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P R O S P E C T U S
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MORGAN STANLEY MONEY MARKET FUND
MORGAN STANLEY TAX-FREE MONEY MARKET FUND
MORGAN STANLEY GOVERNMENT OBLIGATIONS MONEY MARKET FUND
PORTFOLIOS OF THE
MORGAN STANLEY FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-282-4404
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Morgan Stanley Fund, Inc. (the "Fund") is an open-end management investment
company, or mutual fund, which consists of seventeen diversified and
non-diversified investment portfolios. This prospectus (the "Prospectus")
describes the shares of the Morgan Stanley Money Market Fund, the Morgan Stanley
Tax-Free Money Market Fund and the Morgan Stanley Government Obligations Money
Market Fund (collectively, the "Money Market Funds" and each an "Investment
Fund"). The Fund is designed to make available to retail investors the expertise
of Morgan Stanley Asset Management Inc., the investment adviser (the "Adviser")
and administrator (the "Administrator"). Shares are available through Morgan
Stanley & Co. Incorporated ("Morgan Stanley"), the Distributor, and investment
dealers, banks and financial services firms that provide distribution,
administrative or shareholder services ("Participating Dealers"). The Tax-Free
Money Market Fund is not currently offering shares.
The Money Market Funds are subject to certain special risk factors. For
information about these risk factors, see "Prospectus Summary -- Risk Factors."
INVESTMENTS IN THE MONEY MARKET FUNDS ARE NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT AN INVESTMENT FUND WILL BE ABLE
TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus is designed to set forth concisely the information about the
Money Market Funds that a prospective investor should know before investing and
it should be retained for future reference. The Fund offers additional
portfolios which are described in other prospectuses and under "Prospectus
Summary" below. The Fund currently offers the following portfolios: (I) GLOBAL
AND INTERNATIONAL EQUITY -- Morgan Stanley Global Equity Allocation, Morgan
Stanley Asian Growth, Morgan Stanley Emerging Markets, Morgan Stanley Latin
American and Morgan Stanley International Magnum Funds; (II) U.S. EQUITY --
Morgan Stanley American Value, Morgan Stanley Aggressive Equity and Morgan
Stanley U.S. Real Estate Funds; (III) GLOBAL FIXED INCOME -- Morgan Stanley
Global Fixed Income, Morgan Stanley Worldwide High Income and Morgan Stanley
High Yield Funds; and (IV) MONEY MARKET -- Morgan Stanley Money Market and
Morgan Stanley Government Obligations Money Market Funds. Additional information
about the Fund is contained in a "Statement of Additional Information," dated
September 26, 1996, which is incorporated herein by reference. The Statement of
Additional Information and the prospectuses pertaining to the other portfolios
of the Fund are available upon request and without charge by writing or calling
the Fund at the address and telephone number set forth above.
THE MONEY MARKET FUNDS' SHARES ARE NOT DEPOSITS, OBLIGATIONS OR ACCOUNTS
(FUND OR OTHERWISE) OF, OR ENDORSED OR GUARANTEED BY, ANY BANK OR ANY OF ITS
AFFILIATES OR CORRESPONDENTS, NOR ARE THEY FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
INVESTMENTS IN THE FUND INVOLVE RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 26, 1996.
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FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of
an Investment Fund may incur:
<TABLE>
<CAPTION>
GOVERNMENT
TAX-FREE OBLIGATIONS
MONEY MONEY MONEY MARKET
SHAREHOLDER TRANSACTION EXPENSES MARKET FUND MARKET FUND FUND
- ------------------------------------------------------------------------------- ----------- ----------- ---------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases........................................ None None None
Maximum Sales Load Imposed on Reinvested Dividends............................. None None None
Maximum Deferred Sales Load.................................................... None None None
Redemption Fees................................................................ None None None
Exchange Fees.................................................................. None None None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Investment Advisory Fee (after expense reimbursement and/or fee waiver) (1).... .36% .14% .41%
12b-1 Fees (after fee waivers) (1)............................................. .35% .35% .25%
Other Expenses................................................................. .27% .46% .29%
Total Operating Expenses (after expense reimbursement and/or fee waiver)....... .98% .95% .95%
</TABLE>
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(1) The Adviser and the Distributor will voluntarily waive a portion of their
respective fees and/or reimburse fund expenses until such time as they
determine that the particular Investment Fund's performance is competitive
with other comparable funds without such waivers. However, such fee waivers
are voluntary and may be terminated at any time. There can be no assurances
that any future waivers will not vary from the figures reflected in the
expense table. Absent fee waivers, investment advisory fees would be 0.45%
and 12b-1 fees would be 0.50% for each Investment Fund and total operating
expenses would be 1.22% for the Money Market Fund, 1.41% for the Tax-Free
Money Market Fund and 1.24% for the Government Obligations Money Market
Fund. (Investment advisory fees are contractually reduced when average daily
net assets exceed $250 million. (See "Management of the Fund".)) The
percentages shown above representing annual fund operating expenses are
based on net operating expenses for the PCS Money Market Portfolio (the
"Predecessor Money Market Portfolio"), the predecessor portfolio to the
Money Market Fund, and for the PCS Government Obligations Money Market
Portfolio (the "Predecessor Government Obligations Money Market Portfolio"),
the predecessor portfolio to the Government Obligations Money Market Fund,
for the fiscal year ended June 30, 1996. The expenses for the Tax-Free Money
Market Fund, which is not in operation, are estimates based on an estimated
average net asset level for the first year of $50,000,000.
The purpose of the above table is to assist the investor in understanding
the various expenses that an investor in any of the Money Market Funds will bear
directly or indirectly. "Other Expenses" include, among others, Directors' fees
and expenses, amortization of organizational costs, filing fees, professional
fees, and the costs for reports to shareholders. Due to the continuous nature of
Rule 12b-1 fees, long-term shareholders may pay more than the equivalent of the
maximum front-end sales charges otherwise permitted by the Conduct Rules of the
National Association of Securities Dealers, Inc. (the "NASD").
2
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The following example illustrates the expenses that you would pay on a
$1,000 investment, assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. (If it is assumed there are no redemptions, the
expenses are the same.)
<TABLE>
<CAPTION>
GOVERNMENT
MONEY TAX-FREE OBLIGATIONS
MARKET MONEY MONEY MARKET
FUND (1) MARKET FUND FUND (1)
----------- ----------- ---------------
<S> <C> <C> <C>
1 Year....................................................................... $ 10 $ 10 $ 10
3 Years...................................................................... $ 31 $ 30 $ 30
5 Years...................................................................... $ 54 * $ 53
10 Years...................................................................... $ 120 * $ 117
</TABLE>
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(1) The projected expenses are based upon the respective operating histories of
the Predecessor Money Market Portfolio and the Predecessor Government
Obligations Money Market Portfolio.
* Because the Tax-Free Money Market Fund was not operational as of the date of
this Prospectus, the Fund has not projected expenses beyond the three-year
period shown.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN. The Adviser in its discretion may terminate voluntary fee waivers and/or
reimbursements at any time. Absent the waiver of fees or reimbursement of
expenses, the amounts in the example above would be greater.
3
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FINANCIAL HIGHLIGHTS
The following tables provide financial highlights for the PCS Money Market
Portfolio and PCS Government Obligations Money Market Portfolio (the
"Predecessor Portfolios"), the predecessors of the Morgan Stanley Money Market
Fund and Morgan Stanley Government Obligations Money Market Fund, respectively,
for each of the periods presented. The audited financial highlights for the
shares for the fiscal year ended June 30, 1996 are part of the Fund's financial
statements which appear in the PCS Cash Fund, Inc.'s June 30, 1996 Annual Report
to Shareholders and in the Fund's Statement of Additional Information. The
Predecessor Portfolios' financial highlights for each of the periods presented
have been derived from financial statements audited by Coopers & Lybrand L.L.P.,
whose unqualified report thereon also appears in the Statement of Additional
Information. Additional performance information for the shares of the
Predecessor Portfolios is included in the Annual Report. The Annual Report and
the financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and telephone
number noted on the cover page of this Prospectus. The following financial
highlights should be read in conjunction with the financial statements and notes
thereto.
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 4, 1989
FOR THE FISCAL YEAR ENDED JUNE 30, (COMMENCEMENT OF
---------------------------------------------------------------------------------- OPERATIONS)
1996 1995 1994 1993 1992 1991 TO JUNE 30, 1990
------------ ------------ ------------ ------------ ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------ ------------ ------------ ------------ -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment
income............. .0463 .0446 .0246 .0243 .0402 .0652 .0690
Net realized gains
on investments..... (.0006) .0001 -- .0001 -- -- --
------------ ------------ ------------ ------------ ------------ ------------ -------
LESS DIVIDENDS TO
SHAREHOLDERS FROM:
Net investment
income............. (.0463) (.0446) (.0246) (.0243) (.0402) (.0652) (.0690)
Net realized
gains.............. -- (.0001) -- (.0001) -- -- --
------------ ------------ ------------ ------------ ------------ ------------ -------
NET ASSET VALUE, END
OF PERIOD............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------ ------------ ------------ ------------ -------
------------ ------------ ------------ ------------ ------------ ------------ -------
TOTAL RETURN.......... 4.72% 4.55% 2.49% 2.47% 4.11% 6.72% 7.12%(c)
------------ ------------ ------------ ------------ ------------ ------------ -------
------------ ------------ ------------ ------------ ------------ ------------ -------
Ratio of expenses to
average net assets... .98%(b) .98%(b) .98%(b) .98%(b) .98%(b) .98%(b) .98%(a)(b)
Ratio of net
investment income to
average net assets... 4.65%(b) 4.45%(b) 2.45%(b) 2.44%(b) 3.97%(b) 6.40%(b) 7.53%(a)(b)
Net assets at end of
period (000)......... $ 170,973 $ 171,515 $ 176,599 $ 156,310 $ 190,034 $ 140,594 $ 76,463
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
(b) Without voluntary fee waiver of advisory and distribution fees, the
ratios of expenses to average net assets would have been 1.22%, 1.18%,
1.19%, 1.20%, 1.27%, 1.27% and 1.48% (annualized), respectively. The ratio
of net investment income to average net assets would have been 4.41%,
4.25%, 2.24%, 2.22%, 3.68%, 6.11% and 7.03% (annualized), respectively.
4
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FINANCIAL HIGHLIGHTS CONTINUED
GOVERNMENT OBLIGATIONS MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 4, 1989
FOR THE FISCAL YEAR ENDED JUNE 30, (COMMENCEMENT OF
------------------------------------------------------ OPERATIONS)
1996 1995 1994 1993 TO JUNE 30, 1990
------------ ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------ ------------ --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................ .0464 .0448 .0243 .0246 .0094
Net realized gains on investments............ (.0011) -- .0011 .0002 --
------------ ------------ ------------ ------------ --------
LESS DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income........................ (.0464) (.0448) (.0243) (.0246) (.0094)
Net realized gains........................... (.0001) -- .0011 (.0002) --
------------ ------------ ------------ ------------ --------
NET ASSET VALUE, END OF PERIOD................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------ ------------ --------
------------ ------------ ------------ ------------ --------
TOTAL RETURN................................... 4.72% 4.58% 2.45% 2.51% .094%(c)
Ratio of expenses to average net assets........ .95%(b) .95%(b) .95%(b) .95%(b) .95%(a)(b)
Ratio of net investment income to average net
assets........................................ 4.68%(b) 4.61%(b) 2.40%(b) 2.50%(b) 3.07%(a)(b)
Net assets at end of period (000).............. $ 145,978 $ 67,705 $ 102,551 $ 101,736 $ 269,627
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
(b) Without voluntary fee waiver of advisory and distribution fees, the
ration of expenses to average net assets would have been 1.24%, 1.12%,
1.22%, 1.19% and 1.29% annualized and the ratio of net investment income
to average net assets would have been 4.39%, 4.44%, 2.13%, 2.26% and 2.73%
annualized.
(c) Not annualized. Total return, if on an annualized basis, would have been
3.16% for the Government Obligations Money Market Portfolio.
5
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PROSPECTUS SUMMARY
THE FUND
The Fund currently consists of seventeen investment portfolios which are
designed to offer investors a range of investment choices with Morgan Stanley
Asset Management Inc. providing services as Adviser and Administrator and Morgan
Stanley & Co. Incorporated providing services as Distributor. Each investment
portfolio has its own investment objective and policies designed to meet its
specific goals. The investment objective of each Investment Fund described in
this Prospectus is as follows:
- The MONEY MARKET FUND seeks to provide as high a level of current interest
income as is consistent with maintaining liquidity and stability of
principal.
- The TAX-FREE MONEY MARKET FUND seeks to provide as high a level of current
interest income exempt from regular federal income taxes as is consistent
with maintaining liquidity and stability of principal.
- The GOVERNMENT OBLIGATIONS MONEY MARKET FUND seeks to provide as high a
level of current interest income as is consistent with maintaining
liquidity and stability of principal.
The other investment portfolios of the Fund are described in other
prospectuses which may be obtained from the Fund at the address and telephone
number noted on the cover page of this Prospectus. The objectives of the Fund's
other investment portfolios are listed below:
GLOBAL AND INTERNATIONAL EQUITY FUNDS:
- The ASIAN GROWTH FUND seeks long-term capital appreciation by investing
primarily in equity securities of Asian issuers, excluding Japan.
- The EMERGING MARKETS FUND seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
- The EUROPEAN EQUITY FUND seeks long-term capital appreciation by investing
primarily in equity securities of European issuers.
- The GLOBAL EQUITY ALLOCATION FUND seeks long-term capital appreciation by
investing in equity securities of U.S. and non-U.S. issuers in accordance
with country weightings determined by the Adviser and with stock selection
within each country designed to replicate a broad market index.
- The INTERNATIONAL MAGNUM FUND seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance
with EAFE country weightings determined by the Adviser.
- The JAPANESE EQUITY FUND seeks long-term capital appreciation by investing
primarily in equity securities of Japanese issuers.
- The LATIN AMERICAN FUND seeks long-term capital appreciation by investing
primarily in equity securities of Latin American issuers and investing in
debt securities issued or guaranteed by Latin American governments or
governmental entities.
6
<PAGE>
U.S. EQUITY FUNDS:
- The AMERICAN VALUE FUND seeks high long-term total return by investing in
undervalued equity securities of small- to medium-sized corporations.
- The AGGRESSIVE EQUITY FUND seeks capital appreciation by investing
primarily in a non-diversified portfolio of corporate equity and
equity-linked securities.
- The GROWTH AND INCOME FUND seeks capital appreciation and current income
by investing primarily in equity and equity-linked securities.
- The U.S. REAL ESTATE FUND seeks to provide above-average current income
and long-term capital appreciation by investing primarily in equity
securities of companies in the U.S. real estate industry, including real
estate investment trusts.
GLOBAL FIXED INCOME FUNDS:
- The GLOBAL FIXED INCOME FUND seeks to produce an attractive real rate of
return while preserving capital by investing in fixed income securities of
issuers throughout the world, including U.S. issuers.
- The HIGH YIELD FUND seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the three
highest rating categories of the recognized rating services.
- The WORLDWIDE HIGH INCOME FUND seeks high current income consistent with
relative stability of principal and, secondarily, capital appreciation, by
investing primarily in a portfolio of high yielding fixed income
securities of issuers throughout the world.
THE GROWTH AND INCOME, JAPANESE EQUITY, EUROPEAN EQUITY AND TAX-FREE MONEY
MARKET FUNDS CURRENTLY ARE NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc. (the "Adviser" and the
"Administrator"), a wholly-owned subsidiary of Morgan Stanley Group Inc., which,
together with its affiliated asset management companies, had approximately
$103.5 billion in assets under management as an investment manager or as a
fiduciary adviser at June 30, 1996, acts as investment adviser to the Fund and
each of its Money Market Funds. See "Management of the Fund -- Investment
Adviser" and "-- Administrator." On June 24, 1996, Morgan Stanley Group Inc.
entered into a definitive agreement to purchase the parent company of Van Kampen
American Capital, Inc. Van Kampen American Capital, Inc. is the fourth largest
non-proprietary mutual fund provider in the United States with $57.6 billion in
assets under management as of June 30, 1996. The acquisition is expected to
close by the end of November, 1996.
RISK FACTORS
The investment policies of each Investment Fund entail certain risks and
considerations of which an investor should be aware. Investments in the Money
Market Funds are neither insured nor guaranteed by the U.S. Government, and
there is no assurance that an Investment Fund will be able to maintain a stable
net asset value of $1.00 per share. The Money Market and Government Obligations
Money Market Funds, to the extent set forth under "Investment Objectives and
Policies," may engage in the following investment practices: the use
7
<PAGE>
of repurchase agreements and reverse repurchase agreements; the purchase of
mortgage-backed securities; the purchase of securities on a "when-issued" basis;
and the purchase of securities on a "forward commitment" basis. The Money Market
Fund may also invest in securities of foreign issuers, which are subject to
certain risks not typically associated with U.S. securities. All of these
transactions involve certain special risks, as set forth under "Investment
Objectives and Policies."
HOW TO INVEST
Shares of each of the Money Market Funds are offered at net asset value.
Share purchases may be made through Morgan Stanley, through Participating
Dealers or by sending payments directly to the Fund. The minimum initial
investment is $1,000 for each Investment Fund, except that the minimum initial
investment amount for individual retirement accounts ("IRAs") is $250. The
minimum for subsequent investments is $100, except that the minimum for
subsequent investments for IRAs is $50 and there is no minimum for automatic
reinvestment of dividends and distributions. See "Purchase of Shares."
HOW TO REDEEM
Shares of each Investment Fund may be redeemed at any time at the net asset
value per share of the Investment Fund next determined after receipt of the
redemption request. The redemption price may be more or less than the purchase
price. If a shareholder reduces his/her total investment in shares of an
Investment Fund to less than $1,000, the entire investment may be subject to
involuntary redemption. See "Redemption of Shares."
8
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Investment Fund is described below,
together with the policies the Investment Fund employs in its efforts to achieve
its objective. Each Investment Fund's investment objective is a fundamental
policy which may not be changed by the Investment Fund without the approval of a
majority of the Investment Fund's outstanding voting securities. The investment
policies described below are not fundamental policies and may be changed without
shareholder approval. There is no assurance that an Investment Fund will attain
its objective. For more information about certain investment practices common to
two or more of the Money Market Funds and applicable quality requirements, see
"Additional Investment Information."
THE MONEY MARKET FUND
The Money Market Fund's investment objective is to provide as high a level
of current interest income as is consistent with maintaining liquidity and
stability of principal. Obligations held by the Money Market Fund will have
remaining maturities of 397 days or less (except that portfolio securities which
are subject to repurchase agreements may bear maturities exceeding 397 days). In
pursuing its investment objective, the Money Market Fund invests in a broad
range of U.S. dollar-denominated instruments, such as government, bank and
commercial obligations, that may be available in the money markets and that
satisfy strict credit quality standards imposed by the Investment Fund in
accordance with applicable law ("Money Market Instruments"). The following
descriptions illustrate the types of Money Market Instruments in which the Money
Market Fund invests.
BANK OBLIGATIONS. The Investment Fund may purchase bank obligations, such
as certificates of deposit, bankers' acceptances and time deposits, including
U.S. dollar-denominated instruments issued or supported by the credit of U.S. or
foreign banks or savings institutions having total assets at the time of
purchase in excess of $1 billion. The Investment Fund may invest substantially
in U.S. dollar-denominated obligations of foreign banks or foreign branches of
U.S. banks where the Adviser deems the instrument to present minimal credit
risks and to otherwise satisfy applicable quality standards. Such investments
may nevertheless entail risks that are different from those of investments in
domestic obligations of U.S. banks due to differences in political, regulatory
and economic systems and conditions. These risks may include future unfavorable
political and economic developments, possible withholding taxes on interest
income, seizure or nationalization of foreign deposits, currency controls,
interest limitations, or other governmental restrictions which might affect the
payment of principal or interest on the securities held in the Investment Fund.
Additionally, these institutions may be subject to less stringent reserve
requirements and to different accounting, auditing, reporting and recordkeeping
requirements than those applicable to domestic branches of U.S. banks. The
Investment Fund may also make interest-bearing savings deposits in commercial
and savings banks in amounts not in excess of 5% of its total assets.
COMMERCIAL PAPER. The Investment Fund may purchase commercial paper rated
(at the time of purchase) "A-1" or "A-1+" by Standard & Poor's Ratings Group
("S&P") or "Prime-1" by Moody's Investors Service, Inc. ("Moody's") or when
deemed advisable by the Adviser and to the extent permitted under applicable
regulations, limited amounts of issues rated "A-2" or "Prime-2" by S&P or
Moody's, respectively that the Adviser believes to be of high quality. The
Investment Fund may also purchase commercial paper not rated by S&P or Moody's
provided that such paper is determined by the Adviser to be of comparable
quality pursuant to guidelines approved by the Fund's Board of Directors. The
applicable short-term corporate ratings are described in the Appendix to the
Statement of Additional Information.
9
<PAGE>
UNITED STATES GOVERNMENT OBLIGATIONS. The Money Market Fund may invest in
obligations issued or guaranteed by the United States Government, including
United States Treasury securities and other securities backed by the full faith
and credit of the United States, such as obligations of the Government National
Mortgage Association ("GNMA"), the Farmers Home Administration and the
Export-Import Bank. The Investment Fund may also invest in obligations issued or
guaranteed by United States Government agencies or instrumentalities, such as
the Federal Farm Credit System and the Federal Home Loan Banks, where the
Investment Fund must look principally to the issuing or guaranteeing agency for
ultimate repayment. For a more complete discussion of United States Government
Obligations, see the description of the Government Obligations Money Market
Fund.
MUNICIPAL OBLIGATIONS. "Municipal Obligations" are obligations issued by or
on behalf of states, territories and possessions of the United States, the
District of Columbia and their political subdivisions, agencies,
instrumentalities and authorities. The Investment Fund may invest without
limitation in high quality, short-term Municipal Obligations issued by state and
local governmental issuers, the interest on which may be taxable or tax-exempt
for federal income tax purposes, when deemed appropriate by the Adviser in light
of the Investment Fund's investment objective, and provided that such
obligations carry yields that are competitive with those of other types of Money
Market Instruments of comparable quality. For a more complete discussion of
Municipal Obligations, see the description of the Tax-Free Money Market Fund. In
addition, the Investment Fund may acquire "stand-by commitments" with respect to
Municipal Obligations held in its portfolio. Under a stand-by commitment, a
dealer would agree to purchase at the Investment Fund's option specified
Municipal Obligations at a specified price. The acquisition of a stand-by
commitment may increase the cost, and thereby reduce the yield, of the Municipal
Obligation to which such commitment relates. The Investment Fund will acquire
stand-by commitments solely to facilitate portfolio liquidity and does not
intend to exercise its rights thereunder for trading purposes.
THE TAX-FREE MONEY MARKET FUND
The Tax-Free Money Market Fund's investment objective is to provide as high
a level of current interest income exempt from regular federal income taxes as
is consistent with maintaining liquidity and stability of principal. The
Tax-Free Money Market Fund invests substantially all of its assets in a
diversified portfolio of high quality, short-term Municipal Obligations, the
interest on which, in the opinion of bond counsel or counsel to the issuer, as
the case may be, is exempt from the regular federal income tax. It is a
fundamental policy of the Investment Fund that under normal market conditions,
at least 80% of the net assets of the Tax-Free Money Market Fund will be
invested in short-term Municipal Obligations, the interest on which is exempt
from regular federal income tax and is not an item of tax preference for
noncorporate shareholders for purposes of the alternative minimum tax
("Tax-Exempt Interest"). All portfolio investments must satisfy strict credit
quality standards imposed by the Fund in accordance with applicable law.
MUNICIPAL OBLIGATIONS. The Fund invests in short-term Municipal Obligations
which are determined by the Adviser to present minimal credit risks and to
otherwise satisfy applicable quality standards pursuant to guidelines
established by the Fund's Board of Directors and which at the time of purchase
are considered to be "first-tier" securities -- e.g., rated "AAA" or higher by
S&P or "Aaa" or higher by Moody's in the case of bonds; rated "SP-1" by S&P or
"MIG-1" by Moody's in the case of notes; rated "VMIG-1" by Moody's in the case
of variable rate demand notes; or rated "A-1" or "A-1+" by S&P or "Prime-1" by
Moody's in the case of tax-exempt commercial paper. The Fund may also purchase
securities that are not rated by S&P or Moody's at the time of
10
<PAGE>
purchase provided that the securities are determined to be of comparable quality
by the Adviser pursuant to guidelines approved by the Fund's Board of Directors.
The applicable Municipal Obligations ratings are described in the Appendix to
the Statement of Additional Information.
The Investment Fund may hold uninvested cash reserves pending investment
during temporary defensive periods or if, in the opinion of the Adviser,
suitable obligations bearing Tax-Exempt Interest are unavailable. There is no
percentage limitation on the amount of assets which may be held uninvested
during temporary defensive periods. Uninvested cash reserves will not earn
income.
The two principal classifications of Municipal Obligations are "general
obligation" securities and "revenue" securities. General obligation securities
are secured by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest. Revenue securities are payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
excise tax or other specific revenue source such as the user of the facility
being financed. Revenue securities include private activity bonds which are not
payable from the unrestricted revenues of the issuer. Consequently, the credit
quality of private activity bonds is usually directly related to the credit
standing of the corporate user of the facility involved. Municipal Obligations
may also include "moral obligation" bonds, which are normally issued by special
purpose public authorities. If the issuer of moral obligation bonds is unable to
meet its debt service obligations from current revenues, it may draw on a
reserve fund, the restoration of which is a moral commitment but not a legal
obligation of the state or municipality which created the issuer. Municipal
Obligations may include variable rate demand notes, which are described below
under "Additional Investment Information."
Current federal tax law limits the types and volume of bonds qualifying for
the federal income tax exemption of interest. Such limitations may have an
effect on the ability of the Investment Fund to purchase sufficient amounts of
tax-exempt securities. In addition, interest on certain bonds, although exempt
from the regular federal income tax, may be subject to alternative minimum tax.
See the discussion below under "Taxes" and the Statement of Additional
Information.
Although the Tax-Free Money Market Fund may invest more than 25% of its net
assets in (i) Municipal Obligations whose issuers are in the same state, (ii)
Municipal Obligations the interest on which is paid solely from revenues of
similar projects and (iii) private activity bonds bearing Tax-Exempt Interest,
it does not currently intend to do so on a regular basis. To the extent the
Tax-Free Money Market Fund's assets are concentrated in Municipal Obligations
that are payable from the revenues of similar projects or are issued by issuers
located in the same state, the Investment Fund will be subject to the peculiar
risks presented by the laws and economic conditions relating to such states or
projects to a greater extent than it would be if its assets were not so
concentrated.
THE GOVERNMENT OBLIGATIONS MONEY MARKET FUND
The Government Obligations Money Market Fund's investment objective is to
provide as high a level of current interest income as is consistent with
maintaining liquidity and stability of principal. It seeks to achieve such
objective by investing at least 65% of its net assets, under normal market
conditions, in short-term U.S. Treasury bills, notes and other obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
and entering into repurchase agreements relating to such obligations. Purchases
of portfolio securities must satisfy strict credit quality standards imposed by
the Investment Fund in accordance with
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applicable law. The types of U.S. Government obligations in which the Investment
Fund may invest include a variety of U.S. Treasury obligations, which differ
only in their interest rates, maturities, and time of issuance, and obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
including mortgage-backed securities. Obligations of certain agencies and
instrumentalities of the U.S. Government, such as GNMA and the Export-Import
Bank of the United States, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the right of the issuer to borrow from
the Treasury; others, such as those of the Student Loan Marketing Association,
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; still others, such as those of the Federal Farm Credit
Banks or the Federal Home Loan Mortgage Corporation, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so under law. The Investment
Fund will invest in the obligations of such agencies or instrumentalities only
when the Adviser believes that the credit risk with respect thereto is minimal
and that applicable quality standards have been satisfied.
Securities issued or guaranteed by the U.S. Government, its agencies and
instrumentalities have historically involved little risk of loss of principal if
held to maturity. However, due to fluctuations in interest rates, the market
value of such securities may vary during the period a shareholder owns shares
representing an interest in the Investment Fund. Certain government securities
held by the Investment Fund may have remaining maturities exceeding 397 days if
such securities provide for adjustments in their interest rates not less
frequently than annually and the adjustments are sufficient to cause the
securities to have market values, after adjustment, which approximate their par
values.
ADDITIONAL INVESTMENT INFORMATION
ILLIQUID SECURITIES AND RESTRICTED SECURITIES
Each Investment Fund may invest up to 10% of the value of its net assets in
illiquid securities. Illiquid securities include repurchase agreements with
maturities greater than seven days and securities that are restricted from sale
to the public without registration ("Restricted Securities") under the
Securities Act of 1933, as amended (the "1933 Act"), other than Restricted
Securities that can be offered and sold to qualified institutional buyers under
Rule 144A under the 1933 Act ("144A Securities") or commercial paper sold
without restriction pursuant to Section 4(2) of the 1933 Act ("4(2) Commercial
Paper") if such 144A Securities or 4(2) Commercial Paper are determined to be
liquid pursuant to procedures approved by the Fund's Board of Directors. Each
Investment Fund may invest in 144A Securities and 4(2) Commercial Paper
determined to be liquid pursuant to such procedures. The Board of Directors has
delegated to the Adviser, subject to the supervision of the Board of Directors,
the daily function of determining and monitoring the liquidity of 144A
Securities. 144A Securities may become illiquid if qualified institutional
buyers are not interested in acquiring the securities.
LOANS OF PORTFOLIO SECURITIES
Each of the Money Market and Government Obligations Money Market Funds may
lend its securities to brokers, dealers, domestic and foreign banks or other
financial institutions for the purpose of increasing its net investment income.
These loans must be secured continuously by cash or equivalent collateral or by
a letter of credit at least equal to the market value of the securities loaned
plus accrued interest. As with other extensions of
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<PAGE>
credit, there are risks of delay in recovery or even loss of rights in
collateral should the borrower of the portfolio securities fail financially. The
Investment Funds will not enter into securities loan transactions exceeding in
the aggregate 33 1/3% of the market value of an Investment Fund's total assets.
For more detailed information about securities lending, see "Investment
Objectives and Policies" in the Statement of Additional Information.
MORTGAGE-BACKED SECURITIES
The Money Market and Government Obligations Money Market Funds may invest in
mortgage-backed securities. Mortgage loans made by banks, savings and loan
institutions, and other lenders are often assembled into pools, the interests in
which are issued and guaranteed by an agency or instrumentality of the U.S.
Government, though not necessarily by the U.S. Government itself. Interests in
such pools are what this Prospectus calls "mortgage-backed securities."
One such type of mortgage-backed security in which the Investment Funds may
invest is a GNMA Certificate. GNMA Certificates are backed as to the timely
payment of principal and interest by the full faith and credit of the U.S.
Government. Another type is a FNMA Certificate. Principal and interest payments
on FNMA Certificates are guaranteed only by FNMA itself, not by the full faith
and credit of the U.S. Government. A third type of mortgage-backed security in
which such Investment Funds may invest is a Federal Home Loan Mortgage
Association ("FHLMC") Participation Certificate. This type of security is
guaranteed by FHLMC as to timely payment of principal and interest but, like a
FNMA security it is not guaranteed by the full faith and credit of the U.S.
Government. For a further discussion of GNMA, FNMA and FHLMC, see
"Mortgage-Related Debt Securities" in the Statement of Additional Information.
Each of the mortgage-backed securities described above is characterized by
monthly payments to the security holder, reflecting the monthly payments made by
the mortgagors of the underlying mortgage loans. The payments to the security
holders (such as an Investment Fund), like the payments on the underlying loans,
represent both principal and interest. Although the underlying mortgage loans
are for specified periods of time, such as twenty or thirty years, the borrowers
can, and typically do, repay them sooner. Thus, the security holders frequently
receive prepayments of principal, in addition to the principal which is part of
the regular monthly payments. A borrower is more likely to prepay a mortgage
which bears a relatively high rate of interest. This means that, in times of
declining interest rates, some of an Investment Fund's higher yielding
securities might be repaid and thereby converted to cash and the Investment Fund
will be forced to accept lower interest rates when that cash is used to purchase
additional securities. An Investment Fund normally will not distribute principal
payments (whether regular or prepaid) to its shareholders. Interest received by
each Investment Fund will, however, be distributed to shareholders in the form
of dividends.
REPURCHASE AGREEMENTS
The Money Market and Government Obligations Money Market Funds may enter
into repurchase agreements with brokers, dealers or banks that meet the credit
guidelines of the Fund's Board of Directors. In a repurchase agreement, an
Investment Fund buys a security from a seller that has agreed to repurchase it
at a mutually agreed upon date and price, reflecting the interest rate effective
for the term of the agreement. The term of these agreements is usually from
overnight to one week and never exceeds one year. A repurchase agreement may be
viewed as a fully collateralized loan of money by an Investment Fund to the
seller. An Investment Fund always receives securities as collateral with a
market value at least equal to the purchase price, including accrued interest,
and this value is maintained during the term of the agreement. If the seller
defaults
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and the collateral value declines, an Investment Fund might incur a loss. If
bankruptcy proceedings are commenced with respect to the seller, the Investment
Fund's realization upon the collateral may be delayed or limited. The aggregate
of certain repurchase agreements and certain other investments is limited as set
forth under "Investment Limitations."
REVERSE REPURCHASE AGREEMENTS
The Money Market and Government Obligations Money Market Funds may enter
into reverse repurchase agreements with brokers, dealers, banks or other
financial institutions that have been determined by the Adviser to be
creditworthy. In a reverse repurchase agreement, an Investment Fund sells a
security and agrees to repurchase it at a mutually agreed upon date and price,
reflecting the interest rate effective for the term of the agreement. It may
also be viewed as the borrowing of money by the Investment Fund. An Investment
Fund's investment of the proceeds of a reverse repurchase agreement is a
speculative factor known as leverage. An Investment Fund will enter into a
reverse repurchase agreement only if the interest income from investment of the
proceeds is expected to be greater than the interest expense of the transaction
and the proceeds are invested for a period no longer than the term of the
agreement. An Investment Fund will maintain with the Custodian a separate
account with a segregated portfolio of cash or other liquid securities in an
amount at least equal to its purchase obligations under these agreements
(including accrued interest). If interest rates rise during a reverse repurchase
agreement, it may adversely affect an Investment Fund's ability to maintain a
stable net asset value. In the event that the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, the
buyer or its trustee or receiver may receive an extension of time to determine
whether to enforce an Investment Fund's repurchase obligation, and the
Investment Fund's use of proceeds of the agreement may effectively be restricted
pending such decision. The aggregate of these agreements is limited as set forth
under "Investment Limitations." Reverse repurchase agreements are considered to
be borrowings and are subject to the percentage limitations on borrowings set
forth in "Investment Limitations."
STAND-BY COMMITMENTS. The Money Market and Tax-Free Money Market Funds may
each acquire "stand-by commitments" with respect to Municipal Obligations held
in its portfolio. Under a stand-by commitment, a dealer would agree to purchase
at an Investment Fund's option specified Municipal Obligations at a specified
price. The acquisition of a stand-by commitment may increase the cost, and
thereby reduce the yield, of the Municipal Obligations to which such commitment
relates. An Investment Fund will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes.
VARIABLE RATE DEMAND NOTES. The Money Market and Tax-Free Money Market
Funds may purchase variable rate demand notes, which are unsecured instruments
that permit the indebtedness thereunder to vary and provide for periodic
adjustment in the interest rate. Although the notes are not normally traded and
there may be no active secondary market in the notes, an Investment Fund will be
able (at any time or during the specified periods not exceeding 397 days,
depending upon the note involved) to demand payment of the principal of a note.
The notes are frequently not rated by credit rating agencies, but notes not
rated by S&P or Moody's purchased by an Investment Fund will have been
determined by the Adviser to be of comparable quality at the time of the
purchase to rated instruments purchasable by the Investment Fund. Where
necessary to ensure that a note is of sufficiently high quality, an Investment
Fund will require that the issuer's obligation to pay the principal of the note
be backed by an unconditional bank letter or line of credit, guarantee or
commitment to lend. While there may be no active secondary market with respect
to a particular variable rate
14
<PAGE>
demand note purchased by an Investment Fund, the Investment Fund may, upon the
notice specified in the note, demand payment of the principal of the note at any
time or during specified periods not exceeding 397 days, depending upon the
instrument involved. The absence of such an active secondary market, however,
could make it difficult for an Investment Fund to dispose of a variable rate
demand note if the issuer defaulted on its payment obligation or during the
periods that the Investment Fund is not entitled to exercise its demand rights.
An Investment Fund could, for this or other reasons, suffer a loss to the extent
of the default. An Investment Fund will invest in variable rate demand notes
only when the Adviser deems the investment to involve minimal credit risk and to
otherwise satisfy applicable quality standards. The Adviser also monitors the
continuing creditworthiness of issuers of such notes to determine whether an
Investment Fund should continue to hold such notes.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Money Market Fund and Government Obligations Money Market Fund may
purchase securities on a when-issued or delayed delivery basis. In such
transactions, instruments are bought with payment and delivery taking place in
the future in order to secure what is considered to be an advantageous yield or
price at the time of the transaction. Delivery of and payment for these
securities may take as long as a month or more after the date of the purchase
commitment but will take place no more than 120 days after the trade date. An
Investment Fund will maintain with the Custodian a separate account with a
segregated portfolio of cash or liquid securities in an amount at least equal to
these commitments. The payment obligation and the interest rates that will be
received are each fixed at the time an Investment Fund enters into the
commitment, and no interest accrues to the Investment Fund until settlement.
Thus, it is possible that the market value at the time of settlement could be
higher or lower than the purchase price if the general level of interest rates
has changed. It is a current policy of each Investment Fund not to enter into
when-issued commitments or delayed delivery securities exceeding, in the
aggregate, 25% of the Investment Fund's net assets other than the obligations
created by these commitments.
QUALITY INFORMATION. The Money Market Funds utilize the amortized cost
method of valuation in accordance with regulations issued by the SEC. See
"Valuation of Shares." Accordingly, each Investment Fund will limit its
portfolio investments to those instruments which present minimal credit risks
and which are of eligible quality, as determined by the Adviser under the
supervision of the Board of Directors and in accordance with regulations of the
SEC, as such regulations may from time to time be amended. Eligible quality for
this purpose means a security (i) rated in one of the two highest rating
categories by at least two nationally recognized statistical rating
organizations ("NRSROs") assigning a rating to the security or issuer or, if
only one rating organization assigned a rating, by that rating organization or
(ii) if unrated, determined to be of comparable quality by the Adviser under the
supervision of the Board of Directors. Each of the Government Obligations Money
Market and Money Market Funds will not invest more than 5% of its total assets
in securities of issuers having the second highest rating from any NRSRO; and
these Investment Funds will not invest more than the greater of one percent of
its total assets or $1 million in securities issued by an issuer, having at the
time of acquisition or roll over, the second highest rating from any NRSRO. The
Tax-Exempt Money Market Fund will not invest more than 5% of its total assets in
conduit securities (not subject to unconditional demand features) of issuers
having the second highest rating from any NRSRO. Additionally, the Tax-Exempt
Money Market Fund will not invest more than the greater of one percent of its
total assets or $1 million in conduit securities (not subject to unconditional
demand features) of an issuer which, at the time of acquisition or roll over,
has the
15
<PAGE>
second highest rating from an NRSRO. Among the criteria adopted by the Board of
Directors, an Investment Fund will not purchase any bank or corporate obligation
unless it is rated at least Aa or Prime-1 by Moody's or AA, A-1+ or A-1 by S&P
or, if not rated by S&P or Moody's, it is determined to be of comparable quality
by the Adviser under the supervision of the Board of Directors. Ratings,
however, are not the only criteria utilized under the procedures adopted by the
Board of Directors. For a more detailed discussion of other quality requirements
applicable to the Fund, see "Description of Securities and Ratings" in the
Statement of Additional Information.
These quality standards must be satisfied at the time an investment is made.
In the event that an investment held by the Fund is assigned a lower rating or
ceases to be rated, the Adviser, under the supervision of the Board of
Directors, will promptly reassess whether such security presents minimal credit
risks and whether the Investment Fund should continue to hold the security in
its portfolio. If a portfolio security no longer presents minimal credit risks,
is in default or its rating is downgraded to below the second highest rating
category, the Investment Fund will dispose of the security as soon as reasonably
practicable unless the Board of Directors determines that to do so is not in the
best interests of the Investment Fund.
INVESTMENT LIMITATIONS
Each Investment Fund is a diversified investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and is subject to
the following limitations: (a) as to 75% of its total assets, the Investment
Fund may not invest more than 5% of its total assets in the securities of any
one issuer, except obligations of the U.S. Government, its agencies and
instrumentalities, and (b) the Investment Fund may not own more than 10% of the
outstanding voting securities of any one issuer. Under regulations applicable to
money market funds, however, an Investment Fund may invest more than 5% of its
assets in any one issuer of "first tier" securities for no more than three days.
The Money Market Funds also operate under certain investment restrictions
that are deemed fundamental policies and may be changed by an Investment Fund
only with the approval of the holders of a majority of the Investment Fund's
outstanding shares. In addition to other restrictions listed in the Statement of
Additional Information, an Investment Fund may not (i) enter into repurchase
agreements with more than seven days to maturity if, as a result, more than 10%
of the market value of its total assets would be invested in these agreements
and other investments for which market quotations are not readily available or
which are otherwise illiquid; or (ii) invest more than 25% of the Investment
Fund's total assets in securities of companies in any one industry, except that
there is no limitation with respect to investments in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or, for the
Money Market Fund, obligations of U.S. banks or their domestic branches.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. (the "Adviser") is
the investment adviser and administrator of the Fund and each of its Money
Market Funds. The Adviser provides investment advice and portfolio management
services pursuant to an investment advisory agreement (the "Investment Advisory
Agreement") and, subject to the supervision of the Fund's Board of Directors,
makes each of the Investment Fund's investment decisions, arranges for the
execution of portfolio transactions and generally manages each of
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<PAGE>
the Investment Fund's investments. The Adviser is entitled to receive from each
Investment Fund an annual management fee, payable monthly, equal to the
percentages of average daily net assets set forth in the table below. However,
the Adviser will waive a portion of its fees and/or reimburse expenses of an
Investment Fund, if necessary, if such fees would cause the total annual
operating expenses of the Investment Fund to exceed the percentage of average
daily net assets set forth in the "Fund Expenses" table on page 3 above.
<TABLE>
<CAPTION>
ASSETS ABOVE
ASSETS UP TO $250 MILLION UP ASSETS EXCEEDING
$250 MILLION TO $500 MILLION $500 MILLION
--------------- ----------------- -------------------
<S> <C> <C> <C>
Money Market Fund................................................ 0.45% 0.40% 0.35%
Tax-Free Money Market Fund....................................... 0.45% 0.40% 0.35%
Government Obligations Money Market Fund......................... 0.45% 0.40% 0.35%
</TABLE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, NY 10020, conducts a worldwide portfolio management business. It provides
a broad range of portfolio management services to customers in the United States
and abroad. At June 30, 1996, the Adviser together with its affiliated asset
management companies managed investments totaling approximately $103.5 billion,
including approximately $87 billion under active management and $16.5 billion as
Named Fiduciary or Fiduciary Adviser. See "Management of the Fund -- Investment
Advisory and Administrative Agreements" in the Statement of Additional
Information.
The Money Market Funds have adopted a plan of distribution pursuant to Rule
12b-1 (the "Plan") under the 1940 Act. Under the Plan, which is described in
more detail under "Distributor" below, the Distributor is entitled to receive
from each Money Market Fund payments of 0.50% of such Investment Fund's annual
average net assets. The Plan recognizes that, in addition to such payments, the
Adviser may use its advisory fees or other resources to pay expenses associated
with activities which might be construed to be financing the sale of these Money
Market Funds' shares. The Plan provides that the Adviser may make payments from
these sources to third parties, such as consultants that provide assistance in
the distribution effort (in addition to selling shares and providing shareholder
services).
ADMINISTRATOR. The Administrator also provides the Fund with administrative
services pursuant to a separate administration agreement (the "Administration
Agreement"). The services provided under the Administration Agreement are
subject to the supervision of the officers and Board of Directors of the Fund
and include day-to-day administration of matters related to the corporate
existence of the Fund, maintenance of its records, preparation of reports,
supervision of the Fund's arrangements with its custodian and assistance in the
preparation of the Fund's registration statements under federal and state laws.
The Administration Agreement also provides that the Administrator through its
agents will provide the Fund dividend disbursing and transfer agent services.
For its services as Administrator under the Administration Agreement, the Fund
pays the Administrator a monthly fee which on an annual basis equals 0.10% of
the first $200 million of the Fund's average daily net assets, 0.075% on the
next $200 million of average daily net assets, 0.05% on the next $200 million of
average daily net assets, and 0.03% on the average daily net assets over $600
million of each Investment Fund.
Under an agreement between the Administrator and The Chase Manhattan Bank
("Chase"), Chase Global Funds Services Company ("CGFSC"), a Corporate affiliate
of Chase, provides certain administrative services to the Fund. The
Administrator supervises and monitors such administrative services provided by
CGFSC. The services provided under the administration agreement are subject to
the supervision of the Board of Directors of
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<PAGE>
the Fund. The Board of Directors of the Fund has approved the provision of
services described above pursuant to the Administration Agreement as being in
the best interests of the Fund. PFPC, Inc., under an agreement with the
Administrator, will perform as sub-transfer agent and dividend disbursing agent
for Prime Resource Account holders. For additional information on the
Administration Agreement, see "Management of the Fund" in the Statement of
Additional Information.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator and Distributor. The Officers of
the Fund conduct and supervise its daily business operations.
DISTRIBUTOR. Morgan Stanley serves as the distributor (the "Distributor")
of the shares of the Fund. Under its distribution agreement (the "Distribution
Agreement") with the Fund, Morgan Stanley sells shares of the Fund upon the
terms and at the current offering price described in this Prospectus. Morgan
Stanley is not obligated to sell any specific number of shares of the Fund.
Each Investment Fund currently offers only one class of shares. The Fund may
in the future offer one or more classes of shares for each Investment Fund that
may have different sales charges or other distribution charges or a combination
thereof than the class currently offered.
The Board of Directors of the Fund has approved and adopted the Distribution
Agreement for the Fund and a Plan for the Money Market Funds pursuant to Rule
12b-1 under the 1940 Act. Under the Plan, the Distributor is entitled to receive
from these Money Market Funds a distribution fee, which is accrued daily and
paid monthly, of 0.50% for each of the Money Market Funds on an annualized basis
of the average daily net assets of such Investment Fund. The Distributor expects
to reallocate most of its fee to investment dealers, banks or financial services
firms that provide distribution, administrative or shareholder services
("Participating Dealer"). The actual amount of such compensation is agreed upon
by the Fund's Board of Directors and by the Distributor. The Distributor may, in
its discretion, voluntarily waive from time to time all or any portion of its
distribution fee and the Distributor is free to make additional payments out of
its own assets to promote the sale of Fund shares.
The Plan obligates the Money Market Funds to accrue and pay to the
Distributor the fee agreed to under its Distribution Agreement. The Plan does
not obligate the Money Market Funds to reimburse Morgan Stanley for the actual
expenses Morgan Stanley may incur in fulfilling its obligations under the Plan.
Thus, under the Plan, even if Morgan Stanley's actual expenses exceed the fee
payable to it thereunder at any given time, the Money Market Funds will not be
obligated to pay more than that fee. If Morgan Stanley's actual expenses are
less than the fee it receives, Morgan Stanley will retain the full amount of the
fee.
The Plan, under the terms of Rule 12b-1, will remain in effect only if
approved at least annually by the Fund's Board of Directors, including those
directors who are not "interested persons" of the Fund as that term is defined
in the 1940 Act and who have no direct or indirect financial interest in the
operation of the Plan or in any agreements related thereto ("12b-1 Directors").
The Plan may be terminated at any time by a vote of a majority of the 12b-1
Directors or by a vote of a majority of the outstanding voting securities of the
applicable class of an Investment Fund. The fee set forth above will be paid by
the Investment Fund to Morgan Stanley unless and until the Plan is terminated or
not renewed. The Fund intends to operate the Plan in accordance with its terms
and the NASD Rules concerning sales charges.
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<PAGE>
PAYMENTS TO FINANCIAL INSTITUTIONS. The Adviser, the Distributor or their
affiliates may compensate certain financial institutions for the continued
investment of their customers' assets in the Money Market Funds pursuant to the
advice of such financial institutions. These payments will be made directly by
the Adviser, the Distributor or their affiliates from their assets, and will not
be made from the assets of the Fund or by the assessment of a sales charge on
shares. Such financial institutions may also perform certain shareholder or
recordkeeping services that would otherwise be performed by CGFSC. The Adviser
may elect to enter into a contract to pay the financial institutions for such
services.
EXPENSES. The Money Market Funds are responsible for payment of certain
other fees and expenses (including professional fees, custodial fees and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
PURCHASES BY PRIME RESOURCE ACCOUNT HOLDERS
GENERAL. Prime Resource Account Holders are account holders who open a
prime resource account with the Distributor. A prime resource account is a cash
management account offering such features as check writing privileges, automatic
sweep of all cash balances into a money market fund and a Visa
Gold-Registered Trademark- credit card. Pursuant to the sweep feature, Prime
Resource Account Holders will be permitted to purchase shares of the Money
Market Funds. Prime resource accounts are available only to clients of
broker-dealers who use the Distributor as their clearing firm.
Shares are sold without a front-end sales load on a continuous basis by the
Distributor. Investors may purchase shares through an account maintained by the
investor with his brokerage firm (the "Account"). The minimum initial investment
is $1,000, except that the minimum initial investment amount for individual
retirement accounts ("IRAs") is $250. The minimum for subsequent investments is
$100, except that the minimum for subsequent investments for IRAs is $50 and
there is no minimum for automatic reinvestment of dividends and distributions.
The Distributor may waive such minimums in its sole discretion. The Fund in its
sole discretion may accept or reject any order for purchases of shares.
All payments for initial and subsequent investments should be in U.S.
dollars. Purchases will be effected at the net asset value next determined after
PFPC, Inc. (the "Sub-Transfer Agent"), has received a purchase order in proper
form and the Fund's custodian has Federal Funds immediately available to it.
PURCHASES THROUGH A PRIME RESOURCE ACCOUNT. Share purchases may be effected
through an investor's Account with his broker through procedures established in
connection with the requirements of Accounts at such broker.
In such event, beneficial ownership of shares will be recorded by the broker
and will be reflected in the Account statements provided by the broker to such
investors. A broker may impose minimum investor Account requirements. Although a
broker does not impose a sales charge for purchases of shares, depending on the
terms of an investor's Account with his broker, the broker may charge an
investor's Account fees for automatic investment and other service provided to
the Account. Information concerning Account requirements, services and charges
should be obtained from an investor's broker. This Prospectus should be read in
conjunction with any information received from a broker.
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<PAGE>
A broker may offer investors maintaining Accounts the ability to purchase
shares under an automatic purchase program (a "Purchase Program") established by
a participating broker. An investor who participates in a Purchase Program will
have his "free-credit" cash balances in his Account automatically invested in
shares of the Investment Fund which he has designated (the "Designated
Investment Fund") under the Purchase Program. The frequency of investments and
the minimum investment requirement will be established by the broker and the
Fund. In addition, the broker may require a minimum amount of cash and/or
securities to be deposited in an Account for participants in its Purchase
Program. The description of the particular broker's Purchase Program should be
read for details, and any inquiries concerning an Account under a Purchase
Program should be directed to the broker. A participant in a Purchase Program
may change the designation Investment Fund at any time by so instructing his
broker.
If a broker makes special arrangements under which orders for shares are
received by the Sub-Transfer Agent prior to 12:00 noon (Eastern Time) on any day
that the New York Stock Exchange (the "NYSE") and Federal Reserve Banks are open
for business (a "Business Day"), and the broker guarantees that payment for such
shares will be made in Federal Funds to the Fund's custodian prior to 4:00 p.m.
(Eastern Time), on the same day, such purchase orders will be effective, and
shares will be purchased at the offering price in effect, as of 12:00 p.m.
(Eastern Time) on the date the purchase order is received by the Sub-Transfer
Agent. Purchase orders received after 12:00 p.m. (Eastern Time) and prior to
4:00 p.m. (Eastern Time), on any Business Day for which payment in Federal Funds
has been received by 4:00 p.m. (Eastern Time), will be effective, and shares
will be purchased at the offering price in effect, as of 4:00 p.m. (Eastern
Time) the same day.
FOR PRIME RESOURCE ACCOUNT HOLDERS, INFORMATION ON EACH MONEY MARKET FUND
CAN BE OBTAINED BY CALLING THE SUB-TRANSFER AGENT AT 1-800-533-7719.
PURCHASES BY ALL OTHER SHAREHOLDERS
GENERAL. Shares of the Money Market Funds may be purchased through
Participating Dealers or directly from the Fund. Participating Dealers are
responsible for forwarding orders they receive to the Fund by the applicable
times described below on the same day as their receipt of the orders to permit
purchase of shares as described below and the failure to do so will result in
the investors being unable to obtain that day's dividends, if any.
INITIAL PURCHASES DIRECTLY FROM THE FUND
1) BY CHECK. An account may be opened by completing and signing a New Account
Application and mailing it, together with a check ($1,000 minimum for each
Investment Fund, except for IRAs, for which the initial minimum is $250) made
payable to "Morgan Stanley Fund, Inc. -- [Investment Fund name]," to:
Morgan Stanley Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only by check payable in U.S. Dollars, unless prior
approval for payment by other currencies is given by the Fund. The Investment
Fund(s) to be purchased should be designated on the New Account Application.
For purchases by check, the Fund is ordinarily credited with Federal Funds
within one Business Day.
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2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account ($1,000 minimum for each Investment
Fund, except for IRAs, for which the initial minimum is $250). To help ensure
prompt receipt of your Federal Funds Wire, it is important that you follow
these steps:
A. Telephone the Fund (toll free: 1-800-282-4404) and provide your name,
address, telephone number, Social Security or Tax Identification Number,
the Investment Fund(s) and the class(es) selected, the amount being wired,
and by which bank. The Fund will then provide you with a bank wire control
number. (Investors with existing accounts must also notify the Fund prior
to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the Investment Fund(s) selected and the bank wire control number assigned
to you):
The Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, NY 10081-1000
ABA# 021000021
DDA# 910-2-732907
Attn: Morgan Stanley Fund, Inc.
Ref: (Investment Fund name, your account number, your account name)
Please call the Fund at 1-800-282-4404 prior to wiring funds.
C. Complete and sign the New Account Application and mail it to the address
shown thereon. Purchase orders for shares of the Money Market Funds which
are received and accepted no later than 12:00 p.m. (Eastern Time) on any
day that the New York Stock Exchange (the "NYSE") and Federal Reserve Banks
are open for business (a "Business Day") will be effective, and shares will
be purchased at the offering price in effect, as of 12:00 p.m. (Eastern
Time) the same day as long as CGFSC, the Fund's transfer agent (the
"Transfer Agent") receives payment in Federal Funds prior to the close of
trading hours on the NYSE (currently 4:00 p.m. Eastern Time.) Purchase
orders received after 12:00 p.m. (Eastern Time) and prior to 4:00 p.m.
(Eastern Time), on any Business Day for which payment in Federal Funds has
been received by 4:00 p.m. (Eastern Time), will be effective, and shares
will be purchased at the offering price in effect, as of 4:00 p.m. (Eastern
Time) the same day.
Federal Funds purchase orders will be accepted only on a day on which the
NYSE and Federal Reserve Banks are open for business. Your bank may charge
a service fee for wiring funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. With respect to investment in the Money Market Fund, prior to such
conversion, an investor's money will not be invested and, therefore, will not
be earning dividends. The timing of effectiveness of purchase of shares and
receipt of dividends is subject to the same timing considerations as
described above with respect to purchase by Federal Funds wire and depends on
when payment in Federal Funds is received. Your bank may charge a service fee
for wiring funds.
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ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment $100,
except for IRAs, for which the minimum additional investment is $50, and
automatic reinvestment of dividends and capital gains distributions, for which
there is no minimum) by purchasing shares through your Participating Dealer, by
mailing a check to the Fund (payable to "Morgan Stanley Fund, Inc. --
[Investment Fund name]") at the above address or by wiring monies to PNC Bank,
N.A. (the "Custodian Bank") as outlined above. It is very important that your
account number or wire control number be specified in the letter or wire to
better assure proper crediting to your account. In order to ensure that your
wire orders are invested promptly, you are requested to notify one of the Fund's
representatives (toll-free 1-800-282-4404) prior to the wire.
AUTOMATIC INVESTMENT PLAN
After establishing an account with the Fund, investors may purchase shares
of the Fund through an Automatic Investment Plan, under which an amount
specified by the shareholder equal to at least the applicable minimum for an
investment amount on a monthly basis will be sent to the Transfer Agent from the
investor's bank for investment in the Fund. Investors who are participants in
the Fund's Systematic Withdrawal Plan should not at the same time participate in
the Automatic Investment Plan. Investors interested in the Automatic Investment
Plan or seeking further information should contact a Participating Dealer or
fund representative. Shares to be held in broker street name may not be
purchased through the Automatic Investment Plan.
OTHER PURCHASE INFORMATION
Orders for the purchase of shares of the Money Market Funds become effective
on the Business Day that Federal Funds are received, and the purchase will be
effected at the net asset value next computed after receipt of Federal Funds.
Purchase of shares of the Money Market Funds by check is credited to your
account at the price next determined after receipt of Federal Funds on the day
of receipt and will begin receiving dividends the following day. If you purchase
shares of an Investment Fund directly, you must make payment by check or Federal
Funds to effect your purchase of the shares and obtain the price for the shares
as described above. Purchasing shares of an Investment Fund is different from
placing a trade for securities at a given price and having a certain number of
days in which to make settlement or payment for the securities.
In the interest of economy and convenience and because of the operating
procedures of the Fund, certificates representing shares of the Money Market
Funds will normally not be issued. All shares purchased are confirmed to you and
credited to your account on the Fund's books maintained by the Adviser or its
agents. You will have the same rights and ownership with respect to such shares
as if certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until the Fund's depository bank has
made fully available for withdrawal the check amount used to purchase Fund
shares, which generally will be within 15 days. As a condition of this offering,
if a purchase is canceled due to nonpayment or because your check does not
clear, you will be responsible for any loss the Fund and/or its agents incur. If
you are already a shareholder, the Fund may redeem shares from your account(s)
to reimburse the Fund and/or its agents for any loss. In addition, you may be
prohibited or restricted from making future purchases in the Fund.
FOR ALL OTHER SHAREHOLDERS, INFORMATION ON EACH MONEY MARKET FUND CAN BE
OBTAINED BY CALLING THE TRANSFER AGENT AT 1-800-282-4404.
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REDEMPTION OF SHARES
REDEMPTIONS BY MORGAN STANLEY PRIME RESOURCE ACCOUNT HOLDERS
REDEMPTION PROCEDURES
Redemption orders are effected at the net asset value per share next
determined after receipt of the order in proper form by the Sub-Transfer Agent.
Investors may redeem all or some of their shares in accordance with one of the
procedures described below.
REDEMPTION OF SHARES IN A PRIME RESOURCE ACCOUNT. An investor who
beneficially owns shares may redeem such shares in his Account in accordance
with instructions and limitations pertaining to his Account by contacting his
broker. If such notice is received by the Sub-Transfer Agent by 12:00 noon
(Eastern Time) on any Business Day, the redemption will be effective as of 12:00
noon (Eastern Time) on that day. Payment of the redemption proceeds will be made
after 12:00 noon (Eastern Time) on the day the redemption is effected, provided
that the Custodian Bank is open for business. If the Custodian Bank is not open,
payment will be made on the next bank business day. If the redemption request is
received after 12:00 noon but before 4:00 p.m. (Eastern Time), the redemption
will be effected as of 4:00 p.m. (Eastern Time) on that day and payment of the
redemptions proceeds will be made after 12:00 noon (Eastern Time) on the next
Business Day after the redemption is effected, provided that the Custodian Bank
is open for business. If the Custodian Bank is not open, payment will be made on
the next bank business day. If all shares are redeemed, all accrued but unpaid
dividends on those shares will be paid with the redemption proceeds.
An investor's brokerage firm will also redeem each day a sufficient number
of shares of the Designated Investment Fund to cover debit balances created by
transactions in the Account or instructions for cash disbursements. Investment
Fund shares will be redeemed on the same day that a transaction occurs that
results in such a debit balance or charge.
Each brokerage firm reserves the right to waive or modify criteria for
participation in an Account or to terminate participation in an Account for any
reason.
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REDEMPTION BY CHECK. Upon request, the Fund will provide any Prime Resource
Account Holder with forms of drafts ("checks") payable through PNC Bank, N.A.
(the "Custodian Bank"). These checks may be made payable to the order of anyone.
The minimum amount of a check is $500. An investor wishing to use this check
writing redemption procedure should complete specimen signature cards, and then
forward such signature cards to the investor's broker or in accordance with the
broker's instructions. Upon receipt, the Sub-Transfer Agent will then arrange
for the checks to be honored by the Custodian Bank. Investors who own shares
through an Account should contact their brokers for signature cards. Investors
with joint accounts may elect to have checks honored with a single signature.
Check redemptions will be subject to the Custodian Bank's rules governing
checks. An investor will be able to stop payment on a check redemption. The Fund
or Sub-Transfer Agent may terminate this redemption service at any time, and
shall not incur any liability for honoring checks, for effecting redemptions to
pay checks, or for returning checks which have not been accepted.
When a check is presented to the Bank for clearance, the Bank, as the
investor's agent, will cause the Fund to redeem a sufficient number of full and
fractional shares owned by the investor to cover the amount of the check. This
procedure enables the investor to continue to receive dividends on those shares
equalling the amount being redeemed by check until such time as the check is
presented to the Bank. Checks may not be presented for cash payment at the
offices of the Bank because, under 1940 Act rules, redemptions may be effected
only at the redemption price next determined after the redemption requested is
presented to the Transfer Agent or Sub-Transfer Agent. This limitation does not
affect checks used for the payment of bills or to obtain cash at other banks.
REDEMPTION BY ALL OTHER SHAREHOLDERS
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until the Fund's depository bank has made fully
available for withdrawal the check amount used to purchase Fund shares, which
generally will be within 15 days. The Fund will redeem shares of each of the
Money Market Funds at its next determined net asset value. Shares of an
Investment Fund may be redeemed by mail or telephone.
Redemption of shares held in broker street name may not be accomplished by
mail or telephone as described below. Shares held in broker street name may be
redeemed only by contacting your Participating Dealer.
BY MAIL
The Money Market Funds will redeem their shares at the net asset value next
determined after your request is received, if your request is received in "good
order" by the Transfer Agent. Your request should be addressed to Chase Global
Funds Services Company, P.O. Box 2798, Boston, Massachusetts 02208-2798, except
that deliveries by overnight courier should be addressed to Morgan Stanley Fund,
Inc. c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment with stock
certificate, if any, specifying the number of shares or dollar amount to be
redeemed, signed by all registered owners of the shares in the exact names
in which they are registered;
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(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with their Participating Dealers or with a Fund representative.
BY TELEPHONE
Unless you have elected on the New Account Application or on a separate form
supplied by the Transfer Agent not to utilize the telephone redemption
privileges, you or your Participating Dealer can request a redemption of your
shares by calling the Fund and requesting the redemption proceeds be mailed to
you or wired to your bank. Please contact one of the Fund's representatives for
further details. In times of drastic market conditions, the telephone redemption
option may be difficult to implement. If you experience difficulty in making a
telephone redemption, your request may be made by mail or overnight courier, and
it will be implemented at the net asset value next determined after it is
received. The Fund and the Fund's Transfer Agent will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
These procedures include requiring the investor to provide certain personal
identification information at the time an account is opened and prior to
effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to provide
additional telecopied written instructions of such transaction requests. The
Fund or the Transfer Agent may be responsible for losses, liabilities, costs or
expenses for acting upon telephone transactions if procedures are not followed
to confirm that such transactions are genuine.
FOR SHARES THAT ARE HELD IN BROKER STREET NAME, YOU CANNOT REQUEST
REDEMPTION BY TELEPHONE OR BY MAIL; SUCH SHARES MAY BE REDEEMED ONLY BY
CONTACTING YOUR PARTICIPATING DEALER.
To change the name of the commercial bank or account designated to receive
redemption proceeds, a written request must be sent to the Transfer Agent at the
address above. Requests to change the bank or account must be signed by each
shareholder and each signature must be guaranteed.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder, other than a Prime Resource Account Holder, of $5,000 or more
of an Investment Fund's shares at the Offering Price (net asset value plus the
sales charge, if any) may provide for the payment from the owner's account of
any requested dollar amount to be paid to the owner or a designated payee
monthly, quarterly, semiannually or annually. The minimum periodic payment is
$100. Shares are redeemed so that the payee will receive payment on
approximately the first of the month. Any income and capital gains dividends
will be automatically reinvested at net asset value on the reinvestment date. A
sufficient number of full and fractional shares will be redeemed to make the
designated payment. Depending upon the size of the payments requested,
redemptions for the purpose of making such payments may result in a gain or loss
for tax purposes and may reduce or even exhaust the shareholder's Fund account.
To protect shareholders and the Fund, if the Systematic Withdrawal Plan is not
established when an account is opened, a signature guarantee is required to
establish a Systematic Withdrawal Plan subsequently if withdrawal payments are
directed to an address other than the address of record, or if a change of
address request has been submitted in the last 30 days. See "Further Redemption
Information" below.
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The right is reserved to amend the Systematic Withdrawal Plan on thirty
days' notice. The plan may be terminated at any time by the investor or the
Fund.
FURTHER REDEMPTION INFORMATION
The Fund will pay for shares redeemed through broker-dealers using
electronic purchase and redemption systems within seven days after receipt of a
redemption request through such system. In other situations, the Fund normally
will make payment for all shares redeemed under this procedure within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form, except that the Fund may delay the
mailing of the redemption check, or a portion thereof, until the Fund's
depository bank has made fully available for withdrawal the check amount used to
purchase Fund shares, which generally will be within 15 days. The Fund may
suspend the right of redemption or postpone the date at times when the NYSE is
closed, or under any emergency circumstances as determined by the SEC.
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Investment Fund to make
payment wholly or partly in cash, the Fund may pay the redemption proceeds in
whole or in part by a distribution-in-kind of readily marketable securities held
by the Money Market Funds in lieu of cash in conformity with applicable rules of
the SEC. Shareholders may incur brokerage charges upon the sale of portfolio
securities so received in payment of redemptions. Due to the relatively high
cost of maintaining smaller accounts, the Fund reserves the right to redeem
shares in any account invested in an Investment Fund having a value of less than
$1,000. The Fund, however, will not redeem shares based solely upon market
reductions in net asset value. If at any time your total investment does not
equal or exceed the stated minimum value, you may be notified of this fact and
you will be allowed at least 60 days to make an additional investment before the
redemption is processed.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Transfer Agent at 1-800-282-4404 for further information. See "Redemption of
Shares" in the Statement of Additional Information.
SHAREHOLDER SERVICES
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to the Transfer Agent, P.O. Box 2798, Boston, Massachusetts
02208-2798. As in the case of redemptions, the written request must be received
in "good order" before any transfer can be made. Shares held in broker street
name, including shares held by Prime Resource Account holders, may be
transferred only by contacting your Participating Dealer.
VALUATION OF SHARES
The net asset value per share of each of the Money Market Funds is
determined at 12:00 p.m. (Eastern Time) and 4:00 p.m. (Eastern Time) on the days
on which the NYSE and the Custodian Bank are open. For the purpose of
calculating the Investment Fund's net asset value per share, securities are
valued by the "amortized cost" method of valuation, which does not take into
account unrealized gains or losses. This involves valuing an
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instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Investment
Fund would receive if it sold the instrument.
PERFORMANCE INFORMATION
From time to time the Money Market Funds may advertise "yield," and may
advertise "effective yield." Yield figures are based on historical performance
and are not intended to indicate future performance. The "yield" of such
Investment Funds refers to the income generated by an investment in the
Investment Funds over a seven-day period and the income generated over the
seven-day period is then "annualized." That is, the amount of income generated
by the investment during that week is assumed to be generated each week over a
52-week period and is shown as a percentage of the investment. The "effective
yield" is calculated similarly but, when annualized, the income earned on an
investment in an Investment Fund is assumed to be reinvested. The "effective
yield" will be slightly higher than the "yield" because of the compounding
effect of this assumed reinvestment. The Tax-Free Money Market Fund may also
quote its "tax-equivalent yield" from time to time. The tax-equivalent yield
shows the level of taxable yield needed to produce an after-tax equivalent to
the Fund's tax-free yield. This is done by increasing the Investment Fund's
yield (calculated as above) by the amount necessary to reflect the payment of
federal income tax at a stated tax rate. For further information concerning
these figures, see "Performance Information" in the Statement of Additional
Information. The Fund may also use comparative performance information from time
to time in marketing Fund shares, including data from Lipper Analytical
Services, Inc. and/or Donoghue's Money Fund Report.
For information on each Fund's seven-day yield call the Transfer Agent at
1-800-282-4404.
DIVIDENDS AND DISTRIBUTIONS
Shareholders will automatically be credited with all dividends and
distributions in additional shares at net asset value, except that, upon written
notice to the Fund or by checking off the appropriate box in the Distribution
Option Section on the New Account Application, a shareholder may elect to
receive dividends and/ or distributions in cash.
For the Money Market Funds, net investment income is computed and dividends
declared as of 1:00 p.m. (Eastern Time) on each day. Such dividends are payable
to Investment Fund shareholders of record as of 12:00 p.m. (Eastern Time) on
that day, if the Fund and the Custodian Bank are open for business. This means
that shareholders whose purchase orders become effective as of 12:00 p.m.
(Eastern Time) receive the dividend for that day and shareholders whose purchase
orders become effective as of 4:00 p.m. (Eastern Time) receive the dividend for
the following day. Dividends declared for Saturdays, Sundays and holidays are
payable to shareholders of record as of 4:00 p.m. (Eastern Time) on the last
preceding day the Fund and the Custodian Bank were open for business. Net
realized gains, if any, after reduction for any available tax loss carry forward
may be distributed annually.
It is an objective of management to maintain the price per share of each
Money Market Fund as computed for the purpose of sales and redemptions at
exactly $1.00. In the event the Directors determine that a deviation from the
$1.00 per share price may exist which may result in a material dilution or other
unfair results to
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investors or existing shareholders, they will take corrective action they regard
as necessary and appropriate, including the sale of instruments from the
Investment Fund prior to maturity to realize gains or losses, shortening average
portfolio maturity, withholding dividends, making a special capital
distribution, or redemptions of shares in kind.
TAXES
TAX STATUS OF THE INVESTMENT FUNDS
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial
or administrative action. See also the tax sections in the Statement of
Additional Information.
No attempt has been made to present a detailed explanation of the federal,
state or local income tax treatment of an Investment Fund or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each Investment Fund is treated as a separate entity for federal income tax
purposes, and thus the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), generally will be applied to each Investment Fund
separately, rather than to the Fund as a whole. Net long-term and short-term
capital gains, net income and operating expenses therefore will be determined
separately for each Investment Fund.
Each Investment Fund intends to qualify for the special tax treatment
afforded "regulated investment companies" ("RICs") under Subchapter M of the
Code so that it will be relieved of federal income tax on that part of its net
investment income and net capital gain (the excess of net long-term capital gain
over net short-term capital loss) which is distributed to its shareholders.
TAX STATUS OF DISTRIBUTIONS
Each Investment Fund distributes substantially all of its net investment
income (including, for this purpose, net short-term capital gain), to its
shareholders. Dividends paid by the Money Market Fund and Government Obligations
Money Market Fund from their respective net investment income will be taxable to
the shareholders of such Investment Fund as ordinary income, whether received in
cash or in additional shares, if the shareholder is subject to tax. Such
dividends paid by an Investment Fund generally will not qualify for the
dividends-received deduction to corporations.
Distributions of net capital gains (i.e., net long-term capital gains in
excess of net short-term capital losses and any available capital loss
carryforward) are taxable to shareholders subject to tax as long-term capital
gains, regardless of how long the shareholder has held the Investment Fund's
shares. Capital gains distributions are not eligible for the corporate
dividends-received deduction. Each Investment Fund will make annual reports to
shareholders of the federal income tax status of all distributions.
The Tax-Free Money Market Fund intends to qualify to pay "exempt interest
dividends" by satisfying the Code's requirement that at the close of each
quarter of its taxable year at least 50% of the value of its total assets
consists of securities the interest on which is exempt from federal income tax.
So long as this and certain other requirements are satisfied, the Investment
Fund's "exempt interest dividends" will be exempt from regular federal income
tax. Investors in this Investment Fund should note, however, that in certain
circumstances such amounts, while exempt from regular federal income tax, are
subject to alternative minimum tax. In addition, this
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Investment Fund may not be an appropriate investment for persons who are
"substantial users" of facilities financed by industrial development or private
activity bonds. See the Statement of Additional Information for a description of
the application of the alternative minimum tax and certain other collateral tax
consequences.
Current federal income tax law limits the types and volume of bonds
qualifying for the federal income tax exemption of interest, which may affect
the ability of the Tax-Free Money Market Fund to purchase sufficient amounts of
tax-exempt securities to qualify to pay "exempt interest dividends." Investors
should note that interest on indebtedness incurred or continued by shareholders
to purchase or carry shares of the Tax-Free Money Market Fund will not be
deductible for federal income tax purposes.
The Tax-Free Money Market Fund will determine annually the percentages of
its net investment income which are exempt form the regular federal income tax
and will apply such percentages uniformly to all distributions declared from net
investment income during that year. These percentages may differ significantly
form the actual percentages for any particular day.
Shareholders may also be subject to state and local taxes on distributions
from the Fund. Shareholders are advised to consult their own tax advisers with
respect to tax consequences to them of an investment in the Fund.
Dividends and other distributions declared in October, November and December
by an Investment Fund payable as of a record date in such month and paid at any
time during January of the following year are treated as having been paid by an
Investment Fund and received by the shareholders on December 31 of the year
declared.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS AND SHAREHOLDERS SHOULD CONSULT THEIR
OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT
IN AN INVESTMENT FUND.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on August 14, 1992. The
Amended Articles of Incorporation currently permit the Fund to issue 21.75
billion shares of common stock, par value $.001 per share. Pursuant to the
Fund's By-Laws, the Board of Directors may increase the number of shares the
Fund is authorized to issue without the approval of the shareholders of the
Fund. The Board of Directors has the power to designate one or more classes of
shares of common stock and to classify and reclassify any unissued shares with
respect to such classes.
The shares of the Investment Funds, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no preemptive rights. The shares of the Investment
Funds have non-cumulative voting rights, which means that the holders of more
than 50% of the shares voting for the election of Directors can elect 100% of
the Directors if they choose to do so. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act. A Director may be removed by shareholders at a special
meeting called upon written request of shareholders owning at least 10% of
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the outstanding shares of the Fund. Any person or organization owning 25% or
more of the outstanding shares of an Investment Fund may be presumed to
"control" (as that term is defined in the 1940 Act) such Investment Fund.
REPORTS TO SHAREHOLDERS
The Fund and/or its agents will send to shareholders of the Fund annual and
semi-annual reports; the financial statements appearing in annual reports are
audited by independent accountants. Shareholder inquiries for Prime Resource
Accounts should be directed to the Sub-Transfer Agent, PFPC, Inc., P.O. Box
8950, Delaware 19899. Shareholder inquiries for all other accounts should be
directed to the Transfer Agent, Chase Global Funds Services Company, P.O. Box
2798, Boston, Massachusetts 02208-2798.
CUSTODIAN
PNC Bank, N.A. acts as custodian for each of the Money Market Funds. For
more information on the Fund's custodians, see "General Information -- Custody
Arrangements" in the Statement of Additional Information.
DIVIDEND DISBURSING, TRANSFER AGENT AND SUB-TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as dividend disbursing and transfer agent for the
Fund. PFPC, Inc., an indirect wholly-owned subsidiary of PNC Financial Corp., a
multi-bank holding company, serves as sub-transfer agent for Morgan Stanley
Prime Resource Account shareholders. PFPC's address is 400 Bellevue Parkway,
Wilmington, Delaware 19809.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, NY 10036,
serves as independent accountants for the Fund and audits its annual financial
statements.
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
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Fund Expenses........................... 2
Financial Highlights.................... 4
Prospectus Summary...................... 6
Investment Objectives and Policies...... 9
Additional Investment Information....... 12
Investment Limitations.................. 16
Management of the Fund.................. 16
Purchase of Shares...................... 19
Redemption of Shares.................... 23
Shareholder Services.................... 26
Performance Information................. 27
Dividends and Distributions............. 27
Taxes................................... 28
General Information..................... 29
</TABLE>
MORGAN STANLEY
MONEY MARKET FUND
MORGAN STANLEY
TAX-FREE MONEY MARKET FUND
MORGAN STANLEY
GOVERNMENT OBLIGATIONS MONEY
MARKET FUND
PORTFOLIOS OF THE
MORGAN STANLEY
FUND, INC.
COMMON STOCK
($.001 PAR VALUE)
---------------
PROSPECTUS
---------------
INVESTMENT ADVISER
MORGAN STANLEY
ASSET MANAGEMENT INC.
DISTRIBUTOR
MORGANSTANLEY & CO.
INCORPORATED
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<PAGE>
MORGAN STANLEY FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
Morgan Stanley Fund, Inc. (the "Fund") is an open-end management
investment company. The Fund currently consists of seventeen diversified and
non-diversified investment portfolios designed to offer a range of investment
choices. The Fund is designed to provide clients with attractive alternatives
for meeting their investment needs. This Statement of Additional Information
("SAI") addresses information of the Fund applicable to the investment
portfolios listed below (each, an "Investment Fund") (collectively, the
"Investment Funds"). The Morgan Stanley Growth and Income, Morgan Stanley
Japanese Equity, Morgan Stanley European Equity, Morgan Stanley Money
Market, Morgan Stanley Government Obligations Money Market and Morgan Stanley
Tax-Free Money Market Funds are not currently offering shares.
This Statement is not a prospectus but should be read in conjunction with
the Fund's prospectus (the "Prospectus"). To obtain the Prospectus, please call
the Morgan Stanley Fund, Inc. Services Group:
1-800-282-4404
TABLE OF CONTENTS
PAGE
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INVESTMENT OBJECTIVES AND POLICIES. . . . . . . . . . . . . . . . . . . 2
FEDERAL INCOME TAX. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
FEDERAL TAX TREATMENT OF FORWARD. . . . . . . . . . . . . . . . . . . .
CURRENCY CONTRACTS AND EXCHANGE RATE CHANGES. . . . . . . . . . . . . . 16
TAXES AND FOREIGN SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . 17
PURCHASE OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
REDEMPTION OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . 18
INVESTMENT LIMITATIONS. . . . . . . . . . . . . . . . . . . . . . . . . 19
DETERMINING MATURITIES OF CERTAIN INSTRUMENTS . . . . . . . . . . . . . 22
MANAGEMENT OF THE FUND. . . . . . . . . . . . . . . . . . . . . . . . . 23
PORTFOLIO TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . 36
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 36
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 53
DESCRIPTION OF SECURITIES AND RATINGS . . . . . . . . . . . . . . . . . 55
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 59
Statement of Additional Information dated September 26, 1996, relating to:
The Prospectuses for the Morgan Stanley Global Fixed Income Fund, Morgan
Stanley Worldwide High Income Fund and Morgan Stanley High Yield Fund,
dated May 1, 1996 (Class A shares, Class B shares and Class C shares)
The Prospectuses for the Morgan Stanley American Value Fund, Morgan
Stanley Aggressive Equity Fund and Morgan Stanley U.S. Real Estate Fund,
dated May 1, 1996 (Class A shares, Class B shares and Class C shares)
The Prospectuses for the Morgan Stanley Global Equity Allocation Fund,
Morgan Stanley Asian Growth Fund, Morgan Stanley Emerging Markets Fund,
Morgan Stanley Latin American Fund, Morgan Stanley International Magnum
Fund and Morgan Stanley Japanese Equity Fund, dated May 1, 1996 (Class A
shares, Class B shares and Class C shares).
The Prospectuses for the Morgan Stanley Money Market Fund, Morgan Stanley
Tax-Free Money Market Fund and Morgan Stanley Government Obligations
Money Market Fund, dated September 26, 1996.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the investment objectives and policies
set forth in the Fund's Prospectus with respect to the Fund's seventeen
Investment Funds: Morgan Stanley Global Fixed Income Fund, Morgan Stanley
Worldwide High Income Fund, Morgan Stanley High Yield Fund, Morgan Stanley
American Value Fund, Morgan Stanley Aggressive Equity Fund, Morgan Stanley
U.S. Real Estate Fund, Morgan Stanley Global Equity Allocation Fund, Morgan
Stanley Asian Growth Fund, Morgan Stanley Emerging Markets Fund, Morgan
Stanley Latin American Fund, Morgan Stanley International Magnum Fund, Morgan
Stanley Japanese Equity Fund, Morgan Stanley Growth and Income Fund, Morgan
Stanley European Equity Fund (collectively, the "Non-Money Funds") and Morgan
Stanley Money Market Fund, Morgan Stanley Tax-Exempt Money Market Fund and
Morgan Stanley Government Obligations Money Market Fund (collectively, the
"Money Market Funds") (referred to herein respectively as the "Global Fixed
Income Fund," "Worldwide High Income Fund," "High Yield Fund," "American
Value Fund," "Aggressive Equity Fund," "U.S. Real Estate Fund," "Global
Equity Allocation Fund," "Asian Growth Fund," "Emerging Markets Fund," "Latin
American Fund," "International Magnum Fund," "Japanese Equity Fund," "Growth
and Income Fund," "European Equity Fund," "Money Market Fund," "Tax-Exempt
Money Market Fund" and "Government Obligations Money Market Fund.").
EQUITY-LINKED SECURITIES
The Growth and Income and Aggressive Equity Funds may invest in equity-
linked securities, including, among others, PERCS, ELKS, or LYONs, which are
securities that are convertible into, or the value of which is based upon the
value of, equity securities upon certain terms and conditions. The amount
received by an investor at maturity of such securities is not fixed but is based
on the price of the underlying common stock. It is impossible to predict
whether the price of the underlying common stock will rise or fall. Trading
prices of the underlying common stock will be influenced by the issuer's
operational results, by complex, interrelated political, economic, financial or
other factors affecting the capital markets, the stock exchanges on which the
underlying common stock is traded and the market segment of which the issuer is
a part. It is not possible to predict how equity-linked securities will trade
in the secondary market or whether such market will be liquid or illiquid. The
following are three examples of equity-linked securities. The Investment Fund
may invest in the securities described below or other similar equity-linked
securities.
There are certain risks of loss of principal in connection with investing
in equity-linked securities, as described in the following examples of certain
equity-linked securities. Preferred Equity Redemption Cumulative Stock ("PERCS")
as described in "Additional Investment Information" in the Prospectus will
convert into common stock within three years regardless of the price at
which the common stock trades. If the common stock is trading at a price that is
at or below the cap, the Investment Fund receives one share of common stock for
each PERCS share. If the common stock is trading at a price that is above the
cap, the Investment Fund receives less than one share, with the conversion ratio
adjusted so that the market value of the common stock received by the Investment
Fund equals the cap. Accordingly, the Investment Fund is subject to the risk
that if the price of the common stock is above the cap price at the maturity of
the PERCS, the Investment Fund will lose the amount of the difference between
the price of the common stock and the cap. Such a loss could substantially
reduce the Investment Fund's initial investment in the PERCS and any dividends
that were paid on the PERCS. PERCS also present risks based on payment
expectations. If a PERCS issuer redeems the PERCS, the Investment Fund may have
to replace the PERCS with a lower yielding security, resulting in a decreased
return for investors.
The principal amount that Equity-Linked Securities ("ELKS") holders receive
at maturity, as described in "Additional Investment Information" in the
Prospectus, is based on the price of underlying common stock. If the common
stock is trading at a price that is at or below the cap, the Investment Fund
receives for each ELKS share an amount equal to the average price of the common
stock. If the common stock is trading at a price that is above the cap, the
Investment Fund receives the cap amount. Accordingly, the Investment
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Fund is subject to the risk that if the price of the common stock is above the
cap price at the maturity of the ELKS, the Investment Fund will lose the amount
of the difference between the price of the common stock and the cap. Such a
loss could substantially reduce the Investment Fund's initial investment in the
ELKS and any dividends that were paid on the ELKS. An additional risk is that
the issuer may "reopen" the issue of ELKS and issue additional ELKS at a later
time or issue additional debt securities or other securities with terms similar
to those of the ELKS, and such issuances may affect the trading value of the
ELKS.
The principal amount that Liquid Yield Option Notes ("LYONs") holders
receive for LYONs, other than the lower-than-market yield at maturity, as
described in "Additional Investment Information" in the Prospectus, is based on
the price of underlying common stock. If the common stock is trading at a price
that is at or below the purchase price of the LYONs plus accrued original issue
discount, the Investment Fund receives only the lower-than-market yield,
assuming the LYONs are not in default. If the common stock is trading at a
price that is above the purchase price of the LYON's plus accrued original
issue discount, the Investment Fund will receive an amount above the
lower-than-market yield on the LYONs, based on how well the underlying common
stock does. LYONs also present risks based on payment expectations. If a
LYON's issuer redeems the LYONs, the Investment Fund may have to replace the
LYONs with a lower yielding security, resulting in a decreased return for
investors.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The U.S. dollar value of the assets of the Global Equity Allocation, Global
Fixed Income, Asian Growth, Emerging Markets, Latin American, European Equity,
Japanese Equity and International Magnum Funds and to the extent they invest in
foreign currencies, the American Value, Aggressive Equity, Growth and Income,
Worldwide High Income and High Yield Funds may be affected favorably or
unfavorably by changes in foreign currency exchange rates and exchange control
regulations, and the Investment Funds may incur costs in connection with
conversions between various currencies. The Investment Funds will conduct their
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 foreign currency exchange contract (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 banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for such
trades.
The Investment Funds may enter into forward contracts in several
circumstances. When an Investment Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when an Investment
Fund anticipates the receipt in a foreign currency of dividends or interest
payments on a security which it holds, the Investment Fund may desire to
"lock-in" the U.S. dollar price of the security or the U.S. dollar equivalent of
such dividend or interest payment, as the case may be. By entering into a
forward contract for a fixed amount of dollars, for the purchase or sale of the
amount of foreign currency involved in the underlying transactions, the
Investment Fund will be able to protect itself against a possible loss resulting
from an adverse change in the relationship between the U.S. dollar and the
subject foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.
Additionally, when any of these Investment Funds anticipates that the
currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar, it may enter into a forward contract for a fixed amount
of dollars, to sell the amount of foreign currency approximating the value of
some or all of such Investment Fund's securities denominated in such foreign
currency. The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible since the future value
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<PAGE>
of securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date on which the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution of
a short-term hedging strategy is highly uncertain. An Investment Fund will not
enter into such forward contracts or maintain a net exposure to such contracts
where the consummation of the contracts would obligate such Investment Fund to
deliver an amount of foreign currency in excess of the value of such Investment
Fund's securities or other assets denominated in that currency.
Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the long-term investment decisions made
with regard to overall diversification strategies. However, the management of
the Fund believes that it is important to have the flexibility to enter into
such forward contracts when it determines that the best interests of the
performance of each Investment Fund will thereby be served. Except in
circumstances where segregated accounts are not required by the 1940 Act and
the rules adopted thereunder, the Fund's Custodian will place cash or liquid
securities into a segregated account of an Investment Fund in an amount equal
to the value of such Investment Fund's total assets committed to the
consummation of forward contracts. If the value of the securities placed in
the segregated account declines, additional cash or securities will be placed
in the account on a daily basis so that the value of the account will be at
least equal to the amount of such Investment Fund's commitments with respect
to such contracts.
The Investment Funds generally will not enter into a forward contract with
a term of greater than one year. At the maturity of a forward contract, an
Investment Fund may either sell the portfolio security and make delivery of the
foreign currency, or it may retain the security and terminate its contractual
obligation to deliver the foreign currency by purchasing an "offsetting"
contract with the same currency trader obligating it to purchase, on the same
maturity date, the same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for an Investment Fund to purchase additional foreign currency
on the spot market (and bear the expense of such purchase) if the market value
of the security is less than the amount of foreign currency that such Investment
Fund is obligated to deliver and if a decision is made to sell the security and
make delivery of the foreign currency.
If an Investment Fund retains the portfolio security and engages in an
offsetting transaction, such Investment Fund will incur a gain or a loss (as
described below) to the extent that there has been movement in forward contract
prices. Should forward prices decline during the period between an Investment
Fund entering into a forward contract for the sale of a foreign currency and the
date it enters into an offsetting contract for the purchase of the foreign
currency, such Investment Fund will realize a gain to the extent that the price
of the currency it has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should forward prices increase, such Investment Fund would
suffer a loss to the extent that the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The Investment Funds are not required to enter into such transactions with
regard to their foreign currency-denominated securities. It also should be
realized that this method of protecting the value of portfolio securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange which one can achieve at some future point in time. Additionally,
although such contracts tend to minimize the risk of loss due to a decline in
the value of the hedged currency, at the same time, they tend to limit any
potential gain which might result should the value of such currency increase.
FUTURES CONTRACTS
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The Emerging Markets, Latin American, European Equity, International
Magnum, American Value, Aggressive Equity, Growth and Income and Worldwide High
Income Funds may enter into securities index futures contracts and options on
securities index futures contracts to a limited extent and the Latin American
Fund may utilize appropriate interest rate futures contracts and options on
interest rate futures contracts to a limited extent. In addition, the Emerging
Markets, Latin American, European Equity, American Value, Aggressive Equity,
Growth and Income and Worldwide High Income Funds may enter into foreign
currency futures contracts and options thereon. The U.S. Real Estate Fund may
enter into futures contracts and options on futures contracts for the purpose of
remaining fully invested and reducing transaction costs. The High Yield and
U.S. Real Estate Funds may also enter into futures contracts for hedging
purposes. No Portfolio will enter into futures contracts or options thereon for
speculative purposes. Futures contracts provide for the future sale by one
party and purchase by another party of a specified amount of a specific security
or a specific currency at a specified future time and at a specified price.
Futures contracts, which are standardized as to maturity date and underlying
financial instrument, index or currency, traded in the United States are traded
on national futures exchanges. Futures exchanges and trading are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"),
a U.S. government agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currencies, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold" or "selling" a
contract previously "purchased") in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold.
The Emerging Markets, Latin American, European Equity, American Value,
Aggressive Equity, Growth and Income and Worldwide High Income Funds may
purchase and sell indexed financial futures contracts. An index futures
contract is an agreement to take or make delivery of an amount of cash equal to
the difference between the value of the index at the beginning and at the end of
the contract period. Successful use of index futures will be subject to the
Adviser's ability to predict correctly movements in the direction of the
relevant securities market. No assurance can be given that the Adviser's
judgment in this respect will be correct.
The Emerging Markets, Latin American, European Equity, American Value,
Aggressive Equity, Growth and Income and Worldwide High Income Funds may sell
indexed financial futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of securities in its
portfolio that might otherwise result. If the Adviser believes that a portion
of the Investment Fund assets should be invested in emerging country securities
but such investments have not been fully made and the Adviser anticipates a
significant market advance, the Investment Fund may purchase index futures in
order to gain rapid market exposure that may in part or entirely offset
increases in the cost of securities that it intends to purchase. In a
substantial majority of these transactions, the Investment Fund will purchase
such securities upon termination of the futures position but, under unusual
market conditions, a futures position may be terminated without the
corresponding purchase of such securities.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold for prices that
may range upward from less than 5% of the value of the contract being traded.
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After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of an
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Investment
Fund expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the underlying securities with futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from market
fluctuations. The Investment Funds intend to use futures contracts only for
hedging purposes.
Regulations of the CFTC applicable to the Investment Funds require that all
futures transactions constitute bona fide hedging transactions or transactions
for other purposes so long as the aggregate initial margin and premiums required
for such transaction will not exceed 5% of the liquidation value of the
Investment Fund's portfolio, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into. The Investment
Funds will only sell futures contracts to protect securities owned against
declines in price or purchase contracts to protect against an increase in the
price of securities intended for purchase. As evidence of this hedging interest,
the Investment Funds expect that approximately 75% of their respective futures
contracts will be "completed"; that is, equivalent amounts of related securities
will have been purchased or are being purchased by the Investment Fund upon sale
of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control an Investment Fund's exposure to market fluctuations,
the use of futures contracts may be a more effective means of hedging this
exposure. While the Investment Funds will incur commission expenses in both
opening and closing out futures positions, these costs are lower than
transaction costs incurred in the purchase and sale of the underlying
securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. The Emerging Markets, Latin
American, European Equity, American Value, Aggressive Equity, Growth and Income
and Worldwide High Income Funds will not enter into futures contract
transactions to the extent that, immediately thereafter, the sum of its initial
margin deposits on open contracts exceeds 5% of the market value of its total
assets. In addition, an Investment Fund will not enter into futures contracts
to the extent that its outstanding obligations to purchase securities under
futures contracts and options would exceed 20% of its total assets.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, an Investment Fund would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if an Investment
Fund has insufficient cash, it may have to sell portfolio securities to meet its
daily margin requirement at a time when it may be disadvantageous to do so. In
addition, the Investment Fund may be required to make delivery of the
instruments underlying futures contracts it holds. The inability to close
options and futures positions also could have an adverse impact on the
Investment Fund's ability to effectively hedge.
Each Investment Fund will minimize the risk that it will be unable to close
out a futures contract by only entering into futures for which there appears to
be a liquid secondary market.
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The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if, at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the Investment
Funds engage in futures strategies only for hedging purposes, the Adviser does
not believe that the Investment Funds are subject to the risks of loss
frequently associated with futures transactions. The Investment Fund would
presumably have sustained comparable losses if, instead of the futures contract,
the Investment Fund had invested in the underlying security or currency and sold
it after the decline.
Utilization of futures transactions by an Investment Fund does involve the
risk of imperfect or no correlation where the securities underlying futures
contracts have different maturities than the portfolio securities or currencies
being hedged. It is also possible that an Investment Fund could both lose money
on futures contracts and also experience a decline in value of its portfolio
securities. There is also the risk of loss by an Investment Fund of margin
deposits in the event of bankruptcy of a broker with whom the Investment Fund
has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
GLOBAL INVESTING
Global investment diversification can lower the risk that occurs from
fluctuations in any one market. Global stock and bond markets often do not
parallel the performance of each other which means that, over time, diversifying
investments across several countries can help reduce portfolio volatility while
increasing returns.
U.S. stock and bond markets now comprise less than half of the total
securities available worldwide and investors who limit their investments to the
U.S. ignore over 80% of the world's blue chip companies. Participating in global
markets helps the astute investor take advantage of opportunities worldwide.
Over the past 10 years, through 1994, the U.S. ranked in the top five performing
stock markets only two times according to Morgan Stanley Capital International.
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Worldwide High Income Fund may invest in fixed and floating rate loans
("Loans") arranged through private negotiations between an issuer of sovereign
debt obligations and one or more financial institutions ("Lenders"). The
Investment Fund's investments in Loans are expected in most instances to be in
the form of participations in Loans ("Participations") and assignments of all or
a portion of Loans ("Assignments") from third parties. The Investment Fund will
have the right to receive payments of principal, interest and any fees to which
it is entitled only from the Lender selling the Participations and only upon
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receipt by the Lender of the payments from the borrower. In the event of the
insolvency of the Lender selling a Participation, the Investment Fund may be
treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower. Certain Participations may be
structured in a manner designed to avoid purchasers of the Participations
being subject to the credit risk of the Lender with respect to the
Participations, but even under such a structure, in the event of the Lender's
insolvency, the Lender's servicing of the Participations may be delayed and
the assignability of the Participations impaired. The Investment Fund will
acquire Participations only if the Lender interpositioned between the
Investment Fund and the borrower is determined by the Adviser to be
creditworthy.
When the Investment Fund purchases Assignments from Lenders it will
acquire direct rights against the borrower on the Loan. Because Assignments
are arranged through private negotiations between potential assignees and
potential assignors, however, the rights and obligations acquired by the
Investment Fund as the purchaser of an Assignment may differ from, and be
more limited than, those held by the assigning Lender. Because there is no
liquid market for such securities, the Investment Fund anticipates that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market may have an adverse impact on the
value of such securities and the Investment Fund's ability to dispose of
particular Assignments or Participations when necessary to meet the
Investment Fund's liquidity needs or in response to a specific economic event
such as a deterioration in the creditworthiness of the borrower. The lack of
a liquid secondary market for Assignments and Participations also may make it
more difficult for the Investment Fund to assign a value to these securities
for purposes of valuing the Investment Fund's portfolio and calculating its
net asset value.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX
The International Magnum Fund seeks to achieve its objective by investing
primarily in equity securities of non-U.S. issuers in accordance with the EAFE
country (defined below) weightings determined by the Adviser. After
establishing regional allocation strategies, the Adviser then selects equity
securities among issuers of a region. The Investment Fund invests in countries
(each an "EAFE country") comprising the Morgan Stanley Capital International
EAFE (Europe, Australia and the Far East) Index (the "EAFE Index.")
The EAFE Index is one of seven International Indices, twenty National
Indices and thirty-eight Industry Indices making up the Morgan Stanley Capital
International Indices. The Morgan Stanley Capital International EAFE Index is
based on the share prices of 1,066 companies listed on the stock exchanges of
Europe, Australia, New Zealand and the Far East. "Europe" includes Austria,
Belgium, Denmark, Finland, France, Germany, Italy, The Netherlands, Norway,
Spain, Sweden, Switzerland and the United Kingdom. "Far East" includes Japan,
Hong Kong and Singapore/Malaysia.
MORGAN STANLEY CAPITAL INTERNATIONAL WORLD INDEX
The investment objective of the Global Equity Allocation Fund is to
provide long-term capital appreciation by investing in equity securities of
U.S. and non-U.S. issuers in accordance with country weightings determined by
the Adviser and with stock selection within each country designed to
replicate a broad market index. The Adviser determines country allocations
for the Investment Fund on an ongoing basis within policy ranges dictated by
each country's market capitalization and liquidity. The Investment Fund will
invest in the United States and industrialized countries throughout the world
that comprise the Morgan Stanley Capital International World Index (the
"World Index"). The World Index is one of seven International Indices, twenty
National Indices and thirty-eight International Industry Indices making up
the Morgan Stanley Capital International Indices.
The World Index is based on the share prices of companies listed on the
stock exchanges of Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Hong Kong, Italy, Japan, the Netherlands, New Zealand, Norway,
Singapore/Malaysia, Spain, Sweden, Switzerland, the United Kingdom and the
United States.
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OPTIONS ON FOREIGN CURRENCIES
The Emerging Markets, Latin American, European Equity, Aggressive Equity,
Growth and Income and Worldwide High Income Funds may attempt to accomplish
objectives similar to those described above with respect to forward foreign
currency exchange contracts and futures contracts for currency by means of
purchasing put or call options on foreign currencies on exchanges. A put option
gives the Investment Fund the right to sell a currency at the exercise price
until the expiration of the option. A call option gives the Investment Fund the
right to purchase a currency at the exercise price until the expiration of the
option.
OPTIONS TRANSACTIONS
The Emerging Markets, Latin American, European Equity, International
Magnum, Aggressive Equity, U.S. Real Estate, Growth and Income and Worldwide
High Income Funds may write (i.e., sell) covered call options which give the
purchaser the right to buy the underlying security covered by the option from
the Investment Fund at the stated exercise price. A "covered" call option means
that so long as an Investment Fund is obligated as the writer of the option, it
will own (i) the underlying securities subject to the option, or (ii) securities
convertible or exchangeable without the payment of any consideration into the
securities subject to the option. As a matter of operating policy, the value of
the underlying securities on which options will be written at any one time will
not exceed 5% of the total assets of an Investment Fund.
An Investment Fund will receive a premium from writing call options, which
increases the Investment Fund's return on the underlying security in the event
the option expires unexercised or is closed out at a profit. By writing a call,
an Investment Fund will limit its opportunity to profit from an increase in the
market value of the underlying security above the exercise price of the option
for as long as the Investment Fund's obligation as writer of the option
continues. Thus, in some periods an Investment Fund will receive less total
return and in other periods greater total return from writing covered call
options than it would have received from its underlying securities had it not
written call options.
PORTFOLIO TURNOVER
It is anticipated that the annual portfolio turnover rate for each of
the Investment Funds, except the Growth and Income and Aggressive Equity
Funds, will not exceed 100%, although in any particular year, market
conditions could result in portfolio activity at a greater or lesser rate
than anticipated. High rates of portfolio turnover necessarily result in
correspondingly heavier brokerage and portfolio trading costs which are paid
by the Investment Funds. In addition to portfolio trading costs, higher rates
of portfolio turnover may result in the realization of capital gains, See
"Taxes" in the Prospectus for more information on taxation. The portfolio
turnover rate for a year is the lesser of the value of the purchases or sales
for the year divided by the average monthly market value of the Investment
Fund for the year, excluding securities with maturities of one year or less.
The rate of portfolio turnover will not be a limiting factor when an
Investment Fund deems it appropriate to purchase or sell securities for the
portfolio. However, the U.S. federal tax requirement that an Investment Fund
derive less than 30% of its gross income from the sale or disposition of
securities held less than three months may limit the Investment Fund's
ability to dispose of its securities. See "Federal Income Tax." The tables
set forth in the Prospectus under "Financial Highlights" present each of the
non-money market Investment Funds historical portfolio turnover ratios.
SECURITIES LENDING
Each Investment Fund may lend its investment securities to qualified
institutional investors who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures
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to deliver securities or completing arbitrage operations. By lending its
investment securities, an Investment Fund attempts to increase its net
investment income through the receipt of interest on the loan. Any gain or loss
in the market price of the securities loaned that might occur during the term of
the loan would be for the account of the Investment Fund. Each Investment Fund
may lend its investment securities to qualified brokers, dealers, domestic and
foreign banks or other financial institutions, so long as the terms, structure
and the aggregate amount of such loans are not inconsistent with the Investment
Company Act of 1940, as amended (the "1940 Act"), or the Rules and Regulations
or interpretations of the Securities and Exchange Commission (the "SEC")
thereunder, which currently require that (a) the borrower pledge and maintain
with the Investment Fund collateral consisting of cash, an irrevocable letter of
credit issued by a domestic U.S. bank, or securities issued or guaranteed by the
U.S. Government having a value at all times not less than 100% of the value of
the securities loaned, including accrued interest, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the Investment Fund at any time, and (d) the Investment Fund
receive reasonable interest on the loan (which may include the Investment Fund
investing any cash collateral in interest bearing short-term investments), any
distributions on the loaned securities and any increase in their market value.
There may be risks of delay in recovery of the securities or even loss of rights
in the collateral should the borrower of the securities fail financially.
However, loans will only be made to borrowers deemed by Morgan Stanley Asset
Management Inc. (the "Adviser" or "MSAM") to be of good standing and when, in
the judgment of the Adviser, the consideration which can be earned currently
from such securities loans justifies the attendant risk. All relevant facts and
circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Directors.
At the present time, the Staff of the SEC does not object if an investment
company pays reasonable negotiated fees in connection with loaned securities, so
long as such fees are set forth in a written contract and approved by the
investment company's Directors. In addition, voting rights may pass with the
loaned securities, but if a material event will occur affecting an investment on
loan, the loan must be called and the securities voted.
REVERSE REPURCHASE AGREEMENTS. A reverse repurchase agreement involves
the sale of securities held by an Investment Fund pursuant to the Investment
Fund's agreement to repurchase the securities at an agreed upon price, date
and rate of interest. Such agreements are considered to be borrowings under
the Investment Company Act of 1940, as amended (the "1940 Act"). While
reverse repurchase transactions are outstanding, the Investment Funds will
maintain in a segregated account cash or liquid securities of an amount at
least equal to the market value of the securities, plus accrued interest,
subject to the agreement.
VARIABLE RATE DEMAND INSTRUMENTS. Variable rate demand instruments held
by each Money Market Fund may have maturities of more than 397 days,
provided: (i) the Investment Fund is entitled to the payment of principal at
any time, or during specified intervals not exceeding 397 days, upon giving
the prescribed notice (which may not exceed 30 days), and (ii) the rate of
interest on such instruments is adjusted at periodic intervals which may
extend up to 397 days. In determining the weighted average maturity of an
Investment Fund and whether a variable rate demand instrument has a remaining
maturity of 397 days or less, each instrument will be deemed by the
Investment Fund to have a maturity equal to the longer of the period
remaining until its next interest rate adjustment or the period remaining
until the principal amount can be recovered through demand. In determining
whether an unrated variable rate demand instrument is of comparable quality
at the time of purchase to instruments rated "high quality," the Advisor will
follow guidelines adopted by the Fund's Board of Directors.
FIRM COMMITMENTS. Firm commitments for securities include "when issued"
and delayed delivery securities purchased for delivery beyond the normal
settlement date at a stated price and yield. While an Investment Fund has firm
commitments outstanding, the Investment Fund will maintain in a segregated
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account cash or liquid securities of an amount at least equal to the purchase
price of the securities to be purchased. Normally, the custodian for an
Investment Fund will set aside portfolio securities to satisfy a purchase
commitment and, in such a case, an Investment Fund may be required
subsequently to place additional assets in the separate account in order to
ensure that the value of the account remains equal to the amount of such
Investment Fund's commitment. It may be expected that a non-money market
Investment Fund's net assets will fluctuate to a greater degree when it sets
aside portfolio securities to cover such purchase commitments than when it
sets aside cash. Because an Investment Fund's liquidity and ability to
manage its portfolio might be affected when it sets aside cash or portfolio
securities to cover such purchase commitments, it is expected that
commitments to purchase "when issued" securities will not exceed 25% of the
value of a Money Market Fund's total assets absent unusual market conditions.
When an Investment Fund engages in when-issued transactions, it relies on
the seller to consummate the trade. Failure of the seller to do so may
result in an Investment Fund's incurring a loss or missing an opportunity to
obtain a price considered to be advantageous.
STAND-BY COMMITMENTS. An Investment Fund may enter into stand-by
commitments with respect to obligations issued by or on behalf of states,
territories, and possessions of the United States, the District of Columbia, and
their political subdivisions, agencies, instrumentalities and authorities
(collectively, "Municipal Obligations") held in its portfolio. Under a stand-by
commitment, a dealer would agree to purchase, at an Investment Fund's option, a
specified Municipal Obligation at its amortized cost value to the Investment
Fund plus accrued interest, if any. Stand-by commitments may be exercisable by
an Investment Fund at any time before the maturity of the underlying Municipal
Obligations and may be sold, transferred or assigned only with the instruments
involved.
The Investment Funds expect that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, an Investment Fund may pay for a stand-by commitment
either separately in cash or by paying a higher price for portfolio securities
which are acquired subject to the commitment (thus reducing the yield to
maturity otherwise available for the same securities). The total amount paid in
either manner for outstanding stand-by commitments held by an Investment Fund
will not exceed 1/2 of 1% of the value of that Investment Fund's total assets
calculated immediately after each stand-by commitment is acquired.
The Investment Funds intend to enter into stand-by commitments only with
dealers, banks and broker-dealers which, in the Advisor's opinion, present
minimal credit risks and otherwise satisfy applicable quality standards. The
Investment Funds' reliance upon the credit of these dealers, banks and
broker-dealers will be secured by the value of the underlying Municipal
Obligations that are subject to the commitment.
The Investment Funds will acquire stand-by commitments solely to facilitate
portfolio liquidity and do not intend to exercise their right thereunder for
trading purposes. The acquisition of a stand-by commitment will not affect the
valuation or assumed maturity of the underlying Municipal Obligation which will
continue to be valued in accordance with the amortized cost method. The actual
stand-by commitment will be valued at zero in determining net asset value.
Accordingly, where an Investment Fund pays directly or indirectly for a stand-by
commitment, its cost will be reflected as an unrealized loss for the period
during which the commitment is held by that Investment Fund and will be
reflected in realized gain or loss when the commitment is exercised or expires.
OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN BRANCHES OF U.S.
BANKS. For purposes of the Investment Funds' investment policies with respect
to bank obligations, the assets of a bank or savings institution will be deemed
to include the assets of its domestic and foreign branches. Investments in bank
obligations will include obligations of domestic branches of foreign banks and
foreign branches of domestic banks. Such investments may involve risks that are
different from investments in securities of domestic branches of U.S. banks.
These risks may include future unfavorable political and economic developments,
possible withholding taxes on interest income, seizure or nationalization of
foreign deposits, currency
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controls, interest limitations, or other governmental restrictions which might
affect the payment of principal or interest on the securities held in an
Investment Fund. Additionally, these institutions may be subject to less
stringent reserve requirements and to different accounting, auditing, reporting
and recordkeeping requirements than those applicable to domestic branches of
U.S. banks. The Money Market Funds will invest in U.S. dollar-denominated
obligations of domestic branches of foreign banks and foreign branches of
domestic banks only when the Advisor believes that the risks associated with
such investment are minimal and that all applicable quality standards have been
satisfied.
U.S. GOVERNMENT OBLIGATIONS. Examples of types of U.S. Government
obligations include U.S. Treasury Bills, Treasury Notes and Treasury Bonds and
the obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal
Land Banks, the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration, Federal
National Mortgage Association, Government National Mortgage Association, General
Services Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Maritime Administration, International Bank for Reconstruction and
Development (the "World Bank"), the Asian-American Development Bank and the
Inter-American Development Bank.
REPURCHASE AGREEMENTS. The repurchase price under the repurchase
agreements described in the Prospectus generally equals the price paid by an
Investment Fund plus interest negotiated on the basis of current short-term
rates (which may be more or less than the rate on the securities underlying the
repurchase agreement). Securities subject to repurchase agreements will be held
by the Fund's custodian in the Federal Reserve/Treasury book-entry system or by
another authorized securities depository. Repurchase agreements are considered
to be loans by an Investment Fund under the 1940 Act.
MORTGAGE-RELATED DEBT SECURITIES. Mortgage-related debt securities
represent ownership interests in individual pools of residential mortgage loans.
These securities are designed to provide monthly payments of interest and
principal to the investor. Each mortgagor's monthly payment to his lending
institution on his residential mortgage is "passed-through" to investors.
Mortgage pools consist of whole mortgage loans or participations in loans. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. Lending institutions which originate
mortgages for the pools are subject to certain standards, including credit and
underwriting criteria for individual mortgages included in the pools.
The coupon rate of interest on mortgage-related securities is lower than
the interest rates paid on the mortgages included in the underlying pool, but
only by the amount of the fees paid to the mortgage pooler, issuer, and/or
guarantor of payment of the securities for the guarantee of the services of
passing through monthly payments to investors. Actual yield may vary from the
coupon rate, however, if mortgage-related securities are purchased at a premium
or discount, traded in the secondary market at a premium or discount, or to the
extent that mortgages in the underlying pool are prepaid as noted above. In
addition, interest on mortgage-related securities is earned monthly, rather than
semi-annually as is the case for traditional bonds, and monthly compounding may
tend to raise the effective yield earned on such securities.
FEDERAL INCOME TAX
The following is only a summary of certain additional federal tax
considerations generally affecting the Fund and its shareholders that are not
described in the Fund's prospectus. No attempt is made to present a detailed
explanation of the federal, state or local tax treatment of the Fund or its
shareholders, and the discussion here and in the Fund's prospectuses are not
intended as a substitute for careful tax planning.
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Each Investment Fund is generally treated as a separate corporation for
federal income tax purposes, and thus the provisions of the Internal Revenue
Code of 1986, as amended (the "Code") generally will be applied to each
Investment Fund separately, rather than to the Fund as a whole. Each
Investment Fund intends to qualify and elect to be treated for each taxable
year as a regulated investment company ("RIC") under subchapter M of the Code.
The following discussion of federal income tax consequences is based on
the Code and the regulations issued thereunder as in effect on the date of
this Statement of Additional Information. Legislation and administrative
changes or court decisions may significantly change the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
In order to qualify for the special tax treatment afforded to RICs under
Subchapter M of the Code, each Investment Fund must, among other things, (a)
derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities or foreign currencies, and certain
other related income, including, generally, gains from options, futures and
forward contracts (the "90% Gross Income Test"); (b) derive less than 30% of
its gross income each taxable year from the sale or other disposition of (i)
stocks or securities, (ii) options, futures or forward contracts (other than
options, futures or forward contracts on foreign currencies) and (iii)
foreign currencies (or options, futures or forward contracts on foreign
currencies), but only if not directly related to the Investment Fund's
principal business of investing in stocks or securities (or options and
futures with respect to stocks or securities) held less than three months
(the "Short-Short Gain Test"), and (c) diversify its holdings so that, at the
end of each fiscal quarter of the Fund's taxable year, (i) at least 50% of
the market value of the Investment Fund's total assets is represented by
cash, United States Government securities, securities of other RICs, and
other securities and cash items, with such other securities limited, in
respect of any one issuer, to an amount not greater than 5% of the value of
the Investment Fund's total assets or 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer or two or more
issuers which the [Investment] Fund controls and which are engaged in the
same, similar, or related trades or businesses (other than U.S. Government
securities or the securities of other RICs). For purposes of the 90% gross
income requirement described above, foreign currency gains may be excluded by
regulation from income that qualifies under the 90% requirement.
In addition to the requirements described above, in order to qualify as a
RIC, an Investment Fund must distribute at least 90% of its net investment
income (which generally includes dividends, taxable interest, and net short-term
capital gains less operating expenses) to shareholders. If an Investment Fund
meets all of the RIC requirements, it will not be subject to federal income tax
on any of its net investment income or capital gains that it distributes to
shareholders.
If an Investment Fund fails to qualify as a RIC for any taxable year, it
will be taxable at regular corporate rates. In such case, distributions
(including capital gain distributions) will be taxable as ordinary dividends to
the extent of the Investment Fund's current and accumulated earnings and profits
and such distributions generally will be eligible for the corporate dividends
received deductions.
Each Investment Fund will decide whether to distribute or to retain all or
part of any net capital gains (the excess of net long-term capital gains over
net short-term capital losses) in any year for reinvestment. If any such gains
are retained, the Investment Fund will pay federal income tax thereon, and, if
the Investment Fund makes an election, the shareholders will include such
undistributed gains in their income and shareholders subject to tax will be able
to claim their share of the tax paid by the Investment Fund as a credit against
their federal income tax liability.
A gain or loss realized by a shareholder on the sale or exchange of shares
of an Investment Fund held as a capital asset will be capital gain or loss, and
such gain or loss will be long-term if the holding period
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for the shares exceeds one year, and otherwise will be short-term. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced within the 61-day period beginning 30 days before and
ending 30 days after the shares are disposed of. Any loss realized by a
shareholder on the disposition of shares held 6 months or less is treated as a
long-term capital loss to the extent of any distributions of net long-term
capital gains received by the shareholder with respect to such shares or any
inclusion of undistributed capital gain with respect to such shares.
Each Investment Fund will generally be subject to a nondeductible 4%
federal excise tax to the extent it fails to distribute by the end of any
calendar year at least 98% of its ordinary income and 98% of its capital gain
net income (the excess of short and long-term capital gains over short and
long-term capital losses) for the one-year period ending on October 31 of that
year, plus certain other amounts.
Each Investment Fund is required by federal law to withhold 31% of
reportable payments (which may include dividends, capital gains distributions
and redemptions) paid to shareholders who have not certified on the Account
Registration Form or on a separate form supplied by the Investment Fund, that
the Social Security or Taxpayer Identification Number provided is correct and
that the shareholder is exempt from backup withholding or is not currently
subject to backup withholding.
ADDITIONAL CONSIDERATIONS FOR THE TAX-FREE MONEY MARKET FUND
In order for the Tax-Free Money Market Fund to pay exempt interest
dividends during any taxable year, at the close of each quarter of its taxable
year at least 50% of the value of the Investment Fund's assets must consist of
certain tax-exempt obligations. Exempt-interest dividends distributed to
shareholders are not included in the shareholder's gross income for regular
federal income tax purposes. Exempt-interest dividends may, however, be subject
to the alternative minimum tax (the "AMT") imposed by Section 55 and, in the
case of corporate taxpayers, the Code or the environmental tax (the
"Environmental Tax") imposed by Section 59A of the Code. The AMT and the
Environmental Tax may be imposed in two circumstances. First, exempt-interest
dividends derived from certain "private activity bonds" issued after August 7,
1986, will generally be an item of tax preference (and therefore potentially
subject to the AMT and the Environmental Tax) for both corporate and
non-corporate taxpayers. Second, in the case of exempt-interest dividends
received by corporate shareholders, all exempt-interest dividends, regardless of
when the bonds from which they are derived were issued or whether they are
derived from private activity bonds, will be included in the corporation's
"adjusted current earnings," as defined in Section 56(g) of the Code, in
calculating the corporation's alternative minimum taxable income for purposes of
determining the AMT and the Environmental Tax.
The deduction otherwise allowable to property and casualty insurance
companies for "losses incurred" will be reduced by an amount equal to a portion
of exempt-interest dividends received or accrued during any taxable year.
Foreign corporations engaged in a trade or business in the United States will be
subject to a "branch profits tax" on their "dividend equivalent amount" for the
taxable year, which will include exempt-interest dividends. Certain Subchapter
S corporations may also be subject to taxes on their "passive investment
income," which could include exempt-interest dividends. Up to 85% (depending on
the taxpayer's income) of the Social Security benefits or railroad retirement
benefits received by an individual during any taxable year will be included in
the gross income of such individual depending upon the individual's "modified
adjusted gross income" (which includes exempt-interest dividends).
The Tax-Free Money Market Fund may not be an appropriate investment for
persons (including corporations and other business entities) who are
"substantial users" (or persons related to such users) of facilities financed by
industrial development or private activity bonds. A "substantial user" is
defined generally to include certain persons who regularly use such a facility
in their trade or business. Such entities or persons should consult their tax
advisors before purchasing Shares of this Investment Fund.
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Issuers of bonds purchased by the Tax-Free Money Market Fund (or the
beneficiary of such bonds) may have made certain representations or covenants in
connection with the issuance of such bonds to satisfy certain requirements of
the Code that must be satisfied subsequent to the issuance of such bonds.
Investors should be aware that exempt-interest dividends derived from such bonds
may become subject to federal income taxation retroactively to the date of
issuance thereof if such representations are determined to have been inaccurate
or if the issuer of such bonds (or the beneficiary of such bonds) fails to
comply with such covenants.
Distributions of net investment income received by the Tax-Free Money
Market Fund from investments in debt securities (other than interest on
tax-exempt Municipal Obligations) and any net short-term capital gains
distributed by the Investment Fund will be taxable to shareholders as ordinary
income and will not be eligible for the dividends received deduction for
corporate shareholders. Although the Tax-Free Money Market Fund generally does
not expect to receive net investment income other than Tax-Exempt Interest, up
to 20% of the net assets of the Investment Fund may be invested in Municipal
Obligations that do not bear Tax-Exempt Interest, and any taxable income
recognized by the Investment Fund will be distributed and taxed to its
shareholders.
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FOREIGN INCOME TAX
It is expected that each Investment Fund will be subject to foreign
withholding taxes with respect to its dividend and interest income from foreign
countries, and an Investment Fund may be subject to foreign income or other
taxes with respect to other income. So long as more than 50% in value of an
Investment Fund's total assets at the close of the taxable year consists of
stock or securities of foreign corporations, the Investment Fund may elect to
treat certain foreign income taxes imposed on it under U.S. federal income tax
law as paid directly by its shareholders. An Investment Fund will make such an
election only if it deems it to be in the best interest of its shareholders and
will notify shareholders in writing each year if it makes an election and of the
amount of foreign income taxes, if any, to be treated as paid by the
shareholders. If an Investment Fund makes the election, shareholders will be
required to include in income their proportionate shares of the amount of
foreign income taxes treated as imposed on the Investment Fund and will be
entitled to claim either a credit (subject to the limitations discussed below)
or, if they itemize deductions, a deduction for their shares of the foreign
income taxes in computing their federal income tax liability. (No deductions
will be allowed in computing alternative minimum tax liability.)
Shareholders who choose to utilize a credit (rather than a deduction) for
foreign taxes will be subject to the limitation that the credit may not exceed
the shareholder's U.S. tax (determined without regard to the availability of the
credit) attributable to foreign source taxable income. For this purpose, the
portion of dividends and distributions paid by an Investment Fund from its
foreign source income will be treated as foreign source income. An Investment
Fund's gains from the sale of securities will generally be treated as derived
from U.S. sources and certain foreign currency gains and losses likewise will be
treated as derived from U.S. sources. The limitation on the foreign tax credit
is applied separately to foreign source "passive income," such as the portion of
dividends received from an Investment Fund which qualifies as foreign source
income. In addition, the foreign tax credit is allowed to offset only 90% of the
alternative minimum tax imposed on corporations as individuals. Because of these
limitations, shareholders may be unable to claim a credit for the full amount of
their proportionate shares of the foreign income taxes paid by an Investment
Fund.
The foregoing is only a general description of the treatment of foreign
income taxes under the U.S. federal income tax laws. Because the availability of
a credit or deduction depends on the particular circumstances of each
shareholder, shareholders are advised to consult their own tax advisers.
FEDERAL TAX TREATMENT OF FORWARD
CURRENCY CONTRACTS AND EXCHANGE RATE CHANGES
Except for certain hedging transactions, each Investment Fund is required
for federal income tax purposes to recognize as gain or loss for each taxable
year its net unrealized gains and losses on certain forward currency and futures
contracts as of the end of each taxable year, as well as those actually realized
during the year. In most cases, any such gain or loss recognized with respect to
a regulated futures contract is considered to be 60% long-term capital gain or
loss and 40% short-term capital gain or loss, without regard to the holding
period of the contract. Gain or loss attributable to a foreign currency forward
contract is treated as 100% ordinary income. Furthermore, forward currency
futures contracts which are intended to hedge against a change in the value of
securities held by an Investment Fund may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition.
Any net gain realized from the closing out of futures contracts will
generally be qualifying income for purposes of the 90% Gross Income test. In
order to satisfy the Short-Short Gain test, however, the Investment Fund will
have to avoid realizing gains on futures contracts and certain forward contracts
held less than three months and may be required to defer the closing out of
futures contracts beyond the time
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when it would otherwise be advantageous to do so. It is anticipated that
unrealized gains of such contracts that have been open for less than three
months as of the end of the Investment Fund's taxable year and which are treated
as recognized for tax purposes at the end of the taxable year will not be
considered gains on securities held less than three months for purposes of the
Short-Short Gain test.
Gains or losses attributable to foreign currency contracts, or to
fluctuations in exchange rates that occur between the time the Investment Fund
accrues interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Investment Fund actually
collects such receivables or pays such liabilities are treated as ordinary
income or ordinary loss. Similarly, gains or losses on disposition of debt
securities denominated in a foreign currency attributable to fluctuations in the
value of the foreign currency between the date of acquisition of the security
and the date of disposition also are treated as ordinary gain or loss. These
gains or losses increase or decrease the amount of an Investment Fund's net
investment income, if any, available to be distributed to its shareholders as
ordinary income.
TAXES AND FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, a foreign trust or estate, foreign corporation, or foreign
partnership ("Foreign Shareholder") depends on whether the income from the Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the Fund is not effectively connected with a U.S. trade
or business carried on by a Foreign Shareholder, distributions of ordinary
income will be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate) upon the gross amount of the dividend. Furthermore, Foreign
Shareholders will generally be exempt from United States federal income tax on
gains realized on the sale of shares of the Fund, distributions of net long-term
capital gains, and amounts retained by the Fund which are designated as
undistributed capital gains.
If the income from the Fund is effectively connected with a U.S. trade or
business carried on by a Foreign Shareholder, then distributions of net
investment income and net long-term capital gains, and any gains realized upon
the sale of shares of the Fund, will be subject to U.S. federal income tax at
the rates applicable to United States citizens and residents or domestic
corporations.
The Fund may be required to withhold U.S. federal income tax on
distributions that are otherwise exempt from withholding tax (or taxable at a
reduced treaty rate) unless the Foreign Shareholder complies with Internal
Revenue Service certification requirements.
The tax consequences to a Foreign Shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described here.
Furthermore, Foreign Shareholders are strongly urged to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in the Fund.
PURCHASE OF SHARES
For Class A shares of the Non-Money Funds, the purchase price of shares is
based upon the net asset value per share plus the applicable sales charge, if
any, next determined after the purchase order is received. Class B shares and
Class C shares of the Non-Money Funds may be purchased at the net asset value
per share next determined after the purchase order is received. For all classes
of such Investment Funds an order received prior to the regular close of the New
York Stock Exchange (the "NYSE") will be executed at the price computed on the
date of receipt; and an order received after the regular close of the NYSE will
be executed at the price computed on the next day the NYSE is open. The purchase
price of shares of the Non-Money Funds is based on such price as further
described in the Prospectus under "Purchase of Shares." Class A shares of the
Non-Money Funds purchased without an initial sales charge that
17
<PAGE>
are redeemed within one year of purchase are subject to a 1.00% contingent
deferred sales charge ("CDSC"), certain Class B shares of the Non-Money Funds
that are redeemed within six years of purchase are subject to a CDSC of up
to 5.00% and certain Class C shares of the Non-Money Funds that are redeemed
within one year of purchase are subject to a 1.00% CDSC, as described in the
Prospectus under "Purchase of Shares." The initial sales charge and CDSC are
not applicable to shares of any class of any Investment Fund purchased
through the automatic reinvestment of dividends or distributions paid by any
Investment Fund. The price of shares of the Money Market Funds is the net
asset value per share next determined after Federal Funds are available to
such Investment Fund. A purchase of a Money Market Fund's shares by check is
credited to the shareholder's account at the price next determined after
receipt of Federal Funds on the day of receipt and will begin receiving
dividends the following day. Shares of the Fund may be purchased on any day
the NYSE and the Federal Reserve Banks are open. The NYSE and/or the Federal
Reserve Banks are closed when the following holidays are observed: New Year's
Day, Martin Luther King, Jr.'s Birthday, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Each Investment Fund reserves the right in its sole discretion (i) to
suspend the offering of its shares, (ii) to reject purchase orders when in the
judgment of management such rejection is in the best interest of the Fund, and
(iii) to reduce or waive the minimum for initial and subsequent investments for
certain fiduciary accounts such as employee benefit plans or under circumstances
where certain economies can be achieved in sales of an Investment Fund's shares.
REDEMPTION OF SHARES
Each Investment Fund may suspend redemption privileges or postpone the date
of payment (i) during any period that the NYSE is closed, or trading on the NYSE
is restricted as determined by the SEC, (ii) during any period when an emergency
exists as defined by the rules of the SEC as a result of which it is not
reasonably practicable for an Investment Fund to dispose of securities owned by
it, or fairly to determine the value of its assets, and (iii) for such other
periods as the SEC may permit.
Any redemption may be more or less than the shareholder's cost depending
on, among other factors, the market value of the securities held by the
Investment Fund. Class A shares of the Non-Money Funds purchased without an
initial sales charge due to the size of the purchase that are redeemed within
one year of purchase are subject to a 1.00% CDSC, certain Class B shares of the
Non-Money Funds that are redeemed within six years of purchase are subject to a
CDSC of up to 5.00% that decreases to 0% after six years, and certain Class C
shares of the Non-Money Funds that are redeemed within one year of purchase are
subject to a 1.00% CDSC as described in the Prospectus under "Purchase of
Shares." Such initial sales charge and CDSC are not applicable to shares of any
class of any Investment Fund purchased through the automatic reinvestment of
dividends or distributions paid by any Investment Fund.
To protect your account and the Fund from fraud, signature guarantees are
required for certain redemptions. Signature guarantees enable the Fund to verify
the identity of the person who has authorized a redemption from your account.
Signature guarantees are required in connection with: (1) all redemptions,
regardless of the amount involved, when the proceeds are to be paid to someone
other than the registered owner(s) and/or registered address; and (2) share
transfer requests.
Eligible signature guarantor institutions generally include banks,
broker-dealers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations, provided
that the institution is a member of the Securities Transfer Agents Medallion
Program or another recognized signature guarantee program. Notaries public are
not acceptable guarantors.
The signature guarantees must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter or stock power.
18
<PAGE>
Redemption of shares held in broker street name may not be accomplished by
mail or telephone as described above. Shares held in broker street name may be
redeemed only by contacting the investment dealer, bank or financial services
firm ("Participating Dealer") that handles your account.
INVESTMENT LIMITATIONS
Each current Investment Fund of the Fund has adopted the following
restrictions which are fundamental policies and may not be changed without the
approval of the lesser of: (1) at least 67% of the voting securities of the
Investment Fund present at a meeting if the holders of more than 50% of the
outstanding voting securities of the Investment Fund are present or represented
by proxy, or (2) more than 50% of the outstanding voting securities of the
Investment Fund. Each Investment Fund will not:
(1) invest in commodities, except that each of the Emerging Markets Fund,
Latin American Fund, European Equity Fund, American Value Fund, Aggressive
Equity Fund, Growth and Income and Worldwide High Income Fund may invest in
futures contracts and options to the extent that not more than 5% of its total
assets are required as deposits to secure obligations under futures contracts
and not more than 20% of its total assets are invested in futures contracts and
options at any time;
(2) purchase or sell real estate or real estate limited partnerships,
although it may purchase and sell securities of companies which deal in real
estate and may purchase and sell securities which are secured by interests in
real estate, and except that the U.S. Real Estate Fund may invest in real estate
limited partnership interests, but may not invest in such interests that are not
publicly traded;
(3) underwrite the securities of other issuers;
(4) invest for the purpose of exercising control over management of any
company;
(5) invest more than 5% of its total assets in securities of companies
which have (with predecessors) a record of less than three years' continuous
operation, except that the Tax-Free Money Market Fund may not invest in private
activity bonds where the payment of principal and interest are the
responsibility of a company (including its predecessors) with less than three
years of continuous operations;
(6) with respect to all the Investment Funds, except the Latin American
Fund and U.S. Real Estate Fund, acquire any securities of companies within one
industry if, as a result of such acquisition, more
19
<PAGE>
than 25% of the value of the Investment Fund's total assets would be invested in
securities of companies within such industry; provided, however, that there
shall be no limitation on the purchase of obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, or (in the case of the
Money Market Fund) instruments issued by U.S. banks or their domestic branches;
(7) write or acquire options or interests in oil, gas or other mineral
exploration or development programs or leases; or
With respect to limitation (6) above concerning industry concentration,
the Money Market Fund will consider wholly-owned finance companies to be in the
industries of their parents if their activities are primarily related to
financing the activities of the parents, and will divide utility companies
according to their services. For example, gas, gas transmission, electric and
gas, electric and telephone will each be considered a separate industry.
In addition, the following are fundamental investment limitations with
respect to the Non-Money Market Investment Funds. No Non-Money Market
Investment Fund May:
(1) purchase on margin or sell short except as specified above in (1) and
except that the Emerging Markets Fund, Latin American Fund, European Equity
Fund, Aggressive Equity Fund and Worldwide High Income Fund may enter into short
sales in accordance with its investment objectives and policies;
(2) purchase or retain securities of an issuer if those officers and
Directors of the Fund or its investment adviser owning more than 1/2 of 1% of
such securities together own more than 5% of such securities;
(3) borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 10% of the Investment
Fund's total assets valued at the lower of market or cost and an Investment Fund
may not purchase additional securities when borrowings exceed 5% of total
assets, except that the Worldwide High Income Fund, Latin American Fund, Growth
and Income Fund and Money Market Fund may enter into reverse repurchase
agreements in accordance with their investment objectives and policies and
except that each of the Latin American Fund, Aggressive Equity Fund and
Worldwide High Income Fund may borrow amounts up to 33 1/3% of its total assets
(including the amount borrowed), less all liabilities and indebtedness other
than the borrowing;
(4) pledge, mortgage, or hypothecate any of its assets to an extent
greater than 10% of its total assets at fair market value, except that each of
the Latin American, Aggressive Equity and Worldwide High Income Funds may
pledge, mortgage or hypothecate its assets to secure borrowings in amounts up to
33 1/3% of its assets (including the amount borrowed);
(5) invest more than an aggregate of 15% of the total assets of the
Investment Fund, determined at the time of investment, in illiquid assets,
including repurchase agreements having maturities of more than seven days;
provided, however, that no Investment Fund shall invest more than 10% of its
total assets in securities subject to legal or contractual restrictions on
resale;
(6) invest its assets in securities of any investment company, except by
purchase in the open market involving only customary brokers' commissions or in
connection with mergers, acquisitions of assets or consolidations and except as
may otherwise be permitted by the 1940 Act;
(7) issue senior securities.
(8) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitation
described in (5) above) which are publicly distributed, and (ii) by lending its
portfolio securities to banks, brokers, dealers and other financial institutions
so long as such loans are not inconsistent with the 1940 Act or the Rules and
Regulations or interpretations of the SEC thereunder;
(9) with respect to all of the Investment Funds except the Global Fixed
Income Fund, Emerging Markets Fund, Latin American Fund, Aggressive Equity Fund
and U.S. Real Estate Fund, purchase more than 10% of any class of the
outstanding securities of any issuer;
(10) with respect to all the Investment Funds except the Global Fixed
Income Fund, Emerging Markets Fund, Latin American Fund, U.S. Real Estate Fund
purchase securities of an issuer (except obligations of the U.S. Government and
its instrumentalities) if as the result, with respect to 75% of its total
assets, more than 5% of the Investment Fund's total assets, at market, would be
invested in the securities of such issuer;
The following are fundamental investment limitations with respect to the
Money Market Funds. No Money Market Fund may:
(1) issue senior securities or borrow money, except for borrowing money
from banks for temporary purposes or (with respect to the Money Market Fund and
Government Obligations Fund) for reverse repurchase agreements, and then in
amounts not in excess of 10% of the value of the Investment Fund's total assets
at the time of such borrowing, and only if after such borrowing there is asset
coverage
20
<PAGE>
of at least 300 percent for all borrowings of the Investment Fund; or mortgage,
pledge, hypothecate or in any manner transfer as security for indebtedness any
securities owned or held by the Investment Fund, any assets except as may be
necessary in connection with permitted borrowings and then, in amounts not in
excess of 10% of the value of the Investment Fund's total assets at the time of
the borrowing; or purchase portfolio securities while borrowings in excess of 5%
of the Investment Fund's net assets are outstanding. (This borrowing provision
is not for investment leverage, but solely to facilitate management of the
Investment Fund's securities by enabling the Investment Fund to meet redemption
requests where the liquidation of portfolio securities is deemed to be
disadvantageous or inconvenient.);
(2) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions;
(3) make short sales of securities or maintain a short position or write
or sell puts, calls, straddles, spreads or combinations thereof;
(4) with respect to the Money Market Fund, invest in other investment
companies except to the extent permitted by the 1940 Act, provided that the
Investment Fund may invest only in investment companies that are unaffiliated
with the Fund; and with respect to the Tax-Free Money Market Fund and Government
Obligations Money Market Fund, invest more than 10% of the value of the
Investment Fund's assets in other investment companies that are unaffiliated
with the Fund and then no more than 5% of the Investment Fund's assets may be
invested in any one money market fund;
(5) with respect to the Money Market Fund, purchase any securities other
than Money-Market Instruments, some of which may be subject to repurchase
agreements, but the Investment Fund may make interest-bearing savings deposits
in amounts not in excess of 5% of the value of the Investment Fund's assets and
may make time deposits;
(6) with respect to the Tax-Exempt Money Market Fund, under normal market
conditions invest less than 80% of its net assets in securities the interest on
which is exempt from the regular federal income tax and does not constitute an
item of tax preference for purposes of the federal alternative minimum tax
("Tax-Exempt Interest");
(7) with respect to the Government Obligations Money Market Fund, purchase
securities other than U.S. Treasury bills, notes and other obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, and
repurchase agreements relating to such obligations. There is no limit on the
amount of the Investment Fund's assets which may be invested in the securities
of any one issuer of obligations that the Investment Fund is permitted to
purchase;
(8) purchase the securities of any one issuer (other than securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
or securities subject to unconditional demand features issued by a non-
controlled person) if immediately after and as a result at the time of purchase
more than 5% of the Investment Fund's total assets would be invested in the
securities of such issuer; except that, under applicable regulations, the
Investment Fund may invest more than 5% of its total assets in any one issuer
for up to three business days;
(9) enter into repurchase agreements with more than seven days maturity
if, as a result, more than 10% of the value of its net assets would be
invested in these agreements and other investments for which market
quotations are not readily available or which are otherwise illiquid; and
(10) make loans, except that an Investment Fund may purchase or hold
debt obligations in accordance with its investment objectives, policies and
limitations and, with respect to the Money Market and Government Obligations
Money Market Funds, may enter into repurchase agreements for securities, and
may lend portfolio securities against collateral, consisting of cash or
securities which are consistent with the Investment Fund's permitted
investments, which is equal at all times to at least 100% of the value of the
securities loaned. There is no investment restriction on the amount of
securities that may be loaned.
In addition, the Fund has adopted the following limitations which are not
fundamental policies and may be changed without shareholder approval:
21
<PAGE>
(1) no Investment Fund will purchase puts, calls, straddles, spreads and
any combination thereof if by reason thereof the value of its aggregate
investment in such derivative securities will exceed 5% of its respective total
assets except that the Emerging Markets, Latin American, European Equity,
Aggressive Equity, Growth and Income and Worldwide High Income Funds may
purchase puts and calls on foreign currencies and may write covered call options
in accordance with its investment objective and policies;
(2) no Investment Fund may purchase warrants if, by reason of such
purchase, more than 5% of the value of the Investment Fund's net assets would be
invested in warrants valued at the lower of cost or market. Included in this
amount, but not to exceed 2% of the value of the Investment Fund's net assets,
may be warrants that are not listed on a nationally recognized stock exchange;
(3) no Investment Fund will invest in oil, gas or other mineral leases;
Each of the Global Fixed Income, Emerging Markets, Latin American,
Aggressive Equity and U.S. Real Estate Funds will diversify its holdings so
that, at the close of each quarter of its taxable year, (i) at least 50% of the
market value of the Investment Fund's total assets is represented by cash
(including cash items and receivables), U.S. Government securities, and other
securities, with such other securities limited, in respect of any one issuer,
for purposes of this calculation to an amount not greater than 5% of the value
of the Investment Fund's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities); and
(4) the Emerging Markets Fund may invest up to 25% of its total assets in
privately placed securities, provided that it may not invest more than 15% of
its total assets in illiquid securities, including securities for which there is
no readily available market, and provided further that it will not invest more
than 10% of its total assets in securities which are restricted from sale to the
public without registration under the Securities Act of 1933, except securities
that are not registered under the Securities Act of 1933 but that can be offered
and sold to qualified institutional buyers under Rule 144A under that Act.
The percentage limitations contained in these restrictions apply at the
time of purchase of securities. Future Investment Funds of the Fund may adopt
different limitations.
DETERMINING MATURITIES OF CERTAIN INSTRUMENTS
Generally, the maturity of a portfolio instrument shall be deemed to be the
period remaining until the date noted on the face of the instrument as the date
on which the principal amount must be paid, or in the case of an instrument
called for redemption, the date on which the redemption payment must be made.
However, instruments having variable or floating interest rates or demand
features may be deemed to have remaining maturities as follows: (1) a Government
Obligation with a variable rate of interest readjusted no less frequently than
annually may be deemed to have a maturity equal to the period remaining until
the next readjustment of the interest rate; (b) an instrument with a variable
rate of interest, the principal amount of which is scheduled on the face of the
instrument to be paid in one year or less, may be deemed to have a maturity
equal to the period remaining until the next readjustment of the interest rate;
(c) an instrument with a variable rate of interest that is subject to a demand
feature may be deemed to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand; (d) an
instrument with a floating rate of interest that is subject to a demand feature
may be deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand; and (e) a repurchase agreement
may be deemed to have a maturity equal to the period remaining until the date on
which the repurchase of the underlying securities is scheduled to occur, or
where no date is specified, but the agreement is subject to demand, the notice
period applicable to a demand for the repurchase of the securities.
22
<PAGE>
MANAGEMENT OF THE FUND
Officers and Directors
The Fund's officers, under the supervision of the Board of Directors,
manage the day-to-day operations of the Fund. The Directors set broad policies
for the Fund and choose its officers. Three Directors and all of the officers
of the Fund are directors, officers or employees of the Fund's adviser,
distributor or administrative services provider. The other Directors have no
affiliation with the Fund's adviser, distributor or administrative services
provider. The Directors are also Directors of other open-end funds advised by
Morgan Stanley Asset Management Inc. (collectively with the Fund, the "Open-End
Fund Complex"). Officers of the Fund are also
23
<PAGE>
Officers of some or all of the other investment companies managed, administered,
advised or distributed by Morgan Stanley Asset Management Inc. or its
affiliates. A list of the Directors and officers of the Fund and a brief
statement of their present positions and principal occupations during the past 5
years is set forth below:
<TABLE>
<CAPTION>
Principal Occupation During
Name, Address and Date of Birth Position with Fund Past Five Years
- ------------------------------- ------------------ ---------------------------
<S> <C> <C>
Barton M. Biggs* Chairman and Chairman and Director of Morgan Stanley Asset Management Inc.
1221 Avenue of the Director and Morgan Stanley Asset Management Limited; Managing Director of Morgan
Americas Stanley & Co. Incorporated; Director of Morgan Stanley Group Inc.; Member
New York, NY 10020 of Investment Advisory Counsel of the Thailand Fund; Member of the
11/26/32 Yale Development Board; Director of the Rand McNally Company; Director
and Officer of various investment companies managed by Morgan Stanley
Asset Management Inc.
Warren J. Olsen* Director and Principal of Morgan Stanley Asset Management Inc.; President and
1221 Avenue of the President Director of various investment companies managed by Morgan Stanley
Americas Asset Management Inc.
New York, NY 10020
12/21/56
24
<PAGE>
<CAPTION>
Principal Occupation During
Name, Address and Date of Birth Position with Fund Past Five Years
- ------------------------------- ------------------ ---------------------------
<S> <C> <C>
John D. Barrett, II Director Chairman and Director of Barrett Associates, Inc. (investment
521 Fifth Avenue counseling); Director of the Ashforth Company (real estate); Director
New York, NY 10135 of the Morgan Stanley Institutional Fund, Inc. and PCS Cash Fund, Inc.
8/21/35
Gerard E. Jones Director Partner in Richards & O'Neil LLP (law firm); Director of the Morgan
43 Arch Street Stanley Institutional Fund, Inc. and PCS Cash Fund, Inc.
Greenwich, CT 06830
1/23/37
Andrew McNally IV Director Chairman and Chief Executive Officer of Rand McNally (publication);
8255 North Central Director of Allendale Insurance Co., Mercury Finance (consumer finance);
Park Avenue Zenith Electronics, Hubbell, Inc. (industrial electronics); Director
Skokie, IL 60076 of the Morgan Stanley Fund, Inc., Morgan Stanley Institutional Fund,
11/11/39 Inc. and PCS Cash Fund, Inc.; Director of the Morgan Stanley
Institutional Fund, Inc. and PCS Cash Fund, Inc.
Samuel T. Reeves Director Chairman of the Board and CEO, Pinacle Trading L.L.C. (investment firm);
8211 North Fresno Street Director, Pacific Gas and Electric and PG&E Enterprises (utilities);
Fresno, CA 93720 Director of the Morgan Stanley Institutional Fund, Inc. and PCS Cash
7/28/34 Fund, Inc.
Fergus Reid Director Chairman and Chief Executive Officer of LumeLite Corporation
85 Charles Colman Blvd. (injection molding firm); Trustee and Director of Vista Mutual Fund
Pawling, NY 12564 Group; Director of the Morgan Stanley Institutional Fund, Inc. and
8/12/32 PCS Cash Fund, Inc.
25
<PAGE>
<CAPTION>
Principal Occupation During
Name, Address and Date of Birth Position with Fund Past Five Years
- ------------------------------- ------------------ ---------------------------
<S> <C> <C>
Frederick O. Robertshaw Director Of Counsel, Copple, Chamberlin & Boehm, P.C. and Rake,
2800 North Central Avenue Copple, Downey & Black, P.C. (law firms); Director of the
Phoenix, AZ 85004 Morgan Stanley Institutional Fund, Inc. and PCS Cash Fund,
1/24/34 Inc.
Frederick B. Whittemore* Director Advisory Director of Morgan Stanley & Co. Incorporated; Vice-Chairman
1251 Avenue of the and Director of various investment companies managed by Morgan Stanley
Americas, 30th Flr. Asset Management Inc.
New York, NY 10020
11/12/30
James W. Grisham* Vice President Principal of Morgan Stanley Asset Management Inc.; Officer of various
1221 Avenue of the investment companies managed by Morgan Stanley Asset Management Inc.
Americas
New York, NY 10020
10/24/41
Michael F. Klein* Vice President Vice President of Morgan Stanley Asset Management Inc; Officer of
1221 Avenue of the various investment companies managed by Morgan Stanley Asset
Americas Management Inc. Previously associated with Rogers & Wells (law firm).
New York, NY 10020
12/12/58
26
<PAGE>
<CAPTION>
Principal Occupation During
Name, Address and Date of Birth Position with Fund Past Five Years
- ------------------------------- ------------------ ---------------------------
<S> <C> <C>
Harold J. Schaaff, Jr.* Vice President Principal of Morgan Stanley & Co. Incorporated; General Counsel and
1221 Avenue of the Secretary of Morgan Stanley Asset Management Inc.; Officer of various
Americas investment companies managed by Morgan Stanley Asset Management Inc.
New York, NY 10020
6/10/60
Joseph P. Stadler* Vice President Vice President of Morgan Stanley Asset Management Inc.; Officer of
1221 Avenue of the various investment companies managed by Morgan Stanley Asset
Americas Management Inc. Previously with Price Waterhouse LLP (accounting).
New York, NY 10020
6/7/54
27
<PAGE>
<CAPTION>
Principal Occupation During
Name, Address and Date of Birth Position with Fund Past Five Years
- ------------------------------- ------------------ ---------------------------
<S> <C> <C>
Valerie Y. Lewis* Secretary Vice President of Morgan Stanley Asset Management Inc.; Officer of
1221 Avenue of the various investment companies managed by Morgan Stanley Asset Management
Americas Inc. Previously with Citicorp (banking).
New York, NY 10020
3/26/56
Karl O. Hartmann Assistant Secretary Senior Vice President, Secretary and General Counsel of Chase Global
73 Tremont Street Funds Services Company; Previously with Leland, O'Brien, Rubinstein
Boston, MA 02108-3913 Associates, Inc. (investments).
3/7/55
James R. Rooney Treasurer Vice President, Director of Fund Administration and Compliance Services,
73 Tremont Street Chase Global Funds Services Company; Officer of various
Boston, MA 02108-3913 investment companies managed by Morgan Stanley Asset
10/21/58 Management Inc. Previously with Scudder, Stevens &
Clark, Inc. (investment) and Ernst & Young LLP (accounting).
28
<PAGE>
<CAPTION>
Principal Occupation During
Name, Address and Date of Birth Position with Fund Past Five Years
- ------------------------------- ------------------ ---------------------------
<S> <C> <C>
Joanna Haigney Assistant Treasurer Manager of Fund Administration and Compliance Services, Chase Global
73 Tremont Street Funds Services Company; Officer of various investment companies managed
Boston, MA 02108-3913 by Morgan Stanley Asset Management Inc. Previously with Coopers &
10/10/66 Lybrand LLP.
</TABLE>
_______
*"Interested Person" within the meaning of the 1940 Act.
REMUNERATION OF DIRECTORS AND OFFICERS
The Open-End Fund Complex pays each of the nine Directors who is not an
"interested person" an annual aggregate fee of $55,000, plus out-of-pocket
expenses. The Open-End Fund Complex will pay each of the members of the
Fund's Audit Committee, which consists of three of the Fund's Directors who
are not "interested persons," an additional annual aggregate fee of $10,000
for serving on such a committee. The allocation of such fees will be among
the two funds in the Open-End Fund Complex in direct proportion to their
respective average net assets. For the fiscal period ended June 30, 1996,
the Fund paid approximately $77,000 in Directors' fees and expenses.
Directors who are also officers or affiliated persons receive no remuneration
for their services as Directors. The Fund's officers and employees are paid
by the Adviser or its agents. As of September 3, 1996, to Fund management's
knowledge, the Directors and officers of the Fund, as a group, owned less
than 1% of the outstanding common stock of each Investment Fund of the Fund.
The following table shows aggregate compensation paid to each of the Fund's
Directors by the Fund and the Fund Complex, respectively, for the fiscal year
from July 1, 1995 to June 30, 1996.
29
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5)
Name of Aggregate Pension or Estimated Total
Person, Compensation Retirement Annual Compensation
Position From Benefits Benefits From Registrant
Registrant Accrued Upon and Fund Complex
as Part of Retirement Paid to Directors
Fund
Expenses
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Barton M. Biggs* $0 $0 $0 $0
Director and Chairman of the Board
John D. Barret, II,* $65,000 $0 $0 $65,000
Director
John E. Eckleberry,*** $0 $0 $0 $0
Director
Gerard E. Jones,* $65,000 $0 $0 $72,100
Director
Warren J. Olsen,* $0 $0 $0 $0
Director and President
Andrew McNally IV,* $55,000+ $0 $0 $55,000
Director
Samuel T. Reeves,* $55,000+ $0 $0 $55,000
Director
Fergus Reid,* $65,000+ $0 $0 $72,100
Director
Frederick O. Robertshaw,** $55,000+ $0 $0 $55,000
Director
Frederick B. Whittemore,** $0+ $0 $0 $13,750
Director (Chairman of the Board until
June 28, 1995)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
* Elected (Director) as of June 28, 1995.
** Reelected as of June 28, 1995.
*** Resigned as of June 28, 1995.
+ The total amount of deferred compensation for Frederick O. Robertshaw,
Samuel T. Reeves, Fergus Reid, Andrew McNally IV and Frederick B.
Whittemore was $0, $32,500, $27,500, $27,500 and $3,000, respectively.
INVESTMENT ADVISORY AND ADMINISTRATIVE AGREEMENTS
30
<PAGE>
The Adviser is a wholly-owned subsidiary of Morgan Stanley Group Inc.
("Group"). The principal offices of the Group are located at 1221 Avenue of the
Americas, New York, NY 10020.
The Group, a renowned global financial services firm, is distinguished by
quality, service and a commitment to excellence. Tracing its roots to the
founding of the U.S. securities industry, the Group remains a leader in the
field. The Group's premier list of clients includes some of the largest
multinational corporations and institutions, governments, nation-states, royal
households and very high-net-worth individuals.
The Group with its subsidiaries ("Morgan Stanley") maintains a major global
presence with offices in Chicago, Frankfurt, Hong Kong, London, Los Angeles,
Luxembourg, Melbourne, Milan, New York, Paris, San Francisco, Seoul, Singapore,
Taipei, Tokyo, Toronto and Zurich. With over ______ employees, approximately __%
of which are located outside the U.S., and members of the portfolio management
teams which are native to the countries in which they are investing, Morgan
Stanley is in an exceptional position to interpret the forces that will impact
the world's capital markets today, over the next decade and beyond.
The investment management division of Morgan Stanley was formed in 1975
under the leadership of Barton Biggs and incorporated as a wholly-owned
subsidiary of the Group in 1981. MSAM was formed to offer investment management
and fiduciary services to institutions and high-net-worth individuals. MSAM
offers its clients the same superior service and high standards of integrity
that have been the hallmark of Morgan Stanley since its founding in 1935.
As one of the world's premier global investment managers affiliated
with one of the leading global financial services firms and with offices in
the United States, Europe and Asia, MSAM brings a truly global perspective to
the investment of its clients' assets. This global perspective, coupled with
Morgan Stanley's long-standing tradition of integrity and prudence, puts MSAM
in a unique position to offer investment management services. As compensation
for advisory services to the Fund for the fiscal years ended June 30, 1993,
June 30, 1994 and June 30, 1995, the Adviser earned fees of approximately
$126,000 (and voluntarily waived all such fees), $2,322,000 (and voluntarily
waived a portion of such fees equal to approximately $1,026,000), $4,571,000
(and voluntarily waived a portion of such fees equal to approximately
$868,000) respectively. Further, for the fiscal years ended June 30, 1994,
June 30, 1995 and June 30, 1996, MSAM, as adviser for the PCS Money Market
Portfolio (the "Predecessor Money Market Portfolio") the predecessor to the
Money Market Fund received $686,138, $611,754 and $759,398, respectively (net
of voluntary fee waivers of $109,879, $87,105 and $153,797 respectively) and
as adviser for the PCS Government Obligations Money Market Portfolio (the
"Predecessor Government Obligations Portfolio") the predecessor to the
Government Obligations Fund received $412,757, $897,867 and $395,312
respectively (net of voluntary fee waivers of $25,448, $0 and $45,251,
respectively).
Pursuant to the Administration Agreement between the Adviser and the
Fund, the Adviser provides administrative services. For its services under
the Administration Agreement, the Fund pays the Adviser a monthly fee which
on an annual basis equals 0.25% of the average daily net assets of each
Non-Money Market Fund and 0.10% of the first $200 million of each Money
Market Fund's average daily net assets, 0.75% of the next $200 million of
average daily net assets, .05% of the next $200 million of average daily net
assets, and .03% on average daily net assets over $600 million. For the
fiscal years ended June 30, 1993, June 30, 1994 and June 30, 1995, the Fund
paid administrative fees to MSAM of approximately $58,000, $852,000, and
$1,154,000 respectively. For the fiscal years ended June 30, 1994, June 30,
1995 and June 30, 1996, PFPC Inc., which served as administrator to the
Predecessor Money Market Portfolio and Predecessor Government Obligations
Money Market Portfolio (the "Predecessor Portfolios"), was paid aggregate
administrative fees of $283,085, $346,829 and $273,252 respectively.
Under an Agreement between the Adviser and The Chase Manhattan Bank
("Chase," successor in interest to United States Trust Company of New
York), Chase Global Funds Services Company ("CGFSC," formerly Mutual Funds
Service Company, a corporate affiliate of Chase) provides certain
administrative services to the Fund. CGFSC provides operational and
administrative services to investment companies with
31
<PAGE>
approximately $61 billion in assets and having approximately 217,452
shareholder accounts as of September 30, 1995. CGFSC's business address is 73
Tremont Street, Boston, Massachusetts 02108-3913.
DISTRIBUTION OF FUND SHARES
Morgan Stanley & Co. Incorporated (the "Distributor"), a wholly-owned
subsidiary of the Group, serves as the Distributor of the Fund's shares
pursuant to a Distribution Agreement for the Fund and a Plan of Distribution
for the Money Market Funds and each class of the Non-Money Funds pursuant to
Rule 12b-1 under the 1940 Act (each, a "Plan" and collectively, the "Plans").
Under each Plan the Distributor is entitled to receive from these Investment
Funds a distribution fee, which is accrued daily and paid quarterly, of up to
0.25% for Class A shares of each of the Non-Money Funds, up to 0.50% for each
of the Money Market Funds and up to 0.75% of the Class B shares and Class C
shares of each of the Non-Money Funds, on an annualized basis, of the average
daily net assets of such Investment Fund or classes. The Distributor expects
to allocate most of its fee to investment dealers, banks or financial service
firms that provide distribution, administrative or shareholder services
(a "Participating Dealer"). The actual amount of such compensation is agreed
upon by the Fund's Board of Directors and by the Distributor. The
Distributor may, in its discretion, voluntarily waive from time to time all
or any portion of its distribution fee and the Distributor is free to make
additional payments out of its own assets to promote the sale of Fund shares.
The Plans obligate the Investment Funds to accrue and pay to the
Distributor the fee agreed to under its Distribution Agreement. The Plans do
not obligate the Investment Funds to reimburse the Distributor for the actual
expenses the Distributor may incur in fulfilling its obligations under the
Plan. Thus, under each Plan, even if the Distributor's actual expenses exceed
the fee payable to it thereunder at any given time, the Investment Funds will
not be obligated to pay more than that fee. If the Distributor's actual
expenses are less than the fee it receives, the Distributor will retain the
full amount of the fee. The Plans for the Class A, Class B and Class C shares
of the Non-Money Market Funds were most recently approved by the Fund's Board
of Directors, including those directors who are not "interested persons" of
the Fund as that term is defined in the 1940 Act and who have no direct or
indirect financial interest in the operation of a Plan or in any agreements
related thereto, on September 20, 1995 and the Plan for the Money Market
Funds was most recently approved on ________________.
As compensation for providing distribution services to the Fund for the
fiscal year ended June 30, 1995, the Distributor received aggregate fees of
approximately $2,697,893 which were attributable approximately as follows:
Fiscal Year
Ended
June 30, 1995
-------------
Global Equity Allocation Fund-Class A. . . . . . . . . $ 97,885
Global Equity Allocation Fund-Class B+ . . . . . . . . N/A
Global Equity Allocation Fund-Class C+ . . . . . . . . 366,778
Global Fixed Income Fund-Class A . . . . . . . . . . . 24,803
Global Fixed Income Fund-Class B+. . . . . . . . . . . N/A
Global Fixed Income Fund-Class C+. . . . . . . . . . . 56,785
Asian Growth Fund-Class A. . . . . . . . . . . . . . . 402,870
Asian Growth Fund-Class B+ . . . . . . . . . . . . . . N/A
Asian Growth Fund-Class C+ . . . . . . . . . . . . . . 1,314,505
Emerging Markets Fund-Class A* . . . . . . . . . . . . 34,453
Emerging Markets Fund-Class B* . . . . . . . . . . . . N/A
Emerging Markets Fund-Class C* . . . . . . . . . . . . 110,688
Latin American Fund-Class A* . . . . . . . . . . . . . 14,697
Latin American Fund-Class B* . . . . . . . . . . . . . N/A
32
<PAGE>
Latin American Fund-Class C* . . . . . . . . . . . . . 28,402
American Value Fund-Class A. . . . . . . . . . . . . . 35,886
American Value Fund-Class B+ . . . . . . . . . . . . . N/A
American Value Fund-Class C+ . . . . . . . . . . . . . 93,416
Worldwide High Income Fund-Class A . . . . . . . . . . 28,283
Worldwide High Income Fund-Class B . . . . . . . . . . N/A
Worldwide High Income Fund-Class C+. . . . . . . . . . 88,442
Aggressive Equity Fund-Class A** . . . . . . . . . . . N/A
Aggressive Equity Fund-Class B** . . . . . . . . . . . N/A
Aggressive Equity Fund-Class C** . . . . . . . . . . . N/A
High Yield Fund-Class A**. . . . . . . . . . . . . . . N/A
High Yield Fund-Class B**. . . . . . . . . . . . . . . N/A
High Yield Fund-Class C**. . . . . . . . . . . . . . . N/A
U.S. Real Estate Fund-Class A**. . . . . . . . . . . . N/A
U.S. Real Estate Fund-Class B**. . . . . . . . . . . . N/A
U.S. Real Estate Fund-Class C**. . . . . . . . . . . . N/A
International Magnum Fund-Class A**. . . . . . . . . . N/A
International Magnum Fund-Class B**. . . . . . . . . . N/A
International Magnum Fund-Class C**. . . . . . . . . . N/A
Japanese Equity Fund-Class A** . . . . . . . . . . . . N/A
Japanese Equity Fund-Class B** . . . . . . . . . . . . N/A
Japanese Equity Fund-Class C** . . . . . . . . . . . . N/A
Growth and Income Fund-Class A** . . . . . . . . . . . N/A
Growth and Income Fund-Class B** . . . . . . . . . . . N/A
Growth and Income Fund-Class C** . . . . . . . . . . . N/A
European Equity Fund-Class A** . . . . . . . . . . . . N/A
European Equity Fund Class B** . . . . . . . . . . . . N/A
European Equity Fund Class C** . . . . . . . . . . . . N/A
Money Market Fund**++. . . . . . . . . . . . . . . . . N/A
Tax-Free Money Market Fund **. . . . . . . . . . . . . N/A
Government Obligations Money Market Fund**++ . . . . . N/A
________________________
* The Emerging Markets and Latin American Funds commenced operations on
July 6, 1994.
** Not operational as of June 30,1995.
* The Class B shares listed above were created on May 1, 1995. The original
Class B shares were renamed Class C shares, as listed above, on May 1,
1995. The Class B shares commenced operations on August 1, 1995. Therefore,
no fees were incurred for the fiscal year ended June 30, 1995.
** Not operational as of June 30, 1996.
++ As compensation for providing distribution services to the Predecessor
Portfolios for the fiscal years ended June 30, 1996, the Distributor
received fees from the Predecessor Money Market Portfolio in the amount of
$843,776 and from the Predecessor Government Obligations Money Market
Portfolio in the amount of $439,236.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the 1940 Act which incorporates the Code of Ethics of the Adviser
(together, the "Codes"). The Codes significantly restrict the personal investing
activities of all employees of the Adviser and, as described below, impose
additional, more onerous, restrictions on the Fund's investment personnel.
33
<PAGE>
The Codes require that all employees of the Adviser preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Adviser include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security that at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Adviser.
Furthermore, the Codes provide for trading "blackout periods" that prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The names and addresses of the holders of 5% or more of the outstanding
shares of any class of the Fund as of September 3, 1996 and the percentage of
outstanding shares of such classes owned beneficially or of record by such
shareholders as of such date are, to Fund management's knowledge, as follows:
GLOBAL EQUITY ALLOCATION FUND: Scott & Stringfellow PSP, C/O David
Plageman, P.O. Box 1575, Richmond, VA 23213, owned 5% of the total outstanding
Class A shares of such Investment Fund.
GLOBAL FIXED INCOME FUND: The Private Bank & Trust Co., 10 Dearborn
Street, Chicago, IL 60602, owned 16% of the total outstanding Class A shares
of such Investment Fund; Fredmar Inc., P.O. Box 7669, Warwick, RI 02887,
owned 10% of the total outstanding Class B shares of such Investment Fund and
Painewebber, FBO Robert P. Buhrman, P.O. Box 3321, Weehawken, NJ 07087, owned
9% of total outstanding Class C shares of such Investment Fund.
AMERICAN VALUE FUND: Smith Barney Inc., 388 Greenwich Street, New York,
N.Y. 10013, owned 7% of the total outstanding Class A shares of such
Investment Fund; James G. McMurray, M.D. Profit Sharing Plan, 303
Williams Avenue, Suite 411, Huntsville, AL 35801, owned 7% of the total
outstanding Class B shares of such Investment Fund and Morgan Stanley Group
Inc., 1221 Avenue of the Americas, New York, NY 10020, owned 13% of the total
outstanding Class C shares of such Investment Fund.
WORLDWIDE HIGH INCOME FUND: FTC & Co., Attn: Datalynx #118, P.O. Box
173736, Denver, CO 80217, owned 15% of the total outstanding Class A shares of
such Investment Fund.
EMERGING MARKETS FUND: Charles Schwab & Co., Inc., Exclusive Benefit of
its Customers, 101 Montgomery Street, San Francisco, CA 94104, owned 36% of the
total outstanding Class A shares of such Investment Fund.
HIGH YIELD FUND: Morgan Stanley Group, Inc., 1221 Avenue of the
Americas, New York, NY 10020, owned 81% of the total outstanding Class A
shares of such Investment Fund, 88% of the total outstanding Class B shares
of such Investment Fund and 93% of the total outstanding Class C shares of
such Investment Fund.
LATIN AMERICAN FUND: Charles Schwab & Co., Inc., Exclusive Benefit of
its Customers, 101 Montgomery Street, San Francisco, CA 94104, owned 21% of
the total outstanding Class A shares of such Investment Fund and Smith Barney
Inc., 388 Greenwich Street, New York, NY 10013, owned 7% of the total
outstanding Class B shares of such Investment Fund.
U.S. REAL ESTATE FUND: Morgan Stanley Group, Inc., 1221 Avenue of the
Americas, New York, NY 10020, owned 69% of the total outstanding Class A
shares of such Investment Fund, 65% of the total outstanding Class B shares
of such Investment Fund and 89% of the total outstanding Class C shares of
such Investment Fund.
34
<PAGE>
AGGRESSIVE EQUITY FUND: Morgan Stanley Group Inc., 1221 Avenue of the
Americas, New York, NY 10020, owned 34% of the total outstanding Class A shares
of such Investment Fund, 59% of the total outstanding Class B shares of such
Investment Fund and 61% of the total outstanding Class C shares of such
Investment Fund.
INTERNATIONAL MAGNUM FUND: Morgan Stanley Group Inc., 1221 Avenue of the
Americas, New York, NY 10020, owned 91% of the total outstanding Class A
shares of such Investment Fund; Morgan Stanley Group Inc., 1221 Avenue of the
Americas, New York, NY 10020, owned 90% of the total outstanding Class B
shares of such Investment Fund and Morgan Stanley Group Inc., 1221 Avenue of
the Americas, New York, NY 10020, owned 81% of the total outstanding Class C
shares of such Investment Fund.
The Group may be deemed a "controlling person" of the Fund by virtue of its
power to control the voting or disposition of the shares it owns. As a result of
its ownership position, the Group may be able to control the outcome of matters
voted on by shareholders of the Investment Funds.
MONEY MARKET FUND NET ASSET VALUE
Each of the Money Market Funds seeks to maintain a stable net asset value
per share of $1.00. Each Investment Fund uses the amortized cost method of
valuing its securities, which does not take into account unrealized gains or
losses. The use of amortized cost and the maintenance of an Investment Fund's
per share net asset value at $1.00 is based on the Investment Fund's election to
operate under the provisions of Rule 2a-7 under the 1940 Act. As a condition of
operating under that Rule, each of the Money Market Funds must maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 397 days or less, and invest only in
securities which are of "eligible quality" as determined in accordance with
regulations of the SEC.
The Rule also requires that the Directors, as a particular responsibility
within the overall duty of care owed to shareholders, establish procedures
reasonably designed, taking into account current market conditions and the
Investment Funds' investment objectives, to stabilize the net asset value per
share as computed for the purposes of sales and redemptions at $1.00. These
procedures include periodic review, as the Directors deem appropriate and at
such intervals as are reasonable in light of current market conditions, of the
relationship between the amortized cost value per share and a net asset value
per share based upon available indications of market value. In such review,
investments for which market quotations are readily available are valued at the
most recent bid price or quoted yield available for such securities or for
securities of comparable maturity, quality and type as obtained from one or more
of the major market makers for the securities to be valued. Other investments
and assets are valued at fair value, as determined in good faith by, or under
procedures adopted by, the Directors.
In the event of a deviation of over 1/2 of 1% between an Investment Fund's
net asset value based upon available market quotations or market equivalents and
$1.00 per share based on amortized cost, the Directors will promptly consider
what action, if any, should be taken. The Directors will also take such action
as they deem appropriate to eliminate or to reduce to the extent reasonably
practicable any material dilution or other unfair results which might arise from
differences between the two. Such action may include redemption in kind, selling
instruments prior to maturity to realize capital gains or losses or to shorten
the average maturity, withholding dividends, paying distributions from capital
or capital gains or utilizing a net asset value per share as determined by using
available market quotations.
There are various methods of valuing the assets and of paying dividends
and distributions from a money market fund. Each of the Money Market Funds
values its assets at amortized cost while also monitoring the available
market bid price, or yield equivalents. Since dividends from net investment
income will be declared daily and paid monthly, the net asset value per share
of such Investment Funds will ordinarily remain at $1.00, but the Investment
Funds' daily dividends will vary in amount. Net realized short-term capital
gains, if any, less any capital loss carryforwards, will be distributed
whenever the Directors determine that such distributions would be in the best
interest of shareholders, but in any event, at least once a year. The Money
Market Funds do not expect to realize any long-term capital gains. Should any
such gains be realized, they will be distributed annually, less any capital
loss carryforwards.
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<PAGE>
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Investment Funds and directs the Adviser to use its best
efforts to obtain the best available price and most favorable execution with
respect to all transactions for the Investment Funds. The Fund has authorized
the Adviser to pay higher commissions in recognition of brokerage services
which, in the opinion of the Adviser, are necessary for the achievement of
better execution, provided the Adviser believes this to be in the best
interest of the Fund.
In purchasing and selling securities for the Investment Funds, it is the
Fund's policy to seek to obtain quality execution at the most favorable prices,
through responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Investment Funds, consideration will be given to
such factors as the price of the security, the rate of the commission, the size
and difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by an Investment Fund may also be
appropriate for other clients served by the Adviser. If purchase or sale of
securities consistent with the investment policies of an Investment Fund and
one or more of these other clients served by the Adviser is considered at or
about the same time, transactions in such securities will be allocated among the
Investment Fund and clients in a manner deemed fair and reasonable by the
Adviser. Although there is no specified formula for allocating such
transactions, the various allocation methods used by the Adviser, and the
results of such allocations, are subject to periodic review by the Fund's
Directors.
Subject to the overriding objective of obtaining the best possible
execution of orders, the Adviser may allocate a portion of the Fund's
portfolio brokerage transactions to Morgan Stanley or broker affiliates of
Morgan Stanley. In order for Morgan Stanley or its affiliates to effect any
portfolio transactions for the Fund, the commissions, fees or other
remuneration received by Morgan Stanley or such affiliates 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 a securities exchange during a
comparable period of time. Furthermore, the Directors of the Fund, including
a majority of the Directors who are not "interested persons," have adopted
procedures which are reasonably designed to provide that any commissions,
fees or other remuneration paid to Morgan Stanley or such affiliates are
consistent with the foregoing standard. For the three fiscal years ended
June 30, 1993, June 30, 1994 and June 30, 1995, the Fund paid brokerage
commissions of approximately $2,497, $618,000 and $115,622, respectively, to
the Distributor, an affiliated broker-dealer. For the fiscal years ended
June 30, 1993, June 30, 1994 and June 30, 1995, commissions paid to the
Distributor represented approximately 6.8%, 30% and 7%, respectively, of
the total amount of brokerage commissions paid in such period and which were
paid on transactions that represented 8.9%, 21% and 3% respectively, of
the aggregate dollar amount of transactions that incurred commissions paid by
the Fund during such period.
Investment Fund securities will not be purchased from, or through, or sold
to or through, the Adviser or Morgan Stanley or any "affiliated persons," as
defined in the 1940 Act, of Morgan Stanley when such entities are acting as
principals, except to the extent permitted by law.
PERFORMANCE INFORMATION
The Fund may from time to time quote various performance figures to
illustrate the Investment Funds' past performance.
Performance quotations by investment companies are subject to rules adopted
by the SEC, which require the use of standardized performance quotations. In the
case of total return, non-standardized
36
<PAGE>
performance quotations may be furnished by the Fund but must be accompanied by
certain standardized performance information computed as required by the SEC.
Current yield and average annual compounded total return quotations used by the
Fund are based on the standardized methods of computing performance mandated by
the SEC. An explanation of those and other methods used by the Fund to compute
or express performance follows.
TOTAL RETURN
From time to time the Investment Funds may advertise total return. Total
return figures are based on historical earnings and are not intended to indicate
future performance. The average annual total return is determined by finding the
average annual compounded rates of return over 1-, 5-, and 10-year periods (or
over the life of the Investment Fund) that would equate an initial hypothetical
$1,000 investment to its ending redeemable value. The calculation assumes that
all dividends and distributions are reinvested when paid. The quotation assumes
the amount was completely redeemed at the end of each 1-, 5-, and 10- year
period (or over the life of the Investment Fund) and the deduction of all
applicable Fund expenses on an annual basis.
Total return figures are calculated according to the following formula:
n
P(1 + T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of hypothetical $1,000 payment made at
the beginning of the 1-, 5-, or 10-year periods at the end of the
1-, 5-, or 10-year periods (or fractional portion thereof).
Calculated using the formula above, the average annualized total return,
exclusive of a sales charge or deferred sales charge, for each of the
Investment Funds that commenced operations prior to June 30, 1996 for the
one-year period ended June 30, 1996 and for the period from the inception of
each Investment Fund through June 30, 1996 are as follows:
One-Year Period
Ended Since
June 30, 1995 Inception
Global Equity Allocation Fund
(commenced operations on January 4, 1993)
Class A Shares 19.65% 13.82%
Class B Shares+ N/A N/A
Class C Shares+ 18.33% 12.98%
Global Fixed Income Fund
(commenced operations on January 4, 1993)
Class A Shares 17.65% 8.54%
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Class B Shares+ N/A N/A
Class C Shares+ 16.63% 7.63%
Asian Growth Fund
(commenced operations on June 23, 1993)
Class A Shares 6.36% 14.20%
Class B Shares+ N/A N/A
Class C Shares+ 5.49% 13.40%
American Value Fund
(commenced operations on Oct. 18, 1993)
Class A Shares 19.34% 9.44%
Class B Shares+ N/A N/A
Class C Shares+ 18.43% 8.57%
Worldwide High Income Fund
(commenced operations on April 21, 1994)
Class A Shares 19.77% 12.03%
Class B Shares+ N/A N/A
Class C Shares+ 18.88% 11.18%
Emerging Markets Fund
(commenced operations on July 6, 1994)
Class A Shares (7.11) (9.97)%
Class B Shares+ N/A N/A
Class C Shares+ (7.80) (10.64)%
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<PAGE>
Latin American Fund
(commenced operations on July 6, 1994)
Class A Shares (20.43)% (13.96)%
Class B Shares+ N/A N/A
Class C Shares+ (21.19)% (14.80)%
The High Yield, U.S. Real Estate, International Magnum, Japanese
Equity, European Equity, Growth and Income, Tax-Free Money Market and
Government Obligations Money Market Funds had not commenced operations
in the fiscal year ended June 30, 1995.
+ The Class B shares listed above were created on May 1, 1995. The original
Class B shares were renamed Class C shares, as listed above, on May 1,
1995. The Class B shares commenced operations on August 1, 1995.
* Not Annualized.
YIELD FOR CERTAIN INVESTMENT FUNDS
From time to time certain of the Investment Funds may advertise yield.
Current yield reflects the income per share earned by an Investment
Fund's investments.
Current yield is determined by dividing the net investment income per
share earned during a 30-day base period by the maximum offering price per share
on the last day of the period and annualizing the result. Expenses accrued for
the period include any fees charged to all shareholders during the base period.
Current yield figures are obtained using the following formula:
6
Yield = 2[(a - b + 1) - 1]
-----
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive income distributions
d = the maximum offering price per share on the last day of the period
The 30-day yield for the Global Fixed Income Fund as of June 30, 1995
was 5.19% for Class A shares and 4.69% for Class C shares. The 30-day
yield for the Worldwide High Income Fund as of June 30, 1995 was 10.55%
for Class A shares and 10.47% for Class C shares.
CALCULATION OF YIELD FOR MONEY MARKET FUNDS
The current yield of the Money Market, Tax-Free Money Market and
Government Obligations Money Market Funds are calculated daily on a base
period return for a hypothetical account having a beginning balance of one
share for a particular period of time (generally 7 days). The return is
determined by dividing the net change (exclusive of any capital changes in
such account) by its average net asset value for the period, and then
multiplying it by 365/7 to determine the annualized current yield. The
calculation of net change reflects the value of additional shares purchased
with the dividends by the Fund, including dividends on both the original
share and on such additional shares. The yields of the Predecessor Money
Market Portfolio and Predecessor Government Obligations Money Market Portfolio
for the 7-day period ended June 30, 1996 were 4.40% and 4.42% respectively. An
effective yield, which reflects the effects of compounding and represents an
annualization of the current yield with all dividends reinvested, may also be
calculated for each Portfolio by dividing the base period return by 7,
adding 1 to the quotient, raising the sum to the 365th power, and subtracting
1 from the result. The effective yields of the Predecessor Money Market
Portfolio and Predecessor Government Obligations Money Market Portfolio for the
7-day period ended June 30, 1996 were 4.50% and 4.52% respectively.
The yield of a Fund will fluctuate. The annualization of a week's
dividend is not a representation by the Fund to what an investment in the
Fund will actually yield in the future. Actual yields will depend on such
variables as investment quality, average maturity, the type of instruments
the Fund invests in, changes in interest rates on instruments, changes in the
expenses of the Fund and other factors. Yields are one basis investors may
use to analyze the Funds, and other investment vehicles; however, yields of
other investment vehicles may not be comparable because of the factors set
forth in the preceding sentence, differences in the time periods compared,
and differences in the methods used in valuing fund instruments, computing net
asset value and calculating yield.
TAXABLE EQUIVALENT YIELD
It is easy to calculate your own taxable equivalent yield if you know
your tax bracket. The formula is:
Tax Free Yield
--------------------
1 - Your Tax Bracket = Your Taxable Equivalent Yield
For example, if you are in the 28% tax bracket and can earn a tax-free
yield of 7.5%, the taxable equivalent yield would be 10.42%.
The table below indicates the advantages of investments in Municipal
Bonds for certain investors. Tax-exempt rates of interest payable on a
Municipal Bond (shown at the top of each column) are equivalent to the
taxable yields set forth opposite the respective income tax levels, based on
income tax rates effective for the tax year 1996 under the Internal Revenue
Code. There can, of course, be no guarantee that the Money Market, Tax-Free
Money Market or the Government Obligations Money Market will achieve a
specific yield. Also, it is possible that some portion of the Fund's
dividends may be subject to federal income taxes. A substantial portion, if
not all, of such dividends may be subject to state and local taxes.
TAXABLE EQUIVALENT YIELD TABLE
<TABLE>
<CAPTION>
SAMPLE LEVEL OF TAXABLE EQUIVALENT RATES
TAXABLE INCOME BASED ON TAX-EXEMPT YIELD OF:
FEDERAL
INCOME
JOINT SINGLE TAX
RETURN RETURN BRACKETS 3% 4% 5% 6% 7% 8% 9% 10% 11%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
__________
* Net amount subject to 1996 Federal Income Tax after deductions and
exemptions, not indexed for 1996 income tax rates.
The taxable equivalent yield for the Predecessor Government Obligations Money
Market Portfolio for the seven days ended June 30, 1996, assuming a federal
income tax rate of 39.6% (maximum rate), was 7.32%. The taxable equivalent
effective yield for the Predecessor Government Obligations Money Market
Portfolio for the seven days ended June 30 1996, assuming the same tax rate,
was 7.48%.
COMPARISONS
To help investors better evaluate how an investment in an Investment Fund
of Morgan Stanley Fund, Inc. might satisfy their investment objective,
advertisements regarding the Fund may discuss various measures of Fund
performance as reported by various financial publications. Advertisements may
also compare performance (as calculated above) to performance as reported by
other investments, indices and averages. The following publications may be used:
39
<PAGE>
(a) Dow Jones Composite Average or its component averages - an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
(b) Standard & Poor's 500 Stock Index or its component indices - unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
company stocks and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
(c) The New York Stock Exchange composite or component indices - unmanaged
indices of all industrial, utilities, transportation and finance company stocks
listed on the New York Stock Exchange.
(d) Wilshire 5000 Equity Index or its component indices - represents the
return on the market value of all common equity securities for which daily
pricing is available. Comparisons of performance assume reinvestment of
dividends.
(e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income
Fund Performance Analysis - measures total return and average current yield for
the mutual fund industry. Ranks individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive of
any applicable sales charges.
(f) Morgan Stanley Capital International EAFE Index - an arithmetic,
market value-weighted average of the performance of over 1,000 securities on the
stock exchanges of countries in Europe, Australia and the Far East.
(g) Goldman Sachs 100 Convertible Bond Index - currently includes 67 bonds
and 33 preferred. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
(h) Salomon Brothers GNMA Index - includes pools of mortgages originated
by private lenders and guaranteed by the mortgage pools of the Government
National Association.
(i) Salomon Brothers High Grade Corporate Bond Index - consists of
publicly issued, non-convertible corporate bonds rated AA or AAA. It is
value-weighted, total return index, including approximately 800 issues with
maturities of 12 years or greater.
(j) Salomon Brothers Broad Investment Grade Bond - is a market-weighted
index that contains approximately 4700 individually priced investment grade
corporate bonds rated BBB or better, United States Treasury/agency issues and
mortgage pass-through securities.
(k) Salomon Brothers World Bond Index - measures the total return
performance of high-quality securities in major sectors of the international
bond market. The index covers approximately 600 bonds from 10 currencies:
Australian Dollars Netherlands Guilder
Canadian Dollars Swiss Francs
European Currency Units UK Pounds Sterling
French Francs U.S. Dollars
Japanese Yen German Deutsche Marks
(l) J.P. Morgan Traded Global Bond Index - is an unmanaged index of
government bond issues and includes Australia, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, the Netherlands, Spain, Sweden, United Kingdom and United
States gross of withholding tax.
40
<PAGE>
(m) Lehman LONG-TERM Treasury Bond - is composed of all bonds covered by
the Lehman Treasury Bond Index with maturities of 10 years or greater.
(n) Lehman Aggregate Bond Index - is an unmanaged index made up of the
Government/Corporate Index, the Mortgage-Backed Securities Index and the Asset-
Backed Securities Index.
(o) NASDAQ Industrial Index - is composed of more than 3,000 industrial
issues. It is a value-weighted index calculated on price change only and does
not include income.
(p) Composite Indices - 70% Standard & Poor's 500 Stock Index and 30%
NASDAQ Industrial Index; 36% Standard & Poor's 500 Stock Index and 65% Salomon
Brothers High Grade Bond Index; and 65% Standard & Poor's 500 Stock Index and
35% Salomon Brothers High Grade Bond Index.
(q) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
- - analyzes price, current yield, risk, total return and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
(r) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk and total return for equity funds.
(s) Financial publications: Business Week, Changing Times, Financial
World, Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times,
Global Investor, Investor's Daily, Lipper Analytical Services, Inc.,
Morningstar, Inc., New York Times, Personal Investor, Wall Street Journal and
Weisenberger Investment Companies Service - publications that rate fund
performance over specified time periods.
(t) Consumer Price Index (or cost of Living Index), published by the
United States Bureau of Labor Statistics - a statistical measure of change, over
time, in the price of goods and services in major expenditure groups.
(u) Stocks, Bonds, Bills and Inflation, published by Hobson Associates -
historical measure of yield, price and total return for common and small company
stock, long-term government bonds, Treasury bills and inflation.
(v) Savings and Loan Historical Interest Rates - as published in the
United States Savings & Loan League Fact Book.
(w) Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Lehman Brothers Inc. and Bloomberg L.P.
(x) The MSCI Combined Far East Free ex-Japan Index, a
market-capitalization weighted index comprising stocks in Hong Kong,
Indonesia, Korea, Malaysia, Philippines, Taiwan and Thailand. Korea is
included in the MSCI Combined Far East Free ex Japan Index at 20% of its
market capitalization.
(y) C.S. First Boston High Yield Index - generally includes over 180
issues with an average maturity range of seven to ten years with a minimum
capitalization of $100 million. All issues are individually trader-priced
monthly.
(z) Russell 2500 Small Company Index - is comprised of the bottom 500
stocks in the Russell 1000 Index which represents the universe of stocks from
which most active money managers typically select; and all the stocks in the
Russell 2000 Index. The largest security in the index has a market
capitalization of approximately $1.3 billion.
41
<PAGE>
(aa) Morgan Stanley Capital International World Index - An arithmetic,
market value-weighted average of the performance of over 1,470 securities listed
on the stock exchanges of countries in Europe, Australia, the Far East, Canada
and the United States.
(bb) Morgan Stanley Capital International Emerging Markets Global Latin
American Index - An unmanaged, arithmetic market value weighted average of the
performance of over 196 securities on the stock exchanges of Argentina, Brazil,
Chile, Colombia, Mexico, Peru and Venezuela. (Assumes reinvestment of
dividends.)
(cc) IFC Global Total Return Composite Index - An unmanaged index of
common stocks and includes 18 developing countries in Latin America, East and
South Asia, Europe, the Middle East and Africa (net of dividends reinvested).
(dd) EMBI+ - Expanding on the EMBI, which includes only Bradys, the EMBI+
includes a broader group of Brady Bonds, loans, Eurobonds and U.S. Dollar local
markets instruments. A more comprehensive benchmark than EMBI, the EMBI+ covers
49 instruments from 14 countries. At $98 billion, its market cap is nearly 50%
higher than the EMBI's. The EMBI+ is not, however, intended to replace the EMBI
but rather to complement it. The EMBI continues to represent the most liquid,
most easily traded segment of the market, while the EMBI+ represents the broader
market, including more of the assets that investors typically hold in their
portfolios. Both of these indices are published daily.
(ee) The MSCI Latin America Global Index - is a broad-based market cap
weighted composite index covering at least 60% of markets in Mexico, Argentina,
Brazil, Chile, Colombia, Peru and Venezuela (Assumes reinvestment of dividends).
(ff) Morgan Stanley Capital International Japan Index - An unmanaged index
of common stocks (assumes dividends reinvested).
(gg) NAREIT Index - An unmanaged market weighted index of tax qualified
REITs (excluding healthcare REITs) listed on the New York Stock Exchange,
American Stock Exchange and the NASDAQ National Market System, including
dividends.
In assessing such comparisons of performance an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in the Fund's
Investment Funds, that the averages are generally unmanaged, and that the items
included in the calculations of such averages may not be identical to the
formula used by the Fund to calculate its performance. In addition, there can be
no assurance that the Fund will continue this performance as compared to such
other averages.
AMERICAN VALUE FUND
The American Value Fund's portfolio managers are "value" investors, and as
such, their mission is to buy stocks of quality U.S.-based companies they
believe to be selling below their intrinsic worth and sell them when they reach
fair value. This involves buying quality stocks when they are out of favor with
the majority of investors and selling them after the market has realized their
fair value.
Since 1926, small market capitalization stocks have, on average,
outperformed large market capitalization stocks by 2%-3% annualized. Small
capitalized stocks are defined as the five smallest market capitalization
deciles of the Center for Research in Security Prices at the University of
Chicago ("CRSP"); large capitalization stocks constitute the five largest CRSP
market capitalization deciles.
42
<PAGE>
Wilshire Associates reports small cap value stocks (an index made up of the
lowest price-to-book, lowest price-to-earnings and highest yielding small
capitalization stocks) have outperformed the average small cap stock as well as
the average small cap growth stock during the period of 1978 to 1994, and with
less risk than the average small cap growth stock (an index made up of small
capitalization stocks with the highest earnings growth, highest price-to-book
and highest price-to-earnings ratios as shown in the chart below).
[THE FOLLOWING IS A NARRATIVE DESCRIPTION THAT REPLACES
GRAPHIC MATERIAL FOR EDGAR FILING PURPOSES.]
A graph entitled "Small Cap Value Has Provided A Favorable Risk/Return Profile"
indicates returns from 14.3% to 19.5% on the vertical axis and risk (standard
deviation) from 14.9% to 24.3% on the horizontal axis. The following points are
indicated on the graph:
For Small Cap Value Portfolio:
Return of 19.5% at risk (standard deviation) of 15.9%
For Small Cap Mean Between Value and Growth:
Return of 15.9% at risk (standard deviation) of 20.6%
Small Cap Growth Portfolio:
Return of 15.6% at risk (standard deviation) of 24.3%
For S&P 500: Return of 14.3% at risk (standard deviation) of 14.9%
Source: Wilshire Associates style performance data 1978-1994
[END OF NARRATIVE DESCRIPTION THAT REPLACES
GRAPHIC MATERIAL FOR EDGAR FILING PURPOSES.]
Past performance is no guarantee of future results. The S&P 500 and the Style
Portfolio Data are unmanaged indices of securities. The risk factor is an
annualized standard deviation of the annual returns. The Small Cap Value Index
is a straightforward composite benchmark. It is the average of three separate
indices: Low Price/Book Index ("Low P/B"), High Yield Index, and Low
Price/Earnings Index ("Low P/E"). Each index is computed by sorting the
companies of stocks ranked 501-2000 by market capitalization by the fundamental
measure. The universe is then split into equally weighted deciles based on the
sorted fundamental measure. The Low P/B and the Low P/E indices are simply the
unweighted returns from the 8th and 9th decile. The High Yield Index is the
unweighted return from the 2nd and 3rd decile. The process is a repetitive,
rigid algorithm which is not subject to manager selectivity. The Small Cap
Index is the Decile 6-8 index of the Center for Research in Security Prices of
the University of Chicago ("CRSP"). The CRSP
43
<PAGE>
indices are composed of nearly all common stocks traded on the NYSE, AMEX, and
NASDAQ within a given market-cap range. The size cutoffs are determined by
ranking all NYSE stocks by market cap, forming deciles, and then adding all the
issues that fit the size range from the other deciles. The CRSP Decile 6-8
represents the sixth through eighth deciles. The market capitalization ranges
characterized by both indices are consistent with each other and represent the
MSAM/Chicago definition of the small capitalization universe.
44
<PAGE>
$10,000 invested 20 years ago in an unmanaged basket of small cap value stocks
would have significantly outperformed the other investments shown in the chart
below:
[THE FOLLOWING IS A TABULAR REPRESENTATION THAT REPLACES
GRAPHIC MATERIAL FOR EDGAR FILING PURPOSES.]
A graph entitled "Growth of a $10,000 investment on January 1, 1971 through
September 30, 1995" indicates returns of $10,000 to $710,000 on the vertical
axis and calendar quarters from the fourth quarter of 1970 to the third quarter
of 1995 on the horizontal axis. Every sixth quarter is presented instead of
lines covering each quarter.
<TABLE>
<CAPTION>
In Thousands (except last column)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
70Q4 72Q2 73Q4 75Q2 76Q4 78Q2 79Q4 81Q2 82Q4 84Q2 85Q4 87Q2 88Q4 90Q2 91Q4 93Q2 94Q4 9/30/95
- -----------------------------------------------------------------------------------------------------------------------------------
Small Cap $10 $10 $10 $20 $30 $35 $55 $70 $110 $170 $240 $270 $270 $390 $525 $539 $657
Value
$10
- -----------------------------------------------------------------------------------------------------------------------------------
Small Cap 10 10 10 15 20 30 45 55 70 100 120 110 135 160 210 $237 $304
10
- -----------------------------------------------------------------------------------------------------------------------------------
Large Cap 10 10 10 15 15 15 15 30 35 50 65 65 85 110 130 $130 $169
10
- -----------------------------------------------------------------------------------------------------------------------------------
10 Year 10 10 10 12 15 15 15 30 30 35 40 45 50 60 75 $ 74 $ 85
Govt Bond
10
- -----------------------------------------------------------------------------------------------------------------------------------
T-Bill 10 10 10 12 15 15 20 30 35 35 40 45 50 55 58 $ 60 $ 62
10
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[END OF TABULAR REPRESENTATION THAT REPLACES GRAPHIC
MATERIAL FOR EDGAR FILING PURPOSES.]
Past performance is no guarantee of future results. Small cap securities are
generally more volatile than T-Bills, 10-year government bonds or the S&P 500.
The returns shown assume the reinvestment of all distributions of income and
capital gains and do not reflect the deduction of sales charges or management
fees and expenses that would be applicable to a managed basket of equity
securities. The deduction of such sales charges and management fees and
expenses would reduce the returns shown. It is not possible to invest directly
in an index of equity securities, including any of the MSCI indices. An
investment strategy may be designed to replicate an index of equity securities
and may be more or less successful in achieving such a replication.
THE AMERICAN VALUE FUND'S PORTFOLIO. The portfolio universe consists of
the next 2,000 companies that rank in size following the 500 largest U.S.
corporations. The portfolio consists of approximately 100 companies, many of
which have been in business for over one hundred years and meet the stringent
criteria set forth by Morgan Stanley's portfolio management team. Companies in
the portfolio must be bargain-priced, with quality products and a dominant
market niche. They must demonstrate a sustainable growth rate, a healthy
financial position and have a history of paying dividends.
Careful analysis, using this criteria, helps Morgan Stanley portfolio
managers distinguish an underpriced stock that is in a position to recover, from
one that will continue to decline.
THE MORGAN STANLEY DISTINCTION. The portfolio managers' goal is to
capitalize on the market's tendency to overreact to bad news. Often a single
negative event that has been exaggerated in the stock market can cause a stock's
price to decline much more than is justified by the company's actual prospects.
45
<PAGE>
This type of discrepancy between a company's market price and its intrinsic
worth (based on its earnings, cash flow, and/or asset values) is viewed by the
portfolio managers as an opportunity.
The managers of the American Value Fund are long-term investors, not short-
term traders. They recognize that the potentially higher rate of return
available from small stocks cannot be achieved overnight. Value takes time to
be realized.
The Fund's portfolio managers seek companies paying high, sustainable
dividends. Dividends are important because they provide a good indication that
a company has not only quality, shareholder-oriented management, but also
financial strength.
THE ASIAN GROWTH POTENTIAL
Annual growth, as measured by Gross National Product, in the 1990s is
projected to be 5.3% in Asia as compared with 2% in both North America and
Europe, according to the World Bank Atlas. According to Morgan Stanley
research, the economies in this region are less mature and are expected to have
a higher rate of sustainable growth well into the next century.
According to research conducted by J. Walter Thompson, by the year 2000,
Asia will have two-thirds of the world's population; only four of the world's
largest cities will be non-Asian; affluent Asian households will rise by 50% to
51 million; and per capita Gross Domestic Product ("GDP") will double. In
addition, 240 million Asian households will have televisions (a 70% increase in
the past 5 years, as compared with a 4.3% increase in Britain and a 6.7%
increase in the U.S.). China currently has one-quarter of the world's
population and is projected to have 200 million middle-class consumers by the
year 2000. By 2012, China, alone, is projected to have the world's largest
economy.
Annualized returns of stock markets in this region are, in some cases,
twice that of the U.S., according to Morgan Stanley Capital International (MSCI)
Indices. On a relative basis, stock prices in this region are less than many
countries in the world, according to MSCI.
MORGAN STANLEY: THE ASIAN AUTHORITY. Morgan Stanley has a strong
commitment to the Asian region. The portfolio team is based in Morgan Stanley's
Singapore office, with managers who are native to the region and the markets
they analyze, offering local insights that have contributed to a superior
performance record. Morgan Stanley has over 1,250 employees located in the Far
East and has offices in Singapore, Shanghai, Taipei and Seoul.
ESTIMATED GNP GROWTH
1990-2000
Asia 5.3%
North America 2.0%
South America 2.2%
Europe 2.0%
Middle East 1.6%
Africa 0.3%
Source: World Bank Atlas
46
<PAGE>
[THE FOLLOWING IS A TABULAR REPRESENTATION THAT REPLACES
GRAPHIC MATERIAL FOR EDGAR FILING PURPOSES.]
The following replaces a bar graph that indicates price earnings ratios in
percentage returns on the vertical axis and countries on the horizontal
axis:
SUPERIOR HISTORIC MARKET RETURNS
1990-1994 ANNUALIZED RETURNS* (US DOLLARS)
Hong Kong 27.18%
Philippines 21.44
CFEFxJ 20.14
Thailand 17.47
Singapore 16.02
Malaysia 13.86
USA 9.16
World 4.24
EAFE 1.82
Korea 0.26
Indonesia -2.15
Taiwan -2.98
Japan -3.43
Past performance of Asian markets is not a guarantee of their future performance
and is not indicative of the Fund's future performance.
* Gross Dividends
Sources: MSCI Indices
[END OF TABULAR REPRESENTATION THAT REPLACES
GRAPHIC MATERIAL FOR EDGAR FILING PURPOSES.]
Past Performance is no guarantee of future results. The MSCI indices represent
an unmanaged basket of equity securities. The returns shown assume the
reinvestment of all distributions of income and capital gains and do not reflect
the deduction of sales charges or management fees and expenses that would be
applicable to a managed basket of equity securities. The deduction of such
sales charges and management fees and expenses would reduce the returns shown.
It is not possible to invest directly in an index of equity securities,
including any of the MSCI indices. An investment strategy may be designed to
replicate an index of equity securities and may be more or less successful in
achieving such a replication.
[THE FOLLOWING IS A TABULAR REPRESENTATION THAT REPLACES
GRAPHIC MATERIAL FOR EDGAR FILING PURPOSES.]
The following replaces a bar graph that indicates price earnings ratios in
percentages from 0-100% on the vertical axis and countries on the horizontal
axis:
PRICE EARNINGS/RATIO* AS OF DECEMBER, 1994
Japan 97.3%
Taiwan (E) 36.0
Philippines 28.0
Malaysia 24.2
World 23.2
Korea (E) 22.0
Indonesia 20.9
Thailand 20.1
Singapore 19.5
CFEFxJ(E) 19.4
USA 16.9
Hong Kong 13.3
*Trailing 12 Months
Source: MSCI
(E) Estimate, not from MSCI, 12/31/94
[END OF TABULAR REPRESENTATION THAT REPLACES
GRAPHIC MATERIAL FOR EDGAR FILING PURPOSES.]
47
<PAGE>
EMERGING MARKETS' GROWTH POTENTIAL
Annual growth, as measured by Gross National Product, in the 1990s is projected
to be 6.5% in emerging markets as compared with 2.5% in industrial countries,
according to the World Bank. According to Morgan Stanley research, the economies
in this region are less mature and are expected to have a higher rate of
sustainable growth well into the next century. If the high savings in the
emerging markets countries as of 1991 are sustained, the savings will provide
much of the needed capital for economic growth:
[THE FOLLOWING IS A TABULAR REPRESENTATION THAT REPLACES
GRAPHIC MATERIAL FOR EDGAR FILING PURPOSES.]
The following replaces a bar graph that indicates percentage of growth from
0-50% on the vertical axis and countries on the horizontal axis:
GROWTH - HIGH SAVINGS RATE (1991)
Singapore 45%
China 43
Korea 37
Indonesia 37
Thailand 34
Japan 34
Hong Kong 33
Malaysia 33
Taiwan 30
EEC(1) 22
India(1) 20
Mexico 20
Chile 18
Philippines 16
Brazil 16
Argentina 16
USA 15
Source: World Bank
Note: (1) 1989 data.
[END OF TABULAR REPRESENTATION THAT REPLACES
GRAPHIC MATERIAL FOR EDGAR FILING PURPOSES.]
Morgan Stanley believes that population growth projected by the World Bank for
the 1990s, particularly among the middle class, will create buying power and
fuel demand for products, leading to economic growth and industrial
sophistication:
Total Population Middle Classes
(Percent Per Annum)
Developed Countries 0.4% 1.1%
Developing Countries 1.9% 5.9%
SOURCE: WORLD BANK
A large percentage of the population is under the age of 15 in emerging
countries. As these children mature, they will greatly increase consumption of
goods and services.
48
<PAGE>
[THE FOLLOWING IS A TABULAR REPRESENTATION THAT REPLACES
GRAPHIC MATERIAL FOR EDGAR FILING PURPOSES.]
The following replaces a bar graph that indicates the percentages of population
under the age of 15 ranging from 0-50% on the horizontal axis and countries on
the vertical axis.
YOUNG POPULATION (1991)
Source: The Economist
Note:(1) 1990 data.
USA 22%
Argentina(1) 30
Brazil(1) 35
Chile(1) 31
Mexico(1) 37
Venezuela(1) 38
Indonesia 37
S. Korea 27
Malaysia 37
Philippines 39
Taiwan 27
Thailand 35
India 36
Turkey(1) 35
Jordan(1) 44
Nigeria(1) 47
A large percentage of the population is under the age of 15 in emerging
countries. As these children mature, they will have a tremendous impact on
consumption of goods and services.
[END OF TABULAR REPRESENTATION THAT REPLACES
GRAPHIC MATERIAL FOR EDGAR FILING PURPOSES.]
Historically, the average annual total return of emerging markets has
exceeded that of developed countries, and other indicators point to significant
future growth in the emerging markets:
THE CASE FOR EMERGING MARKETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
RETURNS GROWTH VALUE UNDER- DIVERSI-
REPRESEN- FICATION
TATION
- ---------------------------------------------------------------------------------------------------------------
Real
GNP Real Foreign Inv.
Annual Growth EPS Mkt % of
Returns (1994- Growth P/E Cap/ Institutional Average
(1940-1993) 2000) (1994) 1994 GNP Assets Correlation
E
<S> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets 17% 6.5% 15% 24.0x 30% 0.6% 0.07
Developed Markets 13% 2.5% 5% 26.5x 70% 99.4% 0.51%
</TABLE>
SOURCE: MORGAN STANLEY RESEARCH
THE RETURNS DO NOT REFLECT ANY ASSET-BASED CHARGES FOR INVESTMENT MANAGEMENT OR
OTHER EXPENSES.
ASSUMES REINVESTMENT OF ALL DIVIDENDS/DISTRIBUTIONS.
THE PAST PERFORMANCE OF EMERGING MARKETS, HOWEVER, IS NO GUARANTEE OF
49
<PAGE>
THE EMERGING MARKETS FUND'S FUTURE PERFORMANCE.
50
<PAGE>
MORGAN STANLEY: AN AUTHORITY IN LATIN AMERICA AND EMERGING MARKETS
Over one-third of Morgan Stanley's 9,200 employees live and work outside
the United States, enabling them to recognize opportunities as they arise and,
more importantly, to act on them quickly.
At ______, 1996, MSAM, together with its affiliated asset management
companies, had approximately ___ billion in assets under management and
fiduciary advice, including over ______ million in Latin America markets and
over _ billion in equities and fixed income in emerging markets, making it one
of the largest investment managers in emerging markets.
Morgan Stanley portfolio managers have access to proprietary research
through Morgan Stanley Capital International (MSCI), the generally recognized
standard for measuring the performance of international securities worldwide.
MSCI monitors approximately 4,000 of some of the world's leading companies,
which account for about 80% of the total market value of the world's stock
markets.
GROWTH POTENTIAL IN LATIN AMERICA
An economic transformation is occurring in Latin America today, which we
believe is creating a positive environment for investors. Old (protected)
economies are being transformed into new (open) free market economies, as
evidenced by many changes, including:
OLD (PROTECTED) NEW (OPEN)
- --------------- ----------
High import tariffs Low tariffs
Regulated exchange rates Free exchange rates
Regulated interest rates Market interest rates
Investment restrictions Open foreign investment
High tax rates Competitive tax rates
Command economy Market economy
Employment priority Efficiency priority
Subsidies Competitive market prices
State-owned industry Privatization
Deficit spending Fiscal austerity
Capital flight Return capital
High inflation Lower inflation
According to Morgan Stanley research, the economies in this region are less
mature and are expected to have higher rates of sustainable growth well into the
next century. We believe the greatest potential for gain is when situations are
improving and not when they are mature.
51
<PAGE>
[THE FOLLOWING IS A TABULAR REPRESENTATION THAT REPLACES
GRAPHIC MATERIAL FOR EDGAR FILING PURPOSES.]
The following replaces a bell curve line graph that indicates development
increasing upward in the vertical axis and time of maturity increasing to the
right in the horizontal axis:
EMERGING MARKET LIFE CYCLE
- ------------------------------------------------------------------------------
COUNTRIES BEHIND-THE- EMERGING ESTABLISHED MATURE
SCENES MARKETS GROWTH ECONOMIES
- ------------------------------------------------------------------------------
Germany X
- ------------------------------------------------------------------------------
U.S. X
- ------------------------------------------------------------------------------
Japan X
- ------------------------------------------------------------------------------
U.K. X
- ------------------------------------------------------------------------------
Spain X
- ------------------------------------------------------------------------------
Hong Kong X
- ------------------------------------------------------------------------------
Singapore X
- ------------------------------------------------------------------------------
Portugal X
- ------------------------------------------------------------------------------
Taiwan X
- ------------------------------------------------------------------------------
Greece X
- ------------------------------------------------------------------------------
Korea X
- ------------------------------------------------------------------------------
Malaysia X
- ------------------------------------------------------------------------------
Turkey X
- ------------------------------------------------------------------------------
Thailand X
- ------------------------------------------------------------------------------
Mexico X
- ------------------------------------------------------------------------------
Chile X
- ------------------------------------------------------------------------------
Argentina X
- ------------------------------------------------------------------------------
Venezuela X
- ------------------------------------------------------------------------------
Indonesia X
- ------------------------------------------------------------------------------
Philippines X
- ------------------------------------------------------------------------------
India X
- ------------------------------------------------------------------------------
Brazil X
- ------------------------------------------------------------------------------
Pakistan X
- ------------------------------------------------------------------------------
Sri Lanka X
- ------------------------------------------------------------------------------
Peru X
- ------------------------------------------------------------------------------
Egypt X
- ------------------------------------------------------------------------------
Sub-Saharan
Africa X
- ------------------------------------------------------------------------------
Eastern Europe X
- ------------------------------------------------------------------------------
Cuba X
- ------------------------------------------------------------------------------
Vietnam X
- ------------------------------------------------------------------------------
Iran X
- ------------------------------------------------------------------------------
Source: Morgan Stanley Research
[END OF TABULAR REPRESENTATION THAT REPLACES
GRAPHIC MATERIAL FOR EDGAR FILING PURPOSES.]
Historically, this region's economy has grown faster than the industrial
countries, as measured by Gross Domestic Product, and the World Bank projects it
to grow twice as fast as the industrial countries by the year 2000.
Real GDP Growth
1965-93 1993-2000
Forecast
Latin America 4.3% 5.0%
Industrial Countries 3.1% 2.5%
SOURCE: WORLD BANK
PAST PERFORMANCE OF LATIN AMERICAN MARKETS, HOWEVER, IS NO GUARANTEE OF THE
LATIN AMERICAN FUND'S FUTURE PERFORMANCE.
Morgan Stanley believes that the population growth projected by the World
Bank for the 1990s in these developing countries, particularly among the middle
class, will create buying power and fuel demand for products, leading to
economic growth and industrial sophistication:
Growth of
Total Growth of
Population Middle Classes
(Percent Per Annum)
Developed Countries 0.4% 1.1%
Developing Countries 1.9% 5.9%
SOURCE: WORLD BANK
52
<PAGE>
According to Morgan Stanley research, historically, annualized returns of
stock markets in this region have been superior, and on a relative basis, stock
prices in this region are significantly lower than developed markets as well as
other emerging markets, as measured by price/earnings ratios.
1988-93
Annualized 1993
Return Return
S&P 500 14.5% 10.0%
T-Bills 5.7% 3.1%
Emerging Growth Stocks 18.4% 21.0%
U.S. Government Bonds 10.7% 8.2%
EAFE 2.0% 32.6%
Japanese Stocks -7.0% 25.5%
Emerging Market Equities 16.5% 67.5%
MSCI LATIN AMERICA 42.4% 49.1%
SOURCE: MORGAN STANLEY RESEARCH
The returns do not reflect any asset-based charges for investment
management or other expenses. Assumes reinvestment of all
dividends/distribution. Past Performance is no guarantee of the Latin American
Fund's future performance.
Price/Earnings Ratio
Developed Markets* 28.4X
Emerging Markets* 13.9X
LATIN AMERICA** 17.2X
SOURCE: EMERGING MARKETS P/E REPRESENTED BY THE IFC INDEX, DEVELOPED MARKETS BY
MSCI WORLD
* PROSPECTIVE 1995
** TRAILING AS OF DECEMBER 31, 1994
Market Cap/GNP
(As of March 3, 1994)
Developed Markets .7
Emerging Markets .3
LATIN AMERICA .3
SOURCE: EMERGING MARKETS P/E REPRESENTED BY THE IFC INDEX, DEVELOPED MARKETS BY
MSCI WORLD
GENERAL INFORMATION
Description of Shares and Voting Rights
The Fund's Articles of Incorporation permit the Directors to issue 21.75
billion shares of common stock, par value $.001 per share, from an unlimited
number of Investment Funds. Currently the Fund is
53
<PAGE>
authorized to offer shares of seventeen Investment Funds, fourteen of which have
Class A, Class B and Class C shares.
The shares of each Investment Fund of the Fund are fully paid and
non-assessable, and have no preference as to conversion, exchange, dividends,
retirement or other features. The shares of each Investment Fund of the Fund
have no pre-emptive rights. The shares of the Fund have non-cumulative voting
rights, which means that the holders of more than 50% of the shares voting for
the election of Directors can elect 100% of the Directors if they choose to do
so. A shareholder is entitled to one vote for each full share owned (and a
fractional vote for each fractional share owned), then standing in his name on
the books of the Fund.
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute substantially all of each Investment
Fund's net investment income, if any. Each Investment Fund may choose to make
sufficient distributions of net capital gains to avoid liability for federal
excise tax. An Investment Fund will not be subject to federal income tax on
capital gains or ordinary income distributed to shareholders so long as it
qualifies as a RIC (see discussion under "Dividends and Distributions" and
"Taxes" in the Prospectus). However, the Fund may also choose to retain net
realized capital gains and pay taxes on such gains. The amounts of any income
dividends or distributions cannot be predicted.
Any dividend or distribution paid shortly after an investor purchases
shares of an Non-Money Market Fund will reduce the per share net asset value
of that Investment Fund by the per share amount of the dividend or
distribution. Furthermore, such dividends or distributions, although in
effect a return of capital, are subject to income taxes to shareholders
subject to taxes as set forth in the Prospectus.
As set forth in the Prospectus, unless the shareholder elects otherwise in
writing, all dividends and distributions of an Investment Fund are automatically
reinvested in additional shares of that Investment Fund at net asset value as of
the business day following the record date. This reinvestment policy will remain
in effect until the shareholder notifies the Transfer Agent in writing at least
three days prior to a record date that the shareholder has elected either the
Income Option (income dividends in cash and distributions in additional shares
at net asset value) or the Cash Option (both income dividends and distributions
in cash). No initial sales charge or CDSC is imposed on shares of any of the
Investment Funds, including the Non-Money Funds, that are purchased through the
automatic reinvestment of dividends and distributions of an Investment Fund.
Each Investment Fund generally will be treated as a separate corporation
(and hence as a separate "regulated investment company") for federal tax
purposes. Any net capital gains of any Investment Fund, whether or not
distributed to investors, cannot be offset against net capital losses of any
other Investment Fund.
CUSTODY ARRANGEMENTS
Chase serves as the Fund's domestic custodian except with respect to the
Money Market Funds. Chase is not affiliated with Morgan Stanley & Co.
Incorporated. Morgan Stanley Trust Company, Brooklyn, NY, acts as the Fund's
custodian for foreign assets held outside the United States and employs
subcustodians who were approved by the Directors of the Fund in accordance with
Rule 17f-5 adopted by the SEC under the 1940 Act. Morgan Stanley Trust Company
is an affiliate of Morgan Stanley & Co. Incorporated. In the selection of
foreign subcustodians, the Directors consider a number of factors, including,
but not limited to, the reliability and financial stability of the institution,
the ability of the institution to provide efficiently the custodial services
required for the Fund, and the reputation of the institution in the particular
country or region. PNC Bank, N.A. serves as the Fund's custodian for each of
the Money Market Funds.
54
<PAGE>
DESCRIPTION OF SECURITIES AND RATINGS
I. DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
EXCERPTS FROM MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") DESCRIPTION OF
BOND RATINGS: AAA - Bonds which are rated Aaa are judged to be the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edged." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues. AA -
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities. Moody's
applies numerical modifiers 1, 2 and 3 in the Aa and A rating categories. The
modifier 1 indicates that the security ranks at a higher end of the rating
category, modifier 2 indicates a mid-range rating and the modifier 3 indicates
that the issue ranks at the lower end of the rating category.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well. BA - Bonds which are rated Ba
are judged to have speculative elements; their future cannot be considered as
well assured. Often the protection of interest and principal payments may be
very moderate, and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class. B -
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small. CAA -
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
EXCERPTS FROM STANDARD & POOR'S CORPORATION ("S&P") DESCRIPTION OF BOND
RATINGS: AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation and indicate an extremely strong capacity to pay
principal and interest. AA - Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated issues only to a
small degree. A - Bonds rated A have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories. BBB - Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than for debt in higher rated
categories. BB, B, CCC, CC - Debt rated BB, B, CCC and CC is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
55
<PAGE>
C - The rating C is reserved for income bonds on which no interest is being
paid. D - Debt rated D is in default, and payment of interest and/or repayment
of principal is in arrears.
DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES: Moody's
ratings for state and municipal notes and other short-term obligations are
designated Moody's Investment Grade ("MIG"). Symbols used are as follows: MIG-1
- - best quality, enjoying strong protection from established cash flows of funds
for their servicing or from established broad-based access to the market for
refinancing, or both; MIG-2 - high quality with margins of protection ample
although not so large as in the preceding group.
DESCRIPTION OF MOODY'S HIGHEST COMMERCIAL PAPER RATING: Prime-1 ("P1") -
Judged to be of the best quality. Their short-term debt obligations carry the
smallest degree of investment risk.
EXCERPT FROM S&P'S RATING OF MUNICIPAL NOTE ISSUES: S-1+ - very strong
capacity to pay principal and interest; SP-1 - strong capacity to pay principal
and interest.
DESCRIPTION OF S&P'S HIGHEST COMMERCIAL PAPER RATINGS: A-1+ - this
designation indicates the degree of safety regarding timely payment is
overwhelming. A-1 - this designation indicates the degree of safety regarding
timely payment is very strong.
WITH RESPECT TO RATINGS BY IBCA LTD., the designation A1 by IBCA, Ltd.
indicates that the obligation is supported by a very strong capacity for timely
repayment. Those obligations rated A1+ are supported by the highest capacity for
timely repayment. Obligations rated A2 are supported by a strong capacity for
timely repayment, although such capacity may be susceptible to adverse changes
in business, economic or financial conditions.
II. DESCRIPTION OF UNITED STATES GOVERNMENT SECURITIES
The term "United States Government securities" refers to a variety of
securities which are issued or guaranteed by the United States Government, and
by various instrumentalities which have been established or sponsored by the
United States Government.
United States Treasury securities are backed by the "full faith and credit"
of the United States. Securities issued or guaranteed by federal agencies and
United States Government sponsored instrumentalities may or may not be backed by
the full faith and credit of the United States. In the case of securities not
backed by the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. Agencies which are backed by the full faith and credit of
the United States include the Export-Import Bank, Farmers Home Administration,
Federal Financing Bank, and others. Certain agencies and instrumentalities, such
as the Government National Mortgage Associates, are, in effect, backed by the
full faith and credit of the United States through provisions in their charters
that they may make "indefinite and unlimited" drawings on the Treasury, if
needed to service debt. Debt from certain other agencies and instrumentalities,
including the Federal Home Loan Bank and Federal National Mortgage Association,
are not guaranteed by the United States, but those institutions are protected by
the discretionary authority for the United States Treasury to purchase certain
amounts of their securities to assist the institution in meeting its debt
obligations. Finally, other agencies and instrumentalities, such as the Farm
Credit System and the Federal Home Loan Mortgage Corporation, are federally
chartered institutions under Government supervision, but their debt securities
are backed only by the creditworthiness of those institutions, not the United
States Government.
56
<PAGE>
Some of the United States Government agencies that issue or guarantee
securities include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration, and the Tennessee Valley Authority.
An instrumentality of the United States Government is a Government agency
organized under federal charter with Government supervision. Instrumentalities
issuing or guaranteeing securities include, among others, Federal Home Loan
Banks, the Federal Land Banks, Central Bank for Cooperatives, Federal Immediate
Credit Banks, and the Federal National Mortgage Association.
III. FOREIGN INVESTMENTS
The Investment Funds may invest in securities of foreign issuers. Investors
should recognize that investing in such foreign securities involves certain
special considerations which are not typically associated with investing in
United States issuers. For a description of the effect on the Investment Funds
of currency exchange rate fluctuations, see "Investment Objectives and Policies
- - Forward Foreign Currency Exchange Contracts" above. As foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards and may have policies that are not comparable to those of domestic
issuers, there may be less information available about certain foreign companies
than about domestic issuers. Securities of some foreign issuers are generally
less liquid and more volatile than securities of comparable domestic issuers.
There is generally less government supervision and regulation of stock
exchanges, brokers and listed issuers than in the United States. In addition,
with respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect United States investments in those
countries. Foreign securities not listed on a recognized domestic or foreign
exchange are regarded as not readily marketable and therefore such investments
will be limited to 15% of an Investment Fund's net asset value at the time of
purchase.
Although the Investment Funds will endeavor to achieve the most favorable
execution costs in their portfolio transactions, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on
United States exchanges.
Certain foreign governments levy withholding or other taxes on dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from investments in such countries. Except in the case of
the Global Fixed Income Fund, Asian Growth Fund, European Equity Fund and
Worldwide High Income Fund, it is not expected that an Investment Fund or its
shareholders would be able to claim a credit for U.S. tax purposes with respect
to any such foreign taxes. However, these foreign withholding taxes may not have
a significant impact on any such Investment Fund because its investment
objective is to seek long-term capital appreciation and any dividend or interest
income should be considered incidental.
IV. EMERGING COUNTRY EQUITY AND DEBT SECURITIES
The definition of emerging country equity or debt securities of each of the
Global Equity Allocation, Global Fixed Income, Asian Growth, Emerging Markets,
Latin American, European Equity and Worldwide High Income Funds includes
securities of companies that may have characteristics and business relationships
common to companies in a country or countries other than an emerging country. As
a result, the value of the securities of such companies may reflect economic and
market forces applicable to other countries, as well as to an emerging country.
The Adviser believes, however, that investment in such companies will be
appropriate because the Investment Fund will invest only in those companies
which, in its view, have sufficiently strong exposure to economic and market
forces in an emerging country such that their value will tend to reflect
developments in such emerging country to a greater extent than developments in
another country or countries. The Investment Fund may invest in companies
organized and located in countries other than an emerging country, including
companies having their entire production facilities
57
<PAGE>
outside of an emerging country, when securities of such companies meet one or
more elements of the Investment Fund's definition of an emerging country debt
security and so long as the Adviser believes at the time of investment that the
value of the company's securities will reflect principally conditions in such
emerging country.
The value of debt securities held by the Investment Fund generally will
vary inversely to changes in prevailing interest rates. The Investment Fund's
investments in fixed-rated debt securities with longer terms to maturity are
subject to greater volatility than the Investment Fund's investments in shorter-
term obligations. Debt obligations acquired at a discount are subject to
greater fluctuations of market value in response to changing interest rates than
debt obligations of comparable maturities which are not subject to such
discount.
Investments in emerging country government debt securities involve special
risks. Certain emerging countries have historically experienced, and may
continue to experience, high rates of inflation, high interest rates, exchange
rate fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging country's debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of such debt. As a result of the foregoing, a government obligor
may default on its obligations. If such an event occurs, the Investment Fund may
have limited legal recourse against the issuer and/or guarantor. Remedies must,
in some cases, be pursued in the courts of the defaulting party itself, and the
ability of the holder of foreign government debt securities to obtain recourse
may be subject to the political climate in the relevant country. In addition,
no assurance can be given that the holders of commercial bank debt will not
contest payments to the holders of other foreign government debt obligations in
the event of default under their commercial bank loan agreements.
The Investment Fund may invest in certain debt obligations customarily
referred to as "Brady Bonds," which are created through the exchange of existing
commercial bank loans to foreign entities for new obligations in connection with
debt restructurings under a plan introduced by former U.S. Secretary of the
Treasury Nicholas F. Brady (the "Brady Plan"). Brady Bonds have been issued
only recently, and, accordingly, do not have a long payment history. They may be
collateralized or uncollateralized and issued in various currencies (although
most are U.S. dollar-denominated) and they are actively traded in the over-the-
counter secondary market. The Investment Fund may purchase Brady Bonds either
in the primary or secondary markets. The price and yield of Brady Bonds
purchased in the secondary market will reflect the market conditions at the time
of purchase, regardless of the stated face amount and the stated interest rate.
With respect to Brady Bonds with no or limited collateralization, the Investment
Fund will rely for payment of interest and principal primarily on the
willingness and ability of the issuing government to make payment in accordance
with the terms of the bonds.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal due at maturity by U.S. Treasury zero coupon obligations
which have the same maturity as the Brady Bonds. Interest payments on these
Brady Bonds generally are collateralized by cash or securities in an amount
that, in the case of fixed rate bonds, is equal to at least one year of rolling
interest payments or, in the case of floating rate bonds, initially is equal to
at least one year's rolling interest payments based on the applicable interest
rate at that time and is adjusted at regular intervals thereafter. Certain
Brady Bonds are entitled to "value recovery payments" in certain circumstances,
which in effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In the event of
a default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor
58
<PAGE>
will such obligations be sold and the proceeds distributed. The collateral will
be held to the scheduled maturity of the defaulted Brady Bonds by the collateral
agent, at which time the face amount of the collateral will equal the principal
payments which would have then been due on the Brady Bonds in the normal course.
In addition, in light of the residual risk of the Brady Bonds and, among other
factors, the history of defaults with respect to commercial bank loans by public
and private entities of countries issuing Brady Bonds, investments in Brady
Bonds should be viewed as speculative.
Brady Plan debt restructurings totaling approximately $73 billion have been
implemented to date in Argentina, Costa Rica, Mexico, Nigeria, the Philippines,
Uruguay and Venezuela, with the largest proportion of Brady Bonds having been
issued to date by Mexico and Venezuela. Brazil and Poland have announced plans
to issue Brady Bonds aggregating approximately $52 billion, based on current
estimates. There can be no assurance that the circumstances regarding the
issuance of Brady Bonds by these countries will not change.
FINANCIAL STATEMENTS
The Fund's audited financial statements and notes thereto for the fiscal
year ended June 30, 1995, and the report thereon of Price Waterhouse LLP,
independent accountants, which appear in the June 30, 1995 Annual Report to
Shareholders are incorporated herein by reference. The High Yield Fund, U.S.
Real Estate Fund, International Magnum Fund, Japanese Equity Fund, European
Equity Fund, Aggressive Equity Fund, Growth and Income Fund, Money Market
Fund, Tax-Free Money Market Fund and Government Obligations Money Market Fund
were not operational as of the date of the Annual Report.
The PCS Cash Fund, Inc.'s audited financial statements and notes
thereon for the fiscal year ended June 30, 1996, and the report thereon of
Coopers & Lybrand, L.L.P., which appear in the PCS Cash Fund, Inc.'s Annual
Report to Shareholders follow.
These financial statements and notes thereon relate to the PCS Money
Market Portfolio and PCS Government Obligations Money Market Portfolio which
were the predecessors of the Morgan Stanley Money Market Fund and Morgan Stanley
Government Obligations Money Market Fund, respectively.
59
<PAGE>
PCS CASH FUND, INC.
MONEY MARKET PORTFOLIO
STATEMENT OF NET ASSETS
JUNE 30, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT
(000) VALUE
----- -----
<S> <C> <C>
AGENCY OBLIGATIONS (11.6%)
Federal Home Loan Bank Discount Note
5.52%, 07/01/96. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000 $10,000,000
Federal National Mortgage Association Discount Note
5.18%, 09/20/96. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 9,883,450
------------
TOTAL AGENCY OBLIGATIONS (COST $19,883,450). . . . . . . . . . . . . . . . . 19,883,450
------------
CERTIFICATES OF DEPOSIT (10.5%)
BANKS
Duetsche Bank Financial, Inc.
5.37%, 07/10/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 6,000,000
National Westminister Bank (NY)
5.36%, 07/10/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 6,000,015
Royal Bank of Canada (NY)(Banks LOC)
6.05%, 06/11/97 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 6,000,000
------------
TOTAL CERTIFICATES OF DEPOSIT (COST $18,000,015) . . . . . . . . . . . . . . 18,000,015
------------
COMMERCIAL PAPER (35.4%)
BEVERAGES (3.5%)
Coca-Cola Financial Corp.
5.28%, 08/08/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 5,966,560
------------
COMPUTER & OFFICE EQUIPMENT (4.0%)
Hewlett-Packard Co.
5.38%, 09/24/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 6,911,081
------------
FINANCIAL (8.7%)
Abbey Nat'l North Amer. Corp.
5.35%, 11/29/96. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 2,932,679
ABN-AMRO North American Finance Corp.
5.30%, 07/11/96. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 5,991,167
UBS Financial, Inc.
5.55%, 07/01/96. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 6,000,000
------------
TOTAL FINANCIAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,923,846
------------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
PCS CASH FUND, INC.
Money Market Portfolio
Statement of Net Assets (Continued)
June 30, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT
(000) VALUE
----- -----
<S> <C> <C>
COMMERCIAL PAPER (CONTINUED)
MOTOR VEHICLES & CAR BODIES (4.6%)
Daimler Benz
5.38%, 08/02/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000 $ 2,985,653
5.44%, 11/14/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 4,897,339
------------
TOTAL MOTOR VEHICLES & CAR BODIES. . . . . . . . . . . . . . . . . . . . . . 7,882,992
------------
OIL & GAS (3.5%)
Koch Industries, Inc.
5.30%, 07/15/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 5,987,633
------------
RESTAURANTS (4.1%)
McDonald's Corp.
5.35%, 07/15/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 6,985,436
------------
SERVICES - EDUCATIONAL (3.5%)
Harvard University
5.34%, 07/23/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 5,980,420
------------
TELECOMMUNICATIONS (3.5%)
Ameritech Capital Funding Corp.
5.28%, 07/16/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 5,986,800
------------
TOTAL COMMERCIAL PAPER (COST $60,624,768). . . . . . . . . . . . . . . . . . . 60,624,768
------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
PCS CASH FUND, INC.
MONEY MARKET PORTFOLIO
STATEMENT OF NET ASSETS (CONCLUDED)
JUNE 30, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT
(000) VALUE
----- -----
<S> <C> <C> <C>
VARIABLE RATE OBLIGATIONS (25.2%)
Federal National Mortgage Association FLoating Rate Notes
5.18%, 07/01/96** . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000 $ 4,998,642
5.19%, 09/02/96** . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 15,000,000
5.25%, 10/11/96** . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 2,999,176
Federal National Mortgage Association Medium Term Note
5.28%, 07/16/96** . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 4,999,626
Student Loan Marketing Association Floating Rate Note
5.59%, 07/02/96** . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 15,008,299
------------
TOTAL VARIABLE RATE OBLIGATIONS (COST $43,005,743) . . . . . . . . . . . . . 43,005,743
------------
REPURCHASE AGREEMENT (17.2%)
Goldman, Sachs & Co. 5.38%, 07/01/96 (Agreement dated
06/28/96, to be repurchased at $29,379,154 collateralized
by $29,325,000, U.S. Treasury Bonds 7.25%, due
05/15/96. The total market value and accrued interest of
the collateral is $30,235,908)(cost $29,366,000). . . . . . . . . . . . 29,366 29,366,000
------------
TOTAL INVESTMENTS (COST $170,879,976*) . . . . . . . . . . . . . . . 99.9% $170,879,976
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3% 447,415
LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.2%) (354,365)
------------
NET ASSETS (BASED ON 171,084,598 SHARES, HAVING A PAR
VALUE OF $.001 PER SHARE). . . . . . . . . . . . . . . . . . . . . 100.0% $170,973,026
------------
------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE ($170,973,026 DIVIDED BY 171,084,598 SHARES OUTSTANDING) $1.00
------
------
</TABLE>
- --------------
*Also cost for Federal income tax purposes.
**Variable Rate Obligations -- the interest rate shown is the rate as of June
30, 1996 and the maturity date is the shorter of the next interest
readjustment date or the date the principal amount can be recovered through
demand.
See accompanying notes to financial statements.
4
<PAGE>
PCS CASH FUND, INC.
GOVERNMENT OBLIGATIONS MONEY MARKET PORTFOLIO
STATEMENT OF NET ASSETS
JUNE 30, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT
(000) VALUE
----- -----
<S> <C> <C>
AGENCY OBLIGATIONS (82.1%)
Federal Farm Credit Bank Discount Note
5.29%, 07/02/96. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000 $ 9,998,531
Federal Home Loan Bank Discount Notes
5.52%, 07/01/96. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 30,000,000
5.26%, 07/05/96. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 9,994,156
Federal Home Loan Mortgage Corporation Discount Notes
5.24%, 07/03/96. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 9,996,846
5.31%, 07/08/96. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 9,989,675
5.26%, 07/10/96. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 9,986,850
5.28%, 07/15/96. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 9,979,467
5.29%, 07/16/96. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 9,977,958
5.29%, 07/18/96. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 9,975,019
5.30%, 07/23/96. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 9,967,611
------------
TOTAL AGENCY OBLIGATIONS (COST $119,866,113). . . . . . . . . . . . . . . . . . . . 119,866,113
------------
VARIABLE RATE OBLIGATIONS (4.8%)
Federal National Mortgage Association Floating Rate Note
5.25%, 10,11/96**. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 1,999,451
Federal National Mortgage Association Medium Term Note
5.28%, 07/16/96**. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 4,999,626
------------
TOTAL VARIABLE RATE OBLIGATIONS (COST$6,999,077) . . . . . . . . . . . . . . . . . . 6,999,077
------------
REPURCHASE AGREEMENT (13.2%)
Goldman, Sachs & Co. 5.38%, 07/01/96 (Agreement
dated 06/28/96, to be repurchased at $19,294,638
collateralized by $19,260,000, U.S. Treasury Bonds
7.25%, due 05/15/16. The total market value and
accrued interest of the collateral is $19,858,264)
(cost $19,286,000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,286 19,286,000
------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
PCS CASH FUND, INC.
GOVERNMENT OBLIGATIONS MONEY MARKET PORTFOLIO
STATEMENT OF NET ASSETS (CONCLUDED)
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
-----
<S> <C> <C>
TOTAL INVESTMENTS (COST $146,151,190). . . . . . . . . . . . . . . . . . . . . . . 100.1% $146,151,190
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0% 43,994
LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.1%) (217,628)
------------
NET ASSETS (BASED ON 146,076,545 SHARES, HAVING A PAR
VALUE OF $.001 PER SHARE). . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% $145,977,556
-------- ------------
-------- ------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE ($145,977,556 DIVIDED BY 146,076,545 SHARES OUTSTANDING) $1.00
------
------
</TABLE>
- ------------------
*Also cost for Federal income tax purposes.
**Variable Rate Obligations -- the interest rate shown is the rate as of June
30, 1996 and the maturity date is the shorter of the next interest
readjustment date or the date the principal amount can be recovered through
demand.
See accompanying notes to financial statements.
6
<PAGE>
PCS CASH FUND, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
GOVERNMENT OBLIGATIONS
MONEY MARKET MONEY MARKET
PORTFOLIO PORTFOLIO
--------------------- ----------------------
<S> <C> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,502,974 $4,948,893
----------- -----------
EXPENSES
Distribution fees (Note 2). . . . . . . . . . . . . . . . . . . . . . . . 843,776 439,236
Investment advisory fees (Note 2) . . . . . . . . . . . . . . . . . . . . 759,398 395,312
Administration fees (Note 2) . . . . . . . . . . . . . . . . . . . . . . . 167,790 105,462
Registration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,232 26,020
Custodian fees (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . 50,957 26,756
Transfer agent fees (Note 2) . . . . . . . . . . . . . . . . . . . . . . . 49,945 12,000
Printing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,500 22,500
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,250 16,445
Insurance expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,485 15,485
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,356 12,978
Directors' fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,597 8,597
Miscellaneous expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 10,443 10,959
----------- -----------
2,060,729 1,091,750
LESS FEES VOLUNTARILY WAIVED (NOTE 2). . . . . . . . . . . . . . . . . . . . . (406,928) (257,203)
----------- -----------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,653,801 834,547
----------- -----------
NET INVESTMENT INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,849,173 4,114,346
NET REALIZED LOSS ON INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . (99,906) (98,989)
----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . . . . . . . . $7,749,267 $4,015,357
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
PCS CASH FUND, INC.
MONEY MARKET PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,849,173 $ 6,917,658
Net realized loss on investments . . . . . . . . . . . . . . . . . . . . . (99,906) (11,667)
------------- -------------
Net increase in net assets resulting from operations . . . . . . . . . . . 7,749,267 6,905,991
------------- -------------
Dividends to shareholders from:
Net investment income ($.0463 and $.0446 per
share, respectively). . . . . . . . . . . . . . . . . . . . . . . . . . (7,849,173) (6,917,658)
Net realized gains ($.0000 and $.0001 per
share, respectively). . . . . . . . . . . . . . . . . . . . . . . . . . -- (7,700)
------------- -------------
Total dividends to shareholders. . . . . . . . . . . . . . . . . . . . . . . (7,849,173) (6,925,358)
------------- -------------
Decrease in net assets derived from capital
share transactions (Note 3). . . . . . . . . . . . . . . . . . . . . . . . (441,635) (5,064,947)
------------- -------------
Total decrease in net assets . . . . . . . . . . . . . . . . . . . . . . . . (541,541) (5,084,314)
NET ASSETS:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171,514,567 176,598,881
------------- -------------
End of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $170,973,026 $171,514,567
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
PCS CASH FUND, INC.
GOVERNMENT OBLIGATIONS MONEY MARKET PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,114,346 $ 9,351,381
Net realized gain (loss) on investments. . . . . . . . . . . . . . . . . . (98,989) 11,936
------------- -------------
Net increase in net assets resulting from operations . . . . . . . . . . . 4,015,357 8,363,317
------------- -------------
Dividends to shareholders from:
Net investment income ($.0464 and $.0448 per
share, respectively). . . . . . . . . . . . . . . . . . . . . . . . . . (4,114,346) (8,351,381)
Net realized gains ($.0001 and $.0000 per
share, respectively). . . . . . . . . . . . . . . . . . . . . . . . . . (11,936) (572)
------------- -------------
Total dividends to shareholders. . . . . . . . . . . . . . . . . . . . . . . (4,126,282) (9,351,953)
------------- -------------
Increase (decrease) in net assets derived from capital
share transactions (Note 3) . . . . . . . . . . . . . . . . . . . . . . . 78,583,923 (35,057,979)
------------- -------------
Total increase (decrease) in net assets. . . . . . . . . . . . . . . . . . . 78,472,998 (35,046,615)
NET ASSETS:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,504,558 102,551,173
------------- -------------
End of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $145,977,556 $ 67,504,558
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
PCS CASH FUND, INC.
FINANCIAL HIGHLIGHTS
(for a share outstanding through each period)
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED ENDED
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993 JUNE 30, 1992
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income. . . . . . . . . . . . . . . . 0.0463 0.0446 0.0246 0.0243 0.0402
Net realized gains/(losses) on investments . . . . . (.0006) 0.0001 -- 0.0001 --
Less dividends to shareholders from:
Net investment income. . . . . . . . . . . . . . . . (0.0463) (0.0446) (0.0246) (0.0243) (0.0402)
Net realized gains . . . . . . . . . . . . . . . . . -- (0.0001) -- (0.0001) --
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total return . . . . . . . . . . . . . . . . . . . . . 4.72% 4.55% 2.49% 2.47% 4.11%
Ratios of expenses to average net assets . . . . . . . 0.98%(b) 0.98%(b) 0.98%(b) 0.98%(b) 0.98%(b)
Ratios of net investment income to
average net assets . . . . . . . . . . . . . . . . . 4.65%(b) 4.45%(b) 2.45%(b) 2.44%(b) 3.97%(b)
Net assets at end of period (000). . . . . . . . . . . $170,973 $171,515 $176,599 $156,310 $190,034
GOVERNMENT OBLIGATIONS MONEY MARKET PORTFOLIO
FOR THE PERIOD
MARCH 12, 1992
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR (COMMENCEMENT
ENDED ENDED ENDED ENDED OF OPERATIONS)
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993 TO JUNE 30, 1992
-------------- ------------- -------------- ------------ ----------------
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- --------
Income from investment operations:
Net investment income. . . . . . . . . . . . . . . . 0.0464 0.0448 0.0243 0.0246 0.0094
Net realized gains/(losses) on investments . . . . . (0.0011) -- 0.0011 0.0002 --
Less dividends to shareholders from:
Net investment income. . . . . . . . . . . . . . . . (0.0464) (0.0448) (0.0243) (0.0246) (0.0094)
Net realized gains . . . . . . . . . . . . . . . . . (0.0001) -- (0.0011) (0.0002) --
--------- --------- --------- --------- --------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
Total return . . . . . . . . . . . . . . . . . . . . . 4.72% 4.58% 2.45% 2.51% 0.94%(c)
Ratio of expenses to average net assets. . . . . . . . 0.95%(b) 0.95%(b) 0.95%(b) 0.95%(b) 0.95%(a)(b)
Ratio of net investment income to
average net assets . . . . . . . . . . . . . . . . . 4.68%(b) 4.61%(b) 2.40%(b) 2.50%(b) 3.07%(a)(b)
Net assets at end of period (000). . . . . . . . . . . $145,978 $67,505 $102,551 $101,736 $269,627
</TABLE>
- ---------------------
(a) Annualized.
(b) Without the voluntary waiver of advisory and distribution fees, the ratios
of expenses to average net assets would have been 1.22%, 1.18%, 1.19%,
1.20%, and 1.27% for the Money Market Portfolio and 1.24%, 1.12%, 1.22%,
1.19% and 1.29% annualized for the Government Obligations Money Market
Portfolio. The ratios of net investment income to average net assets would
have been 4.41%, 4.25% 2.24%, 2.22%, and 3.68% for the Money Market
Portfolio and 4.39%, 4.44%, 2.13%, 2.26% and 2.73% annualized for the
Government Obligations Money Market Portfolio.
(c) Not annualized. Total return, if on an annualized basis, would have been
3.16% for the Government Obligations Money Market Portfolio.
See accompanying notes to financial statements.
10
<PAGE>
PCS CASH FUND, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PCS Cash Fund, Inc. (The "Fund"), an open-end diversified management
investment company, was incorporated in Maryland on January 5, 1989, and is
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940.
The Fund is authorized to issue 10 billion shares, $.001 par value per
share, of which 1 billion are classified in each of the following three
portfolios: PCS Money Market Portfolio, PCS Tax-Free Money Market Portfolio,
and PCS Government Obligations Money Market Portfolio. There are currently no
shares outstanding in the Tax-Free Money Market Portfolio.
Preparation of the financial statements in accordance with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that effect reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by
the fund in the preparation of their financial statements:
A)SECURITY VALUATION -- Portfolio securities are valued under the
amortized cost method, which approximates current market value. Under this
method, securities are valued at cost when purchased and, thereafter, a
constant proportionate amortization of any discount or premium is recorded
until maturity of the security. Regular review and monitoring of the
valuation is performed in an attempt to avoid dilution or other unfair
results to shareholders. The Fund seeks to maintain net asset value per
share at $1.00. INVESTMENT IN SHARES OF THE FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT THE FUND
WILL MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
B)SECURITY TRANSACTIONS AND INVESTMENT INCOME -- Security transactions
are accounted for on the trade date. The cost of investments sold is
determined by use of the specific identification method for both financial
reporting and income tax purposes. Interest income is recorded on the
accrual basis.
C)DIVIDENDS TO SHAREHOLDERS -- Dividends from net investment income
are declared daily and paid monthly. Any net realized capital gains will
be distributed at least annually.
D)FEDERAL INCOME TAXES -- The Fund intends to continue to qualify for
the tax treatment applicable to regulated investment companies under the
Internal Revenue Code and make the requisite distributions to its
shareholders which will be sufficient to relieve it from Federal income and
Federal excise taxes. Therefore, no provision has been recorded for
Federal income or Federal excise taxes.
E)REPURCHASE AGREEMENTS -- The Fund may purchase money market
instruments from financial institutions, such as banks and non-bank
dealers, subject to the seller's agreement to repurchase them at an agreed
upon date and price (repurchase agreements). Collateral for repurchase
agreements may have longer maturities than the maximum permissible
remaining maturity of portfolio investments. The seller will be required
on a daily basis to maintain the value of the securities subject to the
agreement at not less than the repurchase price, marked-to-market daily.
The agreements are conditioned upon the collateral being deposited under the
Federal Reserve book-entry system or with the Fund's custodian or a third
party sub-custodian.
11
<PAGE>
PCS CASH FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996
NOTE 2 -- TRANSACTIONS WITH AFFILIATES AND OTHERS
The Fund has entered into an investment advisory agreement with Morgan
Stanley Asset Management Inc. (The "Advisor"), a wholly owned subsidiary of
Morgan Stanley Group Inc. The Fund has also entered into an Administration
and Accounting Services Agreement with PFPC Inc., a wholly owned subsidiary
of PNC Bank Corp., and a distribution agreement with Morgan Stanley & Co.
Inc. PNC Bank Corp. serves as custodian for each of the Fund's portfolios.
PFPC Inc. also serves as the Fund's transfer agent.
For the advisory services provided and expenses assumed by it, the
Advisor is entitled to receive from each Portfolio a fee, computed daily and
payable monthly, at an annual rate of .45% of the first $250 million of the
Portfolio's daily net assets, .40% of the next $250 million of the
portfolio's daily net assets and .35% of the Portfolio's daily net assets in
excess of $500 million. The Advisor may, at its discretion from time to time,
waive voluntarily all of any portion of its advisory fee or reimburse the
Portfolio for a portion of the expenses of its operations. For the year
ended June 30, 1996, advisory fees, net of voluntary fee waivers, were
$605,601 for the Money Market Portfolio and $350,061 for the Government
Obligations Money Market Portfolio.
As required by various state regulations in which the Fund is registered
to sell shares, the Advisor will reimburse each Portfolio if and to the
extent that the aggregate operating expenses of the Portfolio exceed
applicable state limits for the fiscal year. Currently, the most restrictive
of such applicable limits is 2.5% of the first $30 million of average annual
net assets, 2.0% of the next $70 million of average annual net assets, and
1.5% of the remaining average annual net assets. Certain expenses such as
brokerage commissions, taxes, interest, and extraordinary items are excluded
from this limitation. No such reimbursements were required for the year
ended June 30, 1996.
For administration services provided, PFPC Inc. is entitled to receive
from each Portfolio a fee, computed daily and payable monthly, at an annual
rate of .10% of the first $200 million daily net assets, .075% of the next
$200 million of daily net assets, .05% of the next $200 million of daily net
assets and .03% of the daily assets in excess of $600 million.
The Fund has adopted a Plan of Distribution and pursuant thereto has
entered into an agreement under which the distributor, Morgan Stanley & Co.
Inc., (the "Distributor") is entitled to receive from each Portfolio
compensation of its distribution costs at an annual rate of up to .50% of
daily net assets. The Distributor may at its discretion from time to time
waive voluntarily all of any portion of its distribution fee. For the year
ended June 30, 1996, distribution fees, net of voluntary fee waivers, were
$590,645 for the Money Market Portfolio and $227,284 for the Government
Obligations Money Market Portfolio.
12
<PAGE>
PCS CASH FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONCLUDED)
JUNE 30, 1996
NOTE 3 -- CAPITAL STOCK
Transactions in capital stock for each Portfolio were as follows:
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
------------------------------------ --------------------------------------
SHARES VALUE SHARES VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Shares sold. . . . . . . . . . . . . . . . . . . 1,390,773,760 $1,390,773,760 1,261,410,987 $1,261,410,987
Shares issued in reinvestment of dividends . . . 7,425,521 7,425,521 6,579,514 6,579,514
Shares redeemed. . . . . . . . . . . . . . . . . (1,398,640,916) (1,398,640,916) (1,273,055,448) (1,273,055,448)
------------- --------------- -------------- --------------
Net decrease . . . . . . . . . . . . . . . . . . (441,635) $ (441,635) (5,064,947) $ (5,064,947)
------------- --------------- -------------- --------------
------------- --------------- -------------- --------------
</TABLE>
GOVERNMENT OBLIGATIONS MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
------------------------------------ --------------------------------------
SHARES VALUE SHARES VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Shares sold. . . . . . . . . . . . . . . . . . . 1,373,640,193 $1,373,640,193 2,017,389,099 $2,017,389,099
Shares issued in reinvestment of dividends . . . 3,510,973 3,510,973 9,053,037 9,053,037
Shares redeemed. . . . . . . . . . . . . . . . . (1,298,567,243) (1,298,567,243) (2,061,500,115) (2,061,500,115)
------------- --------------- -------------- --------------
Net increase (decrease). . . . . . . . . . . . . 78,583,923 $ 78,583,923 (35,057,979) $ (35,057,979)
------------- --------------- -------------- ---------------
------------- --------------- -------------- ---------------
</TABLE>
NOTE 4 -- NET ASSETS
At June 30, 1996, net assets consisted of the following:
<TABLE>
<CAPTION>
MONEY MARKET GOVERNMENT OBLIGATIONS
PORTFOLIO MONEY MARKET PORTFOLIO
------------ ----------------------
<S> <C> <C>
Capital Paid-in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $171,084,599 $146,076,545
Accumulated Net Realized Loss on Investments. . . . . . . . . . . . . . . (111,573) (98,989)
------------ ------------
$170,973,026 $145,977,556
------------ ------------
------------ ------------
</TABLE>
NOTE 5 -- SUBSEQUENT EVENTS
On July 16, 1996 the Board of Directors of the Fund approved an Agreement
and Plan of Reorganization and Liquidation by and between the Fund and Morgan
Stanley Fund, Inc. The Plan, subject to shareholder approval, provides for the
transfer of all or substantially all of the Fund's assets and liabilities to
Morgan Stanley Fund, Inc. in exchange for shares of Morgan Stanley Fund, Inc.
13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of The PCS Cash Fund, Inc.:
We have audited the accompanying statements of net assets of the PCS Cash
Fund, Inc. (Money Market and Government Obligations Money Market Portfolios),
as of June 30, 1996, and the related statements of operations for the year
then ended, the statements of changes in net assets for each of the periods
in the two years then ended, and the financial highlights for each of the
periods presented. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
investments held by the custodian as of June 30, 1996. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
PCS Cash Fund, Inc. (Money Market and Government Obligations Money Market
Portfolios) as of June 30, 1996 and the results of their operations for the year
then ended, the changes in their net assets for each of the periods in the two
years then ended and the financial highlights for each of the periods presented,
in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
/s/ Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
July 31, 1996
14
