance (provided the amount is at
least $25), on a monthly, quarterly, semi-annual or annual basis, from any fund
with a balance of 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.
15
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 60 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(R), if after 12 months
the shareholder has invested less than $1,000 in the account.
However, before the Fund sells your shares in this manner, we will notify you
and allow you 60 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.
DISTRIBUTIONS
[GRAPHIC]
The Fund passes substantially all of its earnings from income and capital gains
along to its investors as "distributions." The Fund earns income from stocks and
interest from fixed-income investments. These amounts are passed along to Fund
shareholders as "income dividend distributions." The Fund realizes capital gains
whenever it sells securities for a higher price than it paid for them. These
amounts may be passed along as "capital gain distributions."
The Fund declares income dividends separately for each Class. Distributions paid
on Class A and Class D shares usually will be higher than for Class B and Class
C shares because distribution fees that Class B and Class C shares pay are
higher. Normally, income dividends are distributed to shareholders annually.
Capital gains, if any, are usually distributed in December. The Fund, however,
may retain and reinvest any long-term capital gains. The Fund may at times make
payments from sources other than income or capital gains that represent a return
of a portion of your investment.
Distributions are reinvested automatically in additional shares of the same
Class and automatically credited to your account, unless you request in writing
that all distributions be paid in cash. If you elect the cash option, the Fund
will mail a check to you no later than seven business days after the
distribution is declared. However, if you purchase Fund shares through a Morgan
Stanley Financial Advisor or other authorized financial representative within
three business days prior to the record date for the distribution, the
distribution will automatically be paid to you in cash, even if you did not
request to receive all distributions in cash. 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.
[SIDENOTE]
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.
16
TAX CONSEQUENCES
[GRAPHIC]
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.
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. Under current law, a portion of the ordinary income dividends you
receive may be taxed at the same rate as long-term capital gains. However, even
if income received in the form of ordinary income dividends is taxed at the same
rates as long-term capital gains, such income will not be considered long-term
capital gains for other federal income tax purposes. For example, you generally
will not be permitted to offset ordinary income dividends with capital losses.
Short-term capital gain distributions will continue to be taxed at ordinary
income rates.
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 on
taxable distributions and redemption proceeds (as of the date of this PROSPECTUS
this rate is 28%). Any withheld amount would be sent to the IRS as an advance
payment of your taxes due on your income.
17
SHARE CLASS ARRANGEMENTS
[GRAPHIC]
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]
CLASS SALES CHARGE MAXIMUM ANNUAL 12b-1 FEE
A Maximum 5.25% initial sales charge reduced for purchase of $25,000 or more; shares sold
without an initial sales charge are generally subject to a 1.0% CDSC during the first
18 months* 0.25%
B Maximum 5.0% CDSC during the first year decreasing to 0% after six years 1.00%
C 1.0% CDSC during first year 1.00%
D None None
* Shares purchased without an initial sales charge prior to December 1, 2004
will be subject to a 1.0% CDSC if sold during the first year.
Certain shareholders may be eligible for reduced sales charges (i.e., breakpoint
discounts), CDSCwaivers and eligibility minimums. Please see the information for
each Class set forth below for specific eligibility requirements. You must
notify your Morgan Stanley Financial Advisor or other authorized financial
representative (or Morgan Stanley Trust if you purchase shares directly through
the Fund) at the time a purchase order (or in the case of Class Bor C shares, a
redemption order) is placed that the purchase (or redemption) qualifies for a
reduced sales charge (i.e., breakpoint discount), CDSC waiver or eligibility
minimum. Similar notification must be made in writing when an order is placed by
mail. The reduced sales charge, CDSC waiver or eligibility minimum will not be
granted if: (i) notification is not furnished at the time of 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.
In order to obtain a reduced sales charge (i.e., breakpoint discount) or to meet
an eligibility minimum, it may be necessary at the time of purchase for you to
inform your Morgan Stanley Financial Advisor or other authorized financial
representative (or Morgan Stanley Trust if you purchase shares directly through
the Fund) of the existence of other accounts in which there are holdings
eligible to be aggregated to meet the sales load breakpoints or eligibility
minimums. In order to verify your eligibility, you may be required to provide
account statements and/or confirmations regarding shares of the Fund or other
Morgan Stanley funds held in all related accounts described below at Morgan
Stanley or by other authorized dealers, as well as shares held by related
parties, such as members of the same family or household, in order to determine
whether you have met a sales load breakpoint or eligibility minimum. The Fund
18
makes available, in a clear and prominent format, free of charge, on its web
site, www.morganstanley.com, information regarding applicable sales loads,
reduced sales charges (i.e., breakpoint discounts), sales load waivers and
eligibility minimums. The web site includes hyperlinks that facilitate access to
the information.
CLASS A SHARES Class A shares are sold at net asset value plus an initial sales
charge of up to 5.25% of the public offering price. The initial sales charge is
reduced for purchases of $25,000 or more according to the schedule below.
Effective December 1, 2004, 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 1.00% on sales made within 18 months after the last
day of the month of purchase. With respect to shares purchased prior to December
1, 2004, investments of $1 million or more are not subject to an initial sales
charge, but are generally subject to a CDSC of 1.00%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 shares.
The Fund will not accept a purchase order for Class A shares that qualifies for
investment in Class D shares.
The offering price of Class A shares includes a sales charge (expressed as a
percentage of the public 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 5.25% 5.54%
$25,000 but less than $50,000 4.75% 4.99%
$50,000 but less than $100,000 4.00% 4.17%
$100,000 but less than $250,000 3.00% 3.09%
$250,000 but less than $500,000 2.50% 2.56%
$500,000 but less than $1 million 2.00% 2.04%
$1 million and over 0.00% 0.00%
You may benefit from a reduced sales charge (i.e., breakpoint discount) for
purchases of Class A shares of the Fund by combining, in a single transaction,
your purchase with purchases of Class A shares of the Fund by the following
related accounts:
- A single account (including an individual, trust or fiduciary account).
- Family member accounts (limited to spouse, and children living in the same
household and 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.
[SIDENOTE]
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.
19
COMBINED PURCHASE PRIVILEGE. You 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. Shareholders also may combine such purchases made in a single transaction
by family members (limited to spouse, and children living in the same household
and under the age of 21).
RIGHT OF ACCUMULATION. You may benefit from a reduced sales charge if the
cumulative net asset value of Class A shares of the Fund purchased in a single
transaction, together with shares of other Morgan Stanley Funds previously
purchased at a price including a front-end sales charge (or Class A shares
purchased at $1 million or more), and shares acquired through reinvestment of
distributions, which are currently held, amounts to $25,000 or more. Also, if
you have a cumulative net asset value of all your Class A and Class D shares of
other Multi-Class Funds and shares of FSCFunds 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.
Existing holdings of family members or other related accounts of a shareholder
may not be combined for purposes of determining eligibility.
LETTER OF INTENT. The above 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 13-month period.
The initial purchase under a Letter of Intent must be at least 5% of the stated
investment goal. The Letter of Intent does not preclude the Fund (or any other
Multi-Class Fund) from discontinuing sales of its shares. 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 historical 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
may combine purchases and exchanges by family members (limited to spouse, and
children living in the same household and under the age of 21) during the
periods referenced in (1) and (2) above. You should retain any records
neccessary to substantiate historical costs because the Fund, its transfer agent
and any financial intermediaries may not maintain this information. 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 13-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.
Share acquired through reinvestment of distribution are not aggregated to
achieve the stated investment goal.
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 a banking affiliate of the Investment Manager 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.
20
- 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 an entity independent from Morgan Stanley
serves as recordkeeper under an alliance or similar agreement with Morgan
Stanley's Retirement Plan Solutions ("Morgan Stanley Eligible Plans").
- 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.
- Insurance company separate accounts that have been approved by the Fund's
distributor.
- 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 who 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) the client 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 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]
YEAR SINCE PURCHASE PAYMENT MADE CDSC AS A PERCENTAGE 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
[SIDENOTE]
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.
21
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.
- 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 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 purchased prior to April 1, 2004 or acquired in exchange for
shares purchased prior to April 1, 2004, if you simultaneously invest the
proceeds from such sale in the Investment Manager's mutual fund asset
allocation program, pursuant to which investors pay an asset-based fee. Any
shares acquired 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 Morgan Stanley Financial Advisor or other authorized
financial representative or call (800) 869-NEWS.
DISTRIBUTION FEE. Class B shares are subject to an annual distribution (12b-1)
fee of up to 1.0% of the average daily net assets of Class B. This fee is higher
than the annual distribution fee paid by Class A.
CONVERSION FEATURE. After 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
22
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 acquired in exchange for
shares of another Morgan Stanley Fund originally purchased before May 1, 1997,
however, will convert to Class A shares in May 2005.)
Effective May 1, 2005, after eight years, Class B shares will convert
automatically to Class A shares of the Fund with no initial sales charge. The
eight-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 eight-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.
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.
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 or the Limited Duration 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 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 f the month of purchase. The CDSC will be assessed in
23
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 up to 1.0% 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.
- 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.
- Employee benefit plans maintained by Morgan Stanley or any of its
subsidiaries for the benefit of certain employees of Morgan Stanley and its
subsidiaries.
- Certain unit investment trusts sponsored by Morgan Stanley DW or its
affiliates.
- 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.
- The Investment Manager and its affiliates with respect to shares held in
connection with certain deferred compensation programs established for their
employees.
A purchase order that meets the requirements for investment in Class D can be
made only in Class D shares.
Class D shares are not offered for investments made through Section 529 plans,
donor-advised charitable gift funds and insurance company separate accounts that
have been approved by the Fund's distributor (regardless of the size of the
investment).
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
24
Funds you currently own that you acquired in exchange for those shares.
Shareholders cannot combine purchases made by family members or a shareholder's
other related accounts in a single transaction for purposes of meeting the $5
million initial investment minimum requirement to qualify to purchase Class D
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.
ADDITIONAL INFORMATION
The Investment Manager and/or the distributor may pay additional compensation
(out of their own funds and not as an expense of the Fund) to selected
affiliated or unaffiliated brokers or other service providers in connection with
the sale, distribution, retention and/or servicing of shares of the Fund. Such
compensation may be significant in amount and the prospect of receiving any such
additional compensation may provide affiliated or unaffiliated entities with an
incentive to favor sales of the Fund over other investment options. Any such
payments will not change the net asset value or the price of the Fund's shares.
For more information, please see the Fund's STATEMENT OF ADDITIONAL INFORMATION.
25
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, an independent
registered public accounting firm, whose report, along with the Fund's financial
statements, are incorporated by reference in the STATEMENT OF ADDITIONAL
INFORMATION from the annual report, which is available upon request.
CLASS A SHARES
[Enlarge/Download Table]
FOR THE PERIOD
OCTOBER 29, 2001*
THROUGH
FOR THE YEAR ENDED AUGUST 31, 2004 2003 AUGUST 31, 2002
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 10.11 $ 8.19 $ 10.00
------------ ----------- -----------
Income (loss) from investment operations:
Net investment loss++ (0.02) (0.03) (0.04)
Net realized and unrealized gain (loss) 0.99 1.95 (1.76)
------------ ----------- -----------
Total income (loss) from investment operations 0.97 1.92 (1.80)
------------ ----------- -----------
Less dividends from net investment income -- -- (0.01)
------------ ----------- -----------
Net asset value, end of period $ 11.08 $ 10.11 $ 8.19
--------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ 9.50% 23.44% (17.99)%(1)
--------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 1.40% 1.47% 1.45%(2)(4)
Net investment loss (0.14)% (0.39)% (0.58)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 3,878 $ 3,173 $ 3,053
Portfolio turnover rate 151% 165% 121%(1)
* Commencement of operations.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
(4) If the Fund had borne all its expenses that were reimbursed or waived by
the Investment Manager, the annualized expense and net investment loss
ratios would have been 1.66% and (0.79)%, respectively.
26
CLASS B SHARES
[Enlarge/Download Table]
FOR THE PERIOD
OCTOBER 29, 2001*
THROUGH
FOR THE YEAR ENDED AUGUST 31, 2004 2003 AUGUST 31, 2002
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.98 $ 8.15 $ 10.00
------------ ----------- -----------
Income (loss) from investment operations:
Net investment loss++ (0.10) (0.09) (0.10)
Net realized and unrealized gain (loss) 0.97 1.92 (1.75)
------------ ----------- -----------
Total income (loss) from investment operations 0.87 1.83 (1.85)
------------ ----------- -----------
Less dividends from net investment income -- -- 0.00++
------------ ----------- -----------
Net asset value, end of period $ 10.85 $ 9.98 $ 8.15
--------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ 8.72% 22.45% (18.47)%(1)
--------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 2.16% 2.24% 2.20%(2)(4)
Net investment loss (0.90)% (1.16)% (1.33)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 60,987 $ 56,823 $ 53,948
Portfolio turnover rate 151% 165% 121%(1)
* Commencement of operations.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
++ Less than $0.005 per share.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
(4) If the Fund had borne all its expenses that were reimbursed or waived by
the Investment Manager, the annualized expense and net investment loss
ratios would have been 2.41% and (1.54)%, respectively.
27
CLASS C SHARES
[Enlarge/Download Table]
FOR THE PERIOD
OCTOBER 29, 2001*
THROUGH
FOR THE YEAR ENDED AUGUST 31, 2004 2003 AUGUST 31, 2002
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 9.98 $ 8.15 $ 10.00
------------ ----------- -----------
Income (loss) from investment operations:
Net investment loss++ (0.09) (0.09) (0.10)
Net realized and unrealized gain (loss) 0.97 1.92 (1.75)
------------ ----------- -----------
Total income (loss) from investment operations 0.88 1.83 (1.85)
------------ ----------- -----------
Less dividends from net investment income -- -- 0.00++
------------ ----------- -----------
Net asset value, end of period $ 10.86 $ 9.98 $ 8.15
--------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ 8.82% 22.45% (18.48)%(1)
--------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 2.08% 2.24% 2.20%(2)(4)
Net investment loss (0.82)% (1.16)% (1.33)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 8,119 $ 7,238 $ 6,354
Portfolio turnover rate 151% 165% 121%(1)
* Commencement of operations.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
++ Less than $0.005 per share.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
(4) If the Fund had borne all its expenses that were reimbursed or waived by
the Investment Manager, the annualized expense and net investment loss
ratios would have been 2.41% and (1.54)%, respectively.
28
CLASS D SHARES
[Enlarge/Download Table]
FOR THE PERIOD
OCTOBER 29, 2001*
THROUGH
FOR THE YEAR ENDED AUGUST 31, 2004 2003 AUGUST 31, 2002
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 10.15 $ 8.21 $ 10.00
------------ ----------- -----------
Income (loss) from investment operations:
Net investment income (loss)++ 0.01 (0.01) (0.04)
Net realized and unrealized gain (loss) 0.99 1.95 (1.73)
------------ ----------- -----------
Total income (loss) from investment operations 1.00 1.94 (1.77)
------------ ----------- -----------
Less dividends from net investment income -- -- (0.02)
------------ ----------- -----------
Net asset value, end of period $ 11.15 $ 10.15 $ 8.21
--------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ 9.75% 23.63% (17.76)%(1)
--------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(3):
Expenses 1.16% 1.24% 1.20%(2)(4)
Net investment income (loss) 0.10% (0.16)% (0.33)%(2)(4)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 236,039 $ 209,035 $ 95,150
Portfolio turnover rate 151% 165% 121%(1)
* Commencement of operations.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
(4) If the Fund had borne all its expenses that were reimbursed or waived by
the Investment Manager, the annualized expense and net investment loss
ratios would have been 1.41% and (0.54)%, respectively.
29
MORGAN STANLEY FUNDS
EQUITY
BLEND/CORE
Total Return Trust
Fund of Funds - Domestic Portfolio
DOMESTIC HYBRID
Allocator Fund
Balanced Growth Fund
Balanced Income Fund
Income Builder Fund
Strategist Fund
GLOBAL/INTERNATIONAL
European Growth Fund
Global Advantage Fund
Global Dividend Growth Securities
International Fund
International SmallCap Fund
International Value Equity Fund
Japan Fund
Pacific Growth Fund
GROWTH
Aggressive Equity Fund
American Opportunities Fund
Capital Opportunities Trust
Developing Growth Securities Trust
Growth Fund
Special Growth Fund
INDEX
Equally-Weighted S&P500 Fund
KLD Social Index Fund
Nasdaq-100 Index Fund
S&P 500 Index Fund
Total Market Index Fund
SPECIALTY
Biotechnology Fund
Convertible Securities Trust
Financial Services Trust
Global Utilities Fund
Health Sciences Trust
Information Fund
Natural Resource Development Securities
Real Estate Fund
Utilities Fund
VALUE
Dividend Growth Securities
Fundamental Value Fund
Mid-Cap Value Fund
Small-Mid Special Value Fund
Special Value Fund
Value Fund
FIXED INCOME
TAXABLE SHORT TERM
Limited Duration Fund (NL)
Limited Duration U.S. Treasury Trust
TAXABLE INTERMEDIATE TERM
Federal Securities Trust
Flexible Income Trust
High Yield Securities
Quality Income Trust
U.S. Government Securities Trust
TAX-FREE
California Tax-Free Income Fund
Limited Term Municipal Trust (NL)
New York Tax-Free Income Fund
Tax-Exempt Securities Trust
MONEY MARKET
TAXABLE
Liquid Asset Fund
U.S. Government Money Market
TAX-FREE
California Tax-Free Daily Income Trust
New York Municipal Money Market Trust
Tax-Free Daily Income Trust
There may be funds created or terminated after this PROSPECTUS was published.
Please consult the inside back cover of a new fund's prospectus for its
designations, e.g. Multi-Class Fund or Money Market Fund.
Unless otherwise noted, each listed Morgan Stanley Fund, except for the Limited
Duration 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) Funds and Money Market Funds.
30
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 (the "SEC")
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: MDFAX
CLASS B: MDFBX
CLASS C: MDFCX
CLASS D: MDFDX
(The Fund's Investment Company Act File No. is 811-10359)
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD.
(C) 2004 Morgan Stanley
[MORGAN STANLEY LOGO]
CLF #39917PR0-00
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY MID-CAP VALUE FUND
39917 10/04
[MORGAN STANLEY LOGO]
PROSPECTUS
OCTOBER 29, 2004
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 29, 2004
MORGAN STANLEY MID-CAP VALUE FUND
This STATEMENT OF ADDITIONAL INFORMATION is not a prospectus. The
PROSPECTUS (dated October 29, 2004) for Morgan Stanley Mid-Cap Value Fund 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
Mid-Cap Value Fund
1221 Avenue of the Americas
New York, NY 10020
(800) 869-NEWS
TABLE OF CONTENTS
[Enlarge/Download Table]
I. Fund History 4
II. Description of the Fund and Its Investments and Risks 4
A. Classification 4
B. Investment Strategies and Risks 4
C. Fund Policies/Investment Restrictions 14
III. Management of the Fund 15
A. Board of Trustees 15
B. Management Information 15
C. Compensation 23
IV. Control Persons and Principal Holders of Securities 25
V. Investment Management and Other Services 25
A. Investment Manager 25
B. Principal Underwriter 26
C. Services Provided by the Investment Manager 27
D. Dealer Reallowances 27
E. Rule 12b-1 Plan 28
F. Other Service Providers 31
G. Codes of Ethics 31
H. Proxy Voting Policies and Procedures and Proxy Voting Record 31
VI. Brokerage Allocation and Other Practices 31
A. Brokerage Transactions 31
B. Commissions 32
C. Brokerage Selection 32
D. Directed Brokerage 33
E. Regular Broker-Dealers 33
F. Revenue Sharing 33
VII. Capital Stock and Other Securities 34
VIII. Purchase, Redemption and Pricing of Shares 35
A. Purchase/Redemption of Shares 35
B. Offering Price 35
IX. Taxation of the Fund and Shareholders 36
X. Underwriters 39
XI. Performance Data 39
XII. Financial Statements 39
XIII. Fund Counsel 40
Appendix A. Morgan Stanley Investment Management Proxy Voting Policy and Procedures A-1
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 Mid-Cap Value Fund, a registered open-end
investment company.
"INDEPENDENT TRUSTEES" -- Trustees who are not "interested persons" (as
defined by the Investment Company Act of 1940, as amended ("Investment Company
Act")) of the Fund.
"INVESTMENT MANAGER" -- Morgan Stanley Investment Advisors Inc., a
wholly-owned investment advisor subsidiary of Morgan Stanley.
"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 Morgan Stanley.
"MORGAN STANLEY FUNDS" -- Registered investment companies for which the
Investment Manager serves as the investment advisor and 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 April 12, 2001, with the name Morgan Stanley Mid-Cap
Value Fund.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
A. CLASSIFICATION
The Fund is an open-end, diversified management investment company whose
investment objective is to seek above-average total return.
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."
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may enter into
forward foreign currency exchange contracts ("forward contracts") as a hedge
against fluctuations in future foreign exchange rates. The Fund may conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. A
forward contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
These contracts are traded in the interbank market conducted directly between
currency traders (usually large, commercial and investment banks) and their
customers. Forward contracts only will be entered into with U.S. banks and their
foreign branches, insurance companies and other dealers or foreign banks whose
assets total $1 billion or more. A forward contract generally has no deposit
requirement, and no commissions are charged at any stage for trades.
The Fund may enter into forward contracts under various circumstances. The
typical use of a forward contract is to "lock in" the price of a security in
U.S. dollars or some other foreign currency which the Fund is holding in its
portfolio. By entering into a forward contract for the purchase or sale, for a
fixed amount of dollars or other currency, of the amount of foreign currency
involved in the underlying security transactions, the Fund may be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar or other currency which is being used for
the security purchase and the foreign currency in which the security is
denominated during the period between the date on which the security is
purchased or sold and the date on which payment is made or received.
The Investment Manager also may from time to time utilize forward
contracts for other purposes. For example, they may be used to hedge a foreign
security held in the portfolio or a security which pays out principal tied to an
exchange rate between the U.S. dollar and a foreign currency, against a decline
in value of the applicable foreign currency. They also may be used to lock in
the current exchange rate of the currency in which those securities anticipated
to be purchased are denominated. At times, the Fund may enter into
"cross-currency" hedging transactions involving currencies other than those in
which securities are held or proposed to be purchased are denominated.
The Fund will not enter into forward contracts or maintain a net exposure
to these contracts where the consummation of the contracts would obligate the
Fund to deliver an amount of foreign currency in excess of the value of the
Fund's portfolio securities.
When required by law, the Fund will cause its custodian bank to earmark
cash, U.S. government securities or other appropriate liquid portfolio
securities in an amount equal to the value of the Fund's total assets committed
to the consummation of forward contracts entered into under the circumstances
set forth above. If the value of the securities so earmarked declines,
additional cash or securities will be earmarked on a daily basis so that the
value of such securities will equal the amount of the Fund's commitments with
respect to such contracts.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. It will, however, do so from time to time, and
4
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the spread between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
The Fund may be limited in its ability to enter into hedging transactions
involving forward contracts by the Internal Revenue Code requirements relating
to qualification as a regulated investment company.
Forward contracts may limit gains on portfolio securities that could
otherwise be realized had they not been utilized and could result in losses. The
contracts also may increase the Fund's volatility and may involve a significant
amount of risk relative to the investment of cash.
OPTIONS AND FUTURES TRANSACTIONS. The Fund may engage in transactions in
listed and over-the-counter ("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 United States) 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 United States) 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 United States) 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 United States) or other clearing corporation or exchange, at the exercise
price.
COVERED CALL WRITING. The Fund is permitted to write covered call options
on portfolio securities, 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 as 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 up to 18
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 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
5
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 net assets. The operation of and limitations on covered put options
(including any applicable segregation requirements) 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 5% 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.
OPTIONS ON FOREIGN CURRENCIES. The Fund may purchase and write options on
foreign currencies for purposes similar to those involved with investing in
forward foreign currency exchange contracts.
OTC OPTIONS. OTC options are purchased from or sold (written) to dealers
or financial institutions which have entered into direct agreements with the
Fund. With OTC options, such variables as expiration date, exercise price and
premium will be agreed upon between the Fund and the transacting dealer, without
the intermediation of a third party such as the OCC. The Fund may engage in OTC
option transactions only with member banks of the Federal Reserve Bank System or
primary dealers in U.S. Government securities or with affiliates of such banks
or dealers.
RISKS OF OPTIONS TRANSACTIONS. The successful use of options depends on
the ability of the Investment Manager, to forecast correctly interest rates,
currency and/or market movements. If the market value of the portfolio
securities upon which call options have been written increases, the Fund may
receive a lower total return from the portion of its portfolio upon which calls
have been written than it would have had such calls not been written. During the
option period, the covered call writer has, in return for the premium on the
option, given up the opportunity for capital appreciation above the exercise
price should the market price of the underlying security (or currency) increase,
but has retained the risk of loss should the price of the underlying security
(or currency) decline. The covered put writer also retains the risk of loss
should the market value of the underlying security (or currency) 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 (or currencies) 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 (or currency)
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 (or currencies) are traded. To the extent that the
option markets close before the markets for the underlying securities (or
currencies), significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
6
The markets in foreign currency options are relatively new and the Fund's
ability to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. There can be no assurance that a
liquid secondary market will exist for a particular option at any specific time.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and have no relationship to the investment merits of a foreign security. Because
foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in
an odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that are not reflected in the options market.
FUTURES CONTRACTS. The Fund may purchase and sell interest rate, currency
and index futures contracts that are traded on U.S. and foreign commodity
exchanges on such underlying securities as U.S. Treasury bonds, notes, bills and
GNMA Certificates and/or any foreign government fixed-income security, on
various currencies and on such indexes of U.S. and foreign securities as may
exist or come into existence.
A futures contract purchaser incurs an obligation to take delivery of a
specified amount of the obligation underlying the contract at a specified time
in the future for a specified price. A seller of a futures contract incurs an
obligation to deliver the specified amount of the underlying obligation at a
specified time in return for an agreed upon price. The purchase of a futures
contract enables the Fund, during the term of the contract, to lock in a price
at which it may purchase a security or currency and protect against a rise in
prices pending purchase of portfolio securities. The sale of a futures contract
enables the Fund to lock in a price at which it may sell a security or currency
and protect against declines in the value of portfolio securities.
Although most futures contracts call for actual delivery or acceptance of
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. Index futures contracts provide for
the delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value at the open or close of the last trading day
of the contract and the futures contract price. A futures contract sale is
closed out by effecting a futures contract purchase for the same aggregate
amount of the specific type of security (currency) and the same delivery date.
If the sale price exceeds the offsetting purchase price, the seller would be
paid the difference and would realize a gain. If the offsetting purchase price
exceeds the sale price, the seller would pay the difference and would realize a
loss. Similarly, a futures contract purchase is closed out by effecting a
futures contract sale for the same aggregate amount of the specific type of
security (currency) and the same delivery date. If the offsetting sale price
exceeds the purchase price, the purchaser would realize a gain, whereas if the
purchase price exceeds the offsetting sale price, the purchaser would realize a
loss. There is no assurance that the Fund will be able to enter into a closing
transaction.
MARGIN. If the Fund enters into a futures contract, it is initially
required to deposit an "initial margin" of cash, 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
7
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 Commodity
Futures Trading Commission recently eliminated limitations on futures trading by
certain regulated entities, including registered investment companies, and
consequently registered investment companies may engage in unlimited futures
transactions and options thereon provided that the investment manager to the
company claims an exclusion from regulation as a commodity pool operator. In
connection with its management of the Fund, the Investment Manager has claimed
such an exclusion from registration as a commodity pool operator under the
Commodity Exchange Act ("CEA"). Therefore, it is not subject to the registration
and regulatory requirements of the CEA. Therefore there are no limitations on
the extent to which the Fund may engage in non-hedging transactions involving
futures and options thereon except as set forth in the Fund's PROSPECTUS or
STATEMENT OF ADDITIONAL INFORMATION. There is no overall limitation on the
percentage of the Fund's net assets which may be subject to a hedge position.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. The prices
of securities and indexes subject to futures contracts (and thereby the futures
contract prices) may correlate imperfectly with the behavior of the cash prices
of the Fund's portfolio securities (and the currencies in which they are
denominated). Also, prices of futures contracts may not move in tandem with the
changes in prevailing interest rates, market movements and/or currency exchange
rates against which the Fund seeks a hedge. A correlation may also be distorted
(a) temporarily, by short-term traders seeking to profit from the difference
between a contract or security price objective and their cost of borrowed funds;
(b) by investors in futures contracts electing to close out their contracts
through offsetting transactions rather than meet margin deposit requirements;
(c) by investors in futures contracts opting to make or take delivery of
underlying securities rather than engage in closing transactions, thereby
reducing liquidity of the futures market; and (d) temporarily, by speculators
who view the deposit requirements in the futures markets as less onerous than
margin requirements in the cash market. Due to the possibility of price
distortion in the futures market and because of the possible imperfect
correlation between movements in the prices of securities and movements in the
prices of futures contracts, a correct forecast of interest rate, currency
exchange rate and/or market movement trends by the Investment Manager may still
not result in a successful hedging transaction.
There is no assurance that a liquid secondary market will exist for
futures contracts and related options in which the Fund may invest. In the event
a liquid market does not exist, it may not be possible to close out a futures
position and, in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin. The absence of a
liquid market in futures contracts might cause the Fund to make or take delivery
of the underlying securities (currencies) at a time when it may be
disadvantageous to do so.
Exchanges also limit the amount by which the price of a futures contract
may move on any day. If the price moves equal to 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.
8
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 on a futures contract, it will cover this position by holding, in a
segregated account maintained on the books of the Fund, cash, U.S. government
securities or other liquid portfolio securities equal in value (when added to
any initial or variation margin on deposit) to the market value of the
securities underlying the futures contract or the exercise price of the option.
Such a position may also be covered by owning the securities underlying the
futures contract (in the case of a stock index futures contract a portfolio of
securities substantially replicating the relevant index), or by holding a call
option permitting the Fund to purchase the same contract at a price no higher
than the price at which the short position was established.
In addition, if the Fund holds a long position in a futures contract or
has sold a put option on a futures contract, it will hold cash, U.S. government
securities or other liquid portfolio securities equal to the purchase price of
the contract or the exercise price of the put option (less the amount of initial
or variation margin on deposit) in a segregated account maintained on the books
of the Fund. Alternatively, the Fund could cover its long position by purchasing
a put option on the same futures contract with an exercise price as high or
higher than the price of the contract held by the Fund.
MONEY MARKET SECURITIES. The Fund may invest in various money market
securities for cash management purposes or when assuming a temporary defensive
position, which among others may include commercial paper, bankers' acceptances,
bank obligations, corporate debt securities, certificates of deposit, U.S.
government securities, obligations of savings institutions and repurchase
agreements. Such securities are limited to:
U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed as to
principal and interest by the United States or its agencies (such as the
Export-Import Bank of the United States, Federal Housing Administration and
Government National Mortgage Association) or its instrumentalities (such as the
Federal Home Loan Bank), including Treasury bills, notes and bonds;
BANK OBLIGATIONS. Obligations (including certificates of deposit, time
deposits and bankers' acceptances) of banks subject to regulation by the U.S.
government and having total assets of $1 billion or more, and instruments
secured by such obligations, not including obligations of foreign branches of
domestic banks except to the extent below;
EURODOLLAR CERTIFICATES OF DEPOSIT. Eurodollar certificates of deposit
issued by foreign branches of domestic banks having total assets of $1 billion
or more;
OBLIGATIONS OF SAVINGS INSTITUTIONS. Certificates of deposit of savings
banks and savings and loan associations, having total assets of $1 billion or
more;
FULLY INSURED CERTIFICATES OF DEPOSIT. Certificates of deposit of banks
and savings institutions, having total assets of less than $1 billion, if the
principal amount of the obligation is federally insured by the Bank Insurance
Fund or the Savings Association Insurance Fund (each of which is administered by
the FDIC), limited to $100,000 principal amount per certificate and to 15% or
less of the Fund's total assets in all such obligations and in all illiquid
assets, in the aggregate;
9
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 that are 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. It is the current policy of the Fund not to invest in
repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by the Fund, amounts to
more than 15% of its net assets.
SWAPS. The Fund may enter into swap contracts ("Swaps"). A Swap is a
Derivative in the form of an agreement to exchange the return generated by one
instrument for the return generated by another instrument. The payment streams
are calculated by reference to a specified index and agreed upon notional
amount. The term "specified index" includes currencies, fixed interest rates,
prices, total return on interest rate indices, fixed-income indices, stock
indices and commodity indices (as well as amounts derived from arithmetic
operations on these indices). For example, the Fund may agree to swap the return
generated by a fixed-income index for the return generated by a second
fixed-income index. The currency Swaps in which the Fund may enter will
generally involve an agreement to pay interest streams in one currency based on
a specified index in exchange for receiving interest streams denominated in
another currency. Such Swaps may involve initial and final exchanges that
correspond to the agreed upon notional amount.
The Swaps in which the Fund may engage also include rate caps, floors and
collars under which one party pays a single or periodic fixed amount(s) (or
premium), and the other party pays periodic amounts based on the movement of a
specified index. Swaps such as interest rate and total rate of return Swaps
generally do not involve the delivery of securities, other underlying assets, or
principal. Accordingly, the risk of loss with respect to Swaps is limited to the
net amount of payments that the Fund is contractually obligated to make. If the
other party to a Swap defaults, the Fund's risk of loss consists of the net
amount of payments that the Fund is contractually entitled to receive. Currency
Swaps, however, usually involve the delivery of the entire principal value of
one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency Swap is subject to the risk
that the other party to the Swap will default on its contractual delivery
obligations. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
Swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized Swap documentation. As a result, the Swap
10
market has become relatively liquid. Caps, floors, and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than Swaps.
The Fund will usually enter into Swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Fund's obligations under a Swap
agreement will be accrued daily (offset against any amounts owing to the Fund)
and any accrued but unpaid net amounts owed to a Swap Counterparty will be
covered by the maintenance of a segregated account consisting of cash or liquid
securities to avoid any potential leveraging of the Fund. To the extent that
these Swaps, caps, floors, and collars are entered into for hedging purposes,
the Investment Manager believes such obligations do not constitute "senior
securities" under the Investment Company Act and, accordingly, will not treat
them as being subject to the Fund's borrowing restrictions. The Fund may enter
into OTC Derivatives transactions (Swaps, caps, floors, puts, etc., but
excluding foreign exchange contracts) with Counterparties that are approved by
the Investment Manager in accordance with guidelines established by the Board.
These guidelines provide for a minimum credit rating for each Counterparty and
various credit enhancement techniques (for example, collateralization of amounts
due from Counterparties) to limit exposure to Counterparties with ratings below
AA.
The use of Swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
Fund securities transactions. If the Investment Manager is incorrect in its
forecasts of market values, interest rates, and currency exchange rates, the
investment performance of the Fund would be less favorable than it would have
been if this investment technique were not used.
INVESTMENT COMPANIES. Any Fund investment in an investment company is
subject to the underlying risk of that investment company's portfolio
securities. For example, if the investment company held common stocks, the Fund
also would be exposed to the risk of investing in common stocks. In addition,
the Fund would bear its share of the investment company's fees and expenses. The
Fund may acquire shares in foreign investment companies. Investment in foreign
investment companies may be the sole or most practical means by which the Fund
may participate in certain foreign securities markets. The Fund may invest in
shares of various exchange-traded index funds ("ETFs"), which seek to track the
performance of various securities indices. Shares of ETFs have many of the same
risks as direct investments in common stocks. Their market value is expected to
rise and fall as the value of the underlying index rises and falls. In addition,
the market value of their shares may differ from the net asset value of the
particular fund. As a shareholder in an investment company, the Fund would bear
its ratable share of that entity's expenses, including its advisory and
administration fees. At the same time, the Fund would continue to pay its own
investment management fees and other expenses. As a result, the Fund and its
shareholders, in effect, will be absorbing duplicate levels of fees with respect
to investments in other investment companies.
ZERO COUPON SECURITIES. A portion of the fixed-income securities purchased
by the Fund may be zero coupon securities. Such securities are purchased at a
discount from their face amount, giving the purchaser the right to receive their
full value at maturity. The interest earned on such securities is, implicitly,
automatically compounded and paid out at maturity. While such compounding at a
constant rate eliminates the risk of receiving lower yields upon reinvestment of
interest if prevailing interest rates decline, the owner of a zero coupon
security will be unable to participate in higher yields upon reinvestment of
interest received on interest-paying securities if prevailing interest rates
rise.
A zero coupon security pays no interest to its holder during its life.
Therefore, to the extent the Fund invests in zero coupon securities, it will not
receive current cash available for distribution to shareholders. In addition,
zero coupon securities are subject to substantially greater price fluctuations
during periods of changing prevailing interest rates than are comparable
securities which pay interest on a current basis. Current federal tax law
requires that a holder (such as the Fund) of a zero coupon security accrue a
portion of the discount at which the security was purchased as income each year
even though the Fund receives no interest payments in cash on the security
during the year.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. The Fund may use reverse
repurchase agreements as part of its investment strategy and may also use dollar
rolls as part of its investment strategy.
11
Reverse repurchase agreements involve sales by the Fund of assets
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. Reverse repurchase agreements involve the risk that
the market value of the securities the Fund is obligated to purchase under the
agreement may decline below the repurchase price. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the agreement may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Fund's obligation to repurchase the securities.
Dollar rolls involve the Fund selling securities for delivery in the
current month and simultaneously contracting to repurchase substantially similar
(same type and coupon) securities on a specified future date. During the roll
period, the Fund will forgo principal and interest paid on the securities. The
Fund is compensated by the difference between the current sales price and the
lower forward price for the future purchase (often referred to as the "drop") as
well as by the interest earned on the cash proceeds of the initial sale.
Reverse repurchase agreements and dollar rolls are speculative techniques
involving leverage and are considered borrowings by the Fund.
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 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.
WHEN, AS AND IF ISSUED SECURITIES. The Fund may purchase securities on a
"when, as and if issued" basis, under which the issuance of the security depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization or debt restructuring. The commitment for
12
the purchase of any such security will not be recognized in the portfolio of the
Fund until the Investment Manager determines that issuance of the security is
probable. At that time, the Fund will record the transaction and, in determining
its net asset value, will reflect the value of the security daily. At that time,
the Fund will also establish a segregated account on the Fund's books in which
it will maintain cash, cash equivalents, U.S. government securities or other
liquid portfolio securities equal in value to recognized commitments for such
securities.
An increase in the percentage of the Fund's total assets committed to the
purchase of securities on a "when, as and if issued" basis may increase the
volatility of its net asset value. The Fund may also sell securities on a "when,
as and if issued" basis provided that the issuance of the security will result
automatically from the exchange or conversion of a security owned by the Fund at
the time of sale.
PRIVATE PLACEMENTS. The Fund may invest up to 15% of its net assets in
securities which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933 (the "Securities Act"), or
which are otherwise not readily marketable. (Securities eligible for resale
pursuant to Rule 144A under the Securities Act, and determined to be liquid
pursuant to the procedures discussed in the following paragraph, are not subject
to the foregoing restriction.) These securities are generally referred to as
private placements or restricted securities. Limitations on the resale of these
securities may have an adverse effect on their marketability, and may prevent
the Fund from disposing of them promptly at reasonable prices. The Fund may have
to bear the expense of registering the securities for resale and the risk of
substantial delays in effecting the registration.
Rule 144A permits the Fund to sell restricted securities to qualified
institutional buyers without limitation. The Investment Manager, pursuant to
procedures adopted by the Trustees, will make a determination as to the
liquidity of each restricted security purchased by the Fund. If a restricted
security is determined to be "liquid," the security will not be included within
the category "illiquid securities," which may not exceed 15% of the Fund's net
assets. However, investing in Rule 144A securities could have the effect of
increasing the level of Fund illiquidity to the extent the Fund, at a particular
point in time, may be unable to find qualified institutional buyers interested
in purchasing such securities.
CONVERTIBLE SECURITIES. The Fund may invest in securities which are
convertible into common stock or other securities of the same or a different
issuer or into cash within a particular period of time at a specified price or
formula. Convertible securities are generally fixed-income securities (but may
include preferred stock) and generally rank senior to common stocks in a
corporation's capital structure and, therefore, entail less risk than the
corporation's common stock. The value of a convertible security is a function of
its "investment value" (its value as if it did not have a conversion privilege),
and its "conversion value" (the security's worth if it were to be exchanged for
the underlying security, at market value, pursuant to its conversion privilege).
To the extent that a convertible security's investment value is greater
than its conversion value, its price will be primarily a reflection of such
investment value and its price will be likely to increase when interest rates
fall and decrease when interest rates rise, as with a fixed-income security (the
credit standing of the issuer and other factors may also have an effect on the
convertible security's value). If the conversion value exceeds the investment
value, the price of the convertible security will rise above its investment
value and, in addition, will sell at some premium over its conversion value.
(This premium represents the price investors are willing to pay for the
privilege of purchasing a fixed-income security with a possibility of capital
appreciation due to the conversion privilege.) At such times the price of the
convertible security will tend to fluctuate directly with the price of the
underlying equity security. Convertible securities may be purchased by the Fund
at varying price levels above their investment values and/or their conversion
values in keeping with the Fund's objective.
Up to 5% of the Fund's net assets may be invested in convertible
securities that are below investment grade. Debt securities rated below
investment grade are commonly known as "junk bonds." Although the Fund selects
these securities primarily on the basis of their equity characteristics,
investors should be aware that convertible securities rated in these categories
are considered high risk securities; the rating agencies consider them
speculative with respect to the issuer's continuing ability to make timely
payments of interest and principal. Thus, to the extent that such convertible
securities are acquired by the Fund, there is a greater risk as to the timely
repayment of the principal of, and timely payment of interest or dividends on,
such securities than in the case of higher-rated convertible securities.
13
INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS. Real Estate Investment Trusts
("REITs") pool investors' funds for investment primarily in income producing
real estate or real estate related loans or interests. A REIT is not taxed on
income distributed to its shareholders or unitholders if it complies with
regulatory requirements relating to its organization, ownership, assets and
income, and with a regulatory requirement that it distribute to its shareholders
or unitholders at least 95% of its taxable income for each taxable year.
Generally, REITs can be classified as Equity REITs, Mortgage REITs or Hybrid
REITs. Equity REITs invest the majority of their assets directly in real
property and derive their income primarily from rents and capital gains from
appreciation realized through property sales. Equity REITs are further
categorized according to the types of real estate securities they own, e.g.,
apartment properties, retail shopping centers, office and industrial properties,
hotels, health-care facilities, manufactured housing and mixed-property types.
Mortgage REITs invest the majority of their assets in real estate mortgages and
derive their income primarily from interest payments. Hybrid REITs combine the
characteristics of both Equity and Mortgage REITs.
A shareholder in the Fund, by investing in REITs indirectly through the
Fund, will bear not only his proportionate share of the expenses of the Fund,
but also, indirectly, the management expenses of the underlying REITs. REITs may
be affected by changes in the value of their underlying properties and by
defaults by borrowers or tenants. Mortgage REITs may be affected by the quality
of the credit extended. Furthermore, REITs are dependent on specialized
management skills. Some REITs may have limited diversification and may be
subject to risks inherent in investments in a limited number of properties, in a
narrow geographic area, or in a single property type. REITs depend generally on
their ability to generate cash flow to make distributions to shareholders or
unitholders, and may be subject to defaults by borrowers and to
self-liquidations. In addition, the performance of a REIT may be affected by its
failure to qualify for tax-free pass-through of income, or its failure to
maintain exemption from registration under the Investment Company Act.
WARRANTS AND SUBSCRIPTION RIGHTS. The Fund may acquire warrants and/or
rights which are attached to other securities. A warrant is, in effect, an
option to purchase equity securities at a specific price, generally valid for a
specific period of time, and has no voting rights, pays no dividends and has no
rights with respect to the corporations issuing it.
A subscription right is a privilege granted to existing shareholders of a
corporation to subscribe to shares of a new issue of common stock before it is
offered to the public. A subscription right normally has a life of two to four
weeks and a subscription price lower than the current market value of the common
stock.
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, 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 above-average total return.
The Fund MAY not:
1. As to 75% of its total assets, invest more than 5% of the value of
its total assets in the securities of any one issuer (other than obligations
issued, or guaranteed by, the U.S. Government, its agencies or
instrumentalities).
2. As to 75% of its total assets, purchase more than 10% of the
outstanding voting securities or any class of securities of any one issuer.
3. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry. This restriction does not apply to obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
14
4. Purchase or sell real estate or interests therein (including limited
partnership interests), although the Fund may purchase securities of issuers
which engage in real estate operations and securities secured by real estate or
interests therein.
5. With the exception of reverse repurchase agreements and dollar
rolls, borrow money except that the Fund may borrow from a bank for temporary or
emergency purposes in amounts not exceeding 5% (taken at the lower of cost or
current value) of its total assets (not including the amount borrowed).
6. Issue senior securities as defined in the Investment Company Act
except insofar as the Fund may be deemed to have issued a senior security by
reason of (a) entering into any repurchase agreement; (b) purchasing any
securities on a when-issued or delayed delivery basis; (c) purchasing or selling
any futures contracts; (d) borrowing money; or (e) lending portfolio securities.
7. Make loans of money or securities, except: (a) by the purchase of
portfolio securities; (b) by investment in repurchase agreements; or (c) by
lending its portfolio securities.
8. Purchase or sell commodities or commodities contracts except that
the Fund may purchase or sell futures contracts or options thereon.
9. 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.
In addition, as a non-fundamental policy, the Fund may not invest in other
investment companies in reliance on Section 12(d)(1)(F), 12(d)(1)(G) or
12(d)(1)(J) of the Investment Company Act.
Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objective by investing all or substantially all
of its assets in another investment company having substantially the same
investment objective and policies as the Fund.
III. MANAGEMENT OF THE FUND
A. BOARD OF TRUSTEES
The Board of Trustees of the Fund oversees the management of the Fund but
does not itself manage the Fund. The Trustees review various services provided
by or under the direction of the Investment Manager to ensure that the Fund's
general investment policies and programs are properly carried out. The Trustees
also conduct their review to ensure that administrative services are provided to
the Fund in a satisfactory manner.
Under state law, the duties of the Trustees are generally characterized as
a duty of loyalty and a duty of care. The duty of loyalty requires a Trustee to
exercise his or her powers in the interest of the Fund and not the Trustee's
own interest or the interest of another person or organization. A Trustee
satisfies his or her duty of care by acting in good faith with the care of an
ordinarily prudent person and in a manner the Trustee reasonably believes to be
in the best interest of the Fund and its shareholders.
B. MANAGEMENT INFORMATION
Effective July 31, 2003, the Board of Directors/Trustees (for ease of
reference referred to herein as "Trustees") of the Fund elected Joseph J. Kearns
and Fergus Reid to serve as Independent Trustees on the Board of the Fund,
thereby consolidating the existing Board of the Fund with the Board of
Directors/Trustees of the open-end and closed-end registered investment
companies managed by Morgan Stanley Investment Management Inc.
TRUSTEES AND OFFICERS. The Board of the Fund consists of nine Trustees.
These same individuals also serve as directors or trustees for all of the funds
advised by the Investment Manager (the "Retail Funds") and certain of the funds
advised by Morgan Stanley Investment Management Inc., Morgan Stanley Investments
LP and Morgan Stanley AIP GP LP (the "Institutional Funds"). Seven Trustees 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 two Trustees (the
"Management Trustees") are affiliated with the Investment Manager.
15
The Independent Trustees of the Fund, their age, address, term of office
and length of time served, their principal business occupations during the past
five years, the number of portfolios in the Fund Complex (defined below)
overseen by each Independent Trustee (as of December 31, 2003) and other
directorships, if any, held by the Trustees, are shown below. The Fund Complex
includes all open-end and closed-end funds (including all of their portfolios)
advised by the Investment Manager and any funds that have an investment advisor
that is an affiliated person of the Investment Manager (including but not
limited to Morgan Stanley Investment Management Inc.).
[Enlarge/Download Table]
NUMBER OF
PORTFOLIOS
IN FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS HELD
INDEPENDENT TRUSTEE REGISTRANT SERVED* PAST 5 YEARS** BY TRUSTEE BY TRUSTEE
---------------------------- ----------- ----------- ------------------------------ ---------- ------------------------------
Michael Bozic (63) Trustee Since Private Investor; Director or 208 Director of Weirton Steel
c/o Kramer Levin April 1994 Trustee of the Retail Funds Corporation.
Naftalis & Frankel LLP (since April 1994) and the
Counsel to the Institutional Funds (since
Independent Trustees July 2003); formerly Vice
919 Third Avenue Chairman of Kmart Corporation
New York, NY (December 1998- October 2000),
Chairman and Chief Executive
Officer of Levitz Furniture
Corporation (November 1995-
November 1998) and President
and Chief Executive Officer of
Hills Department Stores (May
1991- July 1995); formerly
variously Chairman, Chief
Executive Officer, President
and Chief Operating Officer
(1987-1991) of the Sears
Merchandise Group of Sears,
Roebuck & Co.
Edwin J. Garn (72) Trustee Since Managing Director of Summit 208 Director of Franklin Covey
c/o Summit Ventures LLC January Ventures LLC; Director or (time management systems), BMW
One Utah Center 1993 Trustee of the Retail Funds Bank of North America, Inc.
201 South Main Street (since January 1993) and the (industrial loan corporation),
Salt Lake City, UT Institutional Funds (since United Space Alliance (joint
July 2003); member of the Utah venture between Lockheed
Regional Advisory Board of Martin and the Boeing Company)
Pacific Corp.; formerly United and Nuskin Asia Pacific
States Senator (R-Utah) (multilevel marketing); member
(1974-1992) and Chairman, of the board of various civic
Senate Banking Committee and charitable organizations.
(1980-1986), Mayor of Salt
Lake City, Utah (1971-1974),
Astronaut, Space Shuttle
Discovery (April 12-19, 1985),
and Vice Chairman, Huntsman
Corporation (chemical
company).
Wayne E. Hedien (70) Trustee Since Retired; Director or Trustee 208 Director of The PMI Group Inc.
c/o Kramer Levin September of the Retail Funds (since (private mortgage insurance);
Naftalis & Frankel LLP 1997 September 1997) and the Trustee and Vice Chairman of
Counsel to the Institutional Funds (since The Field Museum of Natural
Independent Trustees July 2003); formerly History; director of various
919 Third Avenue associated with the Allstate other business and charitable
New York, NY Companies (1966-1994), most organizations.
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).
----------
* This is the earliest date the Trustee began serving the Retail Funds. Each
Trustee serves an indefinite term, until his or her successor is elected.
** The dates referenced below indicating commencement of service as
Director/Trustee for the Retail Funds and the Institutional Funds reflect the
earliest date the Director/Trustee began serving the Retail or Institutional
Funds as applicable.
16
[Enlarge/Download Table]
NUMBER OF
PORTFOLIOS
IN FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS HELD
INDEPENDENT TRUSTEE REGISTRANT SERVED* PAST 5 YEARS** BY TRUSTEE BY TRUSTEE
---------------------------- ----------- ----------- ------------------------------ ---------- ------------------------------
Dr. Manuel H. Johnson (55) Trustee Since July Senior Partner, Johnson Smick 208 Director of NVR, Inc. (home
c/o Johnson Smick 1991 International, Inc., a construction); Chairman and
International, Inc. consulting firm; Chairman of Trustee of the Financial
2099 Pennsylvania the Audit Committee and Accounting Foundation
Avenue, N.W. Director or Trustee of the (oversight organization of the
Suite 950 Retail Funds (since July 1991) Financial Accounting Standards
Washington, D.C. and the Institutional Funds Board); Director of RBS
(since July 2003); Co-Chairman Greenwich Capital Holdings
and a founder of the Group of (financial holding company).
Seven Council (G7C), an
international economic
commission; formerly Vice
Chairman of the Board of
Governors of the Federal
Reserve System and Assistant
Secretary of the U.S.
Treasury.
Joseph J. Kearns (62) Trustee Since July President, Kearns & Associates 209 Director of Electro Rent
c/o Kearns & 2003 LLC (investment consulting); Corporation (equipment
Associates LLC Deputy Chairman of the Audit leasing), The Ford Family
PMB754 Committee and Director or Foundation, and the UCLA
23852 Pacific Coast Highway Trustee of the Retail Funds Foundation.
Malibu, CA (since July 2003) and the
Institutional Funds (since
August 1994); previously
Chairman of the Audit
Committee of the Institutional
Funds (October 2001- July
2003); formerly CFO of the
J. Paul Getty Trust.
Michael E. Nugent (68) Trustee Since July General Partner of Triumph 208 Director of various business
c/o Triumph Capital, L.P. 1991 Capital, L.P., a private organizations.
445 Park Avenue investment partnership;
New York, NY Chairman of the Insurance
Committee and Director or
Trustee of the Retail Funds
(since July 1991) and the
Institutional Funds (since
July 2001); formerly Vice
President, Bankers Trust
Company and BT Capital
Corporation (1984-1988).
Fergus Reid (72) Trustee Since July Chairman of Lumelite Plastics 209 Trustee and Director of
c/o Lumelite Plastics 2003 Corporation; Chairman of the certain investment companies
Corporation Governance Committee and in the JPMorgan Funds complex
85 Charles Colman Blvd. Director or Trustee of the managed by J.P. Morgan
Pawling, NY Retail Funds (since July 2003) Investment Management Inc.
and the Institutional Funds
(since June 1992).
----------
* This is the earliest date the Trustee began serving the Retail Funds. Each
Trustee serves an indefinite term, until his or her successor is elected.
** The dates referenced below indicating commencement of service as
Director/Trustee for the Retail Funds and the Institutional Funds reflect the
earliest date the Director/Trustee began serving the Retail or Institutional
Funds as applicable.
The Trustees who are affiliated with the Investment Manager or affiliates
of the Investment Manager (as set forth below) and executive officers of the
Fund, their term of office and length of time served, their principal business
occupations during the past five years, the number of portfolios in the Fund
Complex
17
overseen by each Management Trustee (as of December 31, 2003) and the other
directorships, if any, held by the Trustee, are shown below.
[Enlarge/Download Table]
NUMBER OF
PORTFOLIOS
IN FUND
COMPLEX
POSITION(S) LENGTH OF OVERSEEN BY
NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) DURING MANAGEMENT OTHER DIRECTORSHIPS HELD
MANAGEMENT TRUSTEE REGISTRANT SERVED* PAST 5 YEARS** TRUSTEE BY TRUSTEE
---------------------------- ----------- ----------- ------------------------------ ----------- ------------------------------
Charles A. Fiumefreddo (71) Chairman Since July Chairman and Director or 208 None.
c/o Morgan Stanley Trust of the 1991 Trustee of the Retail Funds
Harborside Financial Center, Board (since July 1991) and the
Plaza Two, and Institutional Funds (since
Jersey City, NJ Trustee July 2003); formerly Chief
Executive Officer of the
Retail Funds (until September
2002).
James F. Higgins (56) Trustee Since June Director or Trustee of the 208 Director of AXA Financial,
c/o Morgan Stanley Trust 2000 Retail Funds (since June 2000) Inc. and The Equitable
Harborside Financial Center, and the Institutional Funds Life Assurance Society of
Plaza Two, (since July 2003); Senior the United States
Jersey City, NJ Advisor of Morgan Stanley (financial services).
(since August 2000); Director
of the Distributor and Dean
Witter Realty Inc.; previously
President and Chief Operating
Officer of the Private Client
Group of Morgan Stanley (May
1999- August 2000), and
President and Chief Operating
Officer of Individual
Securities of Morgan Stanley
(February 1997-May 1999).
----------
* This is the earliest date the Trustee began serving the Retail Funds. Each
Trustee serves an indefinite term, until his or her successor is elected.
** The dates referenced below indicating commencement of service as
Director/Trustee for the Retail Funds and the Institutional Funds reflect the
earliest date the Director/Trustee began serving the Retail or Institutional
Funds as applicable.
[Enlarge/Download Table]
POSITION(S) LENGTH OF
NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) DURING
EXECUTIVE OFFICER REGISTRANT SERVED* PAST 5 YEARS**
--------------------------- ----------------- -------------- --------------------------------------------------
Mitchell M. Merin (51) President Since May 1999 President and Chief Operating Officer of Morgan
1221 Avenue of the Americas Stanley Investment Management Inc.; President,
New York, NY Director and Chief Executive Officer of the
Investment Manager and Morgan Stanley Services;
Chairman and Director of the Distributor; Chairman
and Director of the Transfer Agent; Director of
various Morgan Stanley subsidiaries; President of
the Institutional Funds (since July 2003) and
President of the Retail Funds (since May
1999);Trustee (since July 2003) and President
(since December 2002) of the Van Kampen Closed-End
Funds; Trustee (since May 1999) and President
(since October 2002) of the Van Kampen Open-End
Funds.
----------
* This is the earliest date the Officer began serving the Retail Funds. Each
Officer serves an indefinite term, until his or her successor is elected.
** The dates referenced below indicating commencement of service as an Officer
for the Retail and Institutional Funds reflect the earliest date the Officer
began serving the Retail or Institutional Funds as applicable.
18
[Enlarge/Download Table]
POSITION(S) LENGTH OF
NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) DURING
EXECUTIVE OFFICER REGISTRANT SERVED* PAST 5 YEARS**
--------------------------- ----------------- -------------- --------------------------------------------------
Barry Fink (49) Vice President Since February General Counsel (since May 2000) and Managing
1221 Avenue of the Americas 1997 Director (since December 2000) of Morgan Stanley
New York, NY Investment Management; Managing Director (since
December 2000), Secretary (since February 1997)
and Director (since July 1998) of the Investment
Manager and Morgan Stanley Services; Vice
President of the Retail Funds; Assistant Secretary
of Morgan Stanley DW; Vice President of the
Institutional Funds (since July 2003); Managing
Director, Secretary and Director of the
Distributor; previously Secretary (February
1997-July 2003) and General Counsel (February
1997-April 2004) of the Retail Funds ; Vice
President and Assistant General Counsel of the
Investment Manager and Morgan Stanley Services
(February 1997-December 2001).
Ronald E. Robison (65) Executive Vice Since April Principal Executive Officer -- Office of the Funds
1221 Avenue of the Americas President and 2003 (since November 2003); Managing Director of Morgan
New York, NY Principal Stanley & Co. Incorporated, Morgan Stanley
Executive Investment Management Inc. and Morgan Stanley;
Officer Managing Director, Chief Administrative Officer
and Director of the Investment Manager and Morgan
Stanley Services; Chief Executive Officer and
Director of the Transfer Agent; Managing Director
and Director of the Distributor; Executive Vice
President and Principal Executive Officer of the
Institutional Funds (since July 2003) and the
Retail Funds (since April 2003); Director of
Morgan Stanley SICAV (since May 2004); previously
President and Director of the Institutional Funds
(March 2001-July 2003) and Chief Global Operations
Officer of Morgan Stanley Investment Management
Inc.
Joseph J. McAlinden (61) Vice President Since July Managing Director and Chief Investment Officer of
1221 Avenue of the Americas 1995 the Investment Manager and Morgan Stanley
New York, NY Investment Management Inc.; Director of the
Transfer Agent, Chief Investment Officer of the
Van Kampen Funds; Vice President of the
Institutional Funds (since July 2003) and the
Retail Funds (since July 1995).
Amy R. Doberman (42) Vice President Since July Managing Director and General Counsel, U.S.
1221 Avenue of the Americas 2004 Investment Management; Managing Director of Morgan
New York, NY Stanley Investment Management Inc. and the
Investment Manager; Vice President of the
Institutional and Retail Funds (since July 2004);
previously, Managing Director and General Counsel
-- Americas, UBS Global Asset Management (July
2000-July 2004) and General Counsel, Aeltus
Investment Management, Inc. (January 1997-July
2000).
Stefanie V. Chang (37) Vice President Since July Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas 2003 Incorporated, Morgan Stanley Investment Management
New York, NY Inc. and the Investment Manager; Vice President of
the Institutional Funds (since December 1997) and
the Retail Funds (since July 2003); formerly
practiced law with the New York law firm of Rogers
& Wells (now Clifford Chance US LLP).
----------
* This is the earliest date the Officer began serving the Retail Funds. Each
Officer serves an indefinite term, until his or her successor is elected.
** The dates referenced below indicating commencement of service as an Officer
for the Retail and Institutional Funds reflect the earliest date the Officer
began serving the Retail or Institutional Funds as applicable.
19
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POSITION(S) LENGTH OF
NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) DURING
EXECUTIVE OFFICER REGISTRANT SERVED* PAST 5 YEARS**
---------------------------- ----------------- -------------- --------------------------------------------------
Francis J. Smith (39) Treasurer and Treasurer Executive Director of the Investment Manager and
c/o Morgan Stanley Trust Chief Financial since July Morgan Stanley Services (since December 2001);
Harborside Financial Center, Officer 2003 and Chief previously, Vice President of the Retail Funds
Plaza Two, Financial (September 2002-July 2003), Vice President of the
Jersey City, NJ Officer since Investment Manager and Morgan Stanley Services
September 2002 (August 2000-November 2001) and Senior Manager at
PricewaterhouseCoopers LLP (January 1998-August
2000).
Thomas F. Caloia (58) Vice President Since July Executive Director (since December 2002) and
c/o Morgan Stanley Trust 2003 Assistant Treasurer of the Investment Manager, the
Harborside Financial Center, Distributor and Morgan Stanley Services;
Plaza Two, previously Treasurer of the Retail Funds (April
Jersey City, NJ 1989-July 2003); formerly First Vice President of
the Investment Manager, the Distributor and Morgan
Stanley Services.
Mary E. Mullin (37) Secretary Since July Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas 2003 Incorporated, Morgan Stanley Investment Management
New York, NY Inc. and the Investment Manager; Secretary of the
Institutional Funds (since June 1999) and the
Retail Funds (since July 2003); formerly practiced
law with the New York law firms of McDermott, Will
& Emery and Skadden, Arps, Slate, Meagher & Flom
LLP.
----------
* This is the earliest date the Officer began serving the Retail Funds. Each
Officer serves an indefinite term, until his or her successor is elected.
** The dates referenced below indicating commencement of service as an Officer
for the Retail and Institutional Funds reflect the earliest date the Officer
began serving the Retail or Institutional Funds as applicable.
In addition, the following individuals who are officers of the Investment
Manager or its affiliates serve as assistant secretaries of the Fund: Lou Anne
D. McInnis, Joseph Benedetti, Daniel Burton, Marilyn K. Cranney, Joanne Doldo,
Elisa Mitchell, Elizabeth Nelson, Sheldon Winicour and Bennett MacDougall.
For each Trustee, the dollar range of equity securities beneficially owned
by the Trustee in the Fund and in the Family of Investment Companies (Family of
Investment Companies includes all of the registered investment companies advised
by the Investment Manager, Morgan Stanley Investment Management Inc. and Morgan
Stanley AIP GP LP) for the calendar year ended December 31, 2003 is shown below.
Messrs. Kearns and Reid began serving as Trustees of the Fund on July 31, 2003.
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AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN
ALL REGISTERED INVESTMENT COMPANIES OVERSEEN
DOLLAR RANGE OF EQUITY SECURITIES IN THE FUND BY TRUSTEE IN FAMILY OF INVESTMENT COMPANIES
NAME OF TRUSTEE (AS OF DECEMBER 31, 2003) (AS OF DECEMBER 31, 2003)
------------------------ --------------------------------------------- ----------------------------------------------
INDEPENDENT:
Michael Bozic None over $100,000
Edwin J. Garn None over $100,000
Wayne E. Hedien None over $100,000
Dr. Manuel H. Johnson None over $100,000
Joseph J. Kearns(1) None over $100,000
Michael E. Nugent None over $100,000
Fergus Reid(1) None over $100,000
INTERESTED:
Charles A. Fiumefreddo None over $100,000
James F. Higgins None over $100,000
----------
(1) Includes the total amount of compensation deferred by the Trustee at his
election pursuant to a deferred compensation plan. Such deferred
compensation is placed in a deferral account and deemed to be invested in
one or more of the Retail Funds or Institutional Funds (or portfolio
thereof) that are offered as investment options under the plan. As of
December 31, 2003, Messrs. Kearns and Reid had deferred a total of
$430,361 and $600,512, respectively, pursuant to the deferred compensation
plan.
20
As to each Independent Trustee and his immediate family members, no person
owned beneficially or of record securities in an investment advisor or principal
underwriter of the Fund, or a person (other than a registered investment
company) directly or indirectly controlling, controlled by or under common
control with an investment advisor or principal underwriter of the Fund.
INDEPENDENT TRUSTEES AND THE COMMITTEES. Law and regulation establish both
general guidelines and specific duties for the Independent Trustees. The Retail
Funds seek as Independent Trustees individuals of distinction and experience in
business and finance, government service or academia; these are people whose
advice and counsel are in demand by others and for whom there is often
competition. To accept a position on the Retail Funds' boards, such individuals
may reject other attractive assignments because the Retail Funds make
substantial demands on their time. All of the Independent Trustees serve as
members of the Audit Committee. In addition, three Trustees, including two
Independent Trustees, serve as members of the Insurance Committee, and three
Independent Trustees serve as members of the Governance Committee.
The Independent Trustees are charged with recommending to the full Board
approval of management, advisory and administration contracts, Rule 12b-1 plans
and distribution and underwriting agreements; continually reviewing fund
performance; checking on the pricing of portfolio securities, brokerage
commissions, transfer agent costs and performance, and trading among funds in
the same complex; and approving fidelity bond and related insurance coverage and
allocations, as well as other matters that arise from time to time. The
Independent Trustees are required to select and nominate individuals to fill any
Independent Trustee vacancy on the board of any fund that has a Rule 12b-1 plan
of distribution. Most of the Retail Funds have a Rule 12b-1 plan.
The Board of Trustees of the Fund has a separately-designated standing
Audit Committee established in accordance with section 3(a)(58)(A) of the
Securities Exchange Act of 1934, as amended. The Audit Committee is charged with
recommending to the full Board the engagement or discharge of the Fund's
independent registered public accounting firm; directing investigations into
matters within the scope of the independent registered public accounting firm's
duties, including the power to retain outside specialists; reviewing with the
independent registered public accounting firm the audit plan and results of the
auditing engagement; approving professional services provided by the independent
registered public accounting firm and other accounting firms prior to the
performance of the services; reviewing the independence of the independent
registered public accounting firm; 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 Fund
has adopted a formal, written Audit Committee Charter. During the Fund's fiscal
year ended August 31, 2004, the Audit Committee held six meetings.
The members of the Audit Committee of the Fund are currently Michael
Bozic, Edwin J. Garn, Wayne E. Hedien, Dr. Manuel H. Johnson, Joseph J. Kearns,
Michael E. Nugent and Fergus Reid. None of the members of the Fund's Audit
Committee is an interested person, as defined under the Investment Company Act,
of the Fund. Each Independent Trustee is also "independent" from the Fund under
the listing standards of the New York Stock Exchange, Inc. (NYSE). The current
Chairman of the Audit Committee of the Fund is Dr. Manuel H. Johnson.
The Board of Trustees of the Fund also has a Governance Committee. The
Governance Committee identifies individuals qualified to serve as Independent
Trustees on the Fund's Board and on committees of such Board and recommends such
qualified individuals for nomination by the Fund's Independent Trustees as
candidates for election as Independent Trustees, advises the Fund's Board with
respect to Board composition, procedures and committees, develops and recommends
to the Fund's Board a set of corporate governance principles applicable to the
Fund, monitors and makes recommendations on corporate governance matters and
policies and procedures of the Fund's Board of Trustees and any Board committees
and oversees periodic evaluations of the Fund's Board and its committees. The
members of the Governance Committee of the Fund are currently Michael Bozic,
Edwin J. Garn and Fergus Reid, each of whom is an Independent Trustee. The
current Chairman of the Governance Committee is Fergus Reid. During the Fund's
fiscal year ended August 31, 2004, the Governance Committee held one meeting.
21
The Fund does not have a separate nominating committee. While the Fund's
Governance Committee recommends qualified candidates for nominations as
Independent Trustees, the Board of Trustees of the Fund believes that the task
of nominating prospective Independent Trustees is important enough to require
the participation of all current Independent Trustees, rather than a separate
committee consisting of only certain Independent Trustees. Accordingly, each
current Independent Trustee (Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Dr.
Manuel H. Johnson, Joseph J. Kearns, Michael E. Nugent and Fergus Reid)
participates in the election and nomination of candidates for election as
Independent Trustees for the Fund. Persons recommended by the Fund's Governance
Committee as candidates for nomination as Independent Trustees shall possess
such knowledge, experience, skills, expertise and diversity so as to enhance the
Board's ability to manage and direct the affairs and business of the Fund,
including, when applicable, to enhance the ability of committees of the Board to
fulfill their duties and/or to satisfy any independence requirements imposed by
law, regulation or any listing requirements of the NYSE. While the Independent
Trustees of the Fund expect to be able to continue to identify from their own
resources an ample number of qualified candidates for the Fund's Board as they
deem appropriate, they will consider nominations from shareholders to the Board.
Nominations from shareholders should be in writing and sent to the Independent
Trustees as described below.
There were 25 meetings of the Board of Trustees of the Fund held during
the fiscal year ended August 31, 2004. The Independent Trustees of the Fund also
met seven times during that time, in addition to the 25 meetings of the full
Board.
Finally, the Board has formed an Insurance Committee to review and monitor
the insurance coverage maintained by the Fund. The Insurance Committee currently
consists of Messrs. Nugent, Fiumefreddo and Hedien. During the Fund's fiscal
year ended August 31, 2004, the Insurance Committee held eight meetings.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS TRUSTEES FOR THE RETAIL FUNDS AND
INSTITUTIONAL FUNDS. The Independent Trustees and the Fund's management believe
that having the same Independent Trustees for each of the Retail Funds and
Institutional Funds avoids the duplication of effort that would arise from
having different groups of individuals serving as Independent Trustees for each
of the Funds or even of sub-groups of Funds. They believe that having the same
individuals serve as Independent Trustees of all the Retail Funds and
Institutional Funds tends to increase their knowledge and expertise regarding
matters which affect the Fund Complex generally and enhances their ability to
negotiate on behalf of each Fund with the Fund's service providers. This
arrangement also precludes the possibility of separate groups of Independent
Trustees arriving at conflicting decisions regarding operations and management
of the Funds and avoids the cost and confusion that would likely ensue. Finally,
having the same Independent Trustees serve on all Fund boards enhances the
ability of each Fund to obtain, at modest cost to each separate Fund, the
services of Independent Trustees, of the caliber, experience and business acumen
of the individuals who serve as Independent Trustees of the Retail Funds and
Institutional 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 Fund property for
satisfaction of claims arising in connection with the affairs of the Fund. With
the exceptions stated, the Declaration of Trust provides that a Trustee,
Officer, employee or agent is entitled to be indemnified against all liability
in connection with the affairs of the Fund.
SHAREHOLDER COMMUNICATIONS. Shareholders may send communications to the
Fund's Board of Trustees. Shareholders should send communications intended for
the Fund's Board by addressing the communications directly to the Board (or
individual Board members) and/or otherwise clearly indicating in the salutation
that the communication is for the Board (or individual Board members) and by
sending the communication to either the Fund's office or directly to such Board
member(s) at the address specified for each Trustee previously noted. Other
shareholder communications received by the Fund not directly
22
addressed and sent to the Board will be reviewed and generally responded to by
management, and will be forwarded to the Board only at management's discretion
based on the matters contained therein.
C. COMPENSATION
Effective August 1, 2003, each Independent Trustee receives an annual
retainer fee of $168,000 for serving the Retail Funds and the Institutional
Funds. In addition, each Independent Trustee receives $2,000 for attending each
of the four quarterly board meetings and two performance meetings that occur
each year, so that an Independent Trustee who attended all six meetings would
receive total compensation of $180,000 for serving the Funds. The Chairman of
the Audit Committee receives an additional annual retainer fee of $60,000. Other
Committee Chairmen and the Deputy Chairman of the Audit Committee receive an
additional annual retainer fee of $30,000. The aggregate compensation paid to
each Independent Trustee is paid by the Retail Funds and the Institutional
Funds, and is allocated on a pro rata basis among each of the operational
funds/portfolios of the Retail Funds and the Institutional Funds based on the
relative net assets of each of the funds/portfolios. Mr. Fiumefreddo receives an
annual fee for his services as Chairman of the Boards of the Retail Funds and
the Institutional Funds and for administrative services provided to each Board.
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 employed by the Investment Manager or an
affiliated company receive no compensation or expense reimbursement from the
Fund for their services as Trustee or Officer.
Prior to August 1, 2003, the Fund paid 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 paid the Chairman of the Audit Committee an additional annual
fee of $750 and the Chairmen of the Derivatives and Insurance Committees
additional annual fees of $500). With the exception of an Audit Committee
Meeting, if a Board meeting and a meeting of the Independent Trustees and/or one
or more Committee meetings took place on a single day, the Trustees were paid a
single meeting fee by the Fund.
Effective April 1, 2004, the Fund began a Deferred Compensation Plan (the
"DC Plan"), which allows each Independent Trustee to defer payment of all, or a
portion, of the fees he or she receives for serving on the Board of Trustees
throughout the year. Each eligible Trustee generally may elect to have the
deferred amounts credited with a return equal to the total return on one or more
of the Retail Funds or Institutional Funds (or portfolios thereof) that are
offered as investment options under the Plan. At the Trustee's election,
distributions are either in one lump sum payment, or in the form of equal annual
installments over a period of five years. The rights of an eligible Trustee and
the beneficiaries to the amounts held under the DC Plan are unsecured and such
amounts are subject to the claims of the creditors of the Fund.
Prior to April 1, 2004, the Institutional Funds maintained a similar
Deferred Compensation Plan (the "Prior DC Plan"), which also allowed each
Independent Trustee to defer payment of all, or a portion, of the fees he or she
received for serving on the Board of Trustees throughout the year. The DC Plan
amends and supersedes the Prior DC Plan and all amounts payable under the Prior
DC Plan are now subject to the terms of the DC Plan (except for amounts due to
be paid during the calendar year 2004 which will remain subject to the terms of
the Prior DC Plan).
23
The following table shows aggregate compensation paid to the Fund's
Trustees from the Fund for the fiscal year ended August 31, 2004.
FUND COMPENSATION
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AGGREGATE
COMPENSATION
NAME OF TRUSTEE FROM FUND
--------------- ------------
Michael Bozic(1) (3) $ 394
Charles A. Fiumefreddo*(2) 799
Edwin J. Garn(1) (3) 394
Wayne E. Hedien(1) (2) 394
James F. Higgins* 0
Dr. Manuel H. Johnson(1) 527
Joseph J. Kearns(1) (4) 455
Michael E. Nugent(1) (2) 460
Fergus Reid(1) (3) 460
----------
* Messrs. Fiumefreddo and Higgins are deemed to be "interested persons" of
the Fund as that term is defined in the Investment Company Act.
(1) Member of the Audit Committee. Dr. Johnson is the Chairman of the Audit
Committee and Mr. Kearns is the Deputy Chairman of the Audit Committee.
(2) Member of the Insurance Committee. Mr. Nugent is the Chairman of the
Insurance Committee.
(3) Member of the Governance Committee. Mr. Reid is the Chairman of the
Governance Committee.
(4) Includes $119 of compensation deferred at the election of the Trustee
under the DC Plan.
The following table shows aggregate compensation paid to each of the
Fund's Trustees by the Fund Complex (which includes all of the Retail and
Institutional Funds) for the calendar year ended December 31, 2003. Because the
funds in the Fund Complex have different fiscal year ends, the amounts shown in
this table are presented on a calendar-year basis. Messrs. Bozic, Fiumefreddo,
Garn, Hedien, Johnson and Higgins began serving as Trustees of the Institutional
Funds on July 31, 2003, and served as Trustees of the Retail Funds during the
calendar year ended December 31, 2003. Messrs. Kearns and Reid began serving as
Trustees of the Retail Funds on July 31, 2003, and served as Trustees of the
Institutional Funds during the calendar year ended December 31, 2003. Mr. Nugent
served as Trustee of both the Institutional Funds and the Retail Funds during
the calendar year ended December 31, 2003.
CASH COMPENSATION FROM FUND COMPLEX
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NUMBER OF
PORTFOLIOS IN THE
FUND COMPLEX TOTAL COMPENSATION
FROM WHICH THE FROM THE FUND
TRUSTEE RECEIVED COMPLEX PAYABLE
NAME OF TRUSTEE COMPENSATION TO TRUSTEES
--------------- ------------------ ------------------
Michael Bozic 208 $ 164,400
Charles A. Fiumefreddo 208 360,000
Edwin J. Garn 208 164,400
Wayne E. Hedien 208 164,300
James F. Higgins 208 0
Dr. Manuel H. Johnson 208 228,213
Joseph J. Kearns(1) 209 166,710
Michael E. Nugent 208 277,441
Fergus Reid(1) 209 149,299
----------
(1) Includes amounts deferred at the election of the Trustees under the Prior
DC Plan. The total amounts of deferred compensation (including interest)
payable or accrued by Messrs. Kearns and Reid are $430,361 and $600,512,
respectively.
Prior to December 31, 2003, 49 of the Retail Funds (the "Adopting Funds"),
had adopted a retirement program under which an Independent Trustee who retired
after serving for at least five years as an Independent Trustee of any such fund
(an "Eligible Trustee") would have been entitled to retirement payments based on
factors such as length of service, upon reaching the eligible retirement age. On
December 31, 2003, the amount of accrued retirement benefits for each Eligible
Trustee was frozen, and will be payable, together with a return of 8% per annum,
at or following each such Eligible Trustee's retirement as shown in the table
below.
24
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the 49 Retail Funds for the calendar year ended
December 31, 2003, and the estimated retirement benefits for the Independent
Trustees and from the 49 Retail Funds for each calendar year following
retirement. Messrs. Kearns and Reid did not participate in the retirement
program.
[Enlarge/Download Table]
RETIREMENT BENEFITS ACCRUED AS ESTIMATED ANNUAL BENEFITS UPON
FUND EXPENSES RETIREMENT(1)
BY ALL ADOPTING FROM ALL ADOPTING
NAME OF INDEPENDENT TRUSTEE FUNDS FUNDS
--------------------------- ------------------------------ ------------------------------
Michael Bozic $ 19,842 $ 47,838
Edwin J. Garn 35,306 47,877
Wayne E. Hedien 38,649 40,839
Dr. Manuel H. Johnson 20,125 70,050
Michael E. Nugent 36,265 62,646
----------
(1) Total compensation accrued under the retirement plan, together with a
return of 8% per annum, will be paid annually commencing upon retirement
and continuing for the remainder of the Trustee's life.
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of October 7, 2004, no shareholder was known to own beneficially or of
record as much as 5% of the outstanding shares of the Fund.
As of the date of this STATEMENT OF ADDITIONAL INFORMATION, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's officers
and Trustees as a group was less than 1% of the Fund's shares of beneficial
interest outstanding.
V. INVESTMENT MANAGEMENT AND OTHER SERVICES
A. INVESTMENT MANAGER
The Investment Manager to the Fund is Morgan Stanley 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 to manage the investment of the
Fund's assets, including the placing of orders for the purchase and sale of
portfolio securities. The Fund pays the Investment Manager monthly compensation
calculated daily by applying the annual rate of 0.80% to the average net assets
of the Fund determined as of the close of each business day. The management fee
is allocated among the Classes pro rata based on the net assets of the Fund
attributable to each Class. The Investment Manager had agreed to assume all
operating expenses (except for brokerage and 12b-1 fees) and waive the
compensation provided in the Management Agreement until such time as the Fund
had $50 million of net assets or until 6 months from the date of commencement of
the Fund's operations, whichever occurred first. The Fund reached $50 million on
January 24, 2002, at which time the waiver of fees and assumption of expenses
ceased. Taking this waiver and assumption of expenses into account, for the
period October 29, 2001 (commencement of operations) through August 31, 2002,
the fees payable under the Management Agreement amounted to $481,405. For the
fiscal years ended August 31, 2003 and August 31, 2004, the Investment Manager
accrued total compensation under the Management Agreement in the amounts of
$1,633,679 and $2,510,907, respectively.
The Investment Manager has retained its wholly-owned subsidiary, Morgan
Stanley Services, to perform administrative services for the Fund.
25
In approving the Management Agreement, the Board of Trustees, including
the Independent Trustees, considered the nature, quality and scope of the
services provided by the Investment Manager; the performance, fees and expenses
of the Fund compared to other similar investment companies; the Investment
Manager's expenses in providing the services; the profitability of the
Investment Manager and its affiliated companies and other benefits they derive
from their relationship with the Fund; and the extent to which economies of
scale are shared with the Fund. The Independent Trustees met with and reviewed
reports from third parties about the foregoing factors and changes, if any, in
such items since the preceding year's deliberations. The Independent Trustees
noted their confidence in the capability and integrity of the senior management
and staff of the Investment Manager and the financial strength of the Investment
Manager and its affiliated companies. The Independent Trustees weighed the
foregoing factors in light of the advice given to them by their legal counsel as
to the law applicable to the review of investment advisory contracts. Based upon
its review, the Board of Trustees, including all of the Independent Trustees,
determined, in the exercise of its business judgment, that approval of the
Management Agreement was in the best interests of the Fund and its shareholders.
The Board of Trustees of the Fund approved amending and restating,
effective November 1, 2004, the existing investment management agreement for the
Fund ("Current Investment Management Agreement") to remove the administration
services component from the Current Investment Management Agreement. The Fund's
Investment Manager will continue to provide investment advisory services under
amended and restated investment advisory agreements ("Investment Advisory
Agreement"). The administration services previously provided to the Fund by the
Investment Manager will be provided by Morgan Stanley Services Company Inc.
("Administrator") pursuant to a separate administration agreement
("Administration Agreement") entered into by the Fund with the Administrator.
Under the terms of the Administration Agreement, the Administrator will provide
the same administration services previously provided by the Investment Manager.
Although the entities providing administration services to the Fund have
changed, the Morgan Stanley personnel performing such services will remain the
same. Furthermore, the changes will not result in any increase in the amount of
total combined fees paid by the Fund for investment advisory and administration
services, or any decrease in the nature or quality of the investment advisory or
administration services received by 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 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.
26
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 the independent registered public accounting firm 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 registered public
accounting firm; membership dues of industry associations; interest on Fund
borrowings; postage; insurance premiums on property or personnel (including
officers and Trustees) of the Fund which inure to its benefit; extraordinary
expenses (including, but not limited to, legal claims and liabilities and
litigation costs and any indemnification relating thereto); and all other costs
of the Fund's operation. The 12b-1 fees relating to a particular Class will be
allocated directly to that Class. In addition, other expenses associated with a
particular Class (except advisory or custodial fees) may be allocated directly
to that Class, provided that such expenses are reasonably identified as
specifically attributable to that Class and the direct allocation to that Class
is approved by the Trustees.
The Management Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Investment Manager is not liable to the Fund or any
of its investors for any act or omission by the Investment Manager or for any
losses sustained by the Fund or its investors.
The Management Agreement will remain in effect from year to year, provided
continuance of the Management Agreement is approved at least annually by the
vote of the holders of a majority, as defined in the Investment Company Act, of
the outstanding shares of the Fund, or by the Trustees, provided that in either
event such continuance is approved annually by the vote of a majority of the
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.
27
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%, 1.0% and 1.0% of the average daily
net assets of Class A, Class B and Class C, respectively.
Effective May 1, 2004, the Board approved an Amended and Restated Plan of
Distribution Pursuant to Rule 12b-1 (the "Amended Plan") converting the Plan
with respect to Class B shares from a "compensation" to a "reimbursement" plan
similar to that of Class A and Class C. Except as otherwise described below, the
terms of the Plan remain unchanged.
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 fiscal period October 29,
2001 (commencement of operations) through August 31, 2002 and for the fiscal
years ended August 31, 2003 and 2004, in approximate amounts as provided in the
table below (the Distributor did not retain any of these amounts).
[Download Table]
OCTOBER 29, 2001
THROUGH
2004 2003 AUGUST 31, 2002
-------------------- --------------------- ---------------------
Class A FSCs:(1) $ 49,468 FSCs:(1) $ 19,338 FSCs:(1) $ 46,004
CDSCs: $ 0 CDSCs: $ 25 CDSCs: $ 0
Class B CDSCs: $ 174,462 CDSCs: $ 188,301 CDSCs: $ 110,273
Class C CDSC: $ 1,246 CDSCs: $ 7,725 CDSCs: $ 2,392
----------
(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 0.25% of such Class' average daily net assets are
currently each characterized as a "service fee" under the Rules of the NASD (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 NASD.
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. During the fiscal year ended August 31, 2004,
Class A, Class B and Class C shares of the Fund accrued amounts payable to the
Distributor under the Plan of $8,530, $635,412 and $75,224, respectively, which
amounts are equal to 0.24%, 1.00% and 0.92% of the average daily net assets of
Class A, Class B and Class C, respectively, for the fiscal year.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method the Fund offers four
Classes, each with a different distribution arrangement.
With respect to Class A shares, 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 5.0% of the
amount sold and an annual residual commission, currently a residual of up to
0.25% of the current value of the respective accounts for which they are the
Financial Advisors or dealers of record in all cases.
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 and an annual residual commission, currently a residual of up to 0.25% of
the current value (not including reinvested dividends or distributions) of the
amount sold in all cases.
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 1.0% of the current
value of the respective accounts for which they are the Financial Advisors of
record.
28
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.
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 costs 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 1.0%, in the case of Class C, of the average net assets of the respective
Class during the month. No interest or other financing charges, if any, incurred
on any distribution expenses on behalf of Class A and Class C will be
reimbursable under the Plan. With respect to Class A, in the case of all
expenses other than expenses representing the service fee, and, with respect to
Class C, in the case of all expenses other than expenses representing a gross
sales credit or a residual to Financial Advisors and other authorized financial
representatives, such amounts shall be determined at the beginning of each
calendar quarter by the Trustees, including, a majority of the Independent
Trustees. Expenses representing the service fee (for Class A) or a gross sales
credit or a residual to Financial Advisors and other authorized financial
representatives (for Class C) may be reimbursed without prior Board
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 August 31, 2004 to the Distributor. The
Distributor and Morgan Stanley DW estimate that they have spent, pursuant to the
Plan, $3,916,827 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)
10.86% ($425,236) -- advertising and promotional expenses; (ii) 0.05% ($2,057)
-- printing of prospectuses for distribution to other than current shareholders;
and (iii) 89.09% ($3,489,534) -- other expenses, including the gross sales
credit and the carrying charge, of which 2.24% ($78,100) represents carrying
charges, 40.47% ($1,412,333) represents commission credits to Morgan Stanley
DW's branch offices and other selected broker-dealers for payments of
commissions to Financial Advisors and other authorized financial
representatives, and 57.29% ($1,999,100) 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 August 31, 2004 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.
29
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 $1,840,328 as of August 31, 2004 (the end of the Fund's fiscal
year), which amount was equal to approximately 3.02% 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.
Under the Amended Plan, the Fund is authorized to reimburse the
Distributor for its actual distribution expenses incurred on behalf of Class B
shares and from unreimbursed distribution expenses, on a monthly basis, the
amount of which may in no event exceed an amount equal to payment at the annual
rate of 1.00% of average daily net assets of Class B.
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 that there
were no such expenses that may be reimbursed in the subsequent year in the case
of Class A or Class C at December 31, 2003 (the end of the 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 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.
30
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. 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 30 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, 2nd Floor, Jersey City, NJ 07311.
(2) CUSTODIAN AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Bank of New York, 100 Church Street, New York, NY 10286, is the
Custodian of the Fund's assets. Any of the Fund's cash balances with the
Custodian in excess of $100,000 are unprotected by federal deposit insurance.
These balances may, at times, be substantial.
Deloitte & Touche LLP, Two World Financial Center, New York, NY 10281, is
the independent registered public accounting firm of the Fund. The independent
registered public accounting firm is responsible for auditing the annual
financial statements.
(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.
H. PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
The Fund's policies and procedures with respect to the voting of proxies
relating to the Fund's portfolio securities are attached as Appendix A.
Information on how the Fund voted proxies relating to portfolio securities
during the most recent twelve-month period ended June 30 is available without
charge, upon request, by calling (800) 869-NEWS or by visiting the Mutual Fund
Center on our web site at www.morganstanley.com. This information is also
available on the Securities and Exchange Commission's (the "SEC") web site at
http://www.sec.gov.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
A. BROKERAGE TRANSACTIONS
Subject to the general supervision of the Trustees, the Investment Manager
is responsible for decisions to buy and sell securities for the Fund, the
selection of brokers and dealers to effect the transactions, and the negotiation
of brokerage commissions, if any. Purchases and sales of securities on a stock
31
exchange are effected through brokers who charge a commission for their
services. In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a profit
to the dealer. The Fund also expects that securities will be purchased at times
in underwritten offerings where the price includes a fixed amount of
compensation, generally referred to as the underwriter's concession or discount.
Options and futures transactions will usually be effected through a broker and a
commission will be charged. On occasion, the Fund may also purchase certain
money market instruments directly from an issuer, in which case no commissions
or discounts are paid.
For the fiscal period October 29, 2001 (commencement of operations)
through August 31, 2002 and for the fiscal years ended August 31, 2003 and 2004,
the Fund paid a total of $689,995, $1,910,100 and $1,432,566, 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 period October 29, 2001 (commencement of operations)
through August 31, 2002 and for the fiscal years ended August 31, 2003 and 2004,
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 period October 29, 2001 (commencement of operations)
through August 31, 2002 and for the fiscal years ended August 31, 2003 and 2004,
the Fund did not pay any brokerage commissions to Morgan Stanley DW.
During the fiscal period October 29, 2001 (commencement of operations)
through August 31, 2002 and for the fiscal years ended August 31, 2003 and 2004,
the Fund paid a total of $29,523, $33,526 and $30,606, respectively, in
brokerage commissions to Morgan Stanley & Co. During the fiscal year ended
August 31, 2004, the brokerage commissions paid to Morgan Stanley & Co.
represented approximately 2.14% of the total brokerage commissions paid by the
Fund during the year and were paid on account of transactions having an
aggregate dollar value equal to approximately 2.17% of the aggregate dollar
value of all portfolio transactions of the Fund during the year for which
commissions were paid.
C. BROKERAGE SELECTION
The policy of the Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid in
all circumstances. The Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Investment Manager from obtaining a high quality of
brokerage and research
32
services. In seeking to determine the reasonableness of brokerage commissions
paid in any transaction, the Investment Manager relies upon its experience and
knowledge regarding commissions generally charged by various brokers and on its
judgment in evaluating the brokerage and research services received from the
broker effecting the transaction. These determinations are necessarily
subjective and imprecise, as in most cases an exact dollar value for those
services is not ascertainable. The Fund anticipates that certain of its
transactions involving foreign securities will be effected on foreign securities
exchanges. Fixed commissions on such transactions are generally higher than
negotiated commissions on domestic transactions. There is also generally less
government supervision and regulation of foreign securities exchanges and
brokers than in the United States.
In seeking to implement the Fund's policies, the Investment Manager
effects transactions with those brokers and dealers who the Investment Manager
believes provide the most favorable prices and are capable of providing
efficient executions. If the Investment Manager believes the prices and
executions are obtainable from more than one broker or dealer, it may give
consideration to placing portfolio transactions with those brokers and dealers
who also furnish research and other services to the Fund or the Investment
Manager. The services may include, but are not limited to, any one or more of
the following: information as to the availability of securities for purchase or
sale; statistical or factual information or opinions pertaining to investment;
wire services; and appraisals or evaluations of portfolio securities. The
information and services received by the Investment Manager from brokers and
dealers may be 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.
The Investment Manager, and certain of its affiliates currently serve as
investment manager to a number of clients, including other investment companies,
and may in the future act as investment manager or advisor to others. It is the
practice of the Investment Manager and its affiliates to cause purchase and sale
transactions (including transactions in certain initial and secondary public
offerings) 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 August 31, 2004, the Fund paid $946,662 in
brokerage commissions in connection with transactions in the aggregate amount of
$423,413,156 to brokers because of research services provided.
E. REGULAR BROKER-DEALERS
During the fiscal year ended August 31, 2004 the Fund purchased securities
issued by Lehman Brothers Inc. which issuer was among the ten brokers or ten
dealers which executed transactions for or with the Fund in the largest dollar
amounts during the period. At August 31, 2004, the Fund did not own securities
issued by any such issuers.
F. REVENUE SHARING
The Investment Manager and/or the Distributor may pay compensation, out of
their own resources and not as an additional charge to the Fund, to Morgan
Stanley DW and certain unaffiliated brokers, dealers or other financial
intermediaries ("Intermediaries") in connection with the sale, distribution,
retention and/or servicing of Fund shares. For example, the Investment Manager
or the Distributor may pay additional compensation to Morgan Stanley DW and to
Intermediaries for the purpose of promoting the sale of Fund shares, maintaining
share balances and/or for sub-accounting, administrative or shareholder
processing services. Such payments are in addition to any distribution-related
or transfer agency/shareholder servicing fees that may be payable by the Fund or
by the Distributor. The additional payments may be based on current
33
assets, gross sales, the Fund's advisory fee or other measures as determined
from time to time by the Investment Manager or the Distributor. The amount of
these payments, as determined from time to time by the Investment Manager or the
Distributor, may be substantial and may be different for different
Intermediaries.
These payments currently include the following amounts which are paid to
Financial Advisors and Intermediaries or their salespersons in accordance with
the applicable compensation structure:
(1) On sales of $1 million or more of Class A shares (for which no sales
charge was paid) or net asset value purchases by certain employee
benefit plans, Morgan Stanley DW and other Intermediaries receive a
gross sales credit of up to 1.00% of the amount sold.
(2) On sales of 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, Morgan Stanley DW and other
Intermediaries receive a gross sales credit of 0.25% of the amount
sold and an annual residual commission of up to 0.10% of the current
value of the accounts. There is a chargeback of 100% of the gross
sales credit amount paid if the Class D shares are redeemed in the
first year and a chargeback of 50% of the gross sales credit amount
paid if the shares are redeemed in the second year.
(3) On sales (except purchases through 401(k) platforms) through Morgan
Stanley DW's Mutual Fund Network:
- An amount equal to 0.20% of gross sales of Fund shares;
and
- For those shares purchased beginning January 1, 2001, an
annual fee in an amount up to 0.05% of the value of such
Fund shares held for a one-year period or more.
(4) An amount equal to 0.20% on the value of shares sold through 401(k)
platforms.
The prospect of receiving, or the receipt of, additional compensation, as
described above, by Morgan Stanley DW or other Intermediaries may provide Morgan
Stanley DW or other Intermediaries and/or Financial Advisors and other
salespersons with an incentive to favor sales of shares of the Fund over other
investment options with respect to which Morgan Stanley DW or an Intermediary
does not receive additional compensation (or receives lower levels of additional
compensation). These payment arrangements, however, will not change the price
that an investor pays for shares of the Fund or the amount that the Fund
receives to invest on behalf of an investor. Investors may wish to take such
payment arrangements into account when considering and evaluating any
recommendations relating to Fund shares.
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% 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.
34
Under Massachusetts law, shareholders of a business trust may, under
certain limited circumstances, be held personally liable as partners for the
obligations of the Fund. However, the Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Fund,
requires that notice of such Fund obligations include such disclaimer, and
provides for indemnification out of the Fund's property for any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability, and
the nature of the Fund's assets and operations, the possibility of the Fund
being unable to meet its obligations is remote and thus, in the opinion of
Massachusetts counsel to the Fund, the risk to Fund shareholders of personal
liability is remote.
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 a 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 share of each Class is calculated by
dividing the value of the portion of the Fund's securities and other assets
35
attributable to that Class, less the liabilities attributable to that Class, by
the number of shares of that Class outstanding. The assets of each Class of
shares are invested in a single portfolio. The net asset value of each Class,
however, will differ because the Classes have different ongoing fees.
In the calculation of the Fund's net asset value: (1) an equity portfolio
security listed or traded on the New York or American Stock Exchange or other
exchange is valued at its latest sale price, prior to the time when assets are
valued; if there were no sales that day, the security is valued at the mean
between the last reported bid and asked price; (2) an equity portfolio security
listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price;
if there were no sales that day, the security is valued at the mean between the
last reported bid and asked price; and (3) all other portfolio securities for
which over-the-counter market quotations are readily available are valued at the
mean between the last reported bid and asked price. In cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market. For equity securities traded on foreign
exchanges, the last reported sale price or the latest bid price may be used if
there were no sales on a particular day. When market quotations are not readily
available, including circumstances under which it is determined by the
Investment Manager that the sale price, the bid price or the mean between the
last reported bid and asked price are not reflective of a security's market
value, portfolio securities are valued at their fair value as determined in good
faith under procedures established by and under the general supervision of the
Fund's Trustees. For valuation purposes, quotations of foreign portfolio
securities, other assets and liabilities and forward contracts stated in foreign
currency are translated into U.S. dollar equivalents at the prevailing market
rates prior to the close of the NYSE.
Short-term debt securities with remaining maturities of 60 days or less at
the time of purchase are valued at amortized cost, unless the Trustees determine
such does not reflect the securities' market value, in which case these
securities will be valued at their fair value as determined by the Trustees.
Certain of the Fund's portfolio securities may be valued by an outside
pricing service approved by the Fund's Trustees. The pricing service may utilize
a matrix system incorporating security quality, maturity and coupon as the
evaluation model parameters, and/or research evaluations by its staff, including
review of broker-dealer market price quotations in determining what it believes
is the fair valuation of the portfolio securities valued by such pricing
service.
Listed options on debt securities are valued at the latest sale price on
the exchange on which they are listed unless no sales of such options have taken
place that day, in which case they will be valued at the mean between their
latest bid and asked prices. Unlisted options on debt securities and all options
on equity securities are valued at the mean between their latest bid and asked
prices. Futures are valued at the latest price published by the commodities
exchange on which they trade unless it is determined that such price does not
reflect their market value, in which case they will be valued at their fair
value as determined in good faith under procedures established by and under the
supervision of the Trustees.
Generally, trading in foreign securities, as well as corporate bonds, U.S.
government securities and money market instruments, is substantially completed
each day at various times prior to the close of the NYSE. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of the NYSE. Occasionally, events which may affect
the values of such securities and such exchange rates may occur between the
times at which they are determined and the close of the NYSE and will therefore
not be reflected in the computation of the Fund's net asset value. If events
that may affect the value of such securities occur during such period, then
these securities may be valued at their fair value as determined in good faith
under procedures established by and under the supervision of the Trustees.
IX. TAXATION OF THE FUND AND SHAREHOLDERS
The Fund generally will make two basic types of distributions: ordinary
dividends and long-term capital gain distributions. These two types of
distributions are reported differently on a shareholder's income tax return. 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.
36
INVESTMENT COMPANY TAXATION. The Fund intends to continue to qualify 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
timely 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 generally 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 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 forward foreign
currency exchange contracts, options, futures transactions, and non-U.S.
corporations classified as "passive foreign investment companies" ("PFICs").
Those special tax rules can, among other things, affect the treatment of capital
gain or loss as long-term or short-term and may result in ordinary income or
loss rather than capital gain or loss. 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 be
subject to 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 generally taxable to the shareholder as ordinary
income regardless of whether the shareholder receives such payments in
additional shares or in cash. Under current law, a portion of the ordinary
income dividends received by a shareholder may be taxed at the same rate as
long-term capital gains. However, even if income received in the form of
ordinary income dividends is taxed at the same rates as long-term capital gains,
such income will not be considered long-term capital gains for other federal
income tax purposes. For example, you generally will not be permitted to offset
ordinary income dividends with capital losses. Short-term capital gain
distributions will continue to be taxed at ordinary income rates.
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 available to non-corporate shareholders generally is
15%. Without future congressional action, the maximum tax rate on long-term
capital gains would return to 20% in 2009, and the maximum rate on all dividends
would move to 35% in 2009 and 39.6% in 2011.
Shareholders are generally taxed on any ordinary dividend or capital gain
distributions from the Fund in the year they are actually distributed. However,
if any such dividends or distributions are declared in October, November or
December and paid in January then such amounts will be treated for tax purposes
as received by the shareholders on December 31, to shareholders of record of
such month.
Subject to certain exceptions, a corporate shareholder may be eligible for
a 70% dividends received deduction to the extent that the Fund earns and
distributes qualifying dividends from its investments. Distributions of net
capital gains by the Fund will not be eligible for the dividends received
deduction.
37
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. Recently enacted legislation amends certain rules relating to regulated
investment companies. This legislation, among other things, modifies the federal
income tax treatment of certain distributions to foreign investors. The Fund
will no longer be required to withhold any amounts with respect to distributions
to foreign shareholders that are properly designated by the Fund as
"interest-related dividends" or "short-term capital gain dividends," provided
that the income would not be subject to federal income tax if earned directly by
the foreign shareholder. Capital gains distributions attributable to gains from
U.S. real property interests (including certain U.S. real property holding
corporations) will generally be subject to federal withholding tax and will give
rise to an obligation on the part of the foreign shareholder to file a U.S. tax
return. The provisions contained in the legislation relating to distributions to
foreign persons generally would apply to distributions with respect to taxable
years of regulated investment companies beginning after December 31, 2004 and
before January 1, 2008. Prospective investors are urged to consult their tax
advisors regarding the specific tax consequences relating to the legislation.
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, the portion taxable as long-term capital
gains, and the amount of any dividends eligible for the federal dividends
received deduction for corporations.
PURCHASES AND REDEMPTIONS AND EXCHANGES OF FUND SHARES. Any dividend or
capital gains distribution received by a shareholder from any investment company
will have the effect of reducing the net asset value of the shareholder's stock
in that company by the exact amount of the dividend or capital gains
distribution. Furthermore, such dividends and capital gains distributions are
subject to federal income taxes. If the net asset value of the shares should be
reduced below a shareholder's cost as a result of the payment of dividends or
the distribution of realized long-term capital gains, such payment or
distribution would be in part a return of the shareholder's investment but
nonetheless would be taxable to the shareholder. Therefore, an investor should
consider the tax implications of purchasing Fund shares immediately prior to a
distribution record date.
In general, a sale of shares results in capital gain or loss, and for
individual shareholders, is taxable at a federal rate dependent upon the length
of time the shares were held. A redemption of a shareholder's Fund shares is
normally treated as a sale for tax purposes. Fund shares held for a period of
one year or less 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 available to
non-corporate shareholders generally is 15%. Without future congressional
action, the maximum tax rate on long-term capital gains would return to 20% in
2009. 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 adjusted 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
Fund, followed by the purchase of shares in the other fund.
The availability to deduct capital losses may be limited. In addition, if
a shareholder realizes a loss on the redemption or exchange of a fund's shares
and reinvests in that fund's shares or substantially identical 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.
38
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. PERFORMANCE DATA
AVERAGE ANNUAL RETURNS ASSUMING DEDUCTION OF MAXIMUM SALES CHARGE
PERIOD ENDED AUGUST 31, 2004
[Download Table]
INCEPTION
CLASS DATE: 1 YEAR LIFE OF FUND
----- ------------ ------------ ------------
Class A 10/29/01 3.75% 1.74%
Class B 10/29/01 3.72% 1.92%
Class C 10/29/01 7.82% 2.96%
Class D 10/29/01 9.75% 3.94%
AVERAGE ANNUAL RETURNS ASSUMING NO DEDUCTION OF SALES CHARGE
PERIOD ENDED AUGUST 31, 2004
[Download Table]
INCEPTION
CLASS DATE: 1 YEAR LIFE OF FUND
----- ------------ ------------ ------------
Class A 10/29/01 9.50% 3.69%
Class B 10/29/01 8.72% 2.93%
Class C 10/29/01 8.82% 2.96%
Class D 10/29/01 9.75% 3.94%
AGGREGATE TOTAL RETURNS ASSUMING NO DEDUCTION OF SALES CHARGE
PERIOD ENDED AUGUST 31, 2004
[Download Table]
INCEPTION
CLASS DATE: 1 YEAR LIFE OF FUND
----- ------------ ------------ ------------
Class A 10/29/01 9.50% 10.85%
Class B 10/29/01 8.72% 8.53%
Class C 10/29/01 8.82% 8.63%
Class D 10/29/01 9.75% 11.59%
AVERAGE ANNUAL AFTER-TAX RETURNS ASSUMING DEDUCTION OF MAXIMUM SALES CHARGE
CLASS B
PERIOD ENDED AUGUST 31, 2004
[Enlarge/Download Table]
INCEPTION
CALCULATION METHODOLOGY DATE: 1 YEAR LIFE OF FUND
----------------------- ------------ ------------ ------------
After taxes on distributions 10/29/01 3.72% 1.91%
After taxes on distributions and redemptions 10/29/01 2.42% 1.63%
XII. FINANCIAL STATEMENTS
The Fund's audited financial statements for the fiscal year ended August
31, 2004, including notes thereto and the report of Deloitte & Touche LLP, are
herein incorporated by reference from the Fund's annual report. A copy of the
Fund's ANNUAL REPORT TO SHAREHOLDERS must accompany the delivery of this
STATEMENT OF ADDITIONAL INFORMATION.
39
XIII. FUND COUNSEL
Clifford Chance US LLP, located at 31 West 52nd Street, New York, NY
10019, acts as the Fund's legal Counsel.
*****
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.
40
APPENDIX A. MORGAN STANLEY INVESTMENT MANAGEMENT
PROXY VOTING POLICY AND PROCEDURES
I. POLICY STATEMENT
INTRODUCTION -- Morgan Stanley Investment Management's ("MSIM") policies
and procedures for voting proxies with respect to securities held in the
accounts of clients applies to those MSIM entities that provide discretionary
Investment Management services and for which a MSIM entity has the authority to
vote their proxies. The policies and procedures and general guidelines in this
section will be reviewed and, as necessary, updated periodically to address new
or revised proxy voting issues. The MSIM entities covered by these policies and
procedures currently include the following: Morgan Stanley Investment Advisors
Inc., Morgan Stanley Alternative Investment Partners, L.P., Morgan Stanley AIP
GP LP, Morgan Stanley Investment Management Inc., Morgan Stanley Investment
Group Inc., Morgan Stanley Investment Management Limited, Morgan Stanley
Investment Management Company, Morgan Stanley Asset & Investment Trust
Management Co., Limited, Morgan Stanley Investment Management Private Limited,
Morgan Stanley Investments LP, Morgan Stanley Hedge Fund Partners GP LP, Morgan
Stanley Hedge Fund Partners LP, Van Kampen Investment Advisory Corp., Van Kampen
Asset Management Inc., and Van Kampen Advisors Inc. (each a "MSIM Affiliate" and
collectively referred to as the "MSIM Affiliates").
Each MSIM Affiliate will vote proxies as part of its authority to manage,
acquire and dispose of account assets. With respect to the MSIM registered
management investment companies (Van Kampen, Institutional and Advisor
Funds) (collectively referred to as the "MSIM Funds"), each MSIM Fund will vote
proxies pursuant to authority granted under its applicable investment advisory
agreement or, in the absence of such authority, as authorized by its Board of
Directors or Trustees. A MSIM Affiliate will not vote proxies if the "named
fiduciary" for an ERISA account has reserved the authority for itself, or in the
case of an account not governed by ERISA, the Investment Management Agreement
does not authorize the MSIM Affiliate to vote proxies. MSIM Affiliates will, in
a prudent and diligent manner, vote proxies in the best interests of clients,
including beneficiaries of and participants in a client's benefit plan(s) for
which we manage assets, consistent with the objective of maximizing long-term
investment returns ("Client Proxy Standard"). In certain situations, a client or
its fiduciary may provide a MSIM Affiliate with a statement of proxy voting
policy. In these situations, the MSIM Affiliate will comply with the client's
policy unless to do so would be inconsistent with applicable laws or regulations
or the MSIM Affiliate's fiduciary responsibility.
PROXY RESEARCH SERVICES -- To assist the MSIM Affiliates in their
responsibility for voting proxies and the overall global proxy voting process,
Institutional Shareholder Services ("ISS") and the Investor Responsibility
Research Center ("IRRC") have been retained as experts in the proxy voting and
corporate governance area. ISS and IRRC are independent advisers that specialize
in providing a variety of fiduciary-level proxy-related services to
institutional investment managers, plan sponsors, custodians, consultants, and
other institutional investors. The services provided to MSIM Affiliates include
in-depth research, global issuer analysis, and voting recommendations. In
addition to research, ISS provides vote execution, reporting, and recordkeeping.
MSIM's Proxy Review Committee (see Section IV.A. below) will carefully monitor
and supervise the services provided by the proxy research services.
VOTING PROXIES FOR CERTAIN NON-US COMPANIES -- While the proxy voting
process is well established in the United States and other developed markets
with a number of tools and services available to assist an investment manager,
voting proxies of non-US companies located in certain jurisdictions,
particularly emerging markets, may involve a number of problems that may
restrict or prevent a MSIM Affiliate's ability to vote such proxies. These
problems include, but are not limited to: (i) proxy statements and ballots being
written in a language other than English; (ii) untimely and/or inadequate notice
of shareholder meetings; (iii) restrictions on the ability of holders outside
the issuer's jurisdiction of organization to exercise votes; (iv) requirements
to vote proxies in person, (v) the imposition of restrictions on the sale of the
securities for a period of time in proximity to the shareholder meeting; and
(vi) requirements to provide local agents with power of attorney to facilitate
the MSIM Affiliate's voting instructions. As a result, clients' non-U.S. proxies
will be voted on a best efforts basis only, consistent with the Client Proxy
Standard. ISS
A-1
has been retained to provide assistance to the MSIM Affiliates in connection
with voting their clients' non-US proxies.
II. GENERAL PROXY VOTING GUIDELINES
To ensure consistency in voting proxies on behalf of its clients, MSIM
Affiliates will follow (subject to any exception set forth herein) these Proxy
Voting Policies and Procedures, including the guidelines set forth below. These
guidelines address a broad range of issues, including board size and
composition, executive compensation, anti-takeover proposals, capital structure
proposals and social responsibility issues and are meant to be general voting
parameters on issues that arise most frequently. The MSIM Affiliates, however,
may vote in a manner that is contrary to the following general guidelines,
pursuant to the procedures set forth in Section IV. below, provided the vote is
consistent with the Client Proxy Standard.
III. GUIDELINES
A. MANAGEMENT PROPOSALS
1. When voting on routine ballot items the following proposals are generally
voted in support of management, subject to the review and approval of the
Proxy Review Committee, as appropriate.
- Selection or ratification of auditors.
- Approval of financial statements, director and auditor reports.
- Election of Directors.
- Limiting Directors' liability and broadening indemnification of
Directors.
- Requirement that a certain percentage (up to 66 2/3%) of its Board's
members be comprised of independent and unaffiliated Directors.
- Requirement that members of the company's compensation, nominating and
audit committees be comprised of independent or unaffiliated
Directors.
- Recommendations to set retirement ages or require specific levels of
stock ownership by Directors.
- General updating/corrective amendments to the charter.
- Elimination of cumulative voting.
- Elimination of preemptive rights.
- Provisions for confidential voting and independent tabulation of
voting results.
- Proposals related to the conduct of the annual meeting except those
proposals that relate to the "transaction of such other business which
may come before the meeting."
2. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on a shareholder, are
generally voted in support of management, subject to the review and
approval of the Proxy Review Committee, as appropriate.
CAPITALIZATION CHANGES
- Capitalization changes that eliminate other classes of stock and
voting rights.
- Proposals to increase the authorization of existing classes of common
stock (or securities convertible into common stock) if: (i) a clear
and legitimate business purpose is stated; (ii) the number of shares
requested is reasonable in relation to the purpose for which
authorization is requested; and (iii) the authorization does not
exceed 100% of shares currently authorized and at least 30% of the new
authorization will be outstanding.
- Proposals to create a new class of preferred stock or for issuances of
preferred stock up to 50% of issued capital.
- Proposals for share repurchase plans.
A-2
- Proposals to reduce the number of authorized shares of common or
preferred stock, or to eliminate classes of preferred stock.
- Proposals to effect stock splits.
- Proposals to effect reverse stock splits if management proportionately
reduces the authorized share amount set forth in the corporate
charter. Reverse stock splits that do not adjust proportionately to
the authorized share amount will generally be approved if the
resulting increase in authorized shares coincides with the proxy
guidelines set forth above for common stock increases.
COMPENSATION
- Director fees, provided the amounts are not excessive relative to
other companies in the country or industry.
- Employee stock purchase plans that permit discounts up to 15%, but
only for grants that are part of a broad based employee plan,
including all non-executive employees.
- Establishment of Employee Stock Option Plans and other employee
ownership plans.
ANTI-TAKEOVER MATTERS
- Modify or rescind existing supermajority vote requirements to amend
the charters or bylaws.
- Adoption of anti-greenmail provisions provided that the proposal: (i)
defines greenmail; (ii) prohibits buyback offers to large block
holders not made to all shareholders or not approved by disinterested
shareholders; and (iii) contains no anti-takeover measures or other
provisions restricting the rights of shareholders.
3. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on the shareholder, are
generally voted against (notwithstanding management support), subject to
the review and approval of the Proxy Review Committee, as appropriate.
- Capitalization changes that add classes of stock which substantially
dilute the voting interests of existing shareholders.
- Proposals to increase the authorized number of shares of existing
classes of stock that carry preemptive rights or supervoting rights.
- Creation of "blank check" preferred stock.
- Changes in capitalization by 100% or more.
- Compensation proposals that allow for discounted stock options that
have not been offered to employees in general.
- Amendments to bylaws that would require a supermajority shareholder
vote to pass or repeal certain provisions.
- Proposals to indemnify auditors.
4. The following types of non-routine proposals, which potentially may have
a potential financial or best interest impact on an issuer, are voted as
determined by the Proxy Review Committee.
CORPORATE TRANSACTIONS
- Mergers, acquisitions and other special corporate transactions (i.e.,
takeovers, spin-offs, sales of assets, reorganizations, restructurings
and recapitalizations) will be examined on a case-by-case basis. In
all cases, ISS and IRRC research and analysis will be used along with
MSIM Affiliates' research and analysis, based on, among other things,
MSIM internal company-specific knowledge.
- Change-in-control provisions in non-salary compensation plans,
employment contracts, and severance agreements that benefit management
and would be costly to shareholders if triggered.
A-3
- Shareholders rights plans that allow appropriate offers to
shareholders to be blocked by the board or trigger provisions that
prevent legitimate offers from proceeding.
- Executive/Director stock option plans. Generally, stock option plans
should meet the following criteria:
(i) Whether the stock option plan is incentive based;
(ii) For mature companies, should be no more than 5% of the issued
capital at the time of approval;
(iii) For growth companies, should be no more than 10% of the issued
capital at the time of approval.
ANTI-TAKEOVER PROVISIONS
- Proposals requiring shareholder ratification of poison pills.
- Anti-takeover and related provisions that serve to prevent the
majority of shareholders from exercising their rights or effectively
deter the appropriate tender offers and other offers.
B. SHAREHOLDER PROPOSALS
1. The following shareholder proposals are generally supported, subject to
the review and approval of the Proxy Review Committee, as appropriate:
- Requiring auditors to attend the annual meeting of shareholders.
- Requirement that members of the company's compensation, nominating and
audit committees be comprised of independent or unaffiliated
Directors.
- Requirement that a certain percentage of its Board's members be
comprised of independent and unaffiliated Directors.
- Confidential voting.
- Reduction or elimination of supermajority vote requirements.
2. The following shareholder proposals will be voted as determined by the
Proxy Review Committee.
- Proposals that limit tenure of directors.
- Proposals to limit golden parachutes.
- Proposals requiring directors to own large amounts of stock to be
eligible for election.
- Restoring cumulative voting in the election of directors.
- Proposals that request or require disclosure of executive compensation
in addition to the disclosure required by the Securities and Exchange
Commission ("SEC") regulations.
- Proposals that limit retirement benefits or executive compensation.
- Requiring shareholder approval for bylaw or charter amendments.
- Requiring shareholder approval for shareholder rights plan or poison
pill.
- Requiring shareholder approval of golden parachutes.
- Elimination of certain anti-takeover related provisions.
- Prohibit payment of greenmail.
3. The following shareholder proposals are generally not supported, subject
to the review and approval of the Committee, as appropriate.
- Requirements that the issuer prepare reports that are costly to
provide or that would require duplicative efforts or expenditures that
are of a non-business nature or would provide no pertinent information
from the perspective of institutional shareholders.
A-4
- Restrictions related to social, political or special interest issues
that impact the ability of the company to do business or be
competitive and that have a significant financial or best interest
impact to the shareholders.
- Proposals that require inappropriate endorsements or corporate
actions.
IV. ADMINISTRATION OF PROXY POLICIES AND PROCEDURES
A. PROXY REVIEW COMMITTEE
1. The MSIM Proxy Review Committee ("Committee") is responsible for creating
and implementing MSIM's Proxy Voting Policy and Procedures and, in this
regard, has expressly adopted them. Following are some of the functions
and responsibilities of the Committee.
(a) The Committee, which will consist of members designated by MSIM's
Chief Investment Officer, is responsible for establishing MSIM's
proxy voting policies and guidelines and determining how MSIM will
vote proxies on an ongoing basis.
(b) The Committee will periodically review and have the authority to
amend as necessary MSIM's proxy voting policies and guidelines (as
expressed in these Proxy Voting Policy and Procedures) and establish
and direct voting positions consistent with the Client Proxy
Standard.
(c) The Committee will meet at least monthly to (among other matters):
(1) address any outstanding issues relating to MSIM's Proxy Voting
Policy and Procedures; and (2) generally review proposals at
upcoming shareholder meetings of MSIM portfolio companies in
accordance with this Policy and Procedures including, as
appropriate, the voting results of prior shareholder meetings of the
same issuer where a similar proposal was presented to shareholders.
The Committee, or its designee, will timely communicate to ISS
MSIM's Proxy Voting Policy and Procedures (and any amendments to
them and/or any additional guidelines or procedures it may adopt).
(d) The Committee will meet on an ad hoc basis to (among other matters):
(1) authorize "split voting" (i.e., allowing certain shares of the
same issuer that are the subject of the same proxy solicitation and
held by one or more MSIM portfolios to be voted differently than
other shares) and/or "override voting" (i.e., voting all MSIM
portfolio shares in a manner contrary to the Procedures); (2) review
and approve upcoming votes, as appropriate, for matters for which
specific direction has been provided in Sections I, II, and III
above; and (3) determine how to vote matters for which specific
direction has not been provided in Sections I, II and III above.
Split votes will generally not be approved within a single Global
Investor Group team. The Committee may take into account ISS
recommendations and the research provided by IRRC as well as any
other relevant information they may request or receive.
(e) In addition to the procedures discussed above, if the Committee
determines that an issue raises a potential material conflict of
interest, or gives rise to the appearance of a potential material
conflict of interest, the Committee will designate a special
committee to review, and recommend a course of action with respect
to, the conflict(s) in question ("Special Committee"). The Special
Committee may request the assistance of the Law and Compliance
Departments and will have sole discretion to cast a vote. In
addition to the research provided by ISS and IRRC, the Special
Committee may request analysis from MSIM Affiliate investment
professionals and outside sources to the extent it deems
appropriate.
(f) The Committee and the Special Committee, or their designee(s), will
document in writing all of their decisions and actions, which
documentation will be maintained by the Committee and the Special
Committee, or their designee(s) for a period of at least 6 years. To
the extent these decisions relate to a security held by a MSIM U.S.
registered investment company, the Committee and Special Committee,
or their designee(s), will report their decisions to each applicable
Board of Trustees/Directors of those investment companies at each
Board's next regularly Scheduled Board meeting. The report will
contain information concerning decisions
A-5
made by the Committee and Special Committee during the most recently
ended calendar quarter immediately preceding the Board meeting.
(g) The Committee and Special Committee, or their designee(s), will
timely communicate to applicable PMs, the Compliance Departments
and, as necessary to ISS, decisions of the Committee and Special
Committee so that, among other things, ISS will vote proxies
consistent with their decisions.
A-6
MORGAN STANLEY MID-CAP VALUE FUND
PART C OTHER INFORMATION
ITEM 22. EXHIBITS
(a). Declaration of Trust of the Registrant, dated April 12, 2001,
incorporated by reference to Exhibit 1 of the Initial Registration
Statement on Form N-1A, filed on April 18, 2001.
(b). Amended and Restated By-Laws of the Registrant, dated April 24, 2003,
is incorporated by reference to Exhibit b of Post-Effective Amendment
No. 3 to the Registration Statement on Form N-1A, filed on October 30,
2003.
(c). None
(d). Amended and Restated Investment Management Agreement dated May 1,
2004, filed herein.
(e)(1). Form of Distribution Agreement between the Registrant and Morgan
Stanley Distributors Inc., incorporated by reference to Exhibit 4 of
Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-1A, filed on July 26, 2001.
(e)(2). Form of Selected Dealers Agreement, incorporated by reference to
Exhibit 5(b) of Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A, filed on July 26, 2001.
(e)(3). Form of Underwriting Agreement between the Registrant and Morgan
Stanley Distributors Inc., incorporated by reference to Exhibit 5(c)
of Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-1A, filed on July 26, 2001.
(f). Not applicable
(g)(1). Form of Custodian Agreement, incorporated by reference to Exhibit 7(a)
of Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-1A, filed on July 26, 2001.
(g)(2). Amendment to the Custody Agreement between the Registrant and the Bank
of New York, dated June 15, 2001, incorporated by reference to Exhibit
7(b) of Pre-Effective Amendment No. 1 to the Registration Statement on
Form N-1A, filed on July 26, 2001.
(g)(3). Foreign Custody Manager Agreement between the Registrant and the Bank
of New York, dated June 15, 2001, incorporated by reference to Exhibit
7(c) of Pre-Effective Amendment No. 1 to the Registration Statement on
Form N-1A, filed on July 26, 2001.
(h)(1). Form of Transfer Agency and Service Agreement between the Registrant
and Morgan Stanley Trust, incorporated by reference to Exhibit 8(a) of
Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-1A, filed on July 26, 2001.
(h)(2). Form of Services Agreement between Morgan Stanley Investment Advisors
Inc. and Morgan Stanley Services Company Inc., incorporated by
reference to Exhibit 8(b) of Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A, filed on July 26, 2001.
(i)(1). Opinion and Consent of Clifford Chance US LLP, filed herein.
(i)(2). Opinion of Dechert LLP, Massachusetts Counsel, filed herein.
(j). Consent of Independent Registered Public Accounting Firm, filed
herein.
(k). Not applicable
(l). Investment Letter of Morgan Stanley Investment Advisors Inc.,
incorporated by reference to Exhibit 12 of Pre-Effective Amendment No.
1 to the Registration Statement on Form N-1A, filed on July 26, 2001.
(m). Amended and Restated Plan of Distribution pursuant to Rule 12b-1,
dated May 1, 2004, filed herein.
(n). Form of Multiple Class Plan pursuant to Rule 18f-3, incorporated by
reference to Exhibit 14 of Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A, filed on July 26, 2001.
(o). Not applicable
(p)(1). Code of Ethics of Morgan Stanley Investment Management, filed herein.
(p)(2). Code of Ethics of the Morgan Stanley Funds, filed herein.
Other Powers of Attorney of Trustees, dated January 30, 2004, filed herein.
ITEM 23. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND.
None
ITEM 24. 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 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 25. 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 Investment Advisors").
Morgan Stanley Investment Advisors is a wholly-owned subsidiary of Morgan
Stanley & Co. Incorporated.
THE PRINCIPAL ADDRESSES ARE AS FOLLOWS:
MORGAN STANLEY SERVICES COMPANY INC. ("MORGAN STANLEY SERVICES") c/o Morgan
Stanley Trust, Harborside Financial Center, Plaza Two, Jersey City, New Jersey
07311
MORGAN STANLEY DISTRIBUTORS INC. ("MORGAN STANLEY DISTRIBUTORS")
MORGAN STANLEY DW INC. ("MORGAN STANLEY DW")
MORGAN STANLEY FUNDS
MORGAN STANLEY INVESTMENT ADVISORS INC.
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 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.
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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 and Director of Morgan Stanley
and Director Distributors; Chairman and Director of Morgan Stanley Trust;
President, Chief Executive Officer and Director of Morgan
Stanley Services; President of the Morgan Stanley Retail Funds
and the Institutional Funds; Director of Morgan Stanley
Investment Management Inc.; Director of various Morgan Stanley
subsidiaries; Trustee, President and Chief Executive Officer of
the Van Kampen Open-End Funds; President and Chief Executive
Officer of the Van Kampen Closed-End Funds.
Barry Fink Managing Director and General Counsel of Morgan Stanley
Managing Director Investment Management; Managing Director and Director of Morgan
and Director Stanley Services; Managing Director, Secretary, and Director of
Morgan Stanley Distributors; Vice President of the Morgan
Stanley Funds.
Joseph J. McAlinden Chief Investment Officer and Managing Director of Morgan
Managing Director and Stanley Investment Management Inc.; Director of Morgan Stanley
Chief Investment Officer Trust.
[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
---------------------------------- ---------------------------------------------------------------
Ronald E. Robison Principal Executive Officer-Office of the Fund; Managing
Managing Director, Chief Director, Chief Administrative Officer and Director of Morgan
Administrative Officer and Stanley Services; Chief Executive Officer and Director of
Director Morgan Stanley Trust; Managing Director of Morgan Stanley
Distributors; Executive Vice President and Principal Executive
Officer of the Morgan Stanley Funds; Director of Morgan Stanley
SICAV.
P. Dominic Caldecott Managing Director of Morgan Stanley Investment Management Inc.
Managing Director and Morgan Stanley Investment Management Limited; Vice
President and Investment Manager of Morgan Stanley & Co.
International.
Rajesh K. Gupta Managing Director and Chief Administrative Officer-Investments
Managing Director and Chief of Morgan Stanley Investment Management Inc.
Administrative Officer-Investments
John B. Kemp, III President and Chief Executive Officer of Morgan Stanley
Executive Director Distributors.
Francis J. Smith Executive Director of Morgan Stanley Services; Vice President
Executive Director and Chief Financial Officer of the Morgan Stanley Funds.
ITEM 26. 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 Government Securities Trust
(4) Active Assets Institutional Money Trust
(5) Active Assets Money Trust
(6) Active Assets Tax-Free Trust
(7) Morgan Stanley Aggressive Equity Fund
(8) Morgan Stanley Allocator Fund
(9) Morgan Stanley American Opportunities Fund
(10) Morgan Stanley Balanced Growth Fund
(11) Morgan Stanley Balanced Income Fund
(12) Morgan Stanley Biotechnology Fund
(13) Morgan Stanley California Tax-Free Daily Income Trust
(14) Morgan Stanley California Tax-Free Income Fund
(15) Morgan Stanley Capital Opportunities Trust
(16) Morgan Stanley Convertible Securities Trust
(17) Morgan Stanley Developing Growth Securities Trust
(18) Morgan Stanley Dividend Growth Securities Inc.
(19) Morgan Stanley Equally-Weighted S&P 500 Fund
(20) Morgan Stanley European Growth Fund Inc.
(21) Morgan Stanley Federal Securities Trust
(22) Morgan Stanley Financial Services Trust
(23) Morgan Stanley Flexible Income Trust
(24) Morgan Stanley Fund of Funds
(25) Morgan Stanley Fundamental Value Fund
(26) Morgan Stanley Global Advantage Fund
(27) Morgan Stanley Global Dividend Growth Securities
(28) Morgan Stanley Global Utilities Fund
(29) Morgan Stanley Growth Fund
(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 International Fund
(35) Morgan Stanley International SmallCap Fund
(36) Morgan Stanley International Value Equity Fund
(37) Morgan Stanley Japan Fund
(38) Morgan Stanley KLD Social Index Fund
(39) Morgan Stanley Limited Duration Fund
(40) Morgan Stanley Limited Duration U.S. Treasury Trust
(41) Morgan Stanley Limited Term Municipal Trust
(42) Morgan Stanley Liquid Asset Fund Inc.
(43) Morgan Stanley Mid-Cap Value Fund
(44) Morgan Stanley Nasdaq-100 Index Fund
(45) Morgan Stanley Natural Resource Development Securities Inc.
(46) Morgan Stanley New York Municipal Money Market Trust
(47) Morgan Stanley New York Tax-Free Income Fund
(48) Morgan Stanley Pacific Growth Fund Inc.
(49) Morgan Stanley Prime Income Trust
(50) Morgan Stanley Quality Income Trust
(51) Morgan Stanley Real Estate Fund
(52) Morgan Stanley S&P 500 Index Fund
(53) Morgan Stanley Select Dimensions Investment Series
(54) Morgan Stanley Small-Mid Special Value Fund
(55) Morgan Stanley Special Growth Fund
(56) Morgan Stanley Special Value Fund
(57) Morgan Stanley Strategist Fund
(58) Morgan Stanley Tax-Exempt Securities Trust
(59) Morgan Stanley Tax-Free Daily Income Trust
(60) Morgan Stanley Total Market Index Fund
(61) Morgan Stanley Total Return Trust
(62) Morgan Stanley U.S. Government Money Market Trust
(63) Morgan Stanley U.S. Government Securities Trust
(64) Morgan Stanley Utilities Fund
(65) Morgan Stanley Value Fund
(66) Morgan Stanley Variable Investment Series
(b) The following information is given regarding directors and officers of
Morgan Stanley Distributors not listed in Item 25 above. The principal address
of Morgan Stanley Distributors is 1221 Avenue of the Americas, New York, New
York 10020. None of the following persons has any position or office with the
Registrant.
[Download Table]
POSITIONS AND OFFICE WITH
NAME MORGAN STANLEY DISTRIBUTORS
---- -------------------------------------------
John Schaeffer Director
Fred Gonfiantini Executive Director and Financial Operations
Principal of MS Distributors Inc.
ITEM 27. 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 28. MANAGEMENT SERVICES
Registrant is not a party to any such management-related service contract.
ITEM 29. 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.
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 29th day of October, 2004.
MORGAN STANLEY MID-CAP VALUE FUND
By: /S/ AMY R. DOBERMAN
--------------------------------------
Amy R. Doberman
VICE PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 3 has been signed below by the following persons in
the capacities and on the dates indicated.
[Enlarge/Download Table]
SIGNATURES TITLE DATE
---------- ----- ----
(1) Principal Executive Officer Executive Vice President and
Principal Executive Officer
By: /s/ RONALD E. ROBISON
-------------------------------------------
Ronald E. Robison 10/29/04
(2) Principal Financial Officer Chief Financial Officer
By: /s/ FRANCIS J. SMITH
-------------------------------------------
Francis J. Smith 10/29/04
(3) Majority of the Trustees
Charles A. Fiumefreddo (Chairman)
James F. Higgins
By: /s/ BARRY FINK
-------------------------------------------
Barry Fink 10/29/04
Attorney-in-Fact
Michael Bozic Joseph J. Kearns
Edwin J. Garn Michael E. Nugent
Wayne E. Hedien Fergus Reid
Manuel H. Johnson
By: /s/ CARL FRISCHLING
-------------------------------------------
Carl Frischling 10/29/04
Attorney-in-Fact
MORGAN STANLEY MID-CAP VALUE FUND
EXHIBIT INDEX
(d). Amended and Restated Investment Management Agreement, dated May 1,
2004
(i)(1). Opinion and Consent of Clifford Chance US LLP
(i)(2). Opinion and Consent of Dechert LLP
(j). Consent of Independent Registered Public Accounting Firm
(m). Amended and Restated Plan of Distribution pursuant to Rule 12b-1,
dated May 1, 2004
(p)(1). Code of Ethics of Morgan Stanley Investment Management
(p)(2). Code of Ethics of Morgan Stanley Funds
(Other). Powers of Attorney of Trustees, dated January 30, 2004
Dates Referenced Herein and Documents Incorporated by Reference
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