<PAGE>
File No. 33-51294
File No. 811-7140
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
POST-EFFECTIVE AMENDMENT NO. 19 /X/
and
REGISTRATION STATEMENT UNDER THE / /
INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 21
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MORGAN STANLEY FUND, INC.
(Exact Name of Registrant as Specified in Charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of Principal Executive Office)
Registrant's Telephone Number (800) 548-7786
Harold J. Schaaff, Esquire
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas, New York, New York 10020
(Name and Address of Agent for Service)
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COPIES TO:
Warren J. Olsen Richard W. Grant, Esquire
Morgan Stanley Asset Management Inc. Morgan, Lewis & Bockius LLP
1221 Avenue of the Americas 2000 One Logan Square
New York, NY 10020 Philadelphia, PA 19103
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IT IS PROPOSED THAT THIS FILING BE EFFECTIVE
(CHECK APPROPRIATE BOX)
/X/ IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B) OF RULE 485
/ / ON (DATE) PURSUANT TO PARAGRAPH (B) OF RULE 485
/ / 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A) OF RULE 485
/ / ON (DATE) PURSUANT TO PARAGRAPH (A) OF RULE 485
/ / 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A) OF RULE 485
------------------------------------------------------------------------
REGISTRANT HAS PREVIOUSLY ELECTED TO AND HEREBY CONTINUES ITS ELECTION TO
REGISTER AN INDEFINITE NUMBER OF SHARES OF ITS COMMON STOCK, PAR VALUE
$.001 PER SHARE, PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT
OF 1940. REGISTRANT FILED ITS RULE 24F-2 NOTICE FOR ITS FISCAL YEAR
ENDED JUNE 30, 1996 ON AUGUST 23, 1996.
<PAGE>
MORGAN STANLEY FUND, INC.
CROSS REFERENCE SHEET
PART A - INFORMATION REQUIRED IN A PROSPECTUS
Form N-1A
ITEM NUMBER LOCATION IN PROSPECTUS FOR MORGAN STANLEY EMERGING MARKETS DEBT,
MORGAN STANLEY GLOBAL FIXED INCOME, MORGAN STANLEY HIGH YIELD AND
MORGAN STANLEY WORLDWIDE HIGH INCOME FUNDS
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses; Prospectus Summary
Item 3. Condensed Financial Information -- Financial Highlights; Performance
Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objectives and Policies; Additional Investment Information;
Investment Limitations; General Information
Item 5. Management of the Fund -- Management of the Fund; Portfolio
Transactions; General Information
Item 5A. Management's Discussion of Fund Performance -- * (See June 30, 1996
Annual Report to Shareholders)
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Cover Page; Prospectus
Summary; Management of the Fund; Purchase of Shares; Valuation of
Shares
Item 8. Redemption or Repurchase -- Redemption of Shares; Shareholder
Services
Item 9. Pending Legal Proceedings -- *
Form N-1A
ITEM NUMBER LOCATION IN PROSPECTUS FOR MORGAN STANLEY AGGRESSIVE EQUITY, MORGAN
STANLEY AMERICAN VALUE, MORGAN STANLEY EQUITY GROWTH, MORGAN STANLEY
MID CAP GROWTH, MORGAN STANLEY U.S. REAL ESTATE AND MORGAN STANLEY
VALUE FUNDS
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses; Prospectus Summary
Item 3. Condensed Financial Information -- Financial Highlights; Performance
Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objectives and Policies; Additional Investment Information;
Investment Limitations; General Information
Item 5. Management of the Fund -- Management of the Fund; Portfolio
Transactions; General Information
Item 5A. Management's Discussion of Fund Performance -- * (See June 30, 1996
Annual Report to Shareholders)
<PAGE>
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Cover Page; Prospectus
Summary; Management of the Fund; Purchase of Shares; Valuation of
Shares
Item 8. Redemption or Repurchase -- Redemption of Shares; Shareholder
Services
Item 9. Pending Legal Proceedings -- *
Form N-1A
Item Number LOCATION IN PROSPECTUS FOR MORGAN STANLEY ASIAN GROWTH, MORGAN
STANLEY EMERGING MARKETS, MORGAN STANLEY GLOBAL EQUITY, MORGAN
STANLEY GLOBAL EQUITY ALLOCATION, MORGAN STANLEY INTERNATIONAL
MAGNUM, MORGAN STANLEY JAPANESE EQUITY AND MORGAN STANLEY LATIN
AMERICAN FUNDS
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses; Prospectus Summary
Item 3. Condensed Financial Information -- Financial Highlights; Performance
Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objectives and Policies; Additional Investment Information;
Investment Limitations; General Information
Item 5. Management of the Fund -- Management of the Fund; Portfolio
Transactions; General Information
Item 5A. Management's Discussion of Fund Performance -- * (See June 30, 1996
Annual Report to Shareholders)
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Cover Page; Prospectus
Summary; Management of the Fund; Purchase of Shares; Valuation of
Shares
Item 8. Redemption or Repurchase -- Redemption of Shares; Shareholder
Services
Item 9. Pending Legal Proceedings -- *
Form N-1A
Item Number LOCATION IN PROSPECTUS FOR MORGAN STANLEY MONEY MARKET, MORGAN
STANLEY TAX-FREE MONEY MARKET AND MORGAN STANLEY GOVERNMENT
OBLIGATIONS MONEY MARKET FUNDS
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses; Prospectus Summary
Item 3. Condensed Financial Information -- Financial Highlights; Performance
Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objectives and Policies; Additional Investment Information;
Investment Limitations; General Information
Item 5. Management of the Fund -- Management of the Fund; Portfolio
Transactions; General Information
Item 5A. Management's Discussion of Fund Performance -- * (See June 30, 1996
Annual Report to Shareholders)
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Cover Page; Prospectus
Summary; Management of the Fund; Purchase of Shares; Valuation of
Shares
Item 8. Redemption or Repurchase -- Redemption of Shares; Shareholder
Services
Item 9. Pending Legal Proceedings -- *
- ----------------
* Omitted since the answer is negative or the Item is not applicable.
ii
<PAGE>
PART B -INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Form N-1A
Item Number LOCATION IN STATEMENT OF ADDITIONAL INFORMATION FOR MORGAN STANLEY
EMERGING MARKETS DEBT, MORGAN STANLEY GLOBAL FIXED INCOME, MORGAN
STANLEY HIGH YIELD, MORGAN STANLEY WORLDWIDE HIGH INCOME, MORGAN
STANLEY AGGRESSIVE EQUITY, MORGAN STANLEY AMERICAN VALUE, MORGAN
STANLEY EQUITY GROWTH, MORGAN STANLEY MID CAP GROWTH, MORGAN STANLEY
U.S. REAL ESTATE, MORGAN STANLEY VALUE, MORGAN STANLEY ASIAN GROWTH,
MORGAN STANLEY EMERGING MARKETS, MORGAN STANLEY GLOBAL EQUITY,
MORGAN STANLEY GLOBAL EQUITY ALLOCATION, MORGAN STANLEY
INTERNATIONAL MAGNUM, MORGAN STANLEY JAPANESE EQUITY, MORGAN
STANLEY LATIN AMERICAN, MORGAN STANLEY MONEY MARKET, MORGAN STANLEY
TAX-FREE MONEY MARKET AND MORGAN STANLEY GOVERNMENT OBLIGATIONS
MONEY MARKET FUNDS.
Item 10. Cover Page -- Cover Page
Item 11. Table of Contents -- Cover Page
Item 12. General Information and History --
Item 13. Investment Objectives and Policies -- Investment Objectives and
Policies; Investment Limitations; Determining Maturities of Certain
Instruments; Description of Securities and Ratings
Item 14. Management of the Fund -- Management of the Fund
Item 15. Control Persons and Principal Holders of Securities -- Management of
the Fund; General Information
Item 16. Investment Advisory and Other Services -- Management of the Fund;
General Information
Item 17. Brokerage Allocation and Other Practices -- Portfolio Transactions
Item 18. Capital Stock and Other Securities -- General Information
Item 19. Purchase, Redemption and Pricing of Securities Being Offered --
Purchase of Shares; Redemption of Shares; Shareholder Services;
Money Market Fund Net Asset Value; General Information
Item 20. Tax Status -- Investment Objectives and Policies; Federal Income
Tax; Federal Tax Treatment of Forward Currency Contracts and
Exchange Rate Changes; Taxes and Foreign Shareholders; General
Information
Item 21. Underwriters -- Management of the Fund
Item 22. Calculation of Performance Data -- Performance Information
Item 23. Financial Statements -- Financial Statements
PART C - OTHER INFORMATION
iii
<PAGE>
Part C contains the information required by the Items of the Form N-1A under
such Items as set forth in the Form N-1A.
iv
<PAGE>
The Prospectus for the Emerging Markets Debt, Global Fixed Income,
High Yield and Worldwide High Income Funds, included as part of Post-Effective
Amendment No. 18 to the Registration Statement on Form N-1A of Morgan Stanley
Fund, Inc. (File No. 033-51294) filed with the Securities and Exchange
Commission via EDGAR on December 31, 1996, is hereby incorporated by
reference as if set forth in full herein.
The Prospectus for the Aggressive Equity, American Value, Equity
Growth, Mid Cap Growth, U.S. Real Estate and Value Funds, included as part of
Post-Effective Amendment No. 18 to the Registration Statement on Form N-1A of
Morgan Stanley Fund, Inc. (File No. 033-51294) filed with the Securities and
Exchange Commission via EDGAR on December 31, 1996, is hereby incorporated by
reference as if set forth in full herein.
The Prospectus for the Asian Growth, Emerging Markets, Global Equity,
Global Equity Allocation, International Magnum, Japanese Equity and Latin
American Funds, included as part of Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A of Morgan Stanley Fund, Inc. (File No.
033-51294) filed with the Securities and Exchange Commission via EDGAR on
December 31, 1996, is hereby incorporated by reference as if set forth in
full herein.
The Prospectus for the Growth and Income and European Equity Funds,
included as part of Post-Effective Amendment No. 16 to the Registration
Statement on Form N-1A of Morgan Stanley Fund, Inc. (File No. 033-51294)
filed with the Securities and Exchange Commission via EDGAR on October 18,
1996, is hereby incorporated by reference as if set forth in full herein.
v
<PAGE>
MORGAN STANLEY FUND, INC. (THE "FUND")
PART A
The Prospectus for the Morgan Stanley Money Market Fund and Morgan
Stanley Government Obligations Money Market Fund (the "Funds") dated
January 2, 1997, is incorporated herein by reference to the Post-Effective
Amendment No. 18 to Registrant's Registration Statement on Form N-1A (File No.
033-51294) filed with the Securities and Exchange Commission on December 31,
1996. The Prospectus is supplemented by its Financial Highlights as of
December 31, 1996 filed herein to comply with the Fund's undertaking to file a
post-effective amendment containing reasonably current financial statements
which need not be certified within four to six months of its effective date
or commencement of operations, whichever is later.
vi
<PAGE>
SUPPLEMENT DATED MARCH 27, 1997
TO THE PROSPECTUS DATED JANUARY 2, 1997
MONEY MARKET FUND
TAX-FREE MONEY MARKET FUND
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
PORTFOLIOS OF THE
MORGAN STANLEY FUND, INC. (THE "FUND")
P.O. BOX 418256
KANSAS CITY, MISSOURI
64141
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The prospectus is hereby amended and supplemented as follows: The following
paragraph is added under the heading "FINANCIAL HIGHLIGHTS" on Page 4 of the
Prospectus.
Additionally, the following tables provide financial highlights for the
Morgan Stanley Money Market Fund and Morgan Stanley Government Obligations Money
Market Fund for the period ended December 31, 1996 and is part of the Fund's
unaudited financial statements which are included in the Fund's Statement of
Additional Information.
<TABLE>
<CAPTION>
MORGAN STANLEY
GOVERNMENT
MORGAN STANLEY OBLIGATIONS
MONEY MARKET FUND MONEY MARKET FUND
SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
---------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 1.00 $ 1.00
-------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income..................................... 0.0224 0.0220
Net Realized and Unrealized Gain (Loss)................... -- --
-------- --------
Total from Investment Operations........................ 0.0224 0.0220
-------- --------
DISTRIBUTIONS
Net Investment Income..................................... (0.0224) (0.0220)
Net Realized Gain......................................... -- --
-------- --------
Total Distributions..................................... (0.0224) (0.0220)
-------- --------
NET ASSET VALUE, END OF PERIOD.............................. $ 1.00 $ 1.00
-------- --------
-------- --------
TOTAL RETURN................................................ 2.26% 2.20%
-------- --------
-------- --------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000)............................. $254,854 $116,816
Ratio of Expenses to Average Net Assets..................... 0.98%* 0.95%*
Ratio of Net Investment Income to Average Net Assets........ 4.04%* 4.57%*
Ratios Before Expense Limitation:
Expenses to Average Net Assets............................ 0.97%* 1.10%*
Net Investment Income to Average Net Assets............... 3.97%* 4.46%*
</TABLE>
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* Annualized
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.
<PAGE>
MORGAN STANLEY FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
Morgan Stanley Fund, Inc. (the "Company") is an open-end management
investment company. The Company currently consists of twenty-two diversified and
non-diversified investment portfolios designed to offer a range of investment
choices (each, a "Fund" and collectively, the "Funds"). The Company is designed
to make available to retail investors the expertise of Morgan Stanley Asset
Management Inc. ("MSAM") and its affiliate, Miller Anderson & Sherrerd, LLP
("MAS," and each of MSAM and MAS, an "Adviser"). This Statement of Additional
Information ("SAI") addresses information of the Company applicable to the
Funds. The Morgan Stanley Growth and Income, Morgan Stanley Japanese Equity,
Morgan Stanley European Equity and Morgan Stanley Tax-Free Money Market Funds
currently are not offering shares.
This Statement is not a prospectus but should be read in conjunction with
the Company's prospectuses (each a "Prospectus" and together, the
"Prospectuses"). To obtain the Prospectuses, please call the Morgan Stanley
Fund, Inc. Services Group at:
1-800-341-2911
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
INVESTMENT OBJECTIVES AND POLICIES...... 1
FEDERAL INCOME TAX...................... 16
FEDERAL TAX TREATMENT OF FORWARD
CURRENCY CONTRACTS AND EXCHANGE RATE
CHANGES................................ 18
TAXES AND FOREIGN SHAREHOLDERS.......... 19
PURCHASE OF SHARES...................... 20
REDEMPTION OF SHARES.................... 21
INVESTMENT LIMITATIONS.................. 21
DETERMINING MATURITIES OF CERTAIN
INSTRUMENTS............................ 25
MANAGEMENT OF THE COMPANY............... 26
MONEY MARKET FUND NET ASSET VALUE....... 32
PORTFOLIO TRANSACTIONS.................. 33
PERFORMANCE INFORMATION................. 33
GENERAL INFORMATION..................... 41
DESCRIPTION OF SECURITIES AND RATINGS... 42
FINANCIAL STATEMENTS.................... 45
</TABLE>
Statement of Additional Information dated January 2, 1997 as amended March
27, 1997, relating to the following prospectuses (Class A, B and C shares of
each Fund, other than the money market funds, which only offer one class of
shares):
Morgan Stanley Emerging Markets Debt Fund, Morgan Stanley Global Fixed
Income Fund, Morgan Stanley High Yield Fund and Morgan Stanley Worldwide
High Income Fund, dated January 2, 1997.
Morgan Stanley Aggressive Equity Fund, Morgan Stanley American Value Fund,
Morgan Stanley Equity Growth Fund, Morgan Stanley Mid Cap Growth Fund,
Morgan Stanley U.S. Real Estate Fund and Morgan Stanley Value Fund, dated
January 2, 1997.
Morgan Stanley Asian Growth Fund, Morgan Stanley Emerging Markets Fund,
Morgan Stanley Global Equity Fund, Morgan Stanley Global Equity Allocation
Fund, Morgan Stanley International Magnum Fund, Morgan Stanley Japanese
Equity Fund and Morgan Stanley Latin American Fund, dated January 2, 1997.
Morgan Stanley Money Market Fund, Morgan Stanley Tax-Free Money Market Fund
and Morgan Stanley Government Obligations Money Market Fund, dated January
2, 1997.
Morgan Stanley Growth and Income Fund and Morgan Stanley European Equity
Fund, undated (not currently offered).
INVESTMENT OBJECTIVES AND POLICIES
The following policies (listed in alphabetical order) supplement the
investment objectives and policies set forth in the Company's Prospectuses with
respect to the Company's twenty-two 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, Morgan Stanley Equity Growth Fund, Morgan
Stanley Global Equity Fund, Morgan
1
<PAGE>
Stanley Emerging Markets Debt Fund, Morgan Stanley Mid Cap Growth Fund, Morgan
Stanley Value Fund (collectively, the "Non-Money Funds") and Morgan Stanley
Money Market Fund, Morgan Stanley Tax-Free Money Market Fund and Morgan Stanley
Government Obligations Money Market Fund (collectively, the "Money Market
Funds").
For ease of reference, the words "Morgan Stanley," which begin the name of
each Fund, are not used hereinafter. MSAM is the Adviser to all of the Funds,
except that MAS is the Adviser to the Mid Cap Growth and Value Funds.
EMERGING COUNTRY DEBT SECURITIES
GENERAL. The Emerging Markets Debt and Worldwide High Income Funds'
definition of emerging country debt securities 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 Funds will invest in those emerging market 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.
For example, the Funds may invest in companies organized and located in
countries other than an emerging country, including companies having their
entire production facilities outside of an emerging country, when securities of
such companies meet one or more elements of the Funds' 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 Emerging Markets Debt Fund and Worldwide High Income Fund are subject to
no restrictions on the maturities of the emerging country debt securities they
hold; those maturities may range from overnight to 30 years. The value of debt
securities held by a Fund generally will vary inversely to changes in prevailing
interest rates. A Fund's investments in fixed-rated debt securities with longer
terms to maturity are subject to greater volatility than the 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.
Government, government-related and restructured debt securities in emerging
markets will consist of (i) debt securities or obligations issued or guaranteed
by governments, governmental agencies or instrumentalities and political
subdivisions located in emerging countries (including participations in loans
between governments and financial institutions), (ii) debt securities or
obligations issued by government owned, controlled or sponsored entities located
in emerging countries, and (iii) interests in issuers organized and operated for
the purpose of restructuring the investment characteristics of instruments
issued by any of the entities described above. Such type of restructuring
involves the deposit with or purchase by an entity of specific instruments and
the issuance by that entity of one or more classes of securities backed by, or
representing interests in, the underlying instruments. Certain issuers of such
structured securities may be deemed to be "investment companies" as defined in
the Investment Company Act of 1940 (the "1940 Act"). As a result, a Fund's
investment in such securities may be limited by certain investment restrictions
contained in the 1940 Act.
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, a 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.
Debt securities of corporate issuers in emerging countries may include debt
securities or obligations issued (i) by banks located in emerging countries or
by branches of emerging country banks located outside the country or (ii) by
companies organized under the laws of an emerging country. Determinations as to
eligibility will be made by the Adviser based on publicly available information
and inquiries made to the issuer.
Ratings of a non-U.S. debt instrument, to the extent that those ratings are
undertaken, are related to evaluations of the country in which the issuer of the
instrument is located. Ratings generally take into account the currency in which
a non-U.S. debt instrument is denominated. Instruments issued by a foreign
government in other than the local currency, for example, typically have a lower
rating than local currency instruments due to the existence of an additional
risk that the government will be unable to obtain the required foreign currency
to service its foreign currency-denominated debt. In general, the ratings of
debt securities or obligations issued by a non-U.S. public or private entity
will not be higher than the rating of the currency or the foreign currency debt
of the central government of the country in which the issuer is located,
regardless of the intrinsic creditworthiness of the issuer.
2
<PAGE>
BRADY BONDS. The Emerging Markets Debt Fund and Worldwide High Income 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 restructuring 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. A 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, a 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 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 restructuring totaling approximately $73 billion have been
implemented to date in Argentina, Bulgaria, Costa Rica, Ecuador, 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.
STRUCTURED SECURITIES. The Emerging Markets Debt Fund and Worldwide High
Income Fund may also invest a portion of its assets in interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of sovereign debt obligations. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified instruments (such as commercial bank loans or Brady Bonds)
and the issuance by that entity of one or more classes of securities
("Structured Securities") backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Securities to create securities
with different investment characteristics such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to Structured Securities is dependent on the extent of the cash
flow on the underlying instruments. Because Structured Securities of the type in
which each Fund anticipates it will invest typically involve no credit
enhancement, their credit risk generally will be equivalent to that of the
underlying instruments. Each Fund is permitted to invest in a class of
Structured Securities that is either subordinated or unsubordinated to the right
of payment of another class. Subordinated Structured Securities typically have
higher yields and present greater risks than unsubordinated Structured
Securities. Certain issuers of Structured Securities may be deemed to be
"investment companies" as defined in the 1940 Act. As a result, a Fund's
investment in these Structured Securities may be limited by restrictions
contained in the 1940 Act. Structured Securities are typically sold in private
placement transactions, and there currently is no active trading market for
Structured Securities.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Emerging Markets Debt Fund and
Worldwide High Income Fund may also 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"). A 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. A Fund's investment in
Participations typically will result in the Fund having a contractual
relationship only with the Lender and not with the borrower. A 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 Participation and only upon receipt by
the Lender of the payments from the borrower. In connection with purchasing
Participations, the Fund generally will have no right to enforce compliance by
the borrower with the terms of the loan agreement relating to the Loan, nor any
rights of set-off against the borrower, and the Fund may not directly benefit
from any collateral supporting the Loan in which it has purchased the
Participation. As a result, a Fund may be subject to the credit risk of both the
borrower and the Lender that is selling the Participation. In the event of the
3
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insolvency of the Lender selling a Participation, a 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 Participations being subject to the credit risk
of the Lender with respect to the Participation, but even under such a
structure, in the event of the Lender's insolvency, the Lender's servicing of
the Participation may be delayed and the assignability of the Participation
impaired. A Fund will acquire Participations only if the Lender interpositioned
between the Fund and the borrower is determined by the Adviser to be
creditworthy.
When a 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 Fund as the purchaser of an
Assignment may differ from, and be more limited than, those held by the
assigning Lender. The assignability of certain sovereign debt obligations is
restricted by the governing documentation as to the nature of the assignee such
that the only way in which a Fund may acquire an interest in a loan is through a
Participation and not an Assignment. A Fund may have difficulty disposing of
Assignments and Participations because to do so it will have to assign such
securities to a third party. Because there is no liquid market for such
securities, the Funds anticipate 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 a Fund's ability
to dispose of particular Assignments or Participations when necessary to meet
the 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 a Fund to assign a value to these securities for purposes of
valuing the Fund's securities and calculating its net asset value.
EQUITY-LINKED SECURITIES
The Value, Mid Cap Growth, Global Equity, Equity Growth, 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 Funds 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")
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, a 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 Fund
receives less than one share, with the conversion ratio adjusted so that the
market value of the common stock received by the Fund equals the cap.
Accordingly, a 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 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 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 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 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, a 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 Fund receives the
cap amount. Accordingly, a 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 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 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, 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, a 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
Fund will receive an amount above the lower-than-market yield on the LYONs,
based on how well the underlying common stock performs. LYONs also present risks
based on payment expectations. If a LYON's issuer redeems the LYONs, the Fund
may have to replace the LYONs with a lower yielding security, resulting in a
decreased return for investors.
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EURODOLLAR AND YANKEE OBLIGATIONS
Eurodollar bank obligations are dollar-denominated certificates of deposit
and time deposits issued outside the U.S. capital markets by foreign branches of
banks and by foreign banks. Yankee bank obligations are dollar-denominated
obligations issued in the U.S. capital markets by foreign banks.
Eurodollar and Yankee obligations are subject to the same risks that pertain
to domestic issues, notably credit risk, market risk and liquidity risk.
Additionally, Eurodollar (and to a limited extent, Yankee) obligations are
subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of dollars, from flowing
across its borders. Other risks include: adverse political and economic
developments; the extent and quality of government regulation of financial
markets and institutions; the imposition of foreign withholding taxes, and the
expropriation or nationalization of foreign issuers.
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 a Fund has firm commitments outstanding, the Fund will
maintain in a segregated 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 a Fund will set aside portfolio securities to satisfy a purchase
commitment and, in such a case, a 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 Fund's commitment. It may be
expected that a Non-Money Market 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 a 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 a 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 a Fund's incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES
Foreign currency warrants are warrants which entitle the holder to receive
from their issuer an amount of cash (generally, for warrants issued in the
United States, in U.S. Dollars) which is calculated pursuant to a predetermined
formula and based on the exchange rate between a specified foreign currency and
the U.S. Dollar as of the exercise date of the warrant. Foreign currency
warrants generally are exercisable upon their issuance and expire as of a
specified date and time. Foreign currency warrants have been issued in
connection with U.S. Dollar-denominated debt offerings by major corporate
issuers in an attempt to reduce the foreign currency exchange risk which, from
the point of view of prospective purchasers of the securities, is inherent in
the international fixed-income marketplace. Foreign currency warrants may
attempt to reduce the foreign exchange risk assumed by purchasers of a security
by, for example, providing for a supplemental payment in the event that the U.S.
Dollar depreciates against the value of a major foreign currency such as the
Japanese Yen or German Deutschmark. The formula used to determine the amount
payable upon exercise of a foreign currency warrant may make the warrant
worthless unless the applicable foreign currency exchange rate moves in a
particular direction (e.g., unless the U.S. Dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered, and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants), and, in the case where the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unsecured obligations of their issuers and are
not standardized foreign currency options issued by the OCC. Unlike foreign
currency options issued by the OCC, the terms of foreign exchange warrants
generally will not be amended in the event of governmental or regulatory actions
affecting exchange rates or in the event of the imposition of other regulatory
controls affecting the international currency markets. The initial public
offering price of foreign currency warrants is generally considerably in excess
of the price that a commercial user of foreign currencies might pay in the
interbank market for a comparable option involving significantly larger amounts
of foreign currencies. Foreign currency warrants are subject to complex
political or economic factors.
Principal exchange rate linked securities are debt obligations the principal
on which is payable at maturity in an amount that may vary based on the exchange
rate between the U.S. Dollar and a particular foreign currency at or about that
time. The return on "standard" principal exchange rate linked securities is
enhanced if the foreign currency to which the security is linked appreciates
against the U.S. Dollar, and is adversely affected by increases in the foreign
exchange value of the U.S. Dollar; "reverse" principal exchange rate linked
securities are like the "standard" securities, except that their return is
enhanced by
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increases in the value of the U.S. Dollar and adversely impacted by increases in
the value of foreign currency. Interest payments on the securities are generally
made in U.S. Dollars at rates that reflect the degree of foreign currency risk
assumed or given up by the purchaser of the notes (i.e., at relatively higher
interest rates if the purchaser has assumed some of the foreign exchange risk,
or relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based on the expectations of the current market). Principal
exchange rate linked securities may in limited cases be subject to acceleration
of maturity (generally, not without the consent of the holders of the
securities), which may have an adverse impact on the value of the principal
payment to be made at maturity.
Performance indexed paper is U.S. Dollar-denominated commercial paper the
yield of which is linked to certain foreign exchange rate movements. The yield
to the investor on performance indexed paper is between the U.S. Dollar and a
designated currency as of or about that time (generally, the index maturity two
days prior to maturity). The yield to the investor will be within a range
stipulated at the time of purchase of the obligation, generally with a
guaranteed minimum rate of return that is below, and a potential maximum rate of
return that is above, market yields on U.S. Dollar-denominated commercial paper,
with both the minimum and maximum rates of return on the investment
corresponding to the minimum and maximum values of the spot exchange rate two
business days prior to maturity.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The U.S. Dollar value of the assets of the Global Equity, Global Equity
Allocation, Global Fixed Income, Asian Growth, Emerging Markets, Emerging
Markets Debt, Latin American, European Equity, Japanese Equity and International
Magnum Funds and to the extent they invest in assets denominated in foreign
currencies, the Value, Mid Cap Growth, American Value, Aggressive Equity, Growth
and Income, Equity Growth, 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 Funds may incur costs in connection
with conversions between various currencies. The 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 Funds may enter into forward contracts in several circumstances. When a
Fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, or when a Fund anticipates the receipt in a foreign
currency of dividends or interest payments on a security which it holds, the
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 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 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 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 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. A 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 Fund to deliver an amount of foreign currency
in excess of the value of such 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
Company 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 Fund will thereby be served. Except in circumstances where segregated
accounts are not required by the 1940 Act and the rules adopted thereunder, the
Company's Custodian will place cash or liquid assets into a segregated account
of a Fund in an amount equal to the value of such 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 assets 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 Fund's commitments with respect to such contracts.
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The Funds generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, a 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 a 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 Fund is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency.
If a Fund retains the portfolio security and engages in an offsetting
transaction, such 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 a 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 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 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 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.
In addition, Funds may cross-hedge currencies by entering into a transaction
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which a portfolio has or expects to have
portfolio exposure. These Funds may also engage in proxy hedging, which is
defined as entering into positions in one currency to hedge investments
denominated in another currency, where two currencies are economically linked. A
Fund's entry into forward contracts, as well as any use of proxy or cross
hedging techniques, will generally require the Fund to hold liquid securities or
cash equal to the Fund's obligations in a segregated account throughout the
duration of the contract.
FUTURES CONTRACTS
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, U.S.
Real Estate, Emerging Markets Debt, Equity Growth, Global Equity, Value and Mid
Cap Growth Funds may also enter into futures contracts for hedging purposes. No
Fund 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, Equity Growth,
Emerging Markets Debt, Global Equity, American Value, Aggressive Equity, Growth
and Income, Value, Mid Cap Growth 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,
Equity Growth, Emerging Markets Debt, Global Equity, Aggressive Equity, Growth
and Income, Value, Mid Cap Growth 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
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of securities in its portfolio that might otherwise result. If the Adviser
believes that a portion of a Fund's 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 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 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.
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 Funds
expect 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 that they trade, and use
futures contracts with the expectation of realizing profits from market
fluctuations. The Funds intend to use futures contracts only for hedging
purposes.
Regulations of the CFTC applicable to the Funds require generally that all
futures transactions constitute bona fide hedging transactions. A Fund may
engage in futures 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 Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into. The 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 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 Fund upon sale of open
futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control a Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the 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. In addition to the limits
imposed under CFTC regulations, described above, 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 the Fund's outstanding obligations to purchase
securities under futures contracts and options would exceed 20% of its total
assets. The Emerging Markets Debt, Equity Growth, Global Equity, Value and Mid
Cap Growth Funds will not enter into futures contracts to the extent that their
outstanding obligations to purchase securities under these contracts in
combination with their outstanding obligations with respect to options
transactions would exceed 50% of their total assets. Each such Fund will
maintain assets sufficient to meet its obligations under such contracts in a
segregated account with the custodian bank or will otherwise comply with the
SEC's position on asset coverage.
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, a Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if a 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
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 Fund's ability to effectively hedge.
Each 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.
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
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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 Funds engage
in futures strategies only for hedging purposes, the Adviser does not believe
that the Funds are subject to the risks of loss frequently associated with
futures transactions. The Fund would presumably have sustained comparable losses
if, instead of the futures contract, the Fund had invested in the underlying
security or currency and sold it after the decline.
Utilization of futures transactions by a 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 a 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 a Fund of margin deposits in the event of
bankruptcy of a broker with whom the 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.
OPTIONS ON FOREIGN CURRENCIES
The Emerging Markets, Latin American, European Equity, American Value,
Global Equity, Emerging Markets Debt, Equity Growth, Aggressive Equity, Growth
and Income, Value, Mid Cap Growth 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 a Fund the right to sell a currency at the exercise price until the
expiration of the option. A call option gives a Fund the right to purchase a
currency at the exercise price until the expiration of the option.
The Funds noted above may purchase and write options on foreign currencies
in a manner similar to that in which futures contracts on foreign currencies, or
forward contracts, will be utilized. For example, a decline in the dollar value
of a foreign currency in which portfolio securities are denominated will reduce
the dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminution in the value of
portfolio securities, the Funds may purchase put options on the foreign
currency. If the value of the currency does decline, the Funds will have the
right to sell such currency for a fixed amount in dollars and will thereby
offset, in whole or in part, the adverse effect on their portfolios which
otherwise would have resulted. Conversely, where a rise in the dollar value of a
currency in which securities to be acquired are denominated is projected,
thereby increasing the cost of such securities, the Funds may purchase call
options thereon. The purchase of such options could offset, at least partially,
the effects of the adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to the Funds derived from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, where currency exchange rates do not
move in the direction or to the extent anticipated, the Funds could sustain
losses on transactions in foreign currency options which would require them to
forego a portion or all of the benefits of advantageous changes in such rates.
Funds may write options on foreign currencies for the same purposes. For
example, where a Fund anticipates a decline in the dollar value of foreign
currency denominated securities due to adverse fluctuations in exchange rates it
could, instead of purchasing a put option, write a call option on the relevant
currency. If the anticipated decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities will be offset by
the amount of the premium received. Similarly, instead of purchasing a call
option to hedge against an anticipated increase in the dollar cost of securities
to be acquired, the Fund could write a put option on the relevant currency
which, if rates move in the manner projected, will expire unexercised and allow
the portfolio to hedge such increased cost up to the amount of the premium. As
in the case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of the
premium, and only if rates move in the expected direction. If this does not
occur, the option may be exercised and the Fund would be required to purchase or
sell the underlying currency at a loss which may not be offset by the amount of
the premium. Through the writing of options on foreign currencies, the Fund also
may be required to forego all or a portion of the benefits which might otherwise
have been obtained from favorable movements in exchange rates.
Funds may only write covered call options on foreign currencies. A call
option written on a foreign currency by the portfolio is "covered" if the Fund
owns the underlying foreign currency covered by the call, an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by the Custodian) or upon conversion or exchange of other foreign currency held
in its portfolio. A written call option is also covered if the Fund has a call
on the same foreign currency and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise
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price of the call written if the difference is maintained by the Fund in cash or
other liquid securities in a segregated account with the Custodian, or (c)
maintains in a segregated account cash or other liquid securities in an amount
not less than the value of the underlying foreign currency in U.S. Dollars,
marked-to-market daily.
Funds may also write call options on foreign currencies for cross-hedging
purposes. A call option on a foreign currency is for cross-hedging purposes if
it is designed to provide a hedge against a decline in the U.S. Dollar value of
a security which the portfolio owns or has the right to acquire due to an
adverse change in the exchange rate and which is denominated in the currency
underlying the option. In such circumstances, the Fund will either "cover" the
transaction as described above or collateralize the option by maintaining in a
segregated account with the Custodian, cash or other liquid securities in an
amount not less than the value of the underlying foreign currency in U.S.
Dollars marked-to-market daily.
Funds may combine forward contracts with investments in securities
denominated in other currencies in order to achieve desired credit and currency
exposures. Such combinations are generally referred to as synthetic securities.
For example, in lieu of purchasing a foreign bond, a Fund may purchase a U.S.
dollar-denominated security and at the same time enter into a forward contract
to exchange U.S. dollars for the contract's underlying currency at a future
date. By matching the amount of U.S. dollars to be exchanged with the
anticipated value of the U.S. dollar-denominated security, the Fund may be able
to lock in the foreign currency value of the security and adopt a synthetic
position reflecting the credit quality of the U.S. dollar-denominated security.
To the extent required by SEC rules and regulations, the Custodian of the
Funds will place cash or other liquid assets into a segregated account of a Fund
in an amount equal to the value of such Fund's total assets committed to the
consummation of forward foreign currency exchange contracts. If the value of the
securities placed in the segregated account declines, additional cash or liquid
assets 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 Fund's commitments with
respect to such contracts.
OPTIONS TRANSACTIONS
The Emerging Markets, Equity Growth, Emerging Markets Debt, Value, Latin
American, European Equity, International Magnum, Aggressive Equity, Global
Equity, U.S. Real Estate, Growth and Income, Mid Cap Growth 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 Fund at the stated exercise price. A "covered" call option means that so
long as a 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.
A Fund will receive a premium from writing call options, which increases the
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, a 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 Fund's
obligation as writer of the option continues. Thus, in some periods a 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.
A Fund may sell put options to receive the premiums paid by purchasers and
to close out a long put option position. In addition, when the Adviser wishes to
purchase a security at a price lower than its current market price, a Fund may
write a covered put at an exercise price reflecting the lower purchase price
sought.
A Fund may purchase call options to close out a covered call position or to
protect against an increase in the price of a security it anticipates
purchasing. A Fund may purchase put options on securities which it holds in its
portfolio to protect itself against a decline in the value of the security. If
the value of the underlying security were to fall below the exercise price of
the put purchased in an amount greater than the premium paid for the option, the
Fund would incur no additional loss. A Fund may also purchase put options to
close out written put positions in a manner similar to call option closing
purchase transactions. There are no other limits on a Fund's ability to purchase
call and put options.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC Option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
Option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor of credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC Options will be
satisfied. The staff of the SEC currently takes the position that OTC Options
purchased by a Fund or sold by it (the cost of the sell-back plus the
in-the-money amount, if any) are illiquid unless the Fund has entered into a
special arrangement to dispose of the security, and are subject to the Fund's
limitation on investing in illiquid securities.
Investments in options involve some of the same considerations that are
involved in connection with investments in futures contracts (e.g., the
existence of a liquid secondary market). In addition, the purchase of an option
also entails the risk that changes in the value of the underlying security or
contract will not be fully reflected in the value of the option purchased.
Depending on the pricing of the option compared to either the futures contract
or securities, an option may or may not be less risky than ownership of the
futures contract or actual securities. In general, the market prices of options
can be expected to be
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more volatile than the market prices on the underlying futures contract or
securities. In the opinion of the Adviser, the risk that a Fund will be unable
to close out an options contract will be minimized by only entering into options
transactions for which there appears to be a liquid secondary market.
COMBINED TRANSACTIONS
Funds may enter into multiples of the forwards, futures and options
transactions described above in which they are permitted to engage, including
multiple options transactions, multiple futures transactions, multiple foreign
currency transactions (including forward foreign currency exchange contracts)
and any combination of futures, options and foreign currency transactions,
instead of a single transaction, as part of a single hedging strategy when, in
the opinion of the Adviser, it is in the best interest of the Fund to do so. A
combined transaction, while part of a single strategy, may contain elements of
risk that are present in each of its component transactions and will be
structured in accordance with applicable Securities and Exchange Commission (the
"SEC") regulations and SEC staff guidelines.
RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS ON FOREIGN
CURRENCIES
Options on foreign currencies and forward contracts are not traded on
contract markets regulated by the CFTC or (with the exception of certain foreign
currency options) by the SEC. To the contrary, such instruments are traded
through financial institutions acting as market-makers, although foreign
currency options are also traded on certain national securities exchanges, such
as the Philadelphia Stock Exchange and the Chicago Board Options Exchange,
subject to SEC regulation. Similarly, options on currencies may be traded
over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchase of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Furthermore, a liquid
secondary market in options traded on a national securities exchange may be more
readily available than in the over-the-counter market, potentially permitting a
Fund to liquidate open positions at a profit prior to exercise or expiration, or
to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effect of other
political and economic events. In addition, exchange-traded options of foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions, on exercise.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decision, (iii) delays in the Fund's
ability to act upon economic events occurring in foreign markets during non
business hours in the United States, (iv) the imposition of different exercise
and settlement terms and procedures and margin requirements than in the United
States, and (v) lesser trading volume.
GLOBAL INVESTING
Investors should recognize that investing in foreign securities involves
special considerations which are not typically associated with investing in
domestic securities. Since the securities of foreign issuers are frequently
denominated in foreign currencies, and since a Fund may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Fund will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of certain Funds permit entering
into forward foreign currency exchange contracts in order to hedge holdings and
commitments against changes in the level of future currency rates. Such
contracts involve an obligation to purchase or sell a specific currency at a
future date at a price set at the time of the contract.
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As non-U.S. companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to domestic issuers, there may be less publicly available information
about certain foreign securities than about domestic securities. Securities of
some foreign issuers are generally less liquid and more volatile than securities
of comparable domestic companies. There is generally less government supervision
and regulation of stock exchanges, brokers and listed issuers than in the U.S.
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 U.S. investments in those countries.
Although the Funds will endeavor to achieve most favorable execution costs
in their portfolio transactions, fixed commissions on many foreign stock
exchanges are generally higher than negotiated commissions on U.S. exchanges. In
addition, it is expected that the expenses for custodian arrangements of a
Fund's foreign securities will be somewhat greater than the expenses for the
custodian arrangements for handling the U.S. securities of equal value.
Certain foreign governments levy withholding taxes against 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.
INVESTMENT COMPANY SECURITIES
The 1940 Act, generally prohibits a Fund from acquiring more than 3% of the
outstanding voting shares of an investment company and limits such investments
to no more than 5% of the Fund's total assets in any one investment company and
no more than 10% in any combination of investment companies. The 1940 Act also
prohibits a Fund from acquiring in the aggregate more than 10% of the
outstanding voting shares of any registered closed-end investment company. A
Fund may not purchase shares of any affiliated investment company except as
permitted by the Investment Company Act of 1940 or other applicable law.
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.
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 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 Fund on an
ongoing basis within policy ranges dictated by each country's market
capitalization and liquidity. The Fund will invest
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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.
OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS
For purposes of the 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 controls, interest limitations, or other governmental
restrictions which might affect the payment of principal or interest on the
securities held by a Fund. Additionally, these institutions may be subject to
less stringent reserve requirements and to different accounting, auditing,
reporting and record keeping 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 Adviser believes that the risks
associated with such investment are minimal and that all applicable quality
standards have been satisfied.
PORTFOLIO TURNOVER
It is anticipated that the annual portfolio turnover rate for each of the
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 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 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 a Fund
deems it appropriate to purchase or sell securities for the portfolio. However,
the U.S. federal tax requirement that a Fund derive less than 30% of its gross
income from the sale or disposition of securities held less than three months
may limit the 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 Funds historical portfolio turnover ratios.
REPURCHASE AGREEMENTS
The repurchase price under the repurchase agreements described in the
Prospectus generally equals the price paid by a 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 Custodian in the Federal
Reserve/Treasury book-entry system or by another authorized securities
depository. The term of a repurchase agreement is usually from overnight to one
week, and never exceeds one year. Repurchase agreements are considered to be
loans by a Fund under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS
A reverse repurchase agreement involves the sale of securities held by a
Fund pursuant to the 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 1940 Act. While reverse repurchase transactions are
outstanding, the 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.
SECURITIES LENDING
Each 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 to deliver
securities or completing arbitrage operations. By lending its investment
securities, a 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 Fund. Each 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 1940 Act, or the Rules and Regulations or interpretations
of the SEC thereunder, which currently require that (a) the borrower pledge and
maintain with the 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
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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 Fund at any time, and (d) the Fund receive
reasonable interest on the loan (which may include the 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 the Adviser 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.
STAND-BY COMMITMENTS
A 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 a Fund's option, a specified Municipal Obligation at its amortized cost value
to the Fund plus accrued interest, if any. Stand-by commitments may be
exercisable by a 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 Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a 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 a Fund will not exceed 1/2
of 1% of the value of that Fund's total assets calculated immediately after each
stand-by commitment is acquired.
The 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 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 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 a 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 Fund and will be reflected in realized gain or loss
when the commitment is exercised or expires.
STRIPPED MORTGAGE-BACKED SECURITIES
Stripped mortgage-backed securities ("SMBS") are derivative multiclass
mortgage securities. SMBS may be issued by agencies or instrumentalities of the
U.S. Government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on a Fund's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, certain of these securities may be deemed
"illiquid" and subject to a Fund's limitations on investment in illiquid
securities.
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SWAP CONTRACTS
The Global Equity, Emerging Markets Debt, Equity Growth, Value and Mid Cap
Growth Funds may enter into Swap Contracts. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The payment streams are calculated by reference to a specified index
and agreed upon notional amount. The term "specified index" includes currencies,
fixed interest rates, prices, total return on interest rate indices, fixed
income indices, stock indices and commodity indices (as well as amounts derived
from arithmetic operations on these indices). For example, a Fund may agree to
swap the return generated by a fixed-income index for the return generated by a
second fixed-income index. The currency swaps in which a Fund may enter will
generally involve an agreement to pay interest streams in one currency based on
a specified index in exchange for receiving interest streams denominated in
another currency. Such swaps may involve initial and final exchanges that
correspond to the agreed upon notional amount.
The swaps in which the noted Funds may engage also include rate caps, floors
and collars under which one party pays a single or periodic fixed amount(s) (or
premium), and the other party pays periodic amounts based on the movement of a
specified index. Swaps do not involve the delivery of securities, other
underlying assets, or principal. Accordingly, the risk of loss with respect to
swaps is limited to the net amount of payments that the Fund is contractually
obligated to make. If the other party to a swap defaults, the Fund's risk of
loss consists of the net amount of payments that the Fund is contractually
entitled to receive. Currency swaps usually involve the delivery of the entire
principal value of one designated currency in exchange for the other designated
currency. Therefore, the entire principal value of a currency swap is subject to
the risk that the other party to the swap will default on its contractual
delivery obligations. If there is a default by the counterparty, the Fund may
have contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid. Caps, floors, and collars are more recent innovations
for which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Funds will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Fund's obligations under a swap
agreement will be accrued daily (offset against any amounts owing to the
portfolio) and any accrued but unpaid net amounts owed to a swap counterparty
will be covered by the maintenance of a segregated account consisting of cash or
liquid securities, to avoid any potential leveraging of the Fund. To the extent
that these swaps, caps, floors, and collars are entered into for hedging
purposes, the Adviser believes such obligations do not constitute "senior
securities" under the 1940 Act and, accordingly, will not treat them as being
subject to the Fund's borrowing restrictions. Funds may enter into OTC
Derivatives transactions (Swaps, Caps, Floors, Puts, etc., but excluding foreign
exchange contracts) with counterparties that are approved by the Adviser in
accordance with guidelines established by the Board of Directors. These
guidelines provide for a minimum credit rating for each counterparty and various
credit enhancement techniques (for example, collateralization of amounts due
from counterparties) to limit exposure to counterparties with ratings below AA.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of the portfolio would be less favorable than it would have been if this
investment technique were not used.
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.
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 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
a Fund and whether a variable rate demand instrument has a remaining maturity of
397 days or less, each instrument will be deemed by the 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 Adviser will follow guidelines adopted by the Company's
Board of Directors.
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WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
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. Each Fund will maintain with the appropriate
Custodian a separate account with a segregated portfolio of cash or liquid
securities in an amount at least equal to these commitments. It is possible that
the market value at the time of settlement would be higher or lower than the
purchase price if the general level of interest rates has changed.
ZERO COUPON BONDS
Zero coupon bonds is a term used to describe notes and bonds which have been
stripped of their unmatured interest coupons, or the coupons themselves, and
also receipts or certificates representing interest in such stripped debt
obligations and coupons. The timely payment of coupon interest and principal on
zero coupon bonds issued by the U.S. Treasury remains guaranteed by the "full
faith and credit" of the United States Government.
A zero coupon bond does not pay interest. Instead, it is issued at a
substantial discount to its "face value"--what it will be worth at maturity. The
difference between a security's issue or purchase price and its face value
represents the imputed interest an investor will earn if the security is held
until maturity. For tax purposes, a portion of this imputed interest is deemed
to be income received by zero coupon bondholders each year. Each Fund, which
expects to qualify as a regulated investment company, intends to pass along such
interest as a component of the Fund's distributions of net investment income.
Zero coupon bonds may offer investors the opportunity to earn higher yields
than those available on U.S. Treasury bonds of similar maturity. However, zero
coupon bond prices may also exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest is
returned to the investor.
Zero Coupon Treasury Bonds are sold under a variety of different names, such
as: Certificate of Accrual on Treasury Securities ("CATS"), Treasury Receipts
("TRs"), Separate Trading of Registered Interest and Principal of Securities
("STRIPS") and Treasury Investment Growth Receipts ("TIGERS").
FEDERAL INCOME TAX
The following is only a summary of certain additional federal tax
considerations generally affecting the Company and its shareholders that are not
described in the Company's prospectuses. No attempt is made to present a
detailed explanation of the federal, state or local tax treatment of the Company
or its shareholders, and the discussion here and in the Company's prospectuses
are not intended as a substitute for careful tax planning.
Each 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 Fund separately, rather
than to the Company as a whole. Each 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 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 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 Company's taxable
year, (i) at least 50% of the market value of the 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 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 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.
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In addition to the requirements described above, in order to qualify as a
RIC, a 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 a 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 a 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 Fund's
current and accumulated earnings and profits and such distributions generally
will be eligible for the corporate dividends received deductions.
Each 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 Fund will pay federal income tax thereon, and, if the 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 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 a 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 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 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 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 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 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 Fund.
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
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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
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 Fund
may be invested in Municipal Obligations that do not bear Tax-Exempt Interest,
and any taxable income recognized by the Fund will be distributed and taxed to
its shareholders.
FOREIGN INCOME TAX
It is expected that each Fund will be subject to foreign withholding taxes
with respect to its dividend and interest income from foreign countries, if any,
and a Fund may be subject to foreign income or other taxes with respect to other
income. So long as more than 50% in value of a Fund's total assets at the close
of the taxable year consists of stock or securities of foreign corporations, the
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. A 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 a 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 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 a Fund from its foreign source
income will be treated as foreign source income. A 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
a 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 a 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 CONTRACTS
Except for certain hedging transactions, each 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 a 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, a 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 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 a 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 Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the 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
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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 a 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
Company is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the Company 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 Company, distributions of net
long-term capital gains, and amounts retained by the Company which are
designated as undistributed capital gains.
If the income from the Company 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 Company, will be subject to U.S. federal income tax at
the rates applicable to United States citizens and residents or domestic
corporations.
The Company 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
Company.
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 Funds an order received prior to the regular close of the New York Stock
Exchange (the "NYSE") (currently, 4:00 p.m., Eastern Time) 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 Prospectuses under "Purchase of
Shares." Class A shares of the Non-Money Funds purchased without an initial
sales charge that 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 Non-Money Market Fund purchased
through the automatic reinvestment of dividends or distributions paid by any
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 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 Company may be purchased on any day the NYSE is open, except
that shares of the Money Market Funds may be purchased on any day when both the
NYSE and the Federal Reserve Banks are open. The NYSE is closed when the
following holidays are observed: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day
and on the preceding Friday or subsequent Monday when any of these holidays
falls on a Saturday or Sunday, respectively. Federal Reserve Banks are closed on
Martin Luther King Day, Columbus Day and Veterans Day, in addition to such NYSE
holidays.
Each 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 Company, 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 a Fund's shares.
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REDEMPTION OF SHARES
Each 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 a 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. Additionally, if the Board of Directors determines that it
would be detrimental to the best interests of the remaining shareholders of the
Fund to payment wholly or partly in cash, the Company may pay the redemption
proceeds in whole or in part by a distribution-in-kind of readily marketable
securities held by the 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.
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 Fund(s).
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
Fund purchased through the automatic reinvestment of dividends or distributions
paid by any Fund.
To protect your account and the Company from fraud, signature guarantees are
required for certain redemptions. Signature guarantees enable the Company 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 Company are also
being redeemed, on the letter or stock power.
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 Fund of the Company has adopted certain investment policies
which are either fundamental investment limitations or non-fundamental
investment limitations. Fundamental investment limitations may not be changed
without the approval of the lesser of: (1) at least 67% of the voting securities
of the Fund present at a meeting if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy,
or (2) more than 50% of the outstanding voting securities of the Fund.
Non-fundamental investment limitations may be changed by the Board of Directors
of the Company.
For the purpose of adopting investment limitations the current Funds have
been divided into three separate groups, which limitations apply only to the
Funds that form a part of that group. The groups are comprised as follows:
Category I Funds: Global Fixed Income, Worldwide High
Income, High Yield, American Value,
Aggressive Equity, U.S. Real Estate,
Global Equity Allocation, Asian Growth,
Emerging Markets, Latin American,
International Magnum, Japanese Equity,
Growth and Income and European Equity
Funds.
Category II Funds: Equity Growth, Global Equity, Emerging
Markets Debt, Mid Cap Growth and Value
Funds.
Money Market Funds: Money Market, Tax-Free Money Market and
Government Obligations Money Market
Funds.
CATEGORY I FUNDS
The following are fundamental investment limitations with respect to the
Category I Funds. No Category I Fund will:
(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;
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(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;
(6) except with respect to 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 than 25% of the value of the 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;
(7) write or acquire options or interests in oil, gas or other mineral
exploration or development programs or leases;
(8) 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 objective and policies;
(9) purchase or retain securities of an issuer if those officers and
Directors of the Company or its investment adviser owning more than 1/2 of 1% of
such securities together own more than 5% of such securities;
(10) 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 Fund's
total assets valued at the lower of market or cost and a Fund may not purchase
additional securities when borrowings exceed 5% of total assets, except that the
Worldwide High Income Fund, Latin American Fund and Growth and Income Fund may
enter into reverse repurchase agreements in accordance with its investment
objective 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;
(11) 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);
(12) invest more than an aggregate of 15% of the total assets of the Fund,
determined at the time of investment, in illiquid assets, including repurchase
agreements having maturities of more than seven days or invest in fixed time
deposits with a duration of from two business days to seven calendar days if
more than 10% of the Fund's total assets would be invested in these time
deposits; provided, however, that no Fund shall invest (i) more than 10% of its
total assets in securities subject to legal or contractual restrictions on
resale and (ii) in fixed time deposits with a duration of over seven calendar
days;
(13) 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;
(14) issue senior securities;
(15) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitation
described in (12) 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;
(16) except for the Global Fixed Income Fund, Emerging Markets Fund, Latin
America Fund, Aggressive Equity Fund and U.S. Real Estate Fund, purchase more
than 10% of any class of the outstanding securities of any issuer; and
(17) except for the Global Fixed Income Fund, Emerging Markets Fund, Latin
America Fund and 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 Funds total assets,
at market value, would be invested in the securities of such issuer.
The following are non-fundamental investment limitations with respect to the
Category I Funds. As a matter of non-fundamental policy, no Category I Fund
will:
(1) 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;
21
<PAGE>
(2) purchase warrants if, by reason of such purchase, more than 5% of the
value of the 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 Fund's net assets, may be warrants that are not listed on a nationally
recognized stock exchange;
(3) invest in oil, gas or other mineral leases; and
(4) invest in illiquid securities, except 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, as amended (the "1933 Act"), except securities
that are not registered under the 1933 Act but that can be offered and sold to
qualified institutional buyers under Rule 144A under the 1933 Act.
Each of the Global Fixed Income, 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 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 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).
The percentage limitations contained in these restrictions apply at the time
of purchase of securities. Future Funds of the Company may adopt different
limitations.
CATEGORY II FUNDS
The following are fundamental investment limitations with respect to the
Category II Funds. No Category II Fund will:
(1) invest in physical commodities or contracts on physical commodities,
except that any Fund may acquire physical commodities as a result of ownership
of securities or other instruments and may purchase or sell options or futures
contracts or invest in securities or other instruments backed by physical
commodities;
(2) purchase or sell real estate, although each Fund may purchase and sell
securities of companies which deal in real estate, other than real estate
limited partnerships, and may purchase and sell marketable securities which are
secured by interests in real estate;
(3) make loans except: (i) by purchasing debt securities in accordance with
their respective investment objectives and policies, or entering into repurchase
agreements, subject to the limitations described in non-fundamental investment
limitation (8) below, (ii) by lending their portfolio securities, and (iii) by
lending portfolio assets to other Funds, banks, brokers, dealers and other
financial institutions, so long as such loans are not inconsistent with the 1940
Act, the rules, regulations, interpretations or orders of the SEC and its staff
thereunder;
(4) except for the Emerging Markets Debt Fund, with respect to 75% of each
Fund's assets, purchase a security if, as a result, the Fund would hold more
than 10% (taken at the time of such investment) of the outstanding voting
securities of any issuer;
(5) except for the Emerging Markets Debt Fund, with respect to 75% of each
Fund's assets, purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets, taken at market value at the time of such
investment, would be invested in the securities of such issuer except that this
restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities;
(6) issue any class of senior security or sell any senior security of which
it is the issuer, except that each Fund may borrow money as a temporary measure
for extraordinary or emergency purposes, provided that such borrowings do not
exceed 33 1/3% of the Fund's total assets (including the amount borrowed) less
liabilities (exclusive of borrowings) and except that the Emerging Markets Debt
Fund may borrow from banks in an amount not in excess of 33 1/3% of its total
assets (including the amount borrowed) less liabilities in accordance with its
investment objective and policies. The term "senior security" shall not include
any temporary borrowings that do not exceed 5% of the value of a Fund's total
assets at the time the Fund makes such temporary borrowing. Notwithstanding the
foregoing limitations on issuing or selling senior securities and borrowing, a
Fund may engage in investment strategies that obligate it either to purchase
securities or segregate assets, or enter into reverse repurchase agreements,
provided that it will segregate assets to cover its obligations pursuant to such
transactions in accordance with applicable rules, orders, or interpretations of
the SEC or its staff. This investment limitation shall not preclude a Fund from
issuing multiple classes of shares in reliance on SEC rules or orders.
(7) underwrite the securities of other issuers (except to the extent that a
Fund may be deemed to be an underwriter within the meaning of the 1933 Act in
connection with the disposition of restricted securities);
22
<PAGE>
(8) Acquire any securities of companies within one industry, if as a result
of such acquisition, more than 25% of the value of the 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, when any
such Fund adopts a temporary defensive position.
The following are non-fundamental investment limitations with respect to the
Category II Funds. As a matter of non-fundamental policy, no Category II Fund
will:
(1) enter into futures contracts to the extent that each Fund's outstanding
obligations to purchase securities under these contracts in combination with its
outstanding obligations with respect to options transactions would exceed 50% of
each Fund's total assets, and will maintain assets sufficient to meet its
obligations under such contracts in a segregated account with the custodian bank
or will otherwise comply with the SEC's position on asset coverage;
(2) write put or call options except to the extent described above in (1);
(3) purchase on margin, except for use of short-term credit as may be
necessary for the clearance of purchases and sales of securities, provided that
each Fund may make margin deposits in connection with transactions in options,
futures, and options on futures;
(4) sell short unless the Fund (i) owns the securities sold short, (ii) by
virtue of its ownership of other securities, has the right to obtain securities
equivalent in kind and amount to the securities sold and, if the right is
conditional, the sale is made upon the same conditions, or (ii) maintains in a
segregated account on the books of the Fund's custodian an amount that, when
combined with the amount of collateral deposited with the broker in connection
with the short sale, equals the current market value of the security sold short
or such other amount as the SEC or its staff may permit by rule, regulation,
order, or interpretation, except that the Emerging Markets Debt Fund may from
time to time sell securities short without limitation but consistent with
applicable legal requirements as stated in its Prospectus; provided that
transactions in futures contracts and options are not deemed to constitute
selling securities short;
(5) purchase or retain securities of an issuer if those Officers and
Directors of the Company or any of its investment advisers owning more than 1/2
of 1% of such securities together own more than 5% of such securities;
(6) borrow money other than from banks or other Funds of the Company,
provided that a Fund may borrow from banks or other Funds of the Company so long
as such borrowing is not inconsistent with the 1940 Act or the rules,
regulations, interpretations or orders of the SEC and its staff thereunder; or,
except for the Emerging Markets Debt Fund, purchase additional securities when
borrowings exceed 5% of total assets;
(7) pledge, mortgage or hypothecate assets in an amount greater than 10% of
its total assets in the case of the Equity Growth, Global Equity and Emerging
Markets Debt Funds or 50% of its total assets in the case of the Mid Cap Growth
and Value Funds, provided that each Fund may segregate assets without limit in
order to comply with the requirements of Section 18(f) of the 1940 Act and
applicable rules, regulations or interpretations of the SEC and its staff;
(8) invest more than an aggregate of 15% of the net assets of the Fund,
determined at the time of investment, in illiquid securities provided that this
limitation shall not apply to any investment in securities that are not
registered under the 1933 Act but that can be sold to qualified institutional
investors in accordance with Rule 144A under the 1933 Act and are determined to
be liquid securities under guidelines or procedures adopted by the Board of
Directors;
(9) invest for the purpose of exercising control over management of any
company;
(10) 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;
(11) in the case of the Equity Growth, Global Equity, and Emerging Markets
Debt Funds, make loans as described in fundamental investment limitations 3(ii)
and 3(iii), above, in an amount exceeding 33 1/3% of its total assets; and
(12) in the case of the Emerging Markets Debt Fund, purchase a security if,
as a result, with respect to 50% of its assets, it would hold more than 10% of
the outstanding voting securities of an issuer or have more than 5% of its total
assets invested in securities of an issuer or, with respect to 100% of its
assets, it would have more than 25% of its total assets invested in securities
of the issuer, except that these limitations do not apply to investments in U.S.
Government securities.
Unless otherwise indicated, if a percentage limitation on investment or
utilization of assets as set forth above is adhered to at the time an investment
is made, a later change in percentage resulting from changes in the value or
total cost of the Fund's assets will not be considered a violation of the
restriction, and the sale of securities will not be required.
23
<PAGE>
MONEY MARKET FUNDS
The following are fundamental investment limitations with respect to the
Money Market Funds. No Money Market Fund will:
(1) invest in commodities;
(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;
(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) acquire any securities of companies within one industry if, as a result
of such acquisition, more than 25% of the value of the 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;
(8) 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 Fund's total assets at the time
of such borrowing, and only if after such borrowing there is asset coverage of
at least 300% for all borrowings of the Fund; or mortgage, pledge, hypothecate
or in any manner transfer as security for indebtedness any securities owned or
held by the 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 Fund's total assets at the time of the borrowing; or purchase portfolio
securities while borrowings in excess of 5% of the Fund's net assets are
outstanding. (This borrowing provision is not for investment leverage, but
solely to facilitate management of the Fund's securities by enabling the Fund to
meet redemption requests where the liquidation of portfolio securities is deemed
to be disadvantageous or inconvenient.);
(9) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions;
(10) make short sales of securities or maintain a short position or write or
sell puts, calls, straddles, spreads or combinations thereof;
(11) with respect to the Money Market Fund, invest in other investment
companies except to the extent permitted by the 1940 Act, provided that the 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 Fund's assets in other
investment companies that are unaffiliated with the Fund and then no more than
5% of the Fund's assets may be invested in any one money market fund;
(12) 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 Fund may make interest-bearing savings deposits in amounts
not in excess of 5% of the value of the Fund's assets and may make time
deposits;
(13) with respect to the Tax-Free 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");
(14) 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 Fund's assets which may be invested in the securities of any one
issuer of obligations that the Fund is permitted to purchase;
(15) 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 Fund's total assets would be invested in the securities of such
issuer; except that, under applicable regulations, the Fund may invest more than
5% of its total assets in any one issuer for up to three business days;
(16) 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
24
<PAGE>
(17) make loans, except that a 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 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.
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.
The following are non-fundamental investment limitations with respect to the
Money Market Funds. As a matter of non-fundamental policy, no Money Market Fund
will:
(1) 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;
(2) purchase warrants if, by reason of such purchase, more than 5% of the
value of the 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 Fund's net assets, may be warrants that are not listed on a nationally
recognized stock exchange; and
(3) invest in oil, gas or other mineral leases.
The percentage limitations contained in these restrictions apply at the time
of purchase of securities. Future Funds of the Company 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.
25
<PAGE>
MANAGEMENT OF THE COMPANY
OFFICERS AND DIRECTORS
The Company's Officers, under the supervision of the Board of Directors,
manage the day-to-day operations of the Company. The Directors set broad
policies for the Company and choose its Officers. Three Directors and all of the
Officers of the Company are directors, officers or employees of the Company's
advisers or administrative services providers. The other Directors have no
affiliation with the Company's advisers, distributor or administrative services
providers or their affiliates. The Directors are also Directors of other
open-end funds advised by MSAM (collectively with the Company, the "Open-End
Fund Complex") and certain Directors are Directors of closed-end fund[s] advised
by MSAM (together with the Open-End Fund Complex, the "Fund Complex"). Officers
of the Company are also officers of funds in the Fund Complex and some or all of
the other investment companies managed, administered, advised or distributed by
MSAM or its affiliates. A list of the Directors and Officers of the Company and
a brief statement of their present positions and principal occupations during
the past five years is set forth below:
<TABLE>
<CAPTION>
NAME, ADDRESS AND DATE OF
BIRTH POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ------------------------------ ---------------------- --------------------------------------------------
<S> <C> <C>
Barton M. Biggs* Chairman and Director Chairman and Director of Morgan Stanley Asset
1221 Avenue of the Americas Management Inc. and Morgan Stanley Asset
New York, NY 10020 Management Limited; Managing Director of Morgan
11/26/32 Stanley & Co. Incorporated; Member of Investment
Advisory Counsel of the Thailand Fund; Member of
the 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 President Principal of Morgan Stanley Asset Management Inc;
1221 Avenue of the Americas President and Director of various investment
New York, NY 10020 companies managed by Morgan Stanley Asset
12/21/56 Management Inc.
John D. Barrett, II Director Chairman and Director of Barrett Associates, Inc.
521 Fifth Avenue (investment counseling); Director of the Ashforth
New York, NY 10135 Company (real estate); Director of the Morgan
8/21/35 Stanley Institutional Fund, Inc., Morgan Stanley
Universal Funds, Inc. and PCS Cash Fund, Inc.
Gerard E. Jones Director Partner in Richards & O'Neil LLP (law firm);
43 Arch Street Director of the Morgan Stanley Institutional
Greenwich, CT 06830 Fund, Inc., Morgan Stanley Universal Funds, Inc.
1/23/37 and PCS Cash Fund, Inc.
Andrew McNally IV Director Chairman and Chief Executive Officer of Rand
8255 North Central McNally (publication); Director of Allendale
Park Avenue Insurance Co., Mercury Finance (consumer
Skokie, IL 60076 finance); Zenith Electronics, Hubbell, Inc.
11/11/39 (industrial electronics); Director of the Morgan
Stanley Institutional Fund, Inc., Morgan Stanley
Universal Funds, Inc. and PCS Cash Fund, Inc.
Samuel T. Reeves Director Chairman of the Board and CEO, Pinacle Trading
8211 North Fresno Street L.L.C. (investment firm); Director, Pacific Gas
Fresno, CA 93720 and Electric and PG&E Enterprises (utilities);
7/28/34 Director of the Morgan Stanley Institutional
Fund, Inc., Morgan Stanley Universal Funds, Inc.
and PCS Cash Fund, Inc.
Fergus Reid Director Chairman and Chief Executive Officer of LumeLite
85 Charles Colman Blvd. Corporation (injection molding firm); Trustee and
Pawling, NY 12564 Director of Vista Mutual Fund Group; Director of
8/12/32 the Morgan Stanley Institutional Fund, Inc.,
Morgan Stanley Universal Funds, Inc. and PCS Cash
Fund, Inc.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND DATE OF
BIRTH POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ------------------------------ ---------------------- --------------------------------------------------
<S> <C> <C>
Frederick O. Robertshaw Director Of Counsel, Copple, Chamberlin & Boehm, P.C. and
2800 North Central Avenue Rake, Copple, Downey & Black, P.C. (law firms);
Phoenix, AZ 85004 Director of the Morgan Stanley Institutional
1/24/34 Fund, Inc., Morgan Stanley Universal Funds, Inc.
and PCS Cash Fund, Inc.
Frederick B. Whittemore* Director Advisory Director of Morgan Stanley & Co.
1251 Avenue of the Incorporated; Vice-Chairman and Director of
Americas, 30th Flr. various investment companies managed by Morgan
New York, NY 10020 Stanley Asset Management Inc.
11/12/30
James W. Grisham* Vice President Principal of Morgan Stanley Asset Management Inc.;
1221 Avenue of the Americas Officer of various investment companies managed
New York, NY 10020 by Morgan Stanley Asset Management Inc.
10/24/41
Michael F. Klein* Vice President Principal of Morgan Stanley Asset Management Inc;
1221 Avenue of the Americas Officer of various investment companies managed
New York, NY 10020 by Morgan Stanley Asset Management Inc.
12/12/58 Previously practiced law with the New York law
firm of Rogers & Wells.
Harold J. Schaaff, Jr.* Vice President Principal of Morgan Stanley & Co. Incorporated;
1221 Avenue of the Americas General Counsel and Secretary of Morgan Stanley
New York, NY 10020 Asset Management Inc.; Officer of various
6/10/60 investment companies managed by Morgan Stanley
Asset Management Inc.
Joseph P. Stadler* Vice President Vice President of Morgan Stanley Asset Management
1221 Avenue of the Americas Inc.; Officer of various investment companies
New York, NY 10020 managed by Morgan Stanley Asset Management Inc.
6/7/54 Previously with Price Waterhouse LLP
(accounting).
Valerie Y. Lewis* Secretary Vice President of Morgan Stanley Asset Management
1221 Avenue of the Americas Inc.; Officer of various investment companies
New York, NY 10020 managed by Morgan Stanley Asset Management Inc.
3/26/56 Previously with Citicorp (banking).
Karl O. Hartmann Assistant Secretary Senior Vice President, Secretary and General
73 Tremont Street Counsel of Chase Global Funds Services Company;
Boston, MA 02108-3913 Previously with Leland, O'Brien, Rubinstein
3/7/55 Associates, Inc. (investments).
James R. Rooney Treasurer Vice President, Director of Fund Administration
73 Tremont Street and Compliance Services, Chase Global Funds
Boston, MA 02108-3913 Services Company; Officer of various investment
10/21/58 companies managed by Morgan Stanley Asset
Management Inc. Previously with Scudder, Stevens
& Clark, Inc. (investment) and Ernst & Young LLP
(accounting).
Joanna Haigney Assistant Treasurer Manager of Fund Administration and Compliance
73 Tremont Street Services, Chase Global Funds Services Company;
Boston, MA 02108-3913 Officer of various investment companies managed
10/10/66 by Morgan Stanley Asset Management Inc.
Previously with Coopers & Lybrand LLP.
</TABLE>
- ------------------
* "Interested Person" within the meaning of the 1940 Act
27
<PAGE>
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
Company's Audit Committee, which consists of three of the Company'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 Company 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 Company's Officers and employees are paid by the Advisers or
their agents. As of March 14, 1997, to Company management's knowledge, the
Directors and officers of the Company, as a group, owned less than 1% of the
outstanding common stock of each Fund of the Company. The following table shows
aggregate compensation paid to each of the Company's Directors by the Company
and the Fund Complex, respectively, for the fiscal year from July 1, 1995 to
June 30, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
(5)
TOTAL
(3) COMPENSATION
PENSION OR FROM
(2) RETIREMENT (4) REGISTRANT
AGGREGATE BENEFITS ESTIMATED AND FUND
COMPENSATION ACCRUED AS ANNUAL COMPLEX PAID
(1) FROM PART OF FUND BENEFITS UPON TO
NAME OF PERSON, POSITION REGISTRANT EXPENSES RETIREMENT DIRECTORS++
- -------------------------------------------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Barton M. Biggs*
Director and Chairman of the Board............... $ 0 $ 0 $ 0 $ 0
John D. Barrett, II,*
Director......................................... $65,000 $ 0 $ 0 $65,000
John E. Eckleberry,***
Director......................................... $ 0 $ 0 $ 0 $ 0
Gerard E. Jones,*
Director......................................... $65,000 $ 0 $ 0 $72,100
Warren J. Olsen,*
Director and President........................... $ 0 $ 0 $ 0 $ 0
Andrew McNally IV,*
Director......................................... $55,000+ $ 0 $ 0 $55,000
Samuel T. Reeves,*
Director......................................... $55,000+ $ 0 $ 0 $55,000
Fergus Reid,*
Director......................................... $65,000+ $ 0 $ 0 $72,100
Frederick O. Robertshaw,**
Director......................................... $55,000+ $ 0 $ 0 $55,000
Frederick B. Whittemore,**
Director (Chairman of the Board until June 28,
1995)............................................ $ 0 $ 0 $ 0 $13,750
</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.
++ Although the Fund Complex includes Morgan Stanley Universal Funds, Inc.
("Universal"), as of June 30, 1996, the Directors had not received
compensation for their services on the Board of Directors of Universal.
INVESTMENT ADVISORY AND ADMINISTRATIVE AGREEMENTS
MSAM is a wholly-owned subsidiary of Morgan Stanley Group Inc. (the
"Group"). The principal offices of the Group are located at 1221 Avenue of the
Americas, New York, NY 10020. MAS is an indirect wholly-owned subsidiary of the
Group with its principal offices located at One Tower Bridge, West Conshohocken,
PA 19428.
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 Company for the fiscal years ended June 30, 1994, June
30, 1995 and June 30, 1996, the Adviser earned fees of approximately $2,322,000
(and
28
<PAGE>
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), $7,177,000 (and voluntarily waived a portion of such fees equal to
approximately $1,328,000) 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 Money Market Portfolio") the predecessor to
the Government Obligations Money Market Fund received $412,757, $897,867 and
$395,312 respectively (net of voluntary fee waivers of $25,448, $0 and $45,251,
respectively).
MAS provides investment services to employee benefit plans, endowment funds,
foundations, and other institutional investors and has served as investment
adviser to the MAS Funds, a registered open-end investment company, since 1984.
At September 30, 1996, MAS managed investments totaling approximately $37.5
billion.
Pursuant to the Administration Agreements between the Advisers,
respectively, and the Company, MSAM and MAS (each, an "Administrator") provide
administrative services to those Funds that MSAM or MAS, respectively, serves as
Adviser. For their services under the Administration Agreements, the Company
pays the Administrators 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, 1994, June 30, 1995 and June
30, 1996, the Company paid administrative fees to MSAM of approximately
$852,000, $1,154,000 and $1,801,654 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. MAS did not serve as an Administrator and received no compensation
from the Company prior to the end of the fiscal year ended June 30, 1996.
Under Sub-Administration Agreements between the Administrators,
respectively, and The Chase Manhattan Bank ("Chase"), Chase Global Funds
Services Company ("CGFSC," formerly Mutual Funds Service Company, a corporate
affiliate of Chase) provides certain administrative services to the Company.
CGFSC provides operational and administrative services to investment companies
with approximately $66 billion in assets and having approximately 200,000
shareholder accounts as of September 30, 1996. CGFSC's business address is 73
Tremont Street, Boston, Massachusetts 02108-3913.
DISTRIBUTION OF FUND SHARES
Morgan Stanley & Co. Incorporated ("Morgan Stanley"), a wholly-owned
subsidiary of the Group, served as the distributor of the Company's shares
pursuant to a Distribution Agreement with the Company 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").
Subsequent to January 1, 1997, Van Kampen American Capital Distributors, Inc.
(the "Distributor") replaced Morgan Stanley as distributor of the Company's
shares pursuant to a Distribution Agreement with the Company and the Plans.
Under each Plan the Company's distributor is entitled to receive from the Funds
a distribution fee, which is accrued daily and paid quarterly, of 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 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 Company'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 Funds to accrue and pay to the Distributor the fee
agreed to under its Distribution Agreement. The Plans do not obligate the 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 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
Company's Board of Directors, including those directors who are not "interested
persons" of the Company 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 December 12, 1996 and the Plan for the Money
Market Funds was most recently approved on.
29
<PAGE>
The Distributor did not serve as the distributor and received no
compensation from the Company prior to the end of the fiscal year ended June 30,
1996. As compensation for providing distribution services to the Company for the
fiscal year ended June 30, 1996, Morgan Stanley received aggregate fees of
approximately $4,267,000 which were attributable approximately as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JUNE 30, 1996
FUND NAME (000)
- ------------------------------------------------------------------------------------------------- -------------------
<S> <C>
Global Equity Allocation Fund-Class A............................................................ $ 126
Global Equity Allocation Fund-Class B+........................................................... 47
Global Equity Allocation Fund-Class C+........................................................... 496
Global Fixed Income Fund-Class A................................................................. 26
Global Fixed Income Fund-Class B+................................................................ 3
Global Fixed Income Fund-Class C+................................................................ 56
Asian Growth Fund-Class A........................................................................ 516
Asian Growth Fund-Class B+....................................................................... 194
Asian Growth Fund-Class C+....................................................................... 1,505
Emerging Markets Fund-Class A.................................................................... 131
Emerging Markets Fund-Class B+................................................................... 35
Emerging Markets Fund-Class C+................................................................... 309
Latin American Fund-Class A...................................................................... 28
Latin American Fund-Class B+..................................................................... 6
Latin American Fund-Class C+..................................................................... 55
American Value Fund-Class A...................................................................... 57
American Value Fund-Class B+..................................................................... 14
American Value Fund-Class C+..................................................................... 187
Worldwide High Income Fund-Class A............................................................... 90
Worldwide High Income Fund-Class B+.............................................................. 112
Worldwide High Income Fund-Class C+.............................................................. 231
Aggressive Equity Fund-Class A................................................................... 4
Aggressive Equity Fund-Class B................................................................... 10
Aggressive Equity Fund-Class C................................................................... 10
High Yield Fund-Class A.......................................................................... 2
High Yield Fund-Class B.......................................................................... 5
High Yield Fund-Class C.......................................................................... 5
U.S. Real Estate Fund-Class A.................................................................... 1
U.S. Real Estate Fund-Class B.................................................................... 3
U.S. Real Estate Fund-Class C.................................................................... 3
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
Equity Growth Fund-Class A**..................................................................... N/A
Equity Growth Fund-Class B**..................................................................... N/A
Equity Growth Fund-Class C**..................................................................... N/A
Global Equity Fund-Class A**..................................................................... N/A
Global Equity Fund-Class B**..................................................................... N/A
Global Equity Fund-Class C**..................................................................... N/A
Emerging Markets Debt Fund-Class A**............................................................. N/A
Emerging Markets Debt Fund-Class B**............................................................. N/A
Emerging Markets Debt Fund-Class C**............................................................. N/A
Mid Cap Growth Fund-Class A**.................................................................... N/A
Mid Cap Growth Fund-Class B**.................................................................... N/A
Mid Cap Growth Fund-Class C**.................................................................... N/A
Value Fund-Class A**............................................................................. N/A
Value Fund-Class B**............................................................................. N/A
Value Fund-Class C**............................................................................. N/A
</TABLE>
- ------------------
** Not operational as of June 30, 1996.
+ 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.
++ As compensation for providing distribution services to the Predecessor
Portfolios for the fiscal years ended June 30, 1996, Morgan Stanley 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.
30
<PAGE>
CODE OF ETHICS
The Board of Directors of the Company 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 Company's investment personnel.
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 Company within periods of trading by the
Company 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 Company as of March 14, 1997 and the percentage of
outstanding shares of such classes owned beneficially or of record by such
shareholders as of such date are, to Company 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 Fund.
GLOBAL FIXED INCOME FUND: Lehman Brothers Inc., P.O. Box 29198,
Brooklyn, NY 11202, owned 8% of the total outstanding Class A shares of such
Fund; The Private Bank & Trust Co., 10 Dearborn Street, Chicago, IL 60602,
owned 8% of the total outstanding Class A shares of such Fund; Charles Schwab
& Co. Inc., Exclusive Benefit of its Customers, 101 Montgomery Street, San
Francisco, CA 94104, owned 8% of the total outstanding Class A shares of
such Fund; Fredmar Inc., P.O. Box 7669, Warwick, RI 02887, owned 11% of the
total outstanding Class B shares of such Fund; Oppenheimer & Co., Inc., P.O.
Box 3484, Church Street Station, New York, NY 10008, owned 22% of the total
outstanding Class B shares of such Fund and Piper Jaffray as Cust., FBO Mary
Lou Concialdi, 222 S. 9th Street, Minneapolis, MN 55402, owned 7% of the
total outstanding Class B shares of such Fund.
AMERICAN VALUE FUND: Prudential Securities, FBO John P. Dobson, 140
Christie Hill Road, Darien, CT 06820, owned 6% of the total outstanding Class
A shares of such Fund; Smith Barney, Inc., 388 Greenwich Street, New York, NY
10013, owned 6% of the total outstanding Class A shares of such Fund; James
G. McMurray, M.D., Profit Sharing Plan, 303 Williams Avenue, Suite 411,
Huntsville, AL 35801, owned 5% of the total outstanding Class B shares of
such Fund and Morgan Stanley Group, Inc., 1221 Avenue of the Americas, New
York, NY 10020, owned 11% of the total outstanding Class C shares of such
Fund.
WORLDWIDE HIGH INCOME FUND: FTC & Co., Datalynx 118, P.O. Box 173736,
Denver, CO 80217, owned 11% of the total outstanding Class A shares of such
Fund and Charles Schwab & Co., Inc., Exclusive Benefit of its Customers, 101
Montgomery Street, San Francisco, CA 94104 owned 14% of the total outstanding
Class A shares of such Fund.
EMERGING MARKETS FUND: Charles Schwab & Co., Inc., Exclusive Benefit of its
Customers, 101 Montgomery Street, San Francisco, CA 94104, owned 35% of the
total outstanding Class A shares of such Fund.*
HIGH YIELD FUND: Donaldson, Lufkin, Jenrette Securities Corporation
Inc., P.O. Box 2052, Jersey City, NJ 07303, owned 8% of the total outstanding
Class A shares of such Fund and Morgan Stanley Group, Inc., 1221 Avenue of
the Americas, New York, NY 10020, owned 76% of the total outstanding Class A
shares of such Fund, 49% of the total outstanding Class B shares of such Fund
and 74% of the total outstanding Class C shares of such Fund.*
LATIN AMERICAN FUND: Charles Schwab & Co., Inc., Exclusive Benefit of its
Customers, 101 Montgomery Street, San Francisco, CA 94104, owned 32% of the
total outstanding Class A shares of such Fund.*
U.S. REAL ESTATE FUND: PaineWebber for the Benefit of Aspire Partners
LP, C/O Global Direct Mail, 22 Harbor Drive, Port Washington, NY 11050, owned
20% of the total outstanding Class A shares of such Fund; Morgan Stanley
Group, Inc., 1221 Avenue of the Americas, New York, NY 10020, owned 12% of
the total outstanding Class A shares of such Fund; Prudential Securities
Inc., FBO Mr. John H. McCoy, Rosemont Business Campus, 919 Conestoga Road,
Suite 112, Rosemont, PA 19010, owned 8% of the total outstanding Class A
shares of such 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 Fund; Rauscher Pierce Refsnes Inc.,
FBO George Rastelli & Angelo Bacciocchi Trustee San Marino, Cement Wall
Corporation Employment Psp, 1955 Bellingham, Troy, MI 48083, owned 6% of the
total outstanding Class B shares of such Fund; Quin-Tec Inc., 14057 Stephens,
Warren, MI 48089, owned 6% of the total outstanding Class B shares of such
Fund; Prudential Securities Inc., FBO Eugene R. Burkard, San Diego, CA 92103,
owned 11% of the total outstanding Class C shares of such Fund; Dain Bosworth
Inc., FBO Lancaster Ventures LLC, P.O. Box 6368, Lincoln, NE 68506, owned 8%
of the total outstanding Class C shares of such Fund and Robert F. Johnston,
C/O Beacon Hill Financial, 19 Elm Street, Cohasset, MA 02025, owned 7% of the
total outstanding Class C shares of such Fund.
AGGRESSIVE EQUITY FUND: Lehman Brothers Inc., P.O. Box 29198, Brooklyn,
NY 11202, owned 7% of the total outstanding Class A shares of such Fund;
Morgan Stanley Group, Inc., 1221 Avenue of the Americas, New York, NY 10020,
owned 16% of the total outstanding Class A shares of such Fund, 19% of the
total outstanding Class B shares of such Fund and 32% of the total
outstanding Class C shares of such Fund and PaineWebber for the Benefit of LD
Hancock, P.O. Box 2203, Tupelo, MS 38803, owned 9% of the total outstanding
Class A shares of such Fund.*
INTERNATIONAL MAGNUM FUND: Morgan Stanley Group, Inc., 1221 Avenue of
the Americas, New York, NY 10020, owned 31% of the total outstanding Class A
shares of such Fund; 46% of the total outstanding Class B shares of such Fund
and 48% of the total outstanding Class C shares of such Fund; Boatmans Trust
Company, FBO Lambros LP, P.O. Box 14737, St. Louis, MO 63178, owned 7% of the
total outstanding Class A shares of such Fund; Wachovia Bank of NC Cust, FBO
East Carolina University Endowment and Foundation, 300 N. Main Street, P.O.
Box 3073, Winston Salem, NC 27101, owned 28% of the total outstanding Class A
shares of such Fund; Interstate/Johnson Lane, Interstate Tower, P.O. Box
1220, Charlotte, NC 28201, owned 6% of the total outstanding Class C shares
of such Fund and Key Industries Inc., Profit Sharing Plan, P.O. Box 24848,
Seattle, WA 98124, owned 6% of the total outstanding Class C shares of such
Fund. *
MONEY MARKET FUND: PFPC, Inc., 400 Bellevue Parkway, 2nd Floor, Wilmington,
DE 19809, owned 100% of the total outstanding shares of the Fund.*
GOVERNMENT OBLIGATIONS MONEY MARKET FUND: PFPC, Inc., 400 Bellevue Parkway,
2nd Floor, Wilmington, DE 19809, owned 100% of the total outstanding shares of
the Fund.*
TAX-FREE MONEY MARKET FUND: N/A
31
<PAGE>
JAPANESE EQUITY FUND: N/A
GROWTH AND INCOME FUND: N/A
EUROPEAN EQUITY FUND: N/A
EQUITY GROWTH FUND: N/A
GLOBAL EQUITY FUND: N/A
EMERGING MARKETS DEBT FUND: N/A
MID CAP GROWTH FUND: N/A
VALUE FUND: N/A
The shareholder may be deemed a "controlling person" of the particular 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 shareholder may be able to
control the outcome of matters voted on by shareholders of the Fund.
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 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 a Fund's per share net asset value at
$1.00 is based on the 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
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 a 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 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.
32
<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 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 Funds. The Company 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 Company.
In purchasing and selling securities for the Funds, it is the Company'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 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 Company. Some
securities considered for investment by a Fund may also be appropriate for other
clients served by the Adviser. If purchase or sale of securities consistent with
the investment policies of a 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 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 Company's Directors.
Subject to the overriding objective of obtaining the best execution of
orders, the Adviser may allocate a portion of the Company's portfolio brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley under
procedures adopted by the Board of Directors. For the three fiscal years ended
June 30, 1994, June 30, 1995 and June 30, 1996, the Company paid brokerage
commissions of approximately $618,000, $115,622 and $180,458, respectively, to
the Distributor, an affiliated broker-dealer. For the fiscal years ended June
30, 1994, June 30, 1995 and June 30, 1996, commissions paid to the Distributor
represented approximately 30%, 7% and 6%, respectively, of the total amount of
brokerage commissions paid in such period and which were paid on transactions
that represented 21%, 3% and 2% respectively, of the aggregate dollar amount of
transactions that incurred commissions paid by the Company during such period.
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 Company may from time to time quote various performance figures to
illustrate the 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 performance quotations may be furnished
by the Company 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 Company are based on the
standardized methods of computing performance mandated by the SEC. An
explanation of those and other methods used by the Company to compute or express
performance follows.
TOTAL RETURN
From time to time the 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 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 Fund) and the deduction of all applicable Company
expenses on an annual basis.
Total return figures are calculated according to the following formula:
<TABLE>
<C> <C> <S>
P(1+T)n = ERV
</TABLE>
where:
<TABLE>
<C> <C> <S>
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).
</TABLE>
33
<PAGE>
Calculated using the formula above, the average annualized total return,
exclusive of a sales charge or deferred sales charge, for each of the 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 Fund through June 30,
1996 are as follows:
<TABLE>
<CAPTION>
ONE-YEAR INCEPTION
INCEPTION PERIOD ENDED THROUGH JUNE
DATE JUNE 30, 1996 30, 1996
--------- ------------- -------------
<S> <C> <C> <C>
Global Equity Allocation Fund
Class A Shares...................... 01/04/93 24.62% 14.58%
Class B Shares+..................... 08/01/95 18.08% N/A
Class C Shares+..................... 01/04/93 23.65% 13.74%
Global Fixed Income Fund
Class A Shares...................... 01/04/93 5.20% 7.12%
Class B Shares+..................... 08/01/95 3.76% N/A
Class C Shares+..................... 01/04/93 4.47% 6.27%
Asian Growth Fund
Class A Shares...................... 06/23/93 4.45% 13.78%
Class B Shares+..................... 08/01/95 1.82% N/A
Class C Shares+..................... 06/23/93 3.64% 12.98%
American Value Fund
Class A Shares...................... 10/18/93 17.41% 11.29%
Class B Shares+..................... 08/01/95 12.29% N/A
Class C Shares+..................... 10/18/93 16.50% 10.42%
Worldwide High Income Fund
Class A Shares...................... 04/21/94 19.61% 13.28%
Class B Shares+..................... 08/01/95 17.07% N/A
Class C Shares+..................... 04/21/94 18.71% 12.45%
Emerging Markets Fund
Class A Shares...................... 07/06/94 14.16% 0.47%
Class B Shares+..................... 08/01/95 9.45% N/A
Class C Shares+..................... 07/06/94 13.30% 0.29%
Latin American Fund
Class A Shares...................... 07/06/94 39.35% 3.56%
Class B Shares+..................... 08/01/95 29.96% N/A
Class C Shares+..................... 07/06/94 38.26% 2.64%
Aggressive Equity Fund
Class A Shares...................... 01/02/96 20.52% N/A
Class B Shares...................... 01/02/96 20.18% N/A
Class C Shares...................... 01/02/96 20.10% N/A
U.S. Real Estate Fund
Class A Shares...................... 05/01/96 4.63% N/A
Class B Shares...................... 05/01/96 4.54% N/A
Class C Shares...................... 05/01/96 4.54% N/A
High Yield Fund
Class A Shares...................... 05/01/96 0.29% N/A
Class B Shares...................... 05/01/96 0.21% N/A
Class C Shares...................... 05/01/96 0.21% N/A
International Magnum Fund
Class A Shares...................... N/A N/A N/A
Class B Shares...................... N/A N/A N/A
Class C Shares...................... N/A N/A N/A
Japanese Equity Fund
Class A Shares...................... N/A N/A N/A
Class B Shares...................... N/A N/A N/A
Class C Shares...................... N/A N/A N/A
Growth and Income Fund
Class A Shares...................... N/A N/A N/A
Class B Shares...................... N/A N/A N/A
Class C Shares...................... N/A N/A N/A
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
ONE-YEAR INCEPTION
INCEPTION PERIOD ENDED THROUGH JUNE
DATE JUNE 30, 1996 30, 1996
--------- ------------- -------------
European Equity Fund
<S> <C> <C> <C>
Class A Shares...................... N/A N/A N/A
Class B Shares...................... N/A N/A N/A
Class C Shares...................... N/A N/A N/A
Equity Growth Fund
Class A Shares...................... N/A N/A N/A
Class B Shares...................... N/A N/A N/A
Class C Shares...................... N/A N/A N/A
Global Equity Fund
Class A Shares...................... N/A N/A N/A
Class B Shares...................... N/A N/A N/A
Class C Shares...................... N/A N/A N/A
Emerging Markets Debt Fund
Class A Shares...................... N/A N/A N/A
Class B Shares...................... N/A N/A N/A
Class C Shares...................... N/A N/A N/A
MidCap Growth Fund
Class A Shares...................... N/A N/A N/A
Class B Shares...................... N/A N/A N/A
Class C Shares...................... N/A N/A N/A
Value Fund
Class A Shares...................... N/A N/A N/A
Class B Shares...................... N/A N/A N/A
Class C Shares...................... N/A N/A N/A
Money Market Fund....................... 08/04/89 N/A N/A
Tax-Free Money Market Fund.............. N/A N/A N/A
Government Obligations Money Market
Fund................................... 03/12/92 N/A N/A
</TABLE>
- ------------------
The European Equity, International Magnum, Japanese Equity, Growth and Income,
Equity Growth, Global Equity, Emerging Markets Debt, Mid Cap Growth, Value,
Money Market, Tax-Free Money Market and Government Obligations Money Market
Funds had not commenced operations in the fiscal year ended June 30, 1996.
+ 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.
The cumulative total rates of return for the International Magnum Fund
from inception to the date of the financial statements included herein is
2.17% for the Class A Shares, 1.92% for the Class B Shares and 1.83% for the
Class C Shares.
The cumulative total rates of return for the Money Market and Government
Obligations Money Market Funds from the date of the financial statements
included herein is 2.26% and 2.20%, respectively.
YIELD FOR CERTAIN FUNDS
From time to time certain of the Funds may advertise yield.
Current yield reflects the income per share earned by a 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:
<TABLE>
<S> <C> <C>
2[(a - b + 1) - 1]
Yield = ------------------
cd
</TABLE>
where:
<TABLE>
<C> <C> <S>
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
</TABLE>
The 30-day yield for the Global Fixed Income Fund as of June 30, 1996 was
4.63% for Class A shares; 4.69% for Class B shares and 3.94% for Class C shares.
The 30-day yield for the Worldwide High Income Fund as of June 30, 1996 was
12.56% for Class A shares; 12.42% for Class B shares and 12.40% for Class C
shares.
35
<PAGE>
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 yields of the Money Market Fund and Government Obligations Money
Market Fund for the 7-day period ended December 31, 1996 were 4.47% and
4.43%, respectively. The effective yields of the Money Market Fund and
Government Obligations Money Market Fund for the 7-day period ended December
31, 1996 were 4.57% and 4.53%, 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:
<TABLE>
<C> <C> <S>
Tax Free Yield
- ------------------- = Your Taxable Equivalent
1 - Your Tax Bracket Yield
</TABLE>
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 Tax-Free Money Market Fund 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 FEDERAL
TAXABLE INCOME INCOME TAXABLE EQUIVALENT RATES BASED ON TAX-EXEMPT YIELD OF:
- ------------------------------------ TAX ------------------------------------------------------------------
SINGLE RETURN JOINT RETURN BRACKETS 3% 4% 5% 6% 7% 8% 9% 10% 11%
- ----------------- ----------------- -------- ----- ----- ----- ----- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-$24,000 $0-$40,000 15% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76% 12.94%
$24,001-$58,150 $40,101-$96,900 28% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89% 15.28%
$58,151-$121,300 $96,901-$147,700 31% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49% 15.94%
$123,301-$263,750 $147,001-$263,750 36% 4.69% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63% 17.19%
$263,751 and up $263,751 and up 39.6% 4.97% 6.62% 8.28% 9.93% 11.59% 13.23% 14.90% 16.56% 18.21%
</TABLE>
- --------------
* Net amount subject to 1996 Federal Income Tax after deductions and exemptions,
not indexed for 1996 income tax rates.
COMPARISONS
To help investors better evaluate how an investment in a Fund of Morgan
Stanley Fund, Inc. might satisfy their investment objective, advertisements
regarding the Company 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:
(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.
36
<PAGE>
(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 -- Capital Appreciation Index -- a composite of mutual funds
managed for maximum capital gains.
(f) 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.
(g) 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.
(h) 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.
(i) Salomon Brothers GNMA Index -- includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Association.
(j) 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.
(k) 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.
(l) 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:
<TABLE>
<S> <C>
Australian Dollars Netherlands Guilder
Canadian Dollars Swiss Francs
European Currency Units UK Pounds Sterling
French Francs U.S. Dollars
Japanese Yen German Deutsche Marks
</TABLE>
(m) 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.
(n) Lehman LONG-TERM Treasury Bond -- is composed of all bonds covered by
the Lehman Treasury Bond Index with maturities of 10 years or greater.
(o) 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.
(p) NASDAQ Industrial Index -- is composed of more than 3,000 industrial
issues. Ifmis a value-weighted index calculated on price change only and does
not include income.
(q) 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.
(r) 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.
(s) Mutual Fund Source Book, published by Morningstar, Inc. -- analyzes
price, yield, risk and total return for equity funds.
(t) 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.
(u) 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. (v) 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.
37
<PAGE>
(w) Savings and Loan Historical Interest Rates -- as published in the United
States Savings & Loan League Fact Book.
(x) 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.
(y) 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.
(z) CS 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.
(bb) 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, New Zealand, the Far
East, Canada and the United States.
(cc) 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.)
(dd) IFC Global Total Return Composite Index -- An unmanaged index of common
stocks and includes developing countries in Latin America, East and South Asia,
Europe, the Middle East and Africa (net of dividends reinvested).
(ee) 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.
(ff) 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).
(gg) Morgan Stanley Capital International Japan Index -- An unmanaged index
of common stocks (assumes dividends reinvested).
(hh) 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.
(ii) Standard & Poor's 400 Mid Cap Index -- The Standard and Poor's Midcap
400 is a capitalization-weighted index that measures the performance of the
mid-range sector of the U.S. stock market where the medium market capitalization
is approximately $700 million.
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 Company's 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
Company to calculate its performance. In addition, there can be no assurance
that the Company will continue this performance as compared to such other
averages.
GENERAL PERFORMANCE INFORMATION
Each Fund's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates, portfolio
expenses and other factors. Performance is one basis investors may use to
analyze a Fund as compared to other funds and other investment vehicles.
However, performance of other funds and other investment vehicles may not be
comparable because of the foregoing variables, and differences in the methods
used in valuing their portfolio instruments, computing net asset value and
determining performance.
From time to time, a Fund's performance may be compared to other mutual
funds tracked by financial or business publications and periodicals. For
example, a Fund may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance of the
Funds to one another in appropriate categories over specific periods of time may
also be quoted in advertising.
Fund advertising may include data on historical returns of the capital
markets in the United States compiled or published by Ibbotson Associates of
Chicago, Illinois ("Ibbotson"), including returns on common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation
(based on the Consumer Price Index), and combinations of various capital
markets. The performance of these capital
38
<PAGE>
markets is based on the returns of different indices. The Funds may use the
performance of these capital markets in order to demonstrate general
risk-versus-reward investment scenarios. Performance comparisons may also
include the value of a hypothetical investment in any of these capital markets.
The risks associated with the security types in any capital market may or may
not correspond directly to those of the Funds. The Funds may also compare their
performance to that of other compilations or indices that may be developed and
made available in the future.
The Funds may include in advertisements, charts, graphs or drawings which
illustrate the potential risks and rewards of investment in various investment
vehicles, including but not limited to, foreign securities, stocks, bonds,
treasury bills and shares of a Fund. In addition, advertisements may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund and/or other mutual funds, shareholder profiles and hypothetical investor
scenarios, timely information on financial management, tax and retirement
planning and various investment alternatives. Advertisements may include lists
of representative Morgan Stanley clients. The Funds may also from time to time
include discussions or illustrations of the effects of compounding in
advertisements. "Compounding" refers to the fact that, if dividends or other
distributions on a Fund investment are reinvested by being paid in additional
Fund shares, any future income or capital appreciation of a Fund would increase
the value, not only of the original investment in the Fund, but also of the
additional Fund shares received through reinvestment.
The Funds may include in its advertisements, discussions or illustrations of
the potential investment goals of a prospective investor (including materials
that describe general principles of investing, such as asset allocation,
diversification, risk tolerance, and goal setting, questionnaires designed to
help create a personal financial profile, worksheets used to project savings
needs based on assumed rates of inflation and hypothetical rates of return and
action plans offering investment alternatives), investment management
techniques, policies or investment suitability of a Fund (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer, automatic account rebalancing, the advantages and disadvantages
of investing in tax-deferred and taxable investments). Advertisements and sales
materials relating to a Fund may include information regarding the background
and experience of its portfolio managers; the resources, expertise and support
made available to the portfolio managers by Morgan Stanley; and the portfolio
managers' goals, strategies and investment techniques.
The Funds' advertisements may discuss economic and political conditions of
the U.S. and foreign countries, the relationship between sectors of the U.S., a
foreign, or the global economy and the U.S., a foreign, or the global economy as
a whole and the effects of inflation. The Funds may include discussions and
illustrations of the growth potential of various global markets including, but
not limited to, Africa, Europe, Latin America, North America, South America,
Emerging Markets and individual countries. These discussions may include the
past performance of the various markets or market sectors; forecasts of
population, gross national product and market performance; and the underlying
data which supports such forecasts. From time to time advertisements, sales
literature, communications to shareholders or other materials may summarize the
substance of information contained in the Funds' shareholder reports (including
the investment composition of a Fund), as well as the views of Morgan Stanley as
to current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to a Fund.
The Funds may quote various measures of volatility and benchmark correlation
in advertising. The Funds may compare these measures to those of other funds.
Measures of volatility seek to compare the historical share price fluctuations
or total returns to those of a benchmark. Measures of benchmark correlation
indicate how valid a comparative benchmark may be. Measures of volatility and
correlation may be calculated using averages of historical data. A Fund may also
advertise its current interest rate sensitivity, duration, weighted average
maturity or similar maturity characteristics.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a Fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels.
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.
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
39
<PAGE>
growth stock during the period of 1978 to 1995, 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).
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
RETURNS RISK (STANDARD DEVIATION)
<S> <C> <C>
S&P 500 15.4% 15.7%
Small Capitalization Value 20.0% 19.7%
Small Capitalization Mean 16.7% 21.3%
Small Capitalization Growth 16.6% 24.7%
Source:
Wilber Associates Style
Performance
Date 1978-1995
</TABLE>
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 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.
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 Asia 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.
40
<PAGE>
ESTIMATED GNP GROWTH
1990-2000
<TABLE>
<S> <C>
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
</TABLE>
1991-1995 ANNUALIZED RETURNS/GROSS DIVIDENDS (US DOLLARS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
RETURNS (%)
<S> <C>
Hong Kong 25.51
Philippines 36.29
CFEFxJ 20.89
Thailand 20.62
Singapore 18.60
Malaysia 15.29
USA 13.62
World 9.73
EAFE 7.56
Korea 4.52
Indonesia -3.61
Taiwan -5.11
Japan -4.89
Past performance of Asian markets is not a guarantee of their future performance and
is
not indicative of the Fund's future performance. The chart is for educational
purposes only.
For information on the performance of the Morgan Stanley Asian Growth Fund, please
contact
your investment representative.
Sources: MSCI Indices*
</TABLE>
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.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Company'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 Funds. Currently the Company is authorized to offer shares of
twenty-two Funds, nineteen of which have Class A, Class B and Class C shares.
The shares of each Fund of the Company are fully paid and non-assessable,
and have no preference as to conversion, exchange, dividends, retirement or
other features. The shares of each Fund of the Company have no pre-emptive
rights. The shares of the Company 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
Company.
DIVIDENDS AND DISTRIBUTIONS
The Company's policy is to distribute substantially all of each Fund's net
investment income, if any. Each Fund may choose to make sufficient distributions
of net capital gains to avoid liability for federal excise tax. A 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
Company 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
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 a Fund are automatically reinvested
in additional shares of that Fund at net asset value as of the business day
following the record date.
41
<PAGE>
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 Funds, including the Non-Money Funds,
that are purchased through the automatic reinvestment of dividends and
distributions of a Fund.
Each 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 Fund, whether or not distributed to investors, cannot be
offset against net capital losses of any other Fund.
CUSTODY ARRANGEMENTS
Chase serves as the Company'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 Company's
custodian for foreign assets held outside the United States and employs
subcustodians who were approved by the Directors of the Company 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 Company, and the reputation of the institution in the
particular country or region. PNC Bank, N.A. serves as the Company's custodian
for each of the Money Market Funds.
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
ARATINGS: 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
42
<PAGE>
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.
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 NOTES 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 RATING: 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.
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.
43
<PAGE>
FINANCIAL STATEMENTS
The Company's audited financial statements and notes thereto for the
fiscal year ended June 30, 1996, and the report thereon of Price Waterhouse
LLP, independent accountants, which appear in the June 30, 1996 Annual Report
to Shareholders which were previously filed with the Commission (Accession
Number: 0000912057-96-019894) are incorporated herein by reference. The
International Magnum Fund, Japanese Equity Fund, Growth and Income Fund,
European Equity Fund, Equity Growth Fund, Global Equity Fund, Emerging
Markets Debt Fund, Mid Cap Growth Fund, Value 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 LLP which appear in the PCS Cash Fund, Inc.'s Annual Report to
Shareholders which were previously filed with the Commission (Accession
Number: 0000935069-96-000098) are incorporated herein by reference. These
financial statements and notes and report 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.
The following are included: (i) the Company's unaudited financial
statements and notes thereto for the period ended November 30, 1996 for the
International Magnum Fund and (ii) the Company's unaudited financial
statements and notes thereto for the period ended December 31, 1996 for the
Money Market Fund and Government Obligations Money Market Fund.
44
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (86.1%)
AUSTRALIA (1.5%)
7,300 Broken Hill Proprietary Co., Ltd. ................ $ 107
7,700 News Corp., Ltd. ................................. 41
12,000 Western Mining Corp. Holdings Ltd. ............... 76
--------
224
--------
AUSTRIA (0.4%)
800 Boehler-Udderholm AG.............................. 55
--------
BELGIUM (1.0%)
400 Arbed S.A. ....................................... 45
400 Delhaize Freres et Cie, 'Le Lion' S.A. ........... 23
1,500 G.I.B. Holdings LTD............................... 67
400 G.I.B. Holdings VVPR (New)........................ 18
--------
153
--------
DENMARK (1.3%)
1,030 BG Bank A/S (New) 45
500 Jyske Bank A/S (Registered)....................... 37
2,340 Unidanmark A/S, Class A (Registered).............. 117
--------
199
--------
FINLAND (1.1%)
2,650 Amer Group Ltd. Class A........................... 58
1,750 Huhtamaki Oy, series 1............................ 76
11,000 Merita Ltd., Class A 34
--------
168
--------
FRANCE (5.7%)
240 Bongrain S.A. .................................... 94
1,500 Banque Nationale de Paris......................... 60
700 Cie de Saint Gobain............................... 101
750 Elf Acquitaine.................................... 65
460 Eridania Beghin-Say S.A. ......................... 71
500 Groupe Danone RFD................................. 74
1,500 Lafarge Coppee S.A. .............................. 95
540 PSA Peugeot Citroen S.A. ......................... 66
700 SGS-Thomson Microelectronics N.V. ................ 46
1,090 Total S.A., Class B............................... 87
6,250 Usinor Sacilor.................................... 94
--------
853
--------
GERMANY (5.1%)
2,670 BASF AG........................................... 99
1,900 Bayer AG.......................................... 76
1,700 Deutsche Telekom AG ADR........................... 36
9,900 Gerresheimer Glas AG.............................. 217
250 Karstadt AG....................................... 86
120 Mannesmann AG..................................... 50
1,300 VEBA AG........................................... 77
300 Volkswagen AG..................................... 119
--------
760
--------
HONG KONG (6.5%)
2,000 Asia Satellite Telecommunications Holdings
Ltd. ........................................... 5
55,000 China Resources Enterprise Ltd. .................. 79
17,000 Cheung Kong Holdings Ltd. ........................ 150
14,000 Citic Pacific Ltd. ............................... 73
4,000 Hang Seng Bank Ltd. .............................. 48
3,000 Henderson Land Development Co., Ltd. ............. 30
5,200 Hong Kong & Shanghai Bank......................... 108
83,200 Hong Kong Telecommunications Ltd. ................ 144
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<C> <S> <C>
19,000 Hutchison Whampoa Ltd. ........................... $ 147
13,000 New World Development Co. Ltd. ................... 88
7,000 Swire Pacific Ltd., Class A....................... 66
6,000 Wharf Holdings Ltd. .............................. 31
--------
969
--------
ITALY (1.6%)
9,700 Marzotto (Gaetano) & Figili S.p.A. ............... 61
73,000 Olivetti S.p.A. .................................. 26
30,000 Stet Societa' Finanziaria Telefonica S.p.A. ...... 92
35,000 Telecom Italia S.p.A. Di Risp..................... 64
--------
243
--------
JAPAN (33.5%)
9,000 Amada Co., Ltd. .................................. 75
13,000 Asahi Tec Corp. .................................. 80
5,000 Canon, Inc. ...................................... 105
7,000 Daibiru Corp. .................................... 82
15,000 Daicel Chemical Industries Ltd. .................. 71
7,000 Daifuku Co., Ltd. ................................ 82
5,000 Dai Nippon Printing Co., Ltd. .................... 91
9,000 Daikin Industries Ltd. ........................... 84
8,000 Daiwa Securities Co., Ltd. ....................... 86
2,100 FamilyMart........................................ 83
4,000 Fuji Machine Manufacturing Co. ................... 109
3,000 Fuji Photo Film Ltd. ............................. 94
3,000 Hitachi Credit Corp. ............................. 50
14,000 Hitachi Ltd. ..................................... 130
12,000 Inabata & Co. .................................... 83
19,000 Kaneka Corp. ..................................... 113
4,000 Kurita Water Industries........................... 85
2,000 Kyocera Ltd. ..................................... 129
7,000 Kyudenko Co., Ltd. ............................... 75
4,000 Matsushita Communication Industries............... 104
7,000 Matsushita Electric Industries Ltd. .............. 121
26,000 Mitsubishi Chemical Corp. ........................ 98
7,000 Mitsubishi Estate Co., Ltd. ...................... 89
15,000 Mitsubishi Heavy Industries Ltd. ................. 123
6,000 Mitsumi Electric Co., Ltd. ....................... 110
3,000 Murata Manufacturing Co., Ltd. ................... 102
12,000 NEC Corp. ........................................ 145
8,000 Nifco, Inc. ...................................... 88
1,300 Nintendo Corp., Ltd. ............................. 92
13 Nippon Telephone & Telegraph Corp. ............... 93
16,000 Nissan Motor Co. ................................. 114
5,000 Nomura Securities Co., Ltd. ...................... 84
14,000 Obayashi Corp. ................................... 105
9,000 Ricoh Co., Ltd. .................................. 96
4,000 Rinnai............................................ 88
2,000 Sangetsu Co., Ltd. ............................... 44
4,000 Sankyo Co., Ltd. ................................. 107
10,000 Sanwa Shutter..................................... 80
2,000 Secom Co., Ltd. .................................. 121
8,000 Sekisui Chemical Co. ............................. 89
9,000 Sekisui House Co., Ltd. .......................... 96
2,000 Shimamura Co Ltd ................................. 75
2,400 Sony Corp. ....................................... 154
16,000 Stanley Electric Co. ............................. 98
11,000 Sumitomo Marine & Fire Insurance Co. ............. 78
7,000 Suzuki Motor Co., Ltd. ........................... 73
2,000 TDK Corp. ........................................ 129
22,000 Toshiba Corp. .................................... 142
</TABLE>
101
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
14,000 Tsubakimoto Chain................................. $ 82
18,000 Taisei Corp., Ltd. ............................... 100
4,000 Tokyo Electron Ltd. .............................. 114
5,000 Yamanuchi Pharmaceutical Co. ..................... 101
--------
5,042
--------
MALAYSIA (4.1%)
7,000 Commerce Asset Holgings Bhd. ..................... 53
4,000 Edaran Otomobil Nasional Bhd. .................... 39
6,000 Genting Bhd. ..................................... 43
10,000 Ijm Corp. Bhd..................................... 23
14,000 IOI Corp. Bhd. ................................... 22
4,000 Leader Universal Holdings Bhd. ................... 9
12,000 Magnum Corp. Bhd. ................................ 24
2,000 Malayan Banking Bhd. ............................. 20
13,000 Malaysian International Shipping Bhd. (Foreign)... 41
12,000 Petronas Gas Bhd. ................................ 49
19,000 Renong Bhd. ...................................... 35
9,000 Resorts World Bhd. ............................... 45
24,000 Sime Darby Bhd. .................................. 90
6,000 TA Enterprise Bhd. ............................... 9
8,000 Tanjong plc....................................... 33
8,000 Telekom Malaysia Bhd. ............................ 73
1,000 United Engineers Ltd. (Malaysia).................. 8
--------
616
--------
NETHERLANDS (3.9%)
1,528 ABN Amro Holdings N.V. ........................... 99
1,000 Akzo Nobel N.V. .................................. 133
2,700 ING Groep N.V. ................................... 95
3,000 KLM Royal Dutch Airlines N.V. .................... 77
2,000 Koninklijke Van Ommeren N.V. ..................... 87
2,500 Phillips Electronics N.V. ........................ 101
--------
592
--------
NORWAY (1.4%)
26,600 Den Norske Bank A/S, Class A...................... 99
2,900 Saga Petroleum A/S, Series B...................... 43
12,200 Storebrand Asa.................................... 73
--------
215
--------
PORTUGAL (0.2%)
1,700 Banco Totta & Acores S.A., Class B (Registered)... 30
--------
SINGAPORE (1.2%)
2,000 Development Bank of Singapore Ltd. (Foreign)...... 26
4,000 Keppel Corp., Ltd. ............................... 31
2,000 Sembawang Corp., Ltd. ............................ 11
2,000 Singapore Airlines Ltd. (Foreign)................. 19
1,000 Singapore Press Holdings (Foreign)................ 19
3,000 Straits Steamship Land Ltd. ...................... 10
4,000 United Overseas Bank Ltd. (Foreign)............... 42
11,000 Want Want Holdings................................ 27
--------
185
--------
SPAIN (2.9%)
7,000 Iberdrola S.A. ................................... 81
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<C> <S> <C>
2,100 Repsol S.A. ...................................... $ 78
9,000 Sevillana de Electricidad......................... 84
4,850 Telefonica de Espana S.A. ........................ 106
12,000 Uralita S.A. ..................................... 89
--------
438
--------
SWEDEN (2.3%)
600 Electrolux AB, Series B........................... 35
3,600 Nordbanken AB..................................... 102
2,000 Skandia Forsakrings AB............................ 57
3,300 S.K.F. AB, Class B................................ 70
2,500 Sparbanken Sverige AB Class A..................... 41
1,600 Svenska Handelsbanken Class A..................... 44
--------
349
--------
SWITZERLAND (5.3%)
65 Ascom Holding AG (Bearer)......................... 69
50 Bobst AG (Bearer)................................. 69
50 Ciba-Geigy AG (Registered)........................ 62
180 Forbo Holdings AG (Registered).................... 73
120 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ 87
70 Magazine Globus (Participating Certificates)...... 38
120 Nestle S.A. (Registered).......................... 130
700 Oerlikon-Buehrle Holdings AG...................... 72
40 Schindler Holding AG.............................. 42
50 SIG Schweizerische Industrie-Gesellschaft Holdings
AG (Registered)................................. 61
150 Sulzer AG (Registered)............................ 86
--------
789
--------
UNITED KINGDOM (7.1%)
6,000 Bass plc.......................................... 79
12,300 BAT Industries plc................................ 98
16,000 British Telecommunications plc.................... 102
14,700 Calor Group plc................................... 73
19,000 Courtaulds Textiles plc........................... 80
12,000 Imperial Tobacco Group plc........................ 76
15,500 John Mowlem & Co plc.............................. 30
5,600 Kwik Save Group plc............................... 28
7,125 Reckitt & Colman plc.............................. 84
18,000 Royal & Sun Alliance Insurance Group plc.......... 136
2,800 Southern Electric plc............................. 33
10,000 Tate Lyle plc..................................... 82
5,100 Unilever plc...................................... 121
11,800 WPP Group plc..................................... 45
--------
1,067
--------
TOTAL COMMON STOCKS (COST $12,821)............................... 12,947
--------
PREFERRED STOCKS (1.3%)
GERMANY (1.3%)
295 Dyckerhoff AG..................................... 76
1,030 Hornbach Holding AG............................... 68
1,320 RWE AG............................................ 48
--------
TOTAL PREFERRED STOCKS (COST $181)............................... 192
--------
</TABLE>
102
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
- ---------------------------------------------------------------------------
<C> <S> <C>
RIGHTS (0.2%)
SINGAPORE (0.2%)
3,000 Oversea-Chinese Banking Corp. (Foreign) (Cost
$36)............................................ $ 36
--------
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
WARRANTS (0.1%)
SINGAPORE (0.1%)
8,000 Straits Steamship, expiring 12/12/00 (Cost $10)... 9
TOTAL FOREIGN SECURITIES (87.7%) (COST $13,048).................. 13,184
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (8.9%)
REPURCHASE AGREEMENT (8.9%)
$1,344 Chase Securities, Inc., 5.45%, dated 11/29/96, due
12/2/96, to be repurchased at $1,345,
collateralized by $1,390 of U.S. Treasury Bills,
4.76%, due 2/27/96, valued at $1,373 (COST
$1,344)......................................... $ 1,344
--------
FOREIGN CURRENCY (2.2%) (COST $327).............................. 336
--------
TOTAL INVESTMENTS (98.8%) (COST $14,719)......................... 14,864
OTHER ASSETS AND LIABILITIES (1.2%).............................. 173
--------
NET ASSETS (100%)................................................ $ 15,037
--------
--------
</TABLE>
<TABLE>
<S> <C>
- ---------------
ADR -- American Depositary Receipt
RFD -- Ranked for Dividend
</TABLE>
FORWARD FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
November 30, 1996, the Fund is obligated to deliver or is to receive foreign
currency in exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE NET UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- --------------- ------- ---------- ---------------- ------- --------------
<C> <C> <C> <S> <C> <C>
BEF 309 $ 10 12/27/96 USD 10 $ 10 $ --
FRF 903 173 12/27/96 USD 177 177 4
DEM 275 179 12/27/96 USD 183 183 4
JPY 87,324 770 12/27/96 USD 810 810 40
NLG 135 78 12/27/96 USD 80 80 2
CHF 108 83 12/27/96 USD 88 88 5
BEF 3,245 103 1/24/97 USD 104 104 1
DEM 771 503 1/24/97 USD 510 510 7
JPY 282,362 2,501 1/30/97 USD 2,540 2,540 39
USD 1,320 1,320 1/30/97 JPY 145,380 1,288 (32)
NLG 485 283 2/10/97 USD 285 285 2
CHF 666 515 2/10/97 USD 535 535 20
FRF 2,370 456 2/24/97 USD 463 463 7
NLG 100 59 2/24/97 USD 60 60 1
------- ------- ------
$ 7,033 $ 7,133 $ 100
------- ------- ------
------- ------- ------
</TABLE>
- ---------------
BEF -- Belgian Franc
DEM -- German Mark
FRF -- French Franc
JPY -- Japanese Yen
NLG -- Netherlands Guilder
CHF -- Swiss Franc
USD -- United States Dollar
- --------------------------------------------------------------------------------
103
<PAGE>
MORGAN STANLEY INTERNATIONAL MAGNUM FUND
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
(000)
<S> <C>
- ---------------------------------------------------------------------
ASSETS:
Investments in Securities, at Value (Note 1) -- See
accompanying portfolios $14,528
Foreign Currency at Value 336
Receivable for:
Investments Sold 1,372
Fund Shares Sold 347
Dividends 24
Interest 1
Unrealized Gain on Forward Foreign Currency Contracts 100
Deferred Organization Costs 27
Receivable from Investment Adviser 25
-------
Total Assets 16,760
-------
LIABILITIES:
Payable for:
Investments Purchased 1,641
Investment Advisory Fees 23
Administrative Fees 6
Custody Fees 24
Other 29
-------
Total Liabilities 1,723
-------
NET ASSETS $15,037
-------
-------
NET ASSETS CONSIST OF:
Capital Stock at Par $ 1
Paid in Capital in Excess of Par 14,659
Accumulated Net Investment Income (Loss) (15)
Accumulated Net Realized Gain 148
Unrealized Appreciation (Depreciation) on Investments and
Foreign Currency Translations 244
-------
NET ASSETS $15,037
-------
-------
CLASS A SHARES:
Net Assets $ 4,673
Shares Issued and Outstanding ($.001 par value)
(Authorized 375,000,000) 381
Net Asset Value and Redemption Price Per Share $ 12.26
-------
-------
Maximum Sales Charge 4.75%
Maximum Offering Price Per Share (Net Asset Value Per
Share x 100/95.25) $ 12.87
-------
-------
CLASS B SHARES:
Net Assets $ 4,906
Shares Issued and Outstanding ($.001 par value)
(Authorized 375,000,000) 401
Net Asset Value and Offering Price Per Share $ 12.23
-------
-------
CLASS C SHARES:
Net Assets $ 5,458
Shares Issued and Outstanding ($.001 par value)
(Authorized 375,000,000) 447
Net Asset Value and Offering Price Per Share $ 12.22
-------
-------
</TABLE>
104
<PAGE>
MORGAN STANLEY INTERNATIONAL MAGNUM FUND
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE
PERIOD
JULY 1,
1996 TO *
NOVEMBER
30,1996
(000)
<S> <C>
- -------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 59
Interest 39
Less Foreign Taxes Withheld (6)
-----------
Total Income 92
-----------
EXPENSES:
Investment Advisory Fees
Basic Fee 50
Less: Fees Waived (50)
-----------
Investment Advisory Fees -- Net 0
Administrative Fees 18
Custodian Fees 38
Filing and Registration Fees 3
Directors' Fees and Expenses 1
Professional Fees 14
Shareholder Reports 1
Distribution Fees
Class A 4
Class B 16
Class C 18
Blue Sky Fees
Class A 3
Class B 3
Class C 3
Other 2
Expenses Reimbursed by Adviser (17)
-----------
Net Expenses 107
-----------
Net Investment Income (Loss) (15)
-----------
NET REALIZED GAIN (LOSS) ON:
Investments 26
Foreign Currency Transactions 122
-----------
Net Realized Gain (Loss) 148
-----------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments 136
Foreign Currency Translations 108
-----------
Change in Unrealized Appreciation/Depreciation 244
-----------
Net Realized Gain (Loss) and Change in Unrealized
Appreciation/Depreciation 392
-----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ 377
-----------
-----------
</TABLE>
- ------------------
* Commencement of Operations.
105
<PAGE>
MORGAN STANLEY INTERNATIONAL MAGNUM FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE
PERIOD
JULY 1, 1996
TO *
NOVEMBER 30,
1996
(000)
<S> <C>
- ---------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Gain (Loss) $ (15)
Net Realized Gain (Loss) on Investments and Foreign
Currency 148
Change in Unrealized Appreciation/(Depreciation) 244
-------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 377
-------------
CAPITAL SHARE TRANSACTIONS (1):
Issued 14,804
Distributions Reinvested 0
Redeemed (144)
-------------
Net Increase in Net Assets Resulitng from Capital Share
Transactions 14,660
-------------
Total Increase in Net Assets 15,037
NET ASSETS -- Beginning of Period --
-------------
NET ASSETS -- End of Period (Including undistributed net
investment income of $0 and $0, respectively) $ 15,037
-------------
-------------
- ---------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
--------
Shares:
Issued 386
Distributions Reinvested 0
Redeemed (5)
-------------
Net Increase in Class A Shares Outstanding 381
-------------
-------------
Dollars:
Issued $ 4,609
Distributions Reinvested 0
Redeemed (64)
-------------
Net Increase in Class A Shares Outstanding $ 4,545
-------------
-------------
(1) Class B:
--------
Shares:
Issued 400
Distributions Reinvested 0
Redeemed 1
-------------
Net Increase in Class B Shares Outstanding 401
-------------
-------------
Dollars:
Issued $ 4,817
Distributions Reinvested 0
Redeemed (15)
-------------
Net Increase in Class B Shares Outstanding $ 4,802
-------------
-------------
(1) Class C:
--------
Shares:
Issued 453
Distributions Reinvested 0
Redeemed (6)
-------------
Net Increase in Class A Shares Outstanding 447
-------------
-------------
Dollars:
Issued $ 5,378
Distributions Reinvested 0
Redeemed (65)
-------------
Net Increase in Class A Shares Outstanding $ 5,313
-------------
-------------
- ---------------------------------------------------------------------------
</TABLE>
* Commencement of Operations.
106
<PAGE>
MORGAN STANLEY INTERNATIONAL MAGNUM FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------- --------- ---------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
JULY 1, JULY 1, JULY 1,
1996 TO* 1996 TO* 1996 TO*
NOVEMBER NOVEMBER NOVEMBER
SELECTED PER SHARE DATA AND RATIOS 30, 1996 30, 1996 30, 1996
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.00 $ 12.00 $ 12.00
--------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.01 (0.02) (0.02)
Net Realized and Unrealized Gain on
Investments 0.25 0.25 0.24
--------- --------- ---------
Total From Investment Operations 0.26 0.23 0.22
NET ASSET VALUE, END OF PERIOD $ 12.26 $ 12.23 $ 12.22
--------- --------- ---------
--------- --------- ---------
TOTAL RETURN (1) 2.17% 1.92% 1.83%
--------- --------- ---------
--------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 4,673 $ 4,906 $ 5,458
Ratio of Expenses to Average Net Assets 1.64%** 2.39%** 2.40%
Ratio of Net Investment Income (Loss) to
Average Net Assets 0.21%** (0.54)%** (0.55)%
Portfolio Turnover Rate 6% 6% 6%
- ---------------------------------------------------------------------------------------
Average Commission Rate $ 0.0412 $ 0.0412 $ 0.0412
- ---------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation
During the Period
Per Share Benefit to Net Investment
Loss $ 0.06 $ 0.05 $ 0.05
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.98%** 3.73%** 3.73%
Net Investment Loss to Average Net
Assets (1.13)%** (1.88)%** (1.88)%
- ---------------------------------------------------------------------------------------
</TABLE>
* Commencement of Operations.
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred sales
charges. Total return for periods of less than one year are not annualized.
107
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
- --------------------------------------------------------------------------------
Morgan Stanley Fund, Inc. (the "Fund") was incorporated under the laws of
Maryland. The Fund is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company which offers redeemable
shares of diversified and non-diversified investment portfolios. As of November
30, 1996, the Fund had thirteen separate active investment portfolios (each a
"Portfolio", and together, the "Portfolios"). These financial statements report
on the Morgan Stanley International Magnum Fund (referred to herein as
"International Magnum"), which commenced operations on July 1, 1996.
The Fund currently offers three classes of shares, Class A, Class B and Class C
shares. Class A shares are sold with a front-end sales charge of up to 4.75%.
Class B shares are sold with a contingent deferred sales charge on redemptions
made within 6 years of purchase which declines annually from 5% for redemptions
made in year one, down to 1% in year six. The contingent deferred sales charge
is based on the lesser of the current market value of the shares redeemed or the
total cost of such shares. Class B shares will automatically convert to Class A
shares after the seventh year following purchase. Class C shares are sold with a
contingent deferred sales charge of 1% for shares that are redeemed within one
year of purchase, based on the lesser of the current market value of the shares
redeemed or the total cost of such shares. All three classes of shares have
identical voting, dividend, liquidation and other rights.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures on the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average of the mean between the current bid and asked prices obtained from
reputable brokers. Bonds and other fixed income securities may be valued
according to the broadest and most representative market. In addition, bonds and
other fixed income securities may be valued on the basis of prices provided by a
pricing service which are based primarily on institutional size trading in
similar groups of securities. Debt securities purchased with remaining
maturities of 60 days or less are valued at amortized cost, if it approximates
market value. All other securities and assets for which market values are not
readily available, including restricted securities, are valued at fair value as
determined in good faith by the Board of Directors, although the actual
calculations may be done by others.
2. TAXES: It is each Portfolio's intention to qualify as a regulated investment
company and distribute all of its taxable income. Accordingly, no provision for
Federal income taxes is required in the financial statements. A Portfolio may be
subject to taxes imposed by countries in which it invests. Such taxes are
generally based on income and/or capital gains earned or repatriated. Taxes are
accrued and applied to net investment income, net realized capital gains and net
unrealized appreciation as the income and/or capital gains is earned.
3. REPURCHASE AGREEMENTS: In connections with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the underlying
securities, with a market value at least equal to the amount of the repurchase
transaction, including principal and accrued interest. To the extent that any
repurchase transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/ or retention of the collateral or proceeds may be
subject to legal proceedings.
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records
of the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of securities sold during the period.
Accordingly, realized and unrealized foreign currency gains (losses) are
included in the reported net realized and unrealized gains (losses) on
investment transactions and balances. However, pursuant to U.S. Federal income
tax regulations, and the foreign currency portion of gain and losses
108
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOVEMBER 30, 1996
- --------------------------------------------------------------------------------
realized on sales and maturities of foreign denominated debt securities are
treated as ordinary income for U.S. Federal income tax purposes.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from forward foreign currency exchange
contracts, disposition of foreign currencies, currency gains or losses realized
between the trade and settlement dates on securities transactions, and the
difference between the amount of investment income and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts actually
received or paid. Net unrealized currency gains (losses) from valuing foreign
currency denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on the
Statement of Assets and Liabilities. The change in net unrealized currency gains
(losses) for the period is reflected on the Statement of Operations.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the possibly lower level of
governmental supervision and regulation of foreign securities markets and the
possibility of political or economic instability.
Prior governmental approval for foreign investments may be required under
certain circumstances in some countries, and the extent of foreign investment in
domestic companies may be subject to limitations in other countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies to prevent, among other concerns, violation of foreign investment
limitations. As a result, an additional class of shares (identified as "Foreign"
in the Portfolio of Investments) may be created and offered for investment. The
"local" and "foreign" shares' market values may vary.
5. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: Each Portfolio may enter into
forward foreign currency exchange contracts to attempt to protect securities and
related receivables and payables against changes in future foreign currency
exchange rates. A forward currency exchange contract is an agreement between two
parties to buy or sell currency at a set price on a future date. The market
value of the contract will fluctuate with changes in currency exchange rates.
The contract is marked-to-market daily using the forward rate and the change in
market value is recorded by the Portfolio as realized gain or loss. The
Portfolio records realized gains or losses when the contract is closed equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed. Risk may arise upon entering into these
contracts from the potential inability of counterparties to meet the terms of
their contracts and is generally limited to the amount of unrealized gain on the
contracts, if any, at the date of default. Risks may also arise from the
unanticipated movements in the value of a foreign currency relative to the U.S.
dollar.
6. ORGANIZATIONAL COSTS: The organizational costs of the Portfolios are being
amortized on a straight line basis over a period of five years beginning with
each Portfolio's commencement of operations. Morgan Stanley Asset Management,
Inc. has agreed that in the event any of it's initial shares in a Portfolio
which comprised the Fund at it's inception are redeemed, the proceeds on
redemption will be reduced by the pro-rata portion of any unamortized
organizational costs in the same proportion as the number of shares redeemed
bears to the initial shares held at the same time of redemption.
7. OTHER: Security transactions are accounted for on the date the securities are
purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Dividend income
is recorded on the ex-dividend date (except for certain foreign dividends which
may be recorded as soon as the Fund is informed of such dividends) net
applicable withholding taxes where recovery of such taxes is not reasonably
assured. Interest income is recognized on the accrual basis except where
collection is in doubt. Discounts and premiums on securities purchased are
amortized according to the effective yield method over their respective lives.
Most expenses of the Fund can be directly attributed to a particular Portfolio.
Expenses (other than class specific expenses) and realized and unrealized gains
or losses are allocated to each class of shares based upon their relative net
assets. Distributions shares based upon their relative net assets. Distributions
from the Portfolios are recorded as a reduction of their costs.
Certain portfolios own shares of real estate investment trusts ("REITs") which
report information on the source of their distributions annually. A portion of
distributions received from REITs during the year is estimated to be a return of
capital and is recorded as a reduction of their cost.
The amount and the character of income and capital gain distributions to be paid
by the Fund are determined in accordance with Federal income tax regulations
which may differ from generally accepted accounting principles.
Permanent book and tax basis differences relating to shareholder distributions
may result in reclassification among undistributed net investment income (loss),
accumulated net realized gain (loss) and paid in capital.
Permanent book and tax basis differences, if any, are not included in ending
undistributed (distributions in excess of) net investment income for the purpose
of calculating net investment income (loss) per share in the Financial
Highlights.
109
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOVEMBER 30, 1996
- --------------------------------------------------------------------------------
B. ADVISER: Morgan Stanley Asset Management, Inc. (the "Adviser" or "MASM" ), a
wholly owned subsidiary of Morgan Stanley Group, Inc. provides the Fund with
investment advisory services at a fee paid quarterly and calculated at the
annual rates of average daily net assets indicated below. The Adviser has agreed
to reduce advisory fees payable to it and to reimburse the Portfolios, if
necessary, if the annual operating expenses, as defined, expressed as a
percentage of average daily net assets, exceed the maximum ratios indicated as
follows:
<TABLE>
<CAPTION>
CLASS A MAX. CLASS B AND CLASS C
OPERATING MAX. OPERATING
FUND ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
- ----------------------- ------------- --------------- ---------------------
<S> <C> <C> <C>
International Magnum 1.00% 1.65% 2.40%
</TABLE>
C. ADMINISTRATOR: MSAM also provides the fund with administrative services
pursuant to an administrative agreement for a monthly fee which on an annual
basis equals 0.25% of the average daily net assets of each Portfolio, plus
reimbursement of out-of-pocket expenses. Under and agreement between MASM and
The Chase Manhattan Bank ("Chase"), Chase through its affiliate Chase Global
Funds Services Company ("MFSC"), provides certain administrative services to the
Fund. Chase is compensated for such services by MSAM from the fee it receives
from the Fund.
D. DISTRIBUTOR: Morgan Stanley & Co. Incorporated (the "Distributor"), a
wholly-owned subsidiary of Morgan Stanley Group, Inc. and an affiliate of MSAM,
serves as the distributor of the Fund and provides all classes of each Portfolio
with the distribution services pursuant to separate Distribution Plans in
accordance with Rule12b-1 under the Investment Company Act of 1940. The
Distributor is entitled to receive from the Portfolios a distribution fee, which
is accrued daily and paid quarterly, at a minimum rate of 0.25% for the Class A
shares of each Portfolio, and 0.75% of the Class B shares and Class C shares of
each Portfolio, on an annualized basis of the average daily net assets of such
classes.
E. CUSTODIAN: Morgan Stanley Trust Company ("MSTC"), a wholly owned subsidiary
of Morgan Stanley Group, Inc., acts as custodian for the Fund's assets held
outside the United States in accordance with a custodian agreement. Chase is the
custodian for the Fund's domestic assets in accordance with a Custodian
Agreement. Custodian fees are computed and payable monthly based on assets held,
investment purchased and sales activity, an account maintenance fee, plus
reimbursement for certain out-of-pocket expenses.
For the period ended November 30, 1996, the following Portfolios incurred
custody fees and had amounts payable to MSTC at November 30, 1996:
<TABLE>
<CAPTION>
MSTC CUSTODY CUSTODY FEES
FEES INCURRED PAYABLE TO MSTC
FUND (000) (000)
- ------------------------------------------ ------------------- ---------------------
<S> <C> <C>
International 34 20
</TABLE>
F. PURCHASES AND SALES: For the period ended November 30, 1996, purchases and
sales of investment securities other than long-term U.S. Government securities
and short term investments were:
<TABLE>
<CAPTION>
PURCHASES
FUND (000) SALES (000)
- --------------------------------------------------------- ----------- -----
<S> <C> <C>
International Magnum 13,524 502
</TABLE>
G. OTHER: At November 30, 1996, the net assets of the Portfolios was
substantially comprised of foreign denominated securities and currency. Changes
in currency exchange rates will affect the U.S. dollar value of and investment
income from such securities.
At November 30, 1996, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Portfolio was:
<TABLE>
<CAPTION>
NET APPRECIATION
COST (DEPRECIATION) APPRECIATION (DEPRECIATION)
FUND (000) (000) (000) (000)
- ------------------------- --------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
International Magnum 14,392 136 763 (627)
</TABLE>
110
<PAGE>
MORGAN STANLEY
MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- -----------------------------------------------------------------------------------------------
<S> <C>
AGENCY OBLIGATIONS (22.0%)
FEDERAL HOME LOAN BANK DISCOUNT NOTES (9.4%)
$ 4,435 5.22%, 1/2/97 $ 4,434
9,595 5.23%, 1/9/97 9,584
10,000 5.22%, 1/30/97 9,958
---------
23,976
---------
FEDERAL HOME LOAN MORTGAGE CORPORATION DISCOUNT NOTES (6.8%)
9,365 5.20%, 1/3/97 9,362
8,000 5.23%, 1/27/97 7,970
---------
17,332
---------
FEDERAL NATIONAL MORTGAGE ASSOCIATION DISCOUNT NOTES (5.8%)
9,880 5.21%, 1/28/97 9,841
5,000 5.37%, 3/20/97 4,942
---------
14,783
---------
TOTAL AGENCY OBLIGATIONS (COST $56,091) 56,091
---------
CERTIFICATES OF DEPOSIT (20.0%)
BANKS (20.0%)
5,000 ABN-AMRO Bank (NY), Yankee, 6.12%, 7/14/97 5,000
10,000 Barclay's Bank, Yankee, 5.36%, 2/5/97 10,000
10,000 CIBC 5.49%, 1/15/97 10,000
7,000 Deutsche Bank, Yankee, 5.42%, 2/3/97 7,001
10,000 National Westminster Bank 5.42%, 1/6/97 10,000
6,000 Royal Bank Of Canada (NY), Yankee, 6.05%, 6/11/97 6,000
3,000 Societe Generale Bank 6.18%, 9/8/97 3,000
---------
TOTAL CERTIFICATES OF DEPOSIT (COST $51,001) 51,001
---------
COMMERCIAL PAPER (35.9%)
BANKING (6.7%)
5,000 Deutsche Bank 5.47%, 1/23/97 4,983
5,000 Societe Generale 5.32%, 2/20/97 4,963
7,000 Sun Trust Banks 5.30%, 1/6/97 6,995
---------
16,941
---------
ENTERTAINMENT & LEISURE (3.9%)
10,000 The Walt Disney Co. 5.34%, 1/24/97 9,966
---------
FINANCE (21.4%)
3,000 ABN-AMRO North American Finance Corp. 5.58%, 3/6/97 2,970
5,000 ABN-AMRO North American Finance Corp. 5.28%, 5/15/97 4,902
10,000 Bank of Austvia Finance, Inc. 5.30%, 1/21/97 9,971
5,000 FCC National Bank 5.51%, 5/5/97 5,000
10,000 General Electric Credit Corp. 5.27%, 4/18/97 9,843
10,000 METLIFE Funding 5.36%, 1/21/97 9,970
5,000 Private Export Funding Corp. 5.30%, 2/10/97 4,971
7,000 Private Export Funding Corp. 5.31%, 2/20/97 6,949
---------
54,576
---------
The accompanying notes are an integral part of the financial statements.
<PAGE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- -----------------------------------------------------------------------------------------------
<S> <C>
RETAIL (3.9%)
$ 10,000 JC Penny 5.31%, 2/20/97 $ 9,926
---------
TOTAL COMMERCIAL PAPER (COST $91,409) 91,409
---------
VARIABLE RATE OBLIGATIONS (11.8%)
FEDERAL NATIONAL MORTGAGE ASSOCIATION FLOATING RATE NOTE (5.9%)
(h) 15,000 5.41%, 9/2/97 15,000
STUDENT LOAN MARKETING ASSOCIATION FLOATING RATE NOTE (5.9%)
(h) 15,000 5.57%, 10/30/97 15,005
---------
TOTAL VARIABLE RATE OBLIGATIONS (COST $30,005) 30,005
---------
SHORT-TERM INVESTMENT (10.1%)
REPURCHASE AGREEMENT (10.1%)
25,777 Goldman Sachs, 6.52%, dated 12/31/96,
due 1/2/97, to be repurchased at $25,786, collateralized
by $16,935 U.S. Treasury Bonds, 14.00%, due 1/15/11,
valued at $25,777 (COST $25,777) 25,777
---------
TOTAL INVESTMENTS (99.8%) (COST $254,283) 254,283
OTHER ASSETS IN EXCESS OF LIABILITIES (0.2%) 571
---------
NET ASSETS (100%) $254,854
---------
---------
- ------------------
(h) - Variable or floating rate securities - rate disclosed is as of December 31, 1996.
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GOVERNMENT MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(Unaudited)
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- -----------------------------------------------------------------------------------------------
<S> <C>
AGENCY OBLIGATIONS (72.4%)
FEDERAL HOME LOAN BANK DISCOUNT NOTES (17.1%)
$ 10,000 5.22%, 1/16/97 $ 9,978
10,000 5.22%, 1/23/97 9,968
---------
19,946
---------
FEDERAL HOME LOAN MORTGAGE CORPORATION DISCOUNT NOTES (38.3%)
10,000 5.20%, 1/3/97 9,997
10,000 5.23%, 1/17/97 9,977
15,000 5.23%, 1/27/97 14,944
10,000 5.38%, 3/25/97 9,876
---------
44,794
---------
FEDERAL NATIONAL MORTGAGE ASSOCIATION DISCOUNT NOTES (17.0%)
15,000 5.22%, 1/28/97 14,941
5,000 5.34%, 3/20/97 4,942
---------
19,883
---------
TOTAL AGENCY OBLIGATIONS (COST $84,623) 84,623
---------
VARIABLE RATE OBLIGATION (8.6%)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (8.6%)
(h) 10,000 Series 97-Y 5.43%, 6/19/97 (COST $10,000) 10,000
---------
SHORT-TERM INVESTMENT (19.1%)
REPURCHASE AGREEMENT (19.1%)
$22,343 Goldman Sachs, 6.52%, dated 12/31/96,
due 1/2/97, to be repurchased at $22,351, collateralized
by $18,505 U.S. Treasury Bonds, 8.50%, due 2/15/20,
valued at $22,343 (COST $22,343) 22,343
---------
TOTAL INVESTMENTS (100.1%) (COST $116,966) 116,966
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.1%) (150)
---------
NET ASSETS (100%) $116,816
---------
---------
- -------------------
(h) - Variable or floating rate securities - rate disclosed is as of December 31, 1996.
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
(UNAUDITED)
GOVERNMENT
OBLIGATIONS
MONEY MONEY
MARKET MARKET
FUND FUND
(000) (000)
- --------------------------------------------------------------------------------
ASSETS:
Investments in Securities, at Value*
(Note 1) - See accompanying portfolios $116,966 $254,283
Interest Receivable 24 1,054
Deferred Organization Costs 34 34
Other 23 42
---------------------------
Total Assets 117,047 255,413
---------------------------
LIABILITIES:
Payable for:
Dividends Declared 96 271
Investment Advisory Fees 24 67
Administrative Fees 22 41
Custody Fees 5 13
Professional Fees - 1
Distribution Fees 48 112
Shareholder Reporting Expenses 22 23
Directors' Fees and Expenses 8 9
Filing and Registration Fees 6 22
---------------------------
Total Liabilities 231 559
---------------------------
NET ASSETS $116,816 $254,854
---------------------------
---------------------------
NET ASSETS CONSIST OF:
Capital Stock at Par $117 $255
Paid in Capital in Excess of Par 116,798 254,711
Accumulated (Distribution in excess of) Net
Realized Gain (Loss) (99) (112)
---------------------------
NET ASSETS $116,816 $254,854
---------------------------
---------------------------
CLASS A SHARES:
Net Assets $116,816 $254,854
Shares Issued and Outstanding ($.001 par
value) (Authorized 2,625,000,000) 116,915 254,966
Net Asset Value and
Redemption Price Per Share $1.00 $1.00
---------------------------
---------------------------
Investments at Cost, Including Foreign Currency $116,966 $254,283
---------------------------
---------------------------
* Includes repurchase agreements aggregating $22,343,000 and $25,777,000
for Government Obligations Money Market Fund and Money Market Fund,
respectively
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF OPERATIONS
(Unaudited)
Government
Obligations
Money Market Money Market
Fund Fund
Six Months Ended Six Months Ended
December, 31 December, 31
1996 1996
(000) (000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 3,335 $ 5,818
-------------- --------------
Total Income 3,335 5,818
-------------- --------------
EXPENSES:
Investment Advisory Fees
Basic Fee 275 444
Less: Fees Waived (64) (91)
-------------- --------------
Investment Advisory Fees - Net 211 353
Administrative Fees 66 104
Custodian Fees 11 24
Filing and Registration Fees - 13
Directors' Fees and Expenses 3 3
Professional Fees 22 21
Shareholder Reports 20 20
Distribution Fees 224 442
Amortization of Organizational Costs 7 7
Blue Sky Fees 19 30
Other 14 35
-------------- --------------
Net Expenses 597 1,052
-------------- --------------
Net Investment Income (Loss) 2,738 4,766
-------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $2,738 $4,766
-------------- --------------
-------------- --------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
MONEY MARKET FUND
<TABLE>
<CAPTION>
Six Months Ended
December 31, 1996 Year Ended
(Unaudited) June 30, 1996
(000) (000)
- -------------------------------------------------------------------------------- ----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income $4,766 $7,849
Net Realized Loss - (100)
---------------- ----------------
Net Increase in Net Assets Resulting from Operations 4,766 7,749
---------------- ----------------
Distributions:
Net Investment Income (4,766) (7,849)
---------------- ----------------
Capital Share Transactions (1):
Subscribed 340,994 1,390,774
Distributions Reinvested 3,331 7,425
Redeemed (260,444) (1,398,641)
---------------- ----------------
Net Increase (Decrease) in Net Assets Resulting
from Capital Share Transactions 83,881 (442)
---------------- ----------------
Total Increase (Decrease) in Net Assets 83,881 (542)
Net Assets - Beginning of Period 170,973 171,515
---------------- ----------------
Net Assets - End of Period $254,854 $170,973
---------------- ----------------
---------------- ----------------
- ----------------------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Shares:
Subscribed 340,994 1,390,774
Distributions Reinvested 3,331 7,425
Redeemed (260,444) (1,398,641)
---------------- ----------------
Net Increase (Decrease) in Shares Outstanding 83,881 (442)
---------------- ----------------
---------------- ----------------
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED
(UNAUDITED) JUNE 30, 1996
(000) (000)
- ---------------------------------------------------------------------------------------------------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income $2,738 $4,114
Net Realized Loss - (99)
------------- -------------
Net Increase in Net Assets Resulting from Operations 2,738 4,015
------------- -------------
Distributions:
Net Investment Income (2,738) (4,114)
Net Realized Gain - (12)
------------- -------------
Net Decrease in Net Assets Resulting from Distributions (2,738) (4,126)
------------- -------------
Capital Share Transactions (1):
Subscribed 162,299 1,373,640
Distributions Reinvested 1,763 3,511
Redeemed (193,224) (1,298,567)
------------- -------------
Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions (29,162) 78,584
------------- -------------
Total Increase (Decrease) in Net Assets (29,162) 78,473
Net Assets - Beginning of Period 145,978 67,505
------------- -------------
Net Assets - End of Period $116,816 $145,978
------------- -------------
------------- -------------
- ------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
(1) Shares:
Subscribed 162,299 1,373,640
Distributions Reinvested 1,763 3,511
Redeemed (193,224) (1,298,567)
------------- -------------
Net Increase (Decrease) in Shares Outstanding (29,162) 78,584
------------- -------------
------------- -------------
- ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
MONEY MARKET FUND
<TABLE>
<CAPTION>
Six Month Ended
December 31, 1996 Year Ended Year Ended Year Ended
Selected Per Share Data and Ratios (Unaudited) June 30, 1996 June 30, 1995 June 30, 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00
----------------- ------------- ------------- --------------
Income From Investment Operations
Net Investment Income 0.0224 0.0463 0.0446 0.0246
Net Realized and Unrealized Gain (Loss) - (0.0006) 0.0001 -
----------------- ------------- ------------- --------------
Total From Investment Operations 0.0224 0.0457 0.0447 0.0246
----------------- ------------- ------------- --------------
Distribution:
Net Investment Income (0.0224) (0.0463) (0.0446) (0.0246)
Net Realized Gain - - (0.0001) -
----------------- ------------- ------------- --------------
Total Distributions (0.0224) (0.0463) (0.0447) (0.0246)
----------------- ------------- ------------- --------------
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00
----------------- ------------- ------------- --------------
----------------- ------------- ------------- --------------
Total Return 2.26% 4.72% 4.55% 2.49%
----------------- ------------- ------------- --------------
----------------- ------------- ------------- --------------
Ratios and Supplemental Data
Net Assets, End of Period (000's) $254,854 $170,973 $171,515 $176,599
Ratio of Expenses to Average Net Assets 0.98% ** 0.98% 0.98% 0.98%
Ratio of Net Investment Income to Average
Net Assets 4.04% ** 4.65% 4.45% 2.45%
- --------------------------------------------------------------------------------------------------------------------------------
Ratios Before Expense Limitation:
Expenses to Average Net Assets 0.97% ** 1.22% 1.18% 1.19%
Net Investment Income to Average Net Assets 3.97% ** 4.41% 4.25% 2.24%
- --------------------------------------------------------------------------------------------------------------------------------
** Annualized
<CAPTION>
Year Ended Year Ended
Selected Per Share Data and Ratios June 30, 1993 June 30, 1992
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period $1.00 $1.00
------------- -------------
Income From Investment Operations
Net Investment Income 0.0243 0.0402
Net Realized and Unrealized Gain (Loss) 0.0001 -
------------- -------------
Total From Investment Operations 0.0244 0.0402
------------- -------------
Distribution:
Net Investment Income (0.0243) (0.0402)
Net Realized Gain (0.0001) -
------------- -------------
Total Distributions (0.0244) (0.0402)
------------- -------------
Net Asset Value, End of Period $1.00 $1.00
------------- -------------
------------- -------------
Total Return 2.47% 4.11%
------------- -------------
Ratios and Supplemental Data
Net Assets, End of Period (000's) $156,310 $190,034
Ratio of Expenses to Average Net Assets 0.98% 0.98%
Ratio of Net Investment Income to Average
Net Assets 2.44% 3.97%
- ------------------------------------------------------------------------------------------
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.20% 1.27%
Net Investment Income to Average Net Assets 2.22% 3.68%
- ------------------------------------------------------------------------------------------
** Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
<TABLE>
<CAPTION>
Six Month Ended
December 31, 1996 Year Ended Year Ended
Selected Per Share Data and Ratios (Unaudited) June 30, 1996 June 30, 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $1.00 $1.00 $1.00
------------- ------------- -------------
Income From Investment Operations
Net Investment Income 0.0220 0.0464 0.0448
Net Realized and Unrealized Gain (Loss) - (0.0011) -
------------- ------------- -------------
Total From Investment Operations 0.0220 0.0453 0.0448
------------- ------------- -------------
Distribution:
Net Investment Income (0.0220) (0.0464) (0.0448)
Net Realized Gains - (0.0001) -
Total Distributions (0.0220) (0.0465) (0.0448)
Net Asset Value, End of Period $1.00 $1.00 $1.00
------------- ------------- -------------
------------- ------------- -------------
Total Return 2.20% 4.72% 4.58%
------------- ------------- -------------
------------- ------------- -------------
Ratios and Supplemental Data
Net Assets, End of Period (000's) $116,816 $145,978 $67,505
Ratio of Expenses to Average Net Assets 0.95% ** 0.95% 0.95%
Ratio of Net Investment Income to Average Net Assets 4.57% ** 4.68% 4.61%
- ---------------------------------------------------------------------------------------------------------------------------
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.10% ** 1.24% 1.12%
Net Investment Income to Average Net Assets 4.46% ** 4.39% 4.44%
- ---------------------------------------------------------------------------------------------------------------------------
* Commencement of operations
** Annualized
<CAPTION>
For the Period
Year Ended Year Ended March 12, 1992* to
Selected Per Share Data and Ratios June 30, 1994 June 30, 1993 June 30, 1992
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $1.00 $1.00 $1.00
------------- ------------- -------------
Income From Investment Operations
Net Investment Income 0.0243 0.0246 0.0094
Net Realized and Unrealized Gain (Loss) 0.0011 0.0002 -
------------- ------------- -------------
Total From Investment Operations 0.0254 0.0248 0.0094
------------- ------------- -------------
Distribution:
Net Investment Income (0.0243) (0.0246) (0.0094)
Net Realized Gains (0.0011) (0.0002) -
Total Distributions (0.0254) (0.0248) (0.0094)
------------- ------------- -------------
Net Asset Value, End of Period $1.00 $1.00 $1.00
------------- ------------- -------------
------------- ------------- -------------
Total Return 2.45% 2.51% 0.94%
------------- ------------- -------------
------------- ------------- -------------
Ratios and Supplemental Data
Net Assets, End of Period (000's) $102,551 $101,736 $269,627
Ratio of Expenses to Average Net Assets 0.95% 0.95% 0.95% **
Ratio of Net Investment Income to Average Net Assets 2.40% 2.50% 3.07% **
- ----------------------------------------------------------------------------------------------------------------------------
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.22% 1.19% 1.29% **
Net Investment Income to Average Net Assets 2.13% 2.26% 2.73% **
- ----------------------------------------------------------------------------------------------------------------------------
* Commencement of operations
** Annualized
</TABLE>
<PAGE>
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (UNAUDITED)
Morgan Stanley Fund, Inc. (the "Fund") was incorporated under the laws of
Maryland on August 14, 1992 and commenced operations on January 4, 1993. The
Fund is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company which offers redeemable shares of
diversified and non-diversified investment portfolios. As of December 31, 1996,
the Fund had thirteen separate active investment portfolios: Morgan Stanley
Global Equity Allocation Fund, Morgan Stanley Global Fixed Income Fund, Morgan
Stanley Asian Growth Fund, Morgan Stanley American Value Fund, Morgan Stanley
Worldwide High Income Fund, Morgan Stanley Latin American Fund, Morgan Stanley
Emerging Markets Fund, Morgan Stanley Aggressive Equity Fund, Morgan Stanley
U.S. Real Estate Fund, Morgan Stanley High Yield Fund, Morgan Stanley
International Magnum Fund, Morgan Stanley Government Money Market Fund and
Morgan Stanley Money Market Fund (referred to herein respectively as "Global
Equity Allocation Fund", "Global Fixed Income Fund", "Asian Growth Fund",
"American Value Fund", "Worldwide High Income Fund", "Latin American Fund",
"Emerging Markets Fund", "Aggressive Equity Fund", "U.S. Real Estate Fund",
"High Yield Fund", "International Magnum Fund", "Government Money Market Fund"
and "Money Market Fund" individually a "Portfolio" and collectively as the
"Portfolios").
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures on the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average of the mean between the current bid and asked prices obtained from
reputable brokers. Bonds and other fixed income securities may be valued
according to the broadest and most representative market. In addition, bonds and
other fixed income securities may be valued on the basis of prices provided by a
pricing service which are based primarily on institutional size trading in
similar groups of securities. Debt securities purchased with remaining
maturities of 60 days or less are valued at amortized cost, if it approximates
market value. All other securities and assets for which market values are not
readily available, including restricted securities, are valued at fair value as
determined in good faith by the Board of Directors, although the actual
calculations may be done by others.
2. TAXES: It is each portfolio's intention to qualify as a regulated investment
company and distribute all of its taxable income. Accordingly, no provision for
Federal income taxes is required in the financial statements. A portfolio may be
subject to taxes imposed by countries in which it invests. Such taxes are
generally based on income and/or capital gains earned or repatriated. Taxes are
accrued and applied to net investment income, net realized capital gains and net
unrealized appreciation as the income and/or capital gains is earned.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the underlying
securities, with a market value at least equal to the amount of the repurchase
transaction, including principal and accrued interest. To the extent that any
repurchase transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
1
<PAGE>
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records
of the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates
of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of securities sold during the period.
Accordingly, realized and unrealized foreign currency gains (losses) are
included in the reported net realized and unrealized gains (losses) on
investment transactions and balances. However, pursuant to U.S. Federal income
tax regulations, the foreign currency portion of gain and losses realized on
sales and maturities of foreign denominated debt securities are treated as
ordinary income for U.S. Federal income tax purposes.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from forward foreign currency exchange
contracts, disposition of foreign currencies, currency gains or losses realized
between the trade and settlement dates on securities transactions, and the
difference between the amount of investment income and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts actually
received or paid. Net unrealized currency gains (losses) from valuing foreign
currency denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on the
Statement of Assets and Liabilities. The change in net unrealized currency gains
(losses) for the period is reelected on the Statement of Operations.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the possibly lower level of
governmental supervision and regulation of foreign securities markets and the
possibility of political or economic instability.
Prior governmental approval for foreign investments may be required under
certain circumstances in some countries, and the extent of foreign investment in
domestic companies may be subject to limitations in other countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies to prevent, among other concerns, violation of foreign investment
limitations. As a result, an additional class of shares (identified as "Foreign"
in the Portfolio of Investments) may be created and offered for investment. The
"local" and "foreign" shares' market values may vary.
5. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: Each Portfolio may enter into
forward foreign currency exchange contracts to attempt to protect securities and
related receivables and payables against changes in future foreign currency
exchange rates. A forward currency exchange contract is an agreement between two
parties to buy or sell currency at a set price on a future date. The market
value of the contract will fluctuate with changes in currency exchange rates.
The contract is marked-to-market daily using the forward rate and the change in
market value is recorded by the Portfolio as realized gain or loss. The
Portfolio records realized gains or losses when the contract is closed, equal to
the difference between the value of the contract at the time it was opened and
the value of the contract at the time it was closed. Risk may arise upon
entering into these contracts from the potential inability of couterparties to
meet the terms of their contracts but is generally limited to the amount of
unrealized gain on the contracts, if any, at the date of default. Risks may also
arise from the unanticipated movements in the value of a foreign currency
relative to the U.S. dollar.
2
<PAGE>
6. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: Each
portfolio may make forward commitments to purchase or sell securities. Payment
and delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not exceeding 120 days) after
the date of the transaction. Additionally each portfolio may purchase securities
on a when-issued or delayed-delivery basis. Securities purchased on a
when-issued or delayed delivery basis are purchased for delivery beyond the
normal settlement date at a stated price and yield, and no income accrues to the
portfolio on such securities prior to delivery. When the portfolio enters into
a purchase transaction on a when-issued or delayed basis, it establishes a
segregated account in which it maintains liquid assets in an amount at least
equal in value to the portfolio's commitments to purchase such securities.
Purchasing securities on a forward commitment or when issued or delayed-delivery
basis may involve a risk that the market price at the time of delivery may be
lower than the agreed upon purchase price, in which case there could be an
unrealized loss at the time of delivery.
7. ORGANIZATIONAL COSTS: The organizational costs of the Portfolios are being
amortized on a straight line basis over a period of five years beginning with
each portfolio's commencement of operations. Morgan Stanley Asset Management,
Inc. has agreed that in the event any of it's initial shares in a Portfolio
which comprised the Fund at it's inception are redeemed, the proceeds on
redemption will be reduced by the pro-rata portion of any unamortized
organizational costs in the same proportion as the number of shares redeemed
bears to the initial shares held at the same time of redemption.
8. OTHER: Security transactions are accounted for on the date the securities are
purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Dividend income
is recorded on the ex-dividend date (except for certain foreign dividends which
may be recorded as soon as the Fund is informed of such dividends) net of
applicable withholding taxes where recovery of such taxes is not reasonably
assured. Interest income is recognized on the accrual basis except where
collection is in doubt. Discounts and premiums on securities purchased are
amortized according to the effective yield method over their respective lives.
Most expenses of the Fund can be directly attributed to a particular portfolio.
Expenses which cannot be directly attributed are apportioned among the
Portfolios based upon relative net assets. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses are allocated to
each class of shares based upon their relative net assets. Distributions from
the Portfolios are recorded on the ex-distribution date.
The amount and the character of income and capital gain distributions to be paid
by the Fund are determined in accordance with Federal income tax regulations
which may differ from generally accepted accounting principles. These
differences are primarily due to differing book and tax treatment for foreign
currency transactions, net operating losses, foreign taxes on net realized
gains, deductibility of interest expense on short sales and gains on certain
securities of corporations designated as "passive foreign investment companies".
Permanent book and tax basis differences relating to shareholder distributions
may result in reclassification among undistributed net investment income (loss),
accumulated net realized gain (loss) and paid in capital.
Permanent book and tax basis differences, if any, are not included in ending
undistributed (distributions in excess of) net investment income for the purpose
of calculating net investment income (loss) per share in the Financial
Highlights.
B. ADVISER: Morgan Stanley Asset Management, Inc. (the "Adviser" or "MSAM"), a
wholly owned subsidiary of Morgan Stanley Group, Inc. provides the Fund with
investment advisory services at a fee paid quarterly and calculated at the
annual rates of average daily net assets indicated below. The Adviser has agreed
to reduce advisory fees payable to it and to reimburse the Portfolios, if
necessary, if the annual operating expenses, as defined, expressed as a
percentage of average daily net assets, exceed the maximum ratios indicated as
follows:
3
<PAGE>
CLASS A CLASS B AND CLASS C
MAX. OPERATING MAX. OPERATING
FUND ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
- -------------------------------------------------------------------------
Government Money Market 0.45% 1.24% N/A
Money Market 0.45% 1.22% N/A
C. ADMINISTRATOR: MSAM also provides the Fund with administrative services
pursuant to an administrative agreement for a monthly fee which on an annual
basis equals 0.25% of the average daily net assets of each portfolio, plus
reimbursement of out-of-pocket expenses. Under an agreement between MSAM and The
Chase Manhattan Bank ("Chase"), through its affiliate Chase Global Funds
Services Company ("CGFSC"), Chase provides certain administrative services to
the Fund. Chase is compensated for such services by MSAM from the fee it
receives from the Fund.
D. DISTRIBUTOR: Morgan Stanley & Co. Incorporated (the "Distributor"), a
wholly-owned subsidiary of Morgan Stanley Group, Inc. and an affiliate of MSAM,
serves as the distributor of the Fund and provides all classes of each portfolio
with the distribution services pursuant to separate Distribution Plans in
accordance with Rule 12b-1 under the Investment Company Act of 1940. The
Distributor is entitled to receive from the Portfolios a distribution fee, which
is accrued daily and paid quarterly, of up to 1.00% on an annualized basis, of
the average daily net assets attributable to the Class B and Class C shares of
each portfolio.
The Distributor may receive a contingent deferred sales charge for certain
purchases of Class A, Class B and Class C shares of each portfolio redeemed with
one to six years following such purchase.
E. CUSTODIANS: Morgan Stanley Trust Company ("MSTC"), a wholly owned subsidiary
of Morgan Stanley Group, Inc., acts as custodian for the Fund's assets held
outside the United States in accordance with a custodian agreement. Effective
September 1, 1995, Chase replaced the United States Trust Company of New York as
custodian for the Fund's domestic assets in accordance with a Custodian
Agreement. Custodian fees are computed and payable monthly based on assets held,
investment purchased and sales activity, an account maintenance fee, plus
reimbursement for certain out-of-pocket expenses.
F. OTHER:
At December 31, 1996, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of each Portfolio were:
NET
APPRECIATION
COST APPREC. (DEPREC.) (DEPRECIATION)
FUND (000) (000) (000) (000)
- ----------------------------------------------------------------
Government Money Market 116,966 - - -
Money Market 254,283 - - -
4
<PAGE>
PART C
Morgan Stanley Fund, Inc.
Other Information
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS (included in Part A)
Audited financial highlights for the Morgan Stanley Global Equity
Allocation, Morgan Stanley Global Fixed Income, Morgan Stanley Asian
Growth, Morgan Stanley American Value, Morgan Stanley Worldwide High
Income, Morgan Stanley Latin American, Morgan Stanley Emerging
Markets, Morgan Stanley Aggressive Equity, Morgan Stanley U.S. Real
Estate and Morgan Stanley High Yield Funds for the fiscal year ended
June 30, 1996, are included in the prospectuses of the foregoing
portfolios which were filed with the SEC as set forth in Part A and are
incorporated herein by reference. As of June 30, 1996, the Morgan
Stanley Government Obligations Money Market, Morgan Stanley Tax-Free
Money Market, Morgan Stanley European Equity, Morgan Stanley Growth
and Income, Morgan Stanley International Magnum, Morgan Stanley
Japanese Equity, Morgan Stanley Value, Morgan Stanley Equity Growth,
Morgan Stanley Global Equity, Morgan Stanley Aggressive Equity, Morgan
Stanley U.S. Real Estate, Morgan Stanley High Yield, Morgan Stanley
Emerging Markets Debt and Morgan Stanley Mid Cap Growth Funds had not
yet commenced operations. Accordingly, no audited financial highlights
for these Funds are included in the prospectus relating to such Funds.
Audited financial highlights for the PCS Money Market Portfolio and
PCS Government Obligations Money Market Portfolio, portfolios of PCS
Cash Fund, Inc., for the fiscal year ended June 30, 1996, are included
in the prospectus of the foregoing portfolios which were filed with
the SEC as set forth in Part A and are incorporated herein by
reference. The PCS Money Market Portfolio is the predecessor to the
Morgan Stanley Money Market Fund and the PCS Government Obligations
Money Market Portfolio is the predecessor portfolio to the Morgan
Stanley Government Obligations Money Market Fund.
The Registrant's unaudited financial highlights for the Morgan Stanley
International Magnum Fund for the period ended November 30, 1996 are
included in the supplement to the prospectus of the International
Magnum Fund which was filed with the SEC as set forth in Part A and
are incorporated herein by reference.
The Registrant's unaudited financial highlights for the Morgan Stanley
Money Market and Morgan Stanley Government Obligations Money Market
Funds for the period ended December 31, 1996 are included in the
supplement to the prospectus of the Morgan Stanley Money Market and
Morgan Stanley Government Obligations Money Market Funds filed
herewith.
(2) FINANCIAL STATEMENTS (included in Part B)
The registrant's audited financial statements for the Morgan Stanley
Global Equity Allocation, Morgan Stanley Global Fixed Income, Morgan
Stanley Asian Growth, Morgan Stanley American Value, Morgan Stanley
Worldwide High Income, Morgan Stanley Latin American and Morgan
Stanley Emerging Markets, Morgan Stanley Aggressive Equity, Morgan
Stanley U.S. Real Estate and Morgan Stanley High Yield Funds,
respectively, for the fiscal year ended June 30, 1996, including Price
Waterhouse LLP's report thereon, are incorporated by reference into
Part B (the Statement of Additional Information) and are part of the
Registrant's June 30, 1996 Annual Report to Shareholders. The
financial statements incorporated by reference into Part B are:
1. Statements of Net Assets
2. Statements of Operations
3. Statements of Changes in Net Assets
4. Financial Highlights
5. Notes to Financial Statements
6. Report of Independent Accountants
As of June 30, 1996, the Morgan Stanley Money Market, Morgan Stanley
Government Obligations Money Market, Morgan Stanley Tax-Free Money
Market, Morgan Stanley European Equity, Morgan Stanley Growth and
Income, Morgan Stanley International Magnum, Morgan Stanley Japanese
Equity, Morgan Stanley Value, Morgan Stanley Equity Growth, Morgan
Stanley Mid Cap Growth, Morgan Stanley Global Equity and Morgan
Stanley Emerging Markets Debt Funds had not yet commenced operations.
Accordingly, no audited financial statements are filed for these Funds
at this time.
PCS Cash Fund Inc.'s audited financial statements for the PCS Money
Market and PCS Government Obligations Money Market Portfolios, for the
fiscal year ended June 30, 1996 are
<PAGE>
incorporated by reference into Part B (the Statement of Additional
Information) and are a part of the PCS Cash Fund, Inc.'s June 30, 1996
Annual Report to Shareholders. The financial statements incorporated by
reference into Part B are:
1. Statement of Net Assets
2. Statements of Operations
3. Statements of Changes in Net Assets
4. Financial Highlights
5. Notes to Financial Statements
6. Report of Independent Accountants
The Registrant's unaudited financial statements for the Morgan Stanley
International Magnum Fund for the period ended November 30, 1996 are
included in Part B (the Statement of Additional Information).
Included in such financial statements are the following:
1. Portfolio of Investments as of November 30, 1996
2. Statement of Assets and Liabilities for the period
ended November 30, 1996
3. Statement of Operations for the period ended November 30, 1996
4. Statement of Changes in Net Assets for the period ended
November 30, 1996
5. Financial Highlights for the period ended November 30, 1996
6. Notes to Financial Statements
The Registrant's unaudited financial statements for the Morgan Stanley
Money Market and Morgan Stanley Government Obligations Money Market
Funds for the period ended December 31, 1996 are included in Part B
(the Statement of Additional Information). This Post-Effective
Amendment No. 19 is filed to comply with the Registrant's undertaking
to file a Post-Effective Amendment containing reasonably current
financial statements, which need not be certified, within four to six
months of its effective date or commencement of operations, whichever
is later. Included in such financial statements are the following:
1. Portfolio of Investments as of December 31, 1996
2. Statement of Assets and Liabilities for the period
ended December 31, 1996
3. Statement of Operations for the period ended December 31, 1996
4. Statement of Changes in Net Assets for the period ended
December 31, 1996
5. Financial Highlights for the period ended December 31, 1996
6. Notes to Financial Statements
<PAGE>
(B) EXHIBITS
1 (a) Articles of Amendment and Restatement are incorporated by
reference to Post Effective Amendment No. 10 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33- 51294 and
811-7140), as filed with the SEC via EDGAR on October 4, 1995.
(b) Articles Supplementary (adding Registrant's High Yield, U.S. Real
Estate and Japanese Equity Funds) to the Amended and Restated
Articles of Incorporation are incorporated by reference to
Post-Effective Amendment No. 16 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-51294 and 811-7140), as
filed with the SEC via EDGAR on October 18, 1996.
(c) Articles Supplementary (adding Registrant's Government
Obligations Money Market and Tax-Free Money Market Funds)to the
Amended and Restated Articles of Incorporation are incorporated
by reference to Post-Effective Amendment No. 16 to the
Registrant's Registration Statement on Form N-1A (File Nos.
33-51294 and 811-7140), as filed with the SEC via EDGAR on
October 18, 1996.
(d) Articles Supplementary (adding Registrant's Global Equity,
Emerging Markets Debt, Mid Cap Growth, Equity Growth and Value
Funds) to the Amended and Restated Articles of Incorporation are
incorporated by reference to Post-Effective Amendment No. 18 to
the Registrant's Registration Statement on Form N-1A (File Nos.
33-51294 and 811-7140), as filed with the SEC via EDGAR on
December 31, 1996.
2 Amended and Restated By-laws are incorporated by reference to Post-
Effective Amendment No. 10 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-51294 and 811-7140), as filed
with the SEC via EDGAR on October 4, 1995.
3 Not applicable.
4 Registrant's Forms of Specimen Securities were previously filed and
are incorporated herein by reference.
5 (a) Investment Advisory Agreement between Registrant and Morgan
Stanley Asset Management Inc. with respect to the Morgan
Stanley Money Market Fund, the Morgan Stanley Global Fixed
Income Fund and the Morgan Stanley Global Equity Allocation
Fund is incorporated by reference to Post-Effective Amendment
No. 10 to the Registrant's Registration Statement on Form N-1A
(File Nos. 33-51294 and 811-7140), as filed with the SEC via
EDGAR on October 4, 1995.
(b) Investment Advisory Agreement between Registrant and Miller
Anderson & Sherrerd, LLP with respect to the Morgan Stanley Mid
Cap Growth Fund and the Morgan Stanley Value Fund is incorporated
by reference to Post-Effective Amendment No. 18 to the
Registrant's Registration Statement on Form N-1A (File Nos.
33-51294 and 811-7140), as filed with the SEC via EDGAR on
December 31, 1996.
(c) Amended Schedule A and Supplement to Investment Advisory
Agreement between Registrant and Morgan Stanley Asset
Management Inc. (adding Registrant's Asian Growth Fund and
Small Cap Value Equity Fund (currently the American Value
Fund)) is incorporated by reference to Post-Effective Amendment
No. 10 to the Registrant's Registration Statement on Form N-1A
(File Nos. 33-51294 and 811-7140), as filed with the SEC via
EDGAR on October 4, 1995.
(d) Supplement to Investment Advisory Agreement between the
Registrant and Morgan Stanley Asset Management Inc. (adding
Registrant's Worldwide High Income Fund) is incorporated by
reference to Post-Effective Amendment No. 10 to the
Registrant's Registration Statement on Form N-1A (File Nos. 33-
51294 and 811-7140), as filed with the SEC via EDGAR on October
4, 1995.
(e) Supplement to Investment Advisory Agreement between the
Registrant and Morgan Stanley Asset Management Inc. (adding
Registrant's Growth and Income Fund, European Equity Fund,
Latin American Fund and Emerging Markets Fund) is incorporated
by reference to Post-Effective Amendment No. 10 to the
Registrant's
<PAGE>
Registration Statement on Form N-1A (File Nos. 33-51294 and
811-7140), as filed with the SEC via EDGAR on October 4, 1995.
(f) Supplement to Investment Advisory Agreement between the
Registrant and Morgan Stanley Asset Management Inc. (adding
Registrant's Aggressive Equity Fund) is incorporated by
reference to Post-Effective Amendment No. 10 to the
Registrant's Registration Statement on Form N-1A (File Nos. 33-
51294 and 811-7140), as filed with the SEC via EDGAR on October
4, 1995.
(g) Form of Supplement to Investment Advisory Agreement between the
Registrant and Morgan Stanley Asset Management Inc. (adding
Registrant's International Magnum, Japanese Equity, U.S. Real
Estate and High Yield Funds) is incorporated by reference to
Post-Effective Amendment No. 15 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-51294 and 811-7140), as
filed with the SEC via EDGAR on September 23, 1996.
(h) Supplements to Investment Advisory Agreement between the
Registrant and Morgan Stanley Asset Management Inc. (adding
Registrant's U.S. Real Estate and High Yield Funds) are
incorporated by reference to Post-Effective Amendment No. 16 to
the Registrant's Registration Statement on Form N-1A (File Nos.
33-51294 and 811-7140), as filed with the SEC via EDGAR on
October 18, 1996.
(i) Form of Supplement to Investment Advisory Agreement between the
Registrant and Morgan Stanley Asset Management Inc. (adding
Registrant's Tax-Free Money Market Fund) is incorporated by
reference to Post-Effective Amendment No. 14 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-51294 and
811-7140), as filed with the SEC via EDGAR on July 9, 1996.
(j) Supplements to Investment Advisory Agreement between the
Registrant and Morgan Stanley Asset Management Inc. (adding
Registrant's Government Obligations and Money Market Funds) are
incorporated by reference to Post-Effective Amendment No. 16 to
the Registrant's Registration Statement on Form N-1A (File Nos.
33-51294 and 811-7140), as filed with the SEC via EDGAR on
October 18, 1996.
(k) Supplements to Investment Advisory Agreement between the
Registrant and Morgan Stanley Asset Management, Inc. (adding
Registrant's Global Equity, Emerging Markets Debt and Equity
Growth Funds) are incorporated by reference to Post-Effective
Amendment No. 18 to the Registrant's Registration Statement on
Form N-1A (File Nos. 33-51294 and 811-7140), as filed with the
SEC via EDGAR on December 31, 1996.
6 Distribution Agreement between Registrant and Van Kampen American
Capital Distributors, Inc. is incorporated by reference to Post-
Effective Amendment No. 18 to the Registrant's Registration Statement
on Form N-1A (File Nos. 33-51294 and 811-7140), as filed with the SEC
via EDGAR on December 31, 1996.
7 Not applicable.
8 (a) Registrant's Mutual Fund Custody Agreement with the Chase
Manhattan Bank, N.A. dated March 11, 1994 is incorporated by
reference to Post-Effective Amendment No. 11 to the
Registrant's Registration Statement on Form N-1A (File Nos. 33-
51294 and 811-7140), as filed with the SEC via EDGAR on October
30, 1995.
(b) Registrant's Custody Agreement (Global) with Morgan Stanley
Trust Company dated January 4, 1993 is incorporated by
reference to Post-Effective Amendment No. 11 to the
Registrant's Registration Statement on Form N-1A (File Nos. 33-
51294 and 811-7140), as amended, as filed with the SEC via EDGAR on
October 30, 1995.
(c) Registrant's Custody Agreement with PNC Bank, N.A. (with respect
to the Money Market Funds) is incorporated by reference to
Post-Effective Amendment No. 16 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-51294 and 811-7140), as
filed with the SEC via EDGAR on October 18, 1996.
9 (a) Administration Agreement between Registrant and Morgan Stanley
Asset Management Inc. (the "MSAM Administration Agreement") is
incorporated by reference to Post-Effective Amendment No. 11 to
the Registrant's Registration Statement on Form N-1A (File Nos.
33-51294 and 811-7140), as filed with the SEC via EDGAR on
October 30, 1995 and as amended by Addendum to such Agreement
incorporated by reference to Post-Effective Amendment No. 16 to
the Registrant's Registration Statement on Form N-1A (File Nos.
33-51294 and 811-7140), as filed with the SEC via EDGAR on
October 18, 1996.
(b) Administration Agreement between Registrant and Miller Anderson &
Sherrerd, LLP (the "MAS Administration Agreement") is
incorporated by reference to Post-Effective Amendment No. 18 to
the Registrant's Registration Statement on Form N-1A (File Nos.
33-51294 and 811-7140), as filed with the SEC via EDGAR on
December 31, 1996.
(c) Sub-Administration Agreement between Morgan Stanley Asset
Management Inc. and The Chase Manhattan Bank is incorporated by
reference to Post-Effective Amendment No. 18 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-51294 and
811-7140), as filed with the SEC via EDGAR on December 31, 1996.
(d) Sub-Administration Agreement between Miller Anderson & Sherrerd,
LLP and The Chase Manhattan Bank is incorporated by reference to
Post-Effective Amendment No. 18 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-51294 and 811-7140), as
filed with the SEC via EDGAR on December 31, 1996.
(e) Amended Schedule A and Amended Administration Agreement between
Registrant and Morgan Stanley Asset Management Inc. with
respect to the Morgan Stanley Asian
<PAGE>
Growth Fund and Morgan Stanley Small Cap Value Equity Fund
(currently the Morgan Stanley American Value Fund) is
incorporated by reference to Post-Effective Amendment No. 11 to
the Registrant's Registration Statement on Form N-1A (File Nos.
33-51294 and 811-7140), as filed with the SEC via EDGAR on
October 30, 1995.
(f) Sub-Transfer Agent Agreement among Morgan Stanley Asset
Management Inc., Chase Global Funds Services Company and PFPC,
Inc. is incorporated by reference to Post-Effective Amendment No.
16 to the Registrant's Registration Statement on Form N-1A (File
Nos. 33-51294 and 811-7140), as filed with the SEC via EDGAR on
October 18, 1996.
(g) Sub-Transfer Agent Agreement between Morgan Stanley Asset
Management Inc. and ACCESS Investor Services, Inc. is
incorporated by reference to Post-Effective Amendment No. 18 to
the Registrant's Registration Statement on Form N-1A (File Nos.
33-51294 and 811-7140), as filed with the SEC via EDGAR on
December 31, 1996.
(h) Sub-Transfer Agent Agreement between Miller Anderson & Sherrerd,
LLP and ACCESS Investor Services, Inc. is incorporated by
reference to Post-Effective Amendment No. 18 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-51294 and
811-7140), as filed with the SEC via EDGAR on December 31, 1996.
10 Opinion of Counsel is incorporated by reference to Post-Effective
Amendment No. 11 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-51294 and 811-7140), as filed with the SEC via
EDGAR on October 30, 1995.
11 (a) Consent of Price Waterhouse LLP, Independent Accountants is
incorporated by reference to Post-Effective Amendment No. 18 to
the Registrant's Registration Statement on Form N-1A (File Nos.
33-51294 and 811-7140), as filed with the SEC via EDGAR on
December 31, 1996.
(b) Consent of Coopers & Lybrand L.L.P., Independent Accountants is
incorporated by reference to Post-Effective Amendment No. 18 to
the Registrant's Registration Statement on Form N-1A (File Nos.
33-51294 and 811-7140), as filed with the SEC via EDGAR on
December 31, 1996.
12 Not applicable.
13 Purchase Agreement is incorporated by reference to Post-Effective
Amendment No. 11 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-51294 and 811-7140), as filed with the SEC via
EDGAR on October 30, 1995.
14 Not applicable.
15 (a) Amended and Restated Plan of Distribution Pursuant to Rule 12b-1
for shares of the Morgan Stanley Money Market Fund ("Money Market
Plan") is incorporated by reference to Post-Effective Amendment
No. 18 to the Registrant's Registration Statement on Form N-1A
(File Nos. 33-51294 and 811-7140), as filed with the SEC via
EDGAR on December 31, 1996. The following Rule 12b-1 distribution
plans have been omitted because they are substantially identical
to the Money Market Plan and differ from the Money Market Plan
only in references to the Investment Fund to which the plan
relates: Morgan Stanley Government Obligations Money Market Fund.
(b) Form of Plan of Distribution Pursuant to Rule 12b-1 for shares of
the Morgan Stanley Tax-Free Money Market Fund is incorporated by
reference to Post-Effective Amendment No. 18 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-51294 and
811-7140), as filed with the SEC via EDGAR on December 31, 1996.
(c) Form of Plan of Distribution Pursuant to Rule 12b-1 for Class A
Shares (the "Class A Plan") of the Morgan Stanley Global Fixed
Income Fund is incorporated by reference to Post-Effective
Amendment No. 18 to the Registrant's Registration Statement on
Form N-1A (File Nos. 33-51294 and 811-7140), as filed with the
SEC via EDGAR on December 31, 1996. The following plans have been
omitted because they are substantially identical to the Class A
Plan and differ from the Class A Plan only in references to the
Investment Fund to which the plan relates: Morgan Stanley Asian
Growth Fund, Morgan Stanley Small Cap Value Equity Fund
(currently the Morgan Stanley American Value Fund), Morgan
Stanley Worldwide High Income Fund, Morgan Stanley Emerging
Markets Fund, Morgan Stanley Latin American Fund, Morgan Stanley
Global Equity Allocation Fund, Morgan Stanley High Yield Fund,
Morgan Stanley U.S. Real Estate Fund, Morgan Stanley
International Magnum Fund, Morgan Stanley Aggressive Equity Fund.
(d) Form of Plan of Distribution Pursuant to Rule 12b-1 for Class A
Shares (the "Class A Plan") of the Morgan Stanley Japanese Equity
Equity Fund is incorporated by reference to Post-Effective
Amendment No. 18 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-51294 and 811-7140), as filed with the SEC via
EDGAR on December 31, 1996. The following plans have been omitted
because they are substantially identical to the Class A Plan and
differ from the Class A Plan only in references to the Investment
Fund to which the plan relates: Morgan Stanley European Equity Fund,
Morgan Stanley Growth and Income Fund.
(e) Plan of Distribution Pursuant to Rule 12b-1 for Class A Shares
(the "Class A Plan") of the Morgan Stanley Global Equity Fund is
incorporated by reference to Post-Effective Amendment No. 18 to
the Registrant's Registration Statement on Form N-1A (File Nos.
33-51294 and 811-7140), as filed with the SEC via EDGAR on
December 31, 1996. The following plans have been omitted because
they are substantially identical to the Class A Plan and differ
from the Class A Plan only in references to the Investment Fund
to which the plan relates: Morgan Stanley Emerging Markets Debt
Fund, Morgan Stanley Mid Cap Growth Fund, Morgan Stanley Equity
Growth Fund, Morgan Stanley Value Fund.
<PAGE>
(f) Amended and Restated Plan of Distribution Pursuant to Rule 12b-1
for Class B and Class C shares (the "Class B and Class C Plan")
relating to the Morgan Stanley Global Fixed Income Fund, Morgan
Stanley Asian Growth Fund, Morgan Stanley Small Cap Value Equity
Fund (currently the Morgan Stanley American Value Fund), Morgan
Stanley Worldwide High Income Fund, Morgan Stanley Emerging
Markets Fund, Morgan Stanley Latin American Fund, Morgan Stanley
Global Equity Allocation Fund, Morgan Stanley High Yield Fund,
Morgan Stanley U.S. Real Estate Fund, Morgan Stanley
International Magnum Fund and Morgan Stanley Aggressive Equity
Fund is incorporated by reference to Post-Effective Amendment No.
18 to the Registrant's Registration Statement on Form N-1A (File
Nos. 33-51294 and 811-7140), as filed with the SEC via EDGAR on
December 31, 1996.
(g) Form of Plan of Distribution Pursuant to Rule 12b-1 for Class B
and Class C shares (the "Class B and Class C Plan") relating to
the Morgan Stanley Japanese Equity Fund, Morgan Stanley European
Equity Fund and Morgan Stanley Growth and Income Fund is
incorporated by reference to Post-Effective Amendment No. 18 to
the Registrant's Registration Statement on Form N-1A (File Nos.
33-51294 and 811-7140), as filed with the SEC via EDGAR on
December 31, 1996.
16 Schedules of Computation of Performance Information is incorporated
by reference to Post-Effective Amendment No. 11 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-51294 and 811-
7140), as filed with the SEC via EDGAR on October 30, 1995.
18 Registrant's Rule 18f-3 Multiple Class Plan is incorporated by reference
to Post-Effective Amendment No. 18 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-51294 and 811-7140), as filed with
the SEC via EDGAR on December 31, 1996.
24 Powers of Attorney are incorporated by reference to Post-Effective
Amendment No. 10 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-51294 and 811-7140), as filed with the SEC via
EDGAR on October 4, 1995.
27 (a) Financial data schedules for the fiscal year ended June 30, 1996
are filed herewith.
(b) Financial Data Schedules for the period ended November 30, 1996
for the Morgan Stanley International Magnum Fund are filed
herewith.
(c) Financial Data Schedules for the period ended December 31, 1996
for the Morgan Stanley Money Market and Morgan Stanley Government
Obligations Money Market Funds are filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
No person is controlled by or under common control with the
Registrant.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
The following information is given as of March 14, 1997.
Number of
Title of Class Record Holders
-------------- ---------------
Morgan Stanley Global Equity Allocation Fund-Class A..... 4,278
Morgan Stanley Global Equity Allocation Fund-Class B..... 2,443
<PAGE>
Morgan Stanley Global Equity Allocation Fund-Class C.... 5,141
Morgan Stanley Global Fixed Income Fund-Class A......... 333
Morgan Stanley Global Fixed Income Fund-Class B......... 67
Morgan Stanley Global Fixed Income Fund-Class C......... 202
Morgan Stanley Asian Growth Fund-Class A................ 18,279
Morgan Stanley Asian Growth Fund-Class B................ 7,061
Morgan Stanley Asian Growth Fund-Class C................ 12,276
Morgan Stanley Emerging Markets Fund-Class A............ 4,482
Morgan Stanley Emerging Markets Fund-Class B............ 2,044
Morgan Stanley Emerging Markets Fund-Class C............ 3,812
Morgan Stanley Latin American Fund-Class A.............. 1,973
Morgan Stanley Latin American Fund-Class B.............. 431
Morgan Stanley Latin American Fund-Class C.............. 837
Morgan Stanley European Equity Fund-Class A............. 0
Morgan Stanley European Equity Fund-Class B............. 0
Morgan Stanley European Equity Fund-Class C............. 0
Morgan Stanley American Value Fund-Class A.............. 1,300
Morgan Stanley American Value Fund-Class B.............. 350
Morgan Stanley American Value Fund-Class C.............. 1,509
Morgan Stanley Worldwide High Income Fund-Class A....... 2,169
Morgan Stanley Worldwide High Income Fund-Class B....... 2,868
Morgan Stanley Worldwide High Income Fund-Class C....... 1,763
Morgan Stanley Aggressive Equity Fund-Class A........... 801
Morgan Stanley Aggressive Equity Fund-Class B........... 818
Morgan Stanley Aggressive Equity Fund-Class C........... 386
Morgan Stanley Growth and Income Fund-Class A........... 0
Morgan Stanley Growth and Income Fund-Class B........... 0
Morgan Stanley Growth and Income Fund-Class C........... 0
Morgan Stanley High Yield Fund-Class A.................. 57
Morgan Stanley High Yield Fund-Class B.................. 152
Morgan Stanley High Yield Fund-Class C.................. 75
Morgan Stanley U.S. Real Estate Fund-Class A............ 354
Morgan Stanley U.S. Real Estate Fund-Class B............ 285
Morgan Stanley U.S. Real Estate Fund-Class C............ 126
Morgan Stanley International Magnum Fund-Class A........ 374
Morgan Stanley International Magnum Fund-Class B........ 374
Morgan Stanley International Magnum Fund-Class C........ 136
Morgan Stanley Japanese Equity Fund-Class A............. 0
Morgan Stanley Japanese Equity Fund-Class B............. 0
Morgan Stanley Japanese Equity Fund-Class C............. 0
Morgan Stanley Money Market Fund........................ 32
Morgan Stanley Government Obligations Money Market Fund. 7
Morgan Stanley Tax-Free Money Market Fund............... 0
Morgan Stanley Value Fund - Class A..................... 0
Morgan Stanley Value Fund - Class B..................... 0
Morgan Stanley Value Fund - Class C..................... 0
Morgan Stanley Equity Growth Fund - Class A............. 0
Morgan Stanley Equity Growth Fund - Class B............. 0
Morgan Stanley Equity Growth Fund - Class C............. 0
Morgan Stanley Global Equity Fund - Class A............. 0
Morgan Stanley Global Equity Fund - Class B............. 0
Morgan Stanley Global Equity Fund - Class C............. 0
Morgan Stanley Emerging Markets Debt - Class A.......... 0
Morgan Stanley Emerging Markets Debt - Class B.......... 0
Morgan Stanley Emerging Markets Debt - Class C.......... 0
ITEM 27. INDEMNIFICATION
Reference is made to Article SEVEN of the Registrant's Articles of
Incorporation. Insofar as indemnification for liability arising under the
Securities Act of 1933, as amended (the "1933 Act"), may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission (the "Commission") such
indemnification is against public policy as expressed in the 1933 Act and is,
<PAGE>
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1933 Act and will be governed
by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to the caption "Management of the Fund--Investment
Adviser" in the Prospectus constituting Part A of this Registration Statement
and "Management of the Fund" in Part B of this Registration Statement.
Listed below are the officers and Directors of Morgan Stanley Asset
Management Inc. ("MSAM"). The information as to any other business,
profession, vocation, or employment of a substantial nature engaged in by the
Chairman, President and Directors during the past two fiscal years, is
incorporated by reference to Schedules A and D of Form ADV filed by MSAM
pursuant to the Advisers Act (SEC File No. 801-15757).
DIRECTORS
James M. Allwin Director
Barton M. Biggs Director
Gordon S. Gray Director
Peter A. Nadosy Director
Dennis G. Sherva Director
OFFICERS
Barton M. Biggs Chairman
Managing Director
Peter A. Nadosy Vice Chairman
Managing Director
James M. Allwin President
Managing Director
John R. Alkire Managing Director (MSAM) - Toyko
P. Dominic Caldecott Managing Director (MSAM) - UK
A. Macdonald Caputo Managing Director
Ean Wah Chin Managing Director (MSAM) -
Singapore
Garry B. Crowder Managing Director
Madhav Dhar Managing Director
Kurt A. Feuerman Managing Director
Paul B. Ghaffari Managing Director
Gordon S. Gray Managing Director
Marianne Laing Hay Managing Director
Gary D. Latainer Managing Director
Mahmoud A. Mamdani Managing Director
Robert L. Meyer Managing Director
Russell C. Platt Managing Director
Robert A. Sargent Managing Director (MSAM) - UK
Bidyut C. Sen Managing Director
Vinod R. Sethi Managing Director
Dennis G. Sherva Managing Director
James L. Tanner Managing Director (MSAM) - UK
Richard G. Woolworth, Jr. Managing Director
Debra M. Aaron Principal
Warren Ackerman III Principal
Robert E. Angevine Principal
Suzanne S. Akers Principal
Gerald P. Barth-Wehrenaip Principal
Theodore R. Bigman Principal
Francine J. Bovich Principal
Stuart J. M. Breslow Principal
Andrew C. Brown Principal (MSAM) - UK
Jeffrey P. Brown Principal
Frances Campion Principal (MSAM) - UK
Terence P. Carmichael Principal
Arthur Certosimo Principal
<PAGE>
Stephen C. Cordy Principal
Jacqueline A. Day Principal (MSAM) - UK
Raye L. Dube Principal
Abigail Jones Feder Principal
Eugene Flood, Jr. Principal
Thomas C. Frame Principal
James Wayne Grisham Principal
Perry E. Hall II Principal
Ruth A. Hughes-Guden Principal
Margaret Kinsley Johnson Principal
Michael F. Klein Principal
Michael B. Kushma Principal
Khoon-Min Lim Principal
Marianne J. Lippmann Principal
Yvonne Longley Principal (MSAM) - UK
Andrew Mack Principal (MSAM) - UK
Gary J. Mangino Principal
Jeffrey Margolis Principal
M. Paul Martin Principal
Walter Maynard, Jr. Principal
Margaret P. Naylor Principal (MSAM) - UK
Yoshiro Okawa Principal (MSAM) - Tokyo
Warren Olsen Principal
Christopher G. Petrow Principal
Narayan Ramachandran Principal
Gail Hunt Reeke Principal
Christine I. Reilly Principal
Stefano Russo Principal (MSAM) - Milan
Bruce R. Sandberg Principal
Kiat Seng Seah Principal (MSAM) - Singapore
Stephen C. Sexauer Principal
Robert M. Smith Principal
Kunihiko Sugio Principal (MSAM) - Tokyo
Ann D. Thivierge Principal
Philip W. Winters Principal
Alford E. Zick, Jr. Principal
Maryann Savadelis Agre Vice President
Peter Aliprantis Vice President
Jeffrey Alvino Vice President
Alistair Anderson Vice President
William S. Auslander Vice President
Kimberly L. Austin Vice President
Marshall T. Bassett Vice President
Christopher Blair Vice President
Richard Boon Vice President
Geraldine Boyle Vice President
Paul Boyne Vice President
L. Kenneth Brooks Vice President
Jonathan Paul Buckeridge Vice President (MSAM) - Melbourne
Carl Kuo-Wei Chien Vice President (MSAM) - Hong Kong
Lori A. Cohane Vice President
James Colmenares Vice President
Kate Cornish-Bowden Vice President (MSAM) - UK
Nikhil Dhaon Vice President
Christine H. du Bois Vice President
Richard S. Farden Vice President
Daniel E. Fox Vice President
Karen T. Frost Vice President (MSAM) - UK
Lisa Gallo Vice President
Josephine M. Glass Vice President
Charles A. Golden Vice President
Dimitri Goulandris Vice President
James A. Grasselino Vice President
<PAGE>
Kenneth John Greig Vice President (MSAM) - UK
Maureen A. Grover Vice President
Michael Hewett Vice President
Kenneth R. Holley Vice President
Holly D. Hopps Vice President
Etsuko Fuseya Jennings Vice President
Donald B. Johnston Vice President
Jaideep Khanna Vice President
Peter L. Kirby Vice President
George Koshy Vice President
Paul Koske Vice President
Daniel R. Lascano Vice President
Arthur J. Lev Vice President
Valerie Y. Lewis Vice President
Jane Likins Vice President (MSAM) - UK
William David Lock Vice President (MSAM) - UK
Gordon W. Loery Vice President
Paula J. Morgan Vice President (MSAM) - UK
Nancy Morton Vice President
Clare K. Mutone Vice President
Terumi Nagata Vice President (MSAM) - Tokyo
Bradley Okita Vice President
Martin O. Pearce Vice President (MSAM) - UK
Alexander A. Pena Vice President
Anthony J. Pesce Vice President
David J. Polansky Vice President
Karen Post Vice President
Akash Prakash Vice President (MSAM) - Muabai
Gregg A. Robinson Vice President
Gerald D. Rubin Vice President
Donald P. Ryan Vice President
Neil Siegel Vice President
Ashutosh Sinha Vice President
Andy B. Skov Vice President
Michael James Smith Vice President (MSAM) - UK
Kim I. Spellman Vice President
Joseph P. Stadler Vice President
Christian K. Stadlinger Vice President
Catherine Steinhardt Vice President
Ram K. Sundaram Vice President
Keiko Tamaki-Kuroda Vice President
Shunso Tatsumi Vice President
Louise Teeple Vice President
Joseph Y.S. Tern Vice President (MSAM) Singapore
Landon Thomas Vice President
Richard Boon Hwee Toh Vice President (MSAM) Singapore
K.N. Vaidyanathan Vice President (MSAM) Muabai
Dennis J. Walsh Vice President
Jacob Walthour Vice President
Kevin V. Wasp Vice President
Patricia Woo Vice President
Harold J. Schaaff, Jr. Principal
General Counsel and Secretary
Eileen K. Murray Treasurer
Madeline D. Barkhorn Assistant Secretary
Charlene R. Herzer Assistant Secretary
<PAGE>
In addition, MSAM acts as investment adviser to the following
registered investment companies: American Advantage International Equity
Fund; The Brazilian Investment Fund, Inc.; The Enterprise Group of Funds, Inc.
- - Tax-Exempt Income Portfolio; Fortis Series Fund, Inc. - Global Asset
Allocation Series; Fountain Square International Equity Fund; General American
Capital Company; The Latin American Discovery Fund, Inc.; certain portfolios
of The Legends Fund, Inc.; The Malaysia Fund, Inc.; Morgan Stanley Africa
Investment Fund, Inc.; Morgan Stanley Asia-Pacific Fund, Inc.; Morgan Stanley
Emerging Markets Debt Fund, Inc.; Morgan Stanley Emerging Markets Fund, Inc.;
Morgan Stanley European Emerging Markets Fund, Inc.; all funds of the Morgan
Stanley Fund, Inc.; Morgan Stanley Global Opportunity Bond Fund, Inc.; The
Morgan Stanley High Yield Fund, Inc.; Morgan Stanley India Investment Fund,
Inc.; Morgan Stanley Institutional Fund, Inc.; The Pakistan Investment Fund,
Inc.; PCS Cash Fund, Inc.; Principal Aggressive Growth Fund, Inc.; Principal
Asset Allocation Fund, Inc.; certain portfolios of Sun America Series Trust;
SEI Institutional Managed Trust - Balanced Portfolio; The Thai Fund, Inc. and
The Turkish Investment Fund, Inc.
ITEM 29. PRINCIPAL UNDERWRITERS
<PAGE>
Morgan Stanley & Co. Incorporated ("MS&Co.") is distributor for
Morgan Stanley Institutional Fund, Inc., Morgan Stanley Fund, Inc., and PCS
Cash Fund, Inc. The information required by this Item 29 with respect to each
Director and officer of MS&Co. is incorporated by reference to Schedule A of
Form BD filed by MS&Co. pursuant to the Securities and Exchange Act of 1934
(SEC File No. 8-15869).
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a)
under the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder are maintained in the physical possession of the
Registrant; Registrant's Transfer Agent and Sub-Administrator, Chase Global
Funds Services Company, 73 Tremont Street, P.O. Box 2798, Boston,
Massachusetts 02208-2798; Registrant's Sub-Transfer Agent, PFPC, Inc. 400
Bellevue Parkway, Wilmington, Delaware 19809; and the Registrant's custodian
banks, including sub-custodians.
ITEM 31. MANAGEMENT SERVICES
Morgan Stanley Asset Management Inc. ("MSAM") has entered into a
Chase Administration Agreement with The Chase Manhattan Bank, N.A. ("Chase"),
successor in interest to United States Trust Company of New York (which is
incorporated herein by reference to Exhibit No. 9(b) to Pre-Effective
Amendment No. 2 to Registrant's Registration Statement) pursuant to which
Chase will provide the following services to the Registrant: (i) managing,
administering and conducting the general business activities of the
Registrant, other than those which are contracted to third parties; (ii)
providing personnel and facilities to perform the foregoing; (iii) accounting
services, including the preparation of statements and reports; (iv) transfer
agent services, including processing correspondence from shareholders,
recording transfers, issuing stock certificates and handling checks; (v)
handling dividends and distributions, including disbursing, withholding and
tax reporting; and (vi) providing office facilities, statistical and research
data, office supplies and assisting the Registrant to comply with regulatory
developments.
ITEM 32. UNDERTAKINGS
1. Registrant undertakes to file a post-effective amendment
containing reasonably current financial statements, which need not be
certified, for the Morgan Stanley Japanese Equity Fund, Morgan Stanley Growth
and Income Fund, Morgan Stanley European Equity Fund, Morgan Stanley Tax-Free
Money Market Fund, Morgan Stanley Value Fund, Morgan Stanley Equity Growth
Fund, Morgan Stanley Global Equity Fund, Morgan Stanley Emerging Markets Debt
Fund, and Morgan Stanley Mid Cap Growth Fund within four to six months of
their effective date or the commencement of operations of each such
Investment Fund, whichever is later.
2. Registrant hereby undertakes that whenever a Shareholder or
Shareholders who meet the requirements of Section 16(c) of the 1940 Act inform
the Board of Directors of his or their desire to communicate with other
Shareholders of the Fund, the Directors will inform such Shareholder(s) as to
the approximate number of Shareholders of record and the approximate costs of
mailing or afford said Shareholders access to a list of Shareholders.
3. Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's annual report to
shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amendment to the Registration
Statement pursuant to Rule 485(b) and has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York and State of New York, on
the 27th day of March, 1997.
MORGAN STANLEY FUND, INC.
By: /s/ Warren J. Olsen
----------------------
Warren J. Olsen
President and Director
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ Warren J. Olsen Director, President March 27, 1997
- ----------------------------- (Principal Executive --------------
Warren J. Olsen Officer)
*/s/ Barton M. Biggs Director (Chairman) March 27, 1997
- ------------------------------ --------------
Barton M. Biggs
*/s/ Fergus Reid Director March 27, 1997
- ----------------------------- --------------
Fergus Reid
*/s/ Frederick O. Robertshaw Director March 27, 1997
- ----------------------------- --------------
Frederick O. Robertshaw
*/s/ Andrew McNally IV Director March 27, 1997
- ----------------------------- --------------
Andrew McNally IV
*/s/ John D. Barrett II Director March 27, 1997
- ----------------------------- --------------
John D. Barrett II
*/s/ Gerard E. Jones Director March 27, 1997
- ----------------------------- --------------
Gerard E. Jones
*/s/ Samuel T. Reeves Director March 27, 1997
- ----------------------------- --------------
Samuel T. Reeves
*/s/ Frederick B. Whittemore Director March 27, 1997
- ----------------------------- --------------
Frederick B. Whittemore
*/s/ James R. Rooney Treasurer March 27, 1997
- ----------------------------- (Principal --------------
James R. Rooney Accounting Officer)
*By: /s/ Warren J. Olsen
-----------------------
Warren J. Olsen
Attorney-In-Fact
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1 (a) Articles of Amendment and Restatement are incorporated by
reference to Post Effective Amendment No. 10 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-51294 and 811-
7140), as filed with the SEC via EDGAR on October 4, 1995.
(b) Articles Supplementary (adding Registrant's High Yield, U.S.
Real Estate and Japanese Equity Funds) to the Amended and
Restated Articles of Incorporation are incorporated by
reference to Post-Effective Amendment No. 16 to the
Registrant's Registration Statement on Form N-1A (File
Nos. 33-51294 and 811-7140), as filed with the SEC via
EDGAR on October 18, 1996.
(c) Articles Supplementary (adding Registrant's Government
Obligations Money Market and Tax-Free Money Market Funds)to the
Amended and Restated Articles of Incorporation are
incorporated by reference to Post-Effective Amendment No.
16 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-51294 and 811-7140), as filed with the
SEC via EDGAR on October 18, 1996.
EX-99.1d (d) Articles Supplementary (adding Registrant's Global
Equity, Emerging Markets Debt, Mid Cap Growth, Equity
Growth and Value Funds) to the Amended and Restated
Articles of Incorporation are incorporated by reference
to Post-Effective Amendment No. 18 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-51294
and 811-7140), as filed with the SEC via EDGAR on
December 31, 1996.
2 Amended and Restated By-laws are incorporated by reference to Post-
Effective Amendment No. 10 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-51294 and 811-7140), as filed
with the SEC via EDGAR on October 4, 1995.
3 Not applicable.
4 Registrant's Forms of Specimen Securities were previously filed and
are incorporated herein by reference.
5 (a) Investment Advisory Agreement between Registrant and Morgan
Stanley Asset Management Inc. with respect to the Morgan
Stanley Money Market Fund, the Morgan Stanley Global Fixed
Income Fund and the Morgan Stanley Global Equity Allocation
Fund is incorporated by reference to Post-Effective Amendment
No. 10 to the Registrant's Registration Statement on Form N-1A
(File Nos. 33-51294 and 811-7140), as filed with the SEC via
EDGAR on October 4, 1995.
EX-99.5b (b) Investment Advisory Agreement between Registrant and
Miller Anderson & Sherrerd, LLP with respect to the
Morgan Stanley Mid Cap Growth Fund and the Morgan Stanley
Value Fund is incorporated by reference to Post-Effective
Amendment No. 18 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-51294 and 811-7140),
as filed with the SEC via EDGAR on December 31, 1996.
(c) Amended Schedule A and Supplement to Investment Advisory
Agreement between Registrant and Morgan Stanley Asset
Management Inc. (adding Registrant's Asian Growth Fund and
Small Cap Value Equity Fund (currently the American Value
Fund)) is incorporated by reference to Post-Effective Amendment
No. 10 to the Registrant's Registration Statement on Form N-1A
(File Nos. 33-51294 and 811-7140), as filed with the SEC via
EDGAR on October 4, 1995.
(d) Supplement to Investment Advisory Agreement between the
Registrant and Morgan Stanley Asset Management Inc. (adding
Registrant's Worldwide High Income Fund) is incorporated by
reference to Post-Effective Amendment No. 10 to the
Registrant's Registration Statement on Form N-1A (File Nos. 33-
51294 and 811-7140), as filed with the SEC via EDGAR on October
4, 1995.
(e) Supplement to Investment Advisory Agreement between the
Registrant and Morgan Stanley Asset Management Inc. (adding
Registrant's Growth and Income Fund, European Equity Fund,
Latin American Fund and Emerging Markets Fund) is incorporated
by reference to Post-Effective Amendment No. 10 to the
Registrant's
</TABLE>
<PAGE>
<TABLE>
<C> <S>
Registration Statement on Form N-1A (File Nos. 33-51294 and
811-7140), as filed with the SEC via EDGAR on October 4, 1995.
(f) Supplement to Investment Advisory Agreement between the
Registrant and Morgan Stanley Asset Management Inc. (adding
Registrant's Aggressive Equity Fund) is incorporated by
reference to Post-Effective Amendment No. 10 to the
Registrant's Registration Statement on Form N-1A (File Nos. 33-
51294 and 811-7140), as filed with the SEC via EDGAR on October
4, 1995.
(g) Form of Supplement to Investment Advisory Agreement between the
Registrant and Morgan Stanley Asset Management Inc. (adding
Registrant's International Magnum, Japanese Equity, U.S. Real
Estate and High Yield Funds) is incorporated by reference to
Post-Effective Amendment No. 15 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-51294 and 811-7140), as
filed with the SEC via EDGAR on September 23, 1996.
(h) Supplements to Investment Advisory Agreement between the
Registrant and Morgan Stanley Asset Management Inc. (adding
Registrant's U.S. Real Estate and High Yield Funds) are
incorporated by reference to Post-Effective Amendment No.
16 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-51294 and 811-7140), as filed with the
SEC via EDGAR on October 18, 1996.
(i) Form of Supplement to Investment Advisory Agreement between the
Registrant and Morgan Stanley Asset Management Inc. (adding
Registrant's Tax-Free Money Market Fund) is incorporated by
reference to Post-Effective Amendment No. 14 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-51294 and
811-7140), as filed with the SEC via EDGAR on July 9, 1996.
(j) Supplements to Investment Advisory Agreement between the
Registrant and Morgan Stanley Asset Management Inc. (adding
Registrant's Government Obligations and Money Market
Funds) are incorporated by reference to Post-Effective
Amendment No. 16 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-51294 and 811-7140),
as filed with the SEC via EDGAR on October 18, 1996.
EX-99.5k (k) Supplements to Investment Advisory Agreement between the
Registrant and Morgan Stanley Asset Management Inc.
(adding Registrant's Global Equity, Emerging Markets Debt
and Equity Growth Funds) are incorporated by reference to
Post-Effective Amendment No. 18 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-51294
and 811-7140), as filed with the SEC via EDGAR on
December 31, 1996.
EX-99.6 6 Distribution Agreement between Registrant and Van Kampen American
Capital Distributors, Inc. is incorporated by reference to Post-
Effective Amendment No. 18 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-51294 and 811-7140), as
filed with the SEC via EDGAR on December 31, 1996.
7 Not applicable.
8 (a) Registrant's Mutual Fund Custody Agreement with the Chase
Manhattan Bank, N.A. dated March 11, 1994 is incorporated by
reference to Post-Effective Amendment No. 11 to the
Registrant's Registration Statement on Form N-1A (File Nos. 33-
51294 and 811-7140), as filed with the SEC via EDGAR on October
30, 1995.
(b) Registrant's Custody Agreement (Global) with Morgan Stanley
Trust Company dated January 4, 1993 is incorporated by
reference to Post-Effective Amendment No. 11 to the
Registrant's Registration Statement on Form N-1A (File Nos. 33-
51294 and 811-7140), as amended, as filed with the SEC via EDGAR on
October 30, 1995.
(c) Registrant's Custody Agreement with PNC Bank, N.A. (with
respect to the Money Market Funds) is incorporated by
reference to Post-Effective Amendment No. 16 to the
Registrant's Registration Statement on Form N-1A (File
Nos. 33-51294 and 811-7140), as filed with the SEC via
EDGAR on October 18, 1996.
9 (a) Administration Agreement between Registrant and Morgan Stanley
Asset Management Inc. (the "MSAM Administration Agreement") is
incorporated by reference to Post-Effective Amendment No. 11 to
the Registrant's Registration Statement on Form N-1A (File Nos.
33-51294 and 811-7140), as filed with the SEC via EDGAR on
October 30, 1995 and as amended by Addendum to such
Agreement incorporated by reference to Post-Effective
Amendment No. 16 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-51294 and 811-7140),
as filed with the SEC via EDGAR on October 18, 1996.
EX-99.9b (b) Administration Agreement between Registrant and Miller
Anderson & Sherrerd, LLP (the "MAS Administration
Agreement") is incorporated by reference to
Post-Effective Amendment No. 18 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-51294
and 811-7140), as filed with the SEC via EDGAR on
December 31, 1996.
EX-99.9c (c) Sub-Administration Agreement between Morgan Stanley Asset
Management Inc. and The Chase Manhattan Bank is
incorporated by reference to Post-Effective Amendment No.
18 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-51294 and 811-7140), as filed with the
SEC via EDGAR on December 31, 1996.
EX-99.9d (d) Sub-Administration Agreement between Miller Anderson &
Sherrerd, LLP and The Chase Manhattan Bank is
incorporated by reference to Post-Effective Amendment No.
18 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-51294 and 811-7140), as filed with the
SEC via EDGAR on December 31, 1996.
(e) Amended Schedule A and Amended Administration Agreement between
Registrant and Morgan Stanley Asset Management Inc. with
respect to the Morgan Stanley Asian
</TABLE>
<PAGE>
<TABLE>
<C> <S>
Growth Fund and Morgan Stanley Small Cap Value Equity Fund
(currently the Morgan Stanley American Value Fund) is
incorporated by reference to Post-Effective Amendment No. 11 to
the Registrant's Registration Statement on Form N-1A (File Nos.
33-51294 and 811-7140), as filed with the SEC via EDGAR on
October 30, 1995.
(f) Sub-Transfer Agent Agreement among Morgan Stanley Asset
Management Inc., Chase Global Funds Services Company and PFPC,
Inc. is incorporated by reference to Post-Effective
Amendment No. 16 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-51294 and 811-7140),
as filed with the SEC via EDGAR on October 18, 1996.
EX-99.9g (g) Sub-Transfer Agent Agreement between Morgan Stanley Asset
Management Inc. and ACCESS Investor Services, Inc. is
incorporated by reference to Post-Effective Amendment No.
18 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-51294 and 811-7140), as filed with the
SEC via EDGAR on December 31, 1996.
EX-99.9h (h) Sub-Transfer Agent Agreement between Miller Anderson &
Sherrerd, LLP and ACCESS Investor Services, Inc. is
incorporated by reference to Post-Effective Amendment No.
18 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-51294 and 811-7140), as filed with the
SEC via EDGAR on December 31, 1996.
10 Opinion of Counsel is incorporated by reference to Post-Effective
Amendment No. 11 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-51294 and 811-7140), as filed with the SEC via
EDGAR on October 30, 1995.
EX-99.11a 11 (a) Consent of Price Waterhouse LLP, Independent Accountants
is incorporated by reference to Post-Effective Amendment
No. 18 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-51294 and 811-7140), as filed with the
SEC via EDGAR on December 31, 1996.
EX-99.11b (b) Consent of Coopers & Lybrand L.L.P., Independent
Accountants is incorporated by reference to
Post-Effective Amendment No. 18 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-51294
and 811-7140), as filed with the SEC via EDGAR on
December 31, 1996.
12 Not applicable.
13 Purchase Agreement is incorporated by reference to Post-Effective
Amendment No. 11 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-51294 and 811-7140), as filed with the SEC via
EDGAR on October 30, 1995.
14 Not applicable.
EX-99.15a 15 (a) Amended and Restated Plan of Distribution Pursuant to
Rule 12b-1 for shares of the Morgan Stanley Money Market
Fund ("Money Market Plan") is incorporated by reference
to Post-Effective Amendment No. 18 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-51294
and 811-7140), as filed with the SEC via EDGAR on
December 31, 1996. The following Rule 12b-1 distribution
plans have been omitted because they are substantially
identical to the Money Market Plan and differ from the
Money Market Plan only in references to the Investment
Fund to which the plan relates: Morgan Stanley
Government Obligations Money Market Fund.
EX-99.15b (b) Form of Plan of Distribution Pursuant to Rule 12b-1 for
shares of the Morgan Stanley Tax-Free Money Market Fund
is incorporated by reference to Post-Effective Amendment
No. 18 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-51294 and 811-7140), as filed with the
SEC via EDGAR on December 31, 1996.
EX-99.15c (c) Form of Plan of Distribution Pursuant to Rule 12b-1 for
Class A Shares (the "Class A Plan") of the Morgan Stanley
Global Fixed Income Fund is incorporated by reference to
Post-Effective Amendment No. 18 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-51294
and 811-7140), as filed with the SEC via EDGAR on
December 31, 1996. The following plans have been omitted
because they are substantially identical to the Class A
Plan and differ from the Class A Plan only in references
to the Investment Fund to which the plan relates: Morgan
Stanley Asian Growth Fund, Morgan Stanley Small Cap Value
Equity Fund (currently the Morgan Stanley American Value
Fund), Morgan Stanley Worldwide High Income Fund, Morgan
Stanley Emerging Markets Fund, Morgan Stanley Latin
American Fund, Morgan Stanley Global Equity Allocation
Fund, Morgan Stanley High Yield Fund, Morgan Stanley U.S.
Real Estate Fund, Morgan Stanley International Magnum
Fund, Morgan Stanley Aggressive Equity Fund.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
EX-99.15d (d) Form of Plan of Distribution Pursuant to Rule 12b-1 for
Class A Shares (the "Class A Plan") of the Morgan Stanley
Japanese Equity Fund is incorporated by reference to
Post-Effective Amendment No. 18 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-51294
and 811-7140), as filed with the SEC via EDGAR on
December 31, 1996. The following plans have been omitted
because they are substantially identical to the Class A
Plan and differ from the Class A Plan only in references
to the Investment Fund to which the plan relates: Morgan
Stanley European Equity Fund, Morgan Stanley Growth and
Income Fund.
EX-99.15e (e) Plan of Distribution Pursuant to Rule 12b-1 for Class A
Shares (the "Class A Plan") of the Morgan Stanley Global
Equity Fund is incorporated by reference to
Post-Effective Amendment No. 18 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-51294
and 811-7140), as filed with the SEC via EDGAR on
December 31, 1996. The following plans have been omitted
because they are substantially identical to the Class A
Plan and differ from the Class A Plan only in references
to the Investment Fund to which the plan relates: Morgan
Stanley Emerging Markets Debt Fund, Morgan Stanley Mid
Cap Growth Fund, Morgan Stanley Equity Growth Fund,
Morgan Stanley Value Fund.
EX-99.15f (f) Amended and Restated Plan of Distribution Pursuant to
Rule 12b-1 for Class B and Class C shares (the "Class B
and Class C Plan") relating to the Morgan Stanley Global
Fixed Income Fund, Morgan Stanley Asian Growth Fund,
Morgan Stanley Small Cap Value Equity Fund (currently the
Morgan Stanley American Value Fund), Morgan Stanley
Worldwide High Income Fund, Morgan Stanley Emerging
Markets Fund, Morgan Stanley Latin American Fund, Morgan
Stanley Global Equity Allocation Fund, Morgan Stanley
High Yield Fund, Morgan Stanley U.S. Real Estate Fund,
Morgan Stanley International Magnum Fund and Morgan
Stanley Aggressive Equity Fund is incorporated by
reference to Post-Effective Amendment No. 18 to the
Registrant's Registration Statement on Form N-1A (Files
No. 33-51294 and 811-7140), as filed with the SEC via
EDGAR on December 31, 1996.
EX-99.15g (g) Form of Plan of Distribution Pursuant to Rule 12b-1 for
Class B and Class C shares (the "Class B and Class C
Plan") relating to the Morgan Stanley Japanese Equity
Fund, Morgan Stanley European Equity and Morgan Stanley
Growth and Income Fund is incorporated by reference to
Post-Effective Amendment No. 18 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-51294
and 811-7140), as filed with the SEC via EDGAR on
December 31, 1996.
16 Schedules of Computation of Performance Information is
incorporated by reference to Post-Effective Amendment No. 11
to the Registrant's Registration Statement on Form N-1A (File
Nos. 33-51294 and 811-7140), as filed with the SEC via EDGAR
on October 30, 1995.
EX-99.18 18 Registrant's Rule 18f-3 Multiple Class Plan is incorporated by
reference to Post-Effective Amendment No. 18 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-51294 and
811-7140), as filed with the SEC via EDGAR on December 31, 1996.
24 Powers of Attorney are incorporated by reference to Post-
Effective Amendment No. 10 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-51294 and 811-7140), as
filed with the SEC via EDGAR on October 4, 1995.
EX-99.27 27 (a) Financial data schedules for the fiscal year ended June 30,
1996 are filed herewith.
(b) Financial Data Schedules for the period ended November 30,
1996 for the Morgan Stanley International Magnum Fund
are filed herewith.
(c) Financial Data Schedules for the period ended December 31,
1996 for the Morgan Stanley Money Market and Morgan Stanley
Government Obligations Money Market Funds are filed
herewith.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000891080
<NAME> MORGAN STANLEY FUND, INC.
<SERIES>
<NUMBER> 021
<NAME> MORGAN STANLEY GLOBAL FIXED INCOME FUND (CLASS A)
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 11,155
<INVESTMENTS-AT-VALUE> 11,120
<RECEIVABLES> 189
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 769
<TOTAL-ASSETS> 12,078
<PAYABLE-FOR-SECURITIES> 288
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 74
<TOTAL-LIABILITIES> 362
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,910
<SHARES-COMMON-STOCK> 748
<SHARES-COMMON-PRIOR> 1,084
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (36)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (124)
<ACCUM-APPREC-OR-DEPREC> (34)
<NET-ASSETS> 11,716
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,055
<OTHER-INCOME> 0
<EXPENSES-NET> (283)
<NET-INVESTMENT-INCOME> 772
<REALIZED-GAINS-CURRENT> 489
<APPREC-INCREASE-CURRENT> (513)
<NET-CHANGE-FROM-OPS> 748
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (794)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 589
<NUMBER-OF-SHARES-REDEEMED> (975)
<SHARES-REINVESTED> 50
<NET-CHANGE-IN-ASSETS> (5,341)
<ACCUMULATED-NII-PRIOR> 330
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (524)
<GROSS-ADVISORY-FEES> 122
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<NAME> MORGAN STANLEY FUND, INC.
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<NAME> MORGAN STANLEY GOVERNMENT OBLIGATIONS MONEY MARKET FUND
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